DOLES vs. ANGELES
The CA concluded that petitioner was the borrower
FACTS:
On April 1, 1997, Angeles filed a complaint for Specific Performance
with Damages against Doles (petitioner), docketed as Civil Case No.
97-82716. Respondent alleged Doles was indebted to the former in
the concept of a personal loan amounting to P405,430.00 for which
reason Doles ceded to Angeles a parcel land by virtue of a "Deed of
Absolute Sale but the property was mortgaged to National Home
Mortgage Finance Corporation and Doles refused to cooperate with
Angeles to execute the necessary documents and other formalities
required by the NHMFC to effect the transfer of the title over the
property.
Doles, however, denied that she borrowed money from respondent,
and averred that she referred her friends to respondent whom she
knew to be engaged in the business of lending money in exchange
for personal checks through her capitalist Arsenio Pua. Doles also
alleged that the checks bounced for insufficiency of funds; that
despite her efforts to assist respondent to collect from the borrowers,
she could no longer locate them; that, because of this, respondent
became furious and threatened petitioner that if the accounts were
not settled, a criminal case will be filed against her; hence, she was
forced by respondent to execute an "Absolute Deed of Sale" over her
property in Bacoor, Cavite, to avoid criminal prosecution; that the
said.
The RTC dismissed the complaint for insufficiency of evidence.
The RTC held that the sale was void for lack of cause or
consideration because Angeles admitted that the borrowers are the
friends of defendant Doles and further admission that the checks
issued by these borrowers in payment of the loan obligation negate
the cause or consideration of the contract of sale.
Respondent appealed to the CA. In her appeal brief, respondent
interposed her sole assignment of error:
CA reversed.
and, in turn, would "re-lend" the amount borrowed from the
respondent to her friends. Hence, the Deed of Absolute Sale was
supported by a valid consideration.
ISSUE:
WHETHER OR NOT THE PETITIONER CAN BE CONSIDERED AS
A DEBTOR OF THE RESPONDENT
HELD:
Respondent is estopped to deny that she herself acted as agent of a
certain Arsenio Pua, her disclosed principal. She is also estopped to
deny that petitioner acted as agent for the alleged debtors, the
friends whom she (petitioner) referred.
This Court has affirmed that, under Article 1868 of the Civil Code, the
basis of agency is representation which may be established in the
same way as any other fact, either by direct or circumstantial
evidence. The question is ultimately one of intention. Agency may
even be implied from the words and conduct of the parties and the
circumstances of the particular case. Though the fact or extent of
authority of the agents may not, as a general rule, be established
from the declarations of the agents alone, if one professes to act as
agent for another, she may be estopped to deny her agency both as
against the asserted principal and the third persons interested in the
transaction in which he or she is engaged.
In this case, petitioner knew that the financier of respondent is Pua;
and respondent knew that the borrowers are friends of petitioner.
In the case at bar, both petitioner and respondent have undeniably
disclosed to each other that they are representing someone else,
and so both of them are estopped to deny the same.
If an act done by one person in behalf of another is in its essential
nature one of agency, the former is the agent of the latter
notwithstanding he or she is not so called.30 The question is to be
determined by the fact that one represents and is acting for another,
and if relations exist which will constitute an agency, it will be an
agency whether the parties understood the exact nature of the
relation or not.
That both parties acted as mere agents is shown by the undisputed
fact that the friends of petitioner issued checks in payment of the
loan in the name of Pua. If it is true that petitioner was "re-lending",
then the checks should have been drawn in her name and not
directly paid to Pua.
JOCELYN B. DOLES, Petitioner,
vs.
MA. AURA TINA ANGELES, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
This refers to the Petition for Review on Certiorari under Rule 45 of
the Rules of Court questioning the Decision1 dated April 30, 2001 of
the Court of Appeals (CA) in C.A.-G.R. CV No. 66985, which
reversed the Decision dated July 29, 1998 of the Regional Trial Court
(RTC), Branch 21, City of Manila; and the CA Resolution2 dated
August 6, 2001 which denied petitioners Motion for Reconsideration.
The antecedents of the case follow:
On April 1, 1997, Ma. Aura Tina Angeles (respondent) filed with the
RTC a complaint for Specific Performance with Damages against
Jocelyn B. Doles (petitioner), docketed as Civil Case No. 97-82716.
Respondent alleged that petitioner was indebted to the former in the
concept of a personal loan amounting to P405,430.00 representing
the principal amount and interest; that on October 5, 1996, by virtue
of a "Deed of Absolute Sale",3 petitioner, as seller, ceded to
respondent, as buyer, a parcel of land, as well as the improvements
thereon, with an area of 42 square meters, covered by Transfer
Certificate of Title No. 382532,4 and located at a subdivision project
known as Camella Townhomes Sorrente in Bacoor, Cavite, in order
to satisfy her personal loan with respondent; that this property was
mortgaged to National Home Mortgage Finance Corporation
(NHMFC) to secure petitioners loan in the sum of P337,050.00 with
that entity; that as a condition for the foregoing sale, respondent shall
assume the undue balance of the mortgage and pay the monthly
amortization of P4,748.11 for the remainder of the 25 years which
began on September 3, 1994; that the property was at that time
being occupied by a tenant paying a monthly rent of P3,000.00; that
upon verification with the NHMFC, respondent learned that petitioner
had incurred arrearages amounting to P26,744.09, inclusive of
penalties and interest; that upon informing the petitioner of her
arrears, petitioner denied that she incurred them and refused to pay
the same; that despite repeated demand, petitioner refused to
cooperate with respondent to execute the necessary documents and
other formalities required by the NHMFC to effect the transfer of the
title over the property; that petitioner collected rent over the property
for the month of January 1997 and refused to remit the proceeds to
respondent; and that respondent suffered damages as a result and
was forced to litigate.
Petitioner, then defendant, while admitting some allegations in the
Complaint, denied that she borrowed money from respondent, and
averred that from June to September 1995, she referred her friends
to respondent whom she knew to be engaged in the business of
lending money in exchange for personal checks through her
capitalist Arsenio Pua. She alleged that her friends, namely, Zenaida
Romulo, Theresa Moratin, Julia Inocencio, Virginia Jacob, and
Elizabeth Tomelden, borrowed money from respondent and issued
personal checks in payment of the loan; that the checks bounced for
insufficiency of funds; that despite her efforts to assist respondent to
collect from the borrowers, she could no longer locate them; that,
because of this, respondent became furious and threatened
petitioner that if the accounts were not settled, a criminal case will be
filed against her; that she was forced to issue eight checks
amounting to P350,000 to answer for the bounced checks of the
borrowers she referred; that prior to the issuance of the checks she
informed respondent that they were not sufficiently funded but the
latter nonetheless deposited the checks and for which reason they
were subsequently dishonored; that respondent then threatened to
initiate a criminal case against her for violation of Batas Pambansa
Blg. 22; that she was forced by respondent to execute an "Absolute
Deed of Sale" over her property in Bacoor, Cavite, to avoid criminal
prosecution; that the said deed had no valid consideration; that she
did not appear before a notary public; that the Community Tax
Certificate number on the deed was not hers and for which
respondent may be prosecuted for falsification and perjury; and that
she suffered damages and lost rental as a result.
The RTC identified the issues as follows: first, whether the Deed of
Absolute Sale is valid; second; if valid, whether petitioner is obliged
to sign and execute the necessary documents to effect the transfer
of her rights over the property to the respondent; and third, whether
petitioner is liable for damages.
On July 29, 1998, the RTC rendered a decision the dispositive
portion of which states:
WHEREFORE, premises considered, the Court hereby orders the
dismissal of the complaint for insufficiency of evidence. With costs
against plaintiff.
SO ORDERED.
The RTC held that the sale was void for lack of cause or
consideration:5
Plaintiff Angeles admission that the borrowers are the friends of
defendant Doles and further admission that the checks issued by
these borrowers in payment of the loan obligation negates [sic] the
cause or consideration of the contract of sale executed by and
between plaintiff and defendant. Moreover, the property is not solely
owned by defendant as appearing in Entry No. 9055 of Transfer
Certificate of Title No. 382532 (Annex A, Complaint), thus:
"Entry No. 9055. Special Power of Attorney in favor of Jocelyn Doles
covering the share of Teodorico Doles on the parcel of land
described in this certificate of title by virtue of the special power of
attorney to mortgage, executed before the notary public, etc."
The rule under the Civil Code is that contracts without a cause or
consideration produce no effect whatsoever. (Art. 1352, Civil Code).
Respondent appealed to the CA. In her appeal brief, respondent
interposed her sole assignment of error:
THE TRIAL COURT ERRED IN DISMISSING THE CASE AT BAR
ON THE GROUND OF [sic] THE DEED OF SALE BETWEEN THE
PARTIES HAS NO CONSIDERATION OR INSUFFICIENCY OF
EVIDENCE.6
On April 30, 2001, the CA promulgated its Decision, the dispositive
portion of which reads:
WHEREFORE, IN VIEW OF THE FOREGOING, this appeal is
hereby GRANTED. The Decision of the lower court dated July 29,
1998 is REVERSED and SET ASIDE. A new one is entered ordering
defendant-appellee to execute all necessary documents to effect
transfer of subject property to plaintiff-appellant with the arrearages
of the formers loan with the NHMFC, at the latters expense. No
costs.
SO ORDERED.
The CA concluded that petitioner was the borrower and, in turn,
would "re-lend" the amount borrowed from the respondent to her
friends. Hence, the Deed of Absolute Sale was supported by a valid
consideration, which is the sum of money petitioner owed
respondent amounting to P405,430.00, representing both principal
and interest.
The CA took into account the following circumstances in their
entirety: the supposed friends of petitioner never presented
themselves to respondent and that all transactions were made by
and between petitioner and respondent;7 that the money borrowed
was deposited with the bank account of the petitioner, while
payments made for the loan were deposited by the latter to
respondents bank account;8 that petitioner herself admitted in open
court that she was "re-lending" the money loaned from respondent to
other individuals for profit;9 and that the documentary evidence
shows that the actual borrowers, the friends of petitioner, consider
her as their creditor and not the respondent.10
Furthermore, the CA held that the alleged threat or intimidation by
respondent did not vitiate consent, since the same is considered just
or legal if made to enforce ones claim through competent authority
under Article 133511 of the Civil Code;12 that with respect to the
arrearages of petitioner on her monthly amortization with the NHMFC
in the sum of P26,744.09, the same shall be deemed part of the
balance of petitioners loan with the NHMFC which respondent
agreed to assume; and that the amount of P3,000.00 representing
the rental for January 1997 supposedly collected by petitioner, as
well as the claim for damages and attorneys fees, is denied for
insufficiency of evidence.13
On May 29, 2001, petitioner filed her Motion for Reconsideration with
the CA, arguing that respondent categorically admitted in open court
that she acted only as agent or representative of Arsenio Pua, the
principal financier and, hence, she had no legal capacity to sue
petitioner; and that the CA failed to consider the fact that petitioners
father, who co-owned the subject property, was not impleaded as a
defendant nor was he indebted to the respondent and, hence, she
cannot be made to sign the documents to effect the transfer of
ownership over the entire property.
On August 6, 2001, the CA issued its Resolution denying the motion
on the ground that the foregoing matters had already been passed
upon.
On August 13, 2001, petitioner received a copy of the CA Resolution.
On August 28, 2001, petitioner filed the present Petition and raised
the following issues:
I.
WHETHER OR NOT THE PETITIONER CAN BE CONSIDERED AS
A DEBTOR OF THE RESPONDENT.
II.
WHETHER OR NOT AN AGENT WHO WAS NOT AUTHORIZED BY
THE PRINCIPAL TO COLLECT DEBT IN HIS BEHALF COULD
DIRECTLY COLLECT PAYMENT FROM THE DEBTOR.
III.
WHETHER OR NOT THE CONTRACT OF SALE WAS EXECUTED
FOR A CAUSE.14
Although, as a rule, it is not the business of this Court to review the
findings of fact made by the lower courts, jurisprudence has
recognized several exceptions, at least three of which are present in
the instant case, namely: when the judgment is based on a
misapprehension of facts; when the findings of facts of the courts a
quo are conflicting; and when the CA manifestly overlooked certain
relevant facts not disputed by the parties, which, if properly
considered, could justify a different conclusion.15 To arrive at a
proper judgment, therefore, the Court finds it necessary to re-
examine the evidence presented by the contending parties during
the trial of the case.
The Petition is meritorious. q. You also mentioned that you were not the one indebted to the
plaintiff?
The principal issue is whether the Deed of Absolute Sale is
supported by a valid consideration. witness:

1. Petitioner argues that since she is merely the agent or a. Yes, sir.
representative of the alleged debtors, then she is not a party to the
loan; and that the Deed of Sale executed between her and the Atty. Diza:
respondent in their own names, which was predicated on that pre-
existing debt, is void for lack of consideration. q. And you mentioned the persons[,] namely, Elizabeth Tomelden,
Teresa Moraquin, Maria Luisa Inocencio, Zenaida Romulo, they are
Indeed, the Deed of Absolute Sale purports to be supported by a your friends?
consideration in the form of a price certain in money16 and that this
sum indisputably pertains to the debt in issue. This Court has witness:
consistently held that a contract of sale is null and void and produces
no effect whatsoever where the same is without cause or a. Inocencio and Moraquin are my friends while [as to] Jacob and
consideration.17 The question that has to be resolved for the Tomelden[,] they were just referred.
moment is whether this debt can be considered as a valid cause or
consideration for the sale. Atty. Diza:

To restate, the CA cited four instances in the record to support its q. And you have transact[ed] with the plaintiff?
holding that petitioner "re-lends" the amount borrowed from
respondent to her friends: first, the friends of petitioner never witness:
presented themselves to respondent and that all transactions were
made by and between petitioner and respondent;18 second; the a. Yes, sir.
money passed through the bank accounts of petitioner and
respondent;19 third, petitioner herself admitted that she was "re- Atty. Diza:
lending" the money loaned to other individuals for profit;20 and
fourth, the documentary evidence shows that the actual borrowers, q. What is that transaction?
the friends of petitioner, consider her as their creditor and not the
respondent.21 witness:

On the first, third, and fourth points, the CA cites the testimony of the a. To refer those persons to Aura and to refer again to Arsenio Pua,
petitioner, then defendant, during her cross-examination:22 sir.

Atty. Diza: Atty. Diza:

q. Did the plaintiff personally see the transactions with your friends? q. You are re-lending the money?

witness: witness:

a. No, sir. a. Yes, sir.

Atty. Diza: Atty. Diza:

q. Your friends and the plaintiff did not meet personally? q. What profit do you have, do you have commission?

witness: witness:

a. Yes, sir. a. Yes, sir.

Atty. Diza: Atty. Diza:

q. You are intermediaries? q. How much?

witness: witness:

a. We are both intermediaries. As evidenced by the checks of the
debtors they were deposited to the name of Arsenio Pua because
the money came from Arsenio Pua.
xxxx
a. Two percent to Tomelden, one percent to Jacob and then
Inocencio and my friends none, sir.
Based on the foregoing, the CA concluded that petitioner is the real
borrower, while the respondent, the real lender.

Atty. Diza: But as correctly noted by the RTC, respondent, then plaintiff, made
the following admission during her cross examination:23
q. Did the plaintiff knew [sic] that you will lend the money to your
friends specifically the one you mentioned [a] while ago? Atty. Villacorta:

witness: q. Who is this Arsenio Pua?

a. Yes, she knows the money will go to those persons. witness:

Atty. Diza: a. Principal financier, sir.

Atty. Villacorta:
q. More or less she [accommodated] several friends of the
q. So the money came from Arsenio Pua? defendant?

witness: witness:

a. Yes, because I am only representing him, sir. a. Yes, sir, I am aware of that.

Other portions of the testimony of respondent must likewise be xxxx

considered:24
Atty. Villacorta:
Atty. Villacorta:
q. And these friends of the defendant borrowed money from you with
q. So it is not actually your money but the money of Arsenio Pua? the assurance of the defendant?

witness: witness:

a. Yes, sir. a. They go direct to Jocelyn because I dont know them.

Court: xxxx

q. It is not your money? Atty. Villacorta:

witness: q. And is it not also a fact Madam witness that everytime that the
defendant borrowed money from you her friends who [are] in need of
a. Yes, Your Honor. money issued check[s] to you? There were checks issued to you?

Atty. Villacorta: witness:

q. Is it not a fact Ms. Witness that the defendant borrowed from you a. Yes, there were checks issued.
to accommodate somebody, are you aware of that?
Atty. Villacorta:
witness:
q. By the friends of the defendant, am I correct?
a. I am aware of that.
witness:
Atty. Villacorta:
a. Yes, sir. Respondent is estopped to deny that she herself acted as agent of a
certain Arsenio Pua, her disclosed principal. She is also estopped to
Atty. Villacorta: deny that petitioner acted as agent for the alleged debtors, the
friends whom she (petitioner) referred.
q. And because of your assistance, the friends of the defendant who
are in need of money were able to obtain loan to [sic] Arsenio Pua This Court has affirmed that, under Article 1868 of the Civil Code, the
through your assistance? basis of agency is representation.25 The question of whether an
agency has been created is ordinarily a question which may be
witness: established in the same way as any other fact, either by direct or
a. Yes, sir. circumstantial evidence. The question is ultimately one of
intention.26 Agency may even be implied from the words and
Atty. Villacorta: conduct of the parties and the circumstances of the particular
case.27 Though the fact or extent of authority of the agents may not,
q. So that occasion lasted for more than a year? as a general rule, be established from the declarations of the agents
alone, if one professes to act as agent for another, she may be
witness: estopped to deny her agency both as against the asserted principal
and the third persons interested in the transaction in which he or she
a. Yes, sir. is engaged.28

Atty. Villacorta: In this case, petitioner knew that the financier of respondent is Pua;
and respondent knew that the borrowers are friends of petitioner.
q. And some of the checks that were issued by the friends of the
defendant bounced, am I correct? The CA is incorrect when it considered the fact that the "supposed
friends of [petitioner], the actual borrowers, did not present
witness: themselves to [respondent]" as evidence that negates the agency
relationshipit is sufficient that petitioner disclosed to respondent
a. Yes, sir. that the former was acting in behalf of her principals, her friends
whom she referred to respondent. For an agency to arise, it is not
Atty. Villacorta: necessary that the principal personally encounter the third person
with whom the agent interacts. The law in fact contemplates, and to
q. And because of that Arsenio Pua got mad with you? a great degree, impersonal dealings where the principal need not
personally know or meet the third person with whom her agent
witness: transacts: precisely, the purpose of agency is to extend the
personality of the principal through the facility of the agent.29
a. Yes, sir.
In the case at bar, both petitioner and respondent have undeniably
disclosed to each other that they are representing someone else,
and so both of them are estopped to deny the same. It is evident
from the record that petitioner merely refers actual borrowers and
then collects and disburses the amounts of the loan upon which she
received a commission; and that respondent transacts on behalf of
her "principal financier", a certain Arsenio Pua. If their respective
principals do not actually and personally know each other, such
ignorance does not affect their juridical standing as agents,
especially since the very purpose of agency is to extend the
personality of the principal through the facility of the agent.
With respect to the admission of petitioner that she is "re-lending" the
money loaned from respondent to other individuals for profit, it must
be stressed that the manner in which the parties designate the
relationship is not controlling. If an act done by one person in behalf
of another is in its essential nature one of agency, the former is the
agent of the latter notwithstanding he or she is not so called.30 The
question is to be determined by the fact that one represents and is
acting for another, and if relations exist which will constitute an
agency, it will be an agency whether the parties understood the exact
nature of the relation or not.31
That both parties acted as mere agents is shown by the undisputed
fact that the friends of petitioner issued checks in payment of the
loan in the name of Pua. If it is true that petitioner was "re-lending",
then the checks should have been drawn in her name and not
directly paid to Pua.
With respect to the second point, particularly, the finding of the CA
that the disbursements and payments for the loan were made
through the bank accounts of petitioner and respondent,
suffice it to say that in the normal course of commercial dealings and
for reasons of convenience and practical utility it can be reasonably
expected that the facilities of the agent, such as a bank account, may
be employed, and that a sub-agent be appointed, such as the bank
itself, to carry out the task, especially where there is no stipulation to
the contrary.32
In view of the two agency relationships, petitioner and respondent
are not privy to the contract of loan between their principals. Since
the sale is predicated on that loan, then the sale is void for lack of
consideration.
2. A further scrutiny of the record shows, however, that the sale might
have been backed up by another consideration that is separate and
distinct from the debt: respondent averred in her complaint and
testified that the parties had agreed that as a condition for the
conveyance of the property the respondent shall assume the
balance of the mortgage loan which petitioner allegedly owed to the
NHMFC.33 This Court in the recent past has declared that an
assumption of a mortgage debt may constitute a valid consideration
for a sale.34
Although the record shows that petitioner admitted at the time of trial
that she owned the property described in the TCT,35 the Court must
stress that the Transfer Certificate of Title No. 38253236 on its face
shows that the owner of the property which admittedly forms the
subject matter of the Deed of Absolute Sale refers neither to the
petitioner nor to her father, Teodorico Doles, the alleged co-owner.
Rather, it states that the property is registered in the name of
"Household Development Corporation." Although there is an entry to
the effect that the petitioner had been granted a special power of
attorney "covering the shares of Teodorico Doles on the parcel of
land described in this certificate,"37 it cannot be inferred from this
bare notation, nor from any other evidence on the record, that the
petitioner or her father held any direct interest on the property in
question so as to validly constitute a mortgage thereon38 and, with
more reason, to effect the delivery of the object of the sale at the
consummation stage.39 What is worse, there is a notation that the
TCT itself has been "cancelled."40
In view of these anomalies, the Court cannot entertain the
possibility that respondent agreed to assume the balance of the
mortgage loan which petitioner allegedly owed to the NHMFC,
especially since the record is bereft of any factual finding that
petitioner was, in the first place, endowed with any ownership rights
to validly mortgage and convey the property. As the complainant who
initiated the case, respondent bears the burden of proving the basis
of her complaint. Having failed to discharge such burden, the Court
has no choice but to declare the sale void for lack of cause. And
since the sale is void, the Court finds it unnecessary to dwell on the
issue of whether duress or intimidation had been foisted upon
petitioner upon the execution of the sale.
Moreover, even assuming the mortgage validly exists, the Court
notes respondents allegation that the mortgage with the NHMFC
was for 25 years which began September 3, 1994. Respondent filed
her Complaint for Specific Performance in 1997. Since the 25 years
had not lapsed, the prayer of respondent to compel petitioner to
execute necessary documents to effect the transfer of title is
premature.
WHEREFORE, the petition is granted. The Decision and Resolution
of the Court of Appeals are REVERSED and SET ASIDE. The
complaint of respondent in Civil Case No. 97-82716 is DISMISSED.
SO ORDERED.
Rallos vs. Yangco
FACTS:
Yangco, thru a letter, offered Rallos his service in buying and selling
leaf tobacco and other native products and introduce Florentino
Collantes, upon whom Yangco had conferred public power of
attorney before the notary, to perform in his name and on his behalf
all acts necessary for carrying his business plans.
Rallos accepted the invitation and sent said Collantes 218 bundles of
tobacco in the leaf to be sold on commission, as had been other
produce previously. The said Collantes received said tobacco and
sold it for the sum of P1,744. This sum was, apparently, converted to
his own use by said agent.
It appears, however, that prior to the sending of said tobacco the
defendant had severed his relations with Collantes and that the latter
was no longer acting as his factor, which was not known to Rallos as
Yangco gave no notice of any kind to him regarding the termination
of the relations between the defendant and his agent. The defendant
refused to pay the said sum upon demand of the plaintiffs, placing
such refusal upon the ground that at the time the said tobacco was
received and sold by Collantes he was acting personally and not as
agent of the defendant. This action was brought to recover said sum.
ISSUE:
Whether or not the plaintiffs, acting in good faith and without
knowledge, having sent produce to sell on commission to the former
agent of the defendant, can recover of the defendant under the
circumstances above set forth.
HELD:
We are of the opinion that the defendant is liable. Having advertised
the fact that Collantes was his agent and having given them a
special invitation to deal with such agent, it was the duty of the
defendant on the termination of the relationship of principal and
agent to give due and timely notice thereof to the plaintiffs. Failing to
do so, he is responsible to them for whatever goods may have been
in good faith and without negligence sent to the agent without
knowledge, actual or constructive, of the termination of such
relationship.
FLORENTINO RALLOS, ET AL., plaintiff-appellee,
vs.
TEODORO R. YANGCO, defendant-appellant.
MORELAND, J.:
This is an appeal from a judgment of the Court of First Instance of
the Province of Cebu, the Hon. Adolph Wislizenus presiding, in favor
of the plaintiffs, in the sum of P1,537.08, with interest at 6 per cent
per annum from the month of July, 1909, with costs.
The defendant in this case on the 27th day of November, 1907, sent
to the plaintiff Florentino Rallos, among others, the following letter:
CIRCULAR NO. 1.
MANILA, November 27, 1907
MR. FLORENTINO RALLOS, Cebu.
DEAR SIR: I have the honor to inform you that I have on this date
opened in my steamship office at No. 163 Muelle de la Reina,
Binondo, Manila, P. I., a shipping and commission department for
buying and selling leaf tobacco and other native products, under the
following conditions:
1. When the consignment has been received, the consignor
thereof will be credited with a sum not to exceed two-thirds of the
value of the goods shipped, which may be made available by
acceptance of a draft or written order of the consignor on five to ten
day's sight, or by his ordering at his option a bill of goods. In the
latter case he must pay a commission of 2 per cent.
2. No draft or written order will be accepted without previous
notice forwarding the consignment of goods to guarantee the same.
3. Expenses of freight, hauling and everything necessary for duly
executing the commission will be charged in the commission.
4. All advances made under sections (1) and (3) shall bear
interest at 10 per cent a year, counting by the sale of the goods
shipped or remittance of the amount thereof.
5. A commission of 2 per cent will be collected on the amount
realized from the sale of the goods shipped.
6. A Payment will be made immediately after collection of the
price of the goods shipped.
7. Orders will be taken for the purchase of general merchandise,
ship-stores, cloths, etc., upon remittance of the amount with the
commission of 2 per cent on the total value of the goods bought.
Expenses of freight, hauling, and everything necessary for properly
executing the commission will be charged to the consignor.
8. The consignor of the good may not fix upon the consignee a
longer period than four months, counting from the date of receipt, for
selling the same; with the understanding that after such period the
consignee is authorized to make the sale, so as to prevent the
advance and cost of storage from amounting to more than the actual
value of said goods, as has often happened.
9. The shipment to the consignors of the goods ordered on
account of the amount realized from the sale of the goods consigned
and of the goods bought on remittance of the value thereof, under
sections (1) and (3), will not be insured against risk by sea and land
except on written order of the interested parties.
10. On all consignments of goods not insured according to the
next preceding section, the consignors will bear the risk.
11. All the foregoing conditions will take effect only after this office
has acknowledged the consignor's previous notice.
12. All other conditions and details will be furnished at the office of
the undersigned.
If you care to favor me with your patronage, my office is at No. 163
Muelle de la Reinna, Binondo, Manila, P. I., under the name of
"Teodoro R. Yangco." In this connection it gives me great pleasure to
introduce to you Mr. Florentino Collantes, upon whom I have
conferred public power of attorney before the notary, Mr. Perfecto
Salas Rodriguez, dated November 16, 1907, to perform in my name
and on my behalf all acts necessary for carrying out my plans, in the
belief that through his knowledge and long experience in the
business, along with my commercial connections with the merchants
of this city and of the provinces, I may hope to secure the most
advantageous prices for my patrons. Mr. Collantes will sign by power
of attorney, so I beg that you make due note of his signature hereto
affixed.
Very respectfully,
(Sgd.) T. R. YANGCO.
(Sgd.) F. COLLANTES.
Accepting this invitation, the plaintiffs proceeded to do a
considerable business with the defendant through the said Collantes,
as his factor, sending to him as agent for the defendant a good deal
of produce to be sold on commission. Later, and in the month of
February, 1909, the plaintiffs sent to the said Collantes, as agent for
the defendant, 218 bundles of tobacco in the leaf to be sold on
commission, as had been other produce previously. The said
Collantes received said tobacco and sold it for the sum of P1,744.
The charges for such sale were P206.96. leaving in the hands of
said Collantes the sum of P1,537.08 belonging to the plaintiffs. This
sum was, apparently, converted to his own use by said agent.
It appears, however, that prior to the sending of said tobacco the
defendant had severed his relations with Collantes and that the latter
was no longer acting as his factor. This fact was not known to the
plaintiffs; and it is conceded in the case that no notice of any kind
was given by the defendant to the plaintiffs of the termination of the
relations between the defendant and his agent. The defendant
refused to pay the said sum upon demand of the plaintiffs, placing
such refusal upon the ground that at the time the said tobacco was
received and sold by Collantes he was acting personally and not as
agent of the defendant. This action was brought to recover said sum.
As is seen, the only question for our decision is whether or not the
plaintiffs, acting in good faith and without knowledge, having sent
produce to sell on commission to the former agent of the defendant,
can recover of the defendant under the circumstances above set
forth. We are of the opinion that the defendant is liable. Having
advertised the fact that Collantes was his agent and having given
them a special invitation to deal with such agent, it was the duty of
the defendant on the termination of the relationship of principal and
agent to give due and timely notice thereof to the plaintiffs. Failing to
do so, he is responsible to them for whatever goods may have been
in good faith and without negligence sent to the agent without
knowledge, actual or constructive, of the termination of such
relationship.
For these reasons the judgment appealed from is confirmed, without
special finding as to costs.
GOZUN vs.MERCADO
FACTS:
Mercado vied for the gubernatorial post in Pampanga and requested
Gozun, a printing shop owner to draft samples and price quotation of
campaign materials, which he eventually printed as Mercados wife
told him that Mercado had already approved it. Gozun availed of the
ser services and facilities of other printing shop due to the urgency
and limited time to do the job.
Aside from the printed materials, Mercados sister-in-law, Lilian,
obtained from Gozun "cash advance" of P253,000 allegedly for the
allowances of poll watchers. Hence, Mercados total amount due
reached to P2,177,906, P1M of which was partially paid by
Mercados wife.
Despite repeated demands and Mercados promise to pay, he failed
to settle the balance of his account to Gozun, who file a complaint
against respondent to collect the remaining amount.
For his defense, Mercado alleged that the various campaign
materials delivered to him were represented as donations, that he
had not authorized the cash advance, and that the P1M paid by his
wife represented "compensation [to petitioner] who helped a lot in
the campaign as a gesture of goodwill."
The trial court rendered judgment in favor of Gozun. The CA
reversed the trial courts decision and dismissed the complaint for
lack of cause of action.
ISSUE:
Whether Lilian R. Soriano was authorized by the respondent to
receive the cash advance from the petitioner in the amount of
P253,000.00.
HELD:
Contracts entered into in the name of another person by one who
has been given no authority or legal representation or who has acted
beyond his powers are classified as unauthorized contracts and are
declared unenforceable, unless they are ratified.
A special power of attorney is necessary for an agent to, as in this
case, borrow money, unless it be urgent and indispensable for the
preservation of the things which are under administration.
Under Article 1317 of the New Civil Code, a person cannot be bound
by contracts he did not authorize to be entered into his behalf.
It bears noting that Lilian signed in the receipt in her name alone,
without indicating therein that she was acting for and in behalf of
respondent. She thus bound herself in her personal capacity and not
as an agent of respondent or anyone for that matter.
It is a general rule in the law of agency that, in order to bind the
principal by a mortgage on real property executed by an agent, it
must upon its face purport to be made, signed and sealed in the
name of the principal, otherwise, it will bind the agent only. It is not
enough merely that the agent was in fact authorized to make the
mortgage, if he has not acted in the name of the principal.
CA erred in not declaring petitioner as a real party in interest insofar
as recovery of the cost of campaign materials made by petitioners
mother and sister are concerned, upon the wrong notion that they
should have been, but were not, impleaded as plaintiffs.
In sum, respondent has the obligation to pay the total cost of printing
his campaign materials delivered by petitioner in the total of
P1,924,906, less the partial payment of P1,000,000, or P924,906.
JESUS M. GOZUN, petitioner,
vs.
JOSE TEOFILO T. MERCADO a.k.a. DON PEPITO MERCADO,
respondent.
CARPIO MORALES, J.:
On challenge via petition for review on certiorari is the Court of
Appeals Decision of December 8, 2004 and Resolution of April 14,
2005 in CA-G.R. CV No. 763091 reversing the trial courts decision2
against Jose Teofilo T. Mercado a.k.a. Don Pepito Mercado
(respondent) and accordingly dismissing the complaint of Jesus M.
Gozun (petitioner).
In the local elections of 1995, respondent vied for the gubernatorial
post in Pampanga. Upon respondents request, petitioner, owner of
JMG Publishing House, a printing shop located in San Fernando,
Pampanga, submitted to respondent draft samples and price
quotation of campaign materials.
By petitioners claim, respondents wife had told him that respondent
already approved his price quotation and that he could start printing
the campaign materials, hence, he did print campaign materials like
posters bearing respondents photograph,3 leaflets containing the
slate of party candidates,4 sample ballots,5 poll watcher
identification cards,6 and stickers.
Given the urgency and limited time to do the job order, petitioner
availed of the services and facilities of Metro Angeles Printing and of
St. Joseph Printing Press, owned by his daughter Jennifer Gozun
and mother Epifania Macalino Gozun, respectively.
Petitioner delivered the campaign materials to respondents
headquarters along Gapan-Olongapo Road in San Fernando,
Pampanga.8
Meanwhile, on March 31, 1995, respondents sister-in-law, Lilian
Soriano (Lilian) obtained from petitioner "cash advance" of P253,000
allegedly for the allowances of poll watchers who were attending a
seminar and for other related expenses. Lilian acknowledged on
petitioners 1995 diary9 receipt of the amount.10
Petitioner later sent respondent a Statement of Account11 in the total
amount of P2,177,906 itemized as follows: P640,310 for JMG
Publishing House; P837,696 for Metro Angeles Printing; P446,900
for St. Joseph Printing Press; and P253,000, the "cash advance"
obtained by Lilian.
On August 11, 1995, respondents wife partially paid P1,000,000 to
petitioner who issued a receipt12 therefor.
Despite repeated demands and respondents promise to pay,
respondent failed to settle the balance of his account to petitioner.
Petitioner and respondent being compadres, they having been
principal sponsors at the weddings of their respective daughters,
waited for more than three (3) years for respondent to honor his
promise but to no avail, compelling petitioner to endorse the matter
to his counsel who sent respondent a demand letter.13 Respondent,
however, failed to heed the demand.14
Petitioner thus filed with the Regional Trial Court of Angeles City on
November 25, 1998 a complaint15 against respondent to collect the
remaining amount of P1,177,906 plus "inflationary adjustment" and
attorneys fees.
In his Answer with Compulsory Counterclaim,16 respondent denied
having transacted with petitioner or entering into any contract for the
printing of campaign materials. He alleged that the various campaign
materials delivered to him were represented as donations from his
family, friends and political supporters. He added that all contracts
involving his personal expenses were coursed through and signed by
him to ensure compliance with pertinent election laws.

On petitioners claim that Lilian, on his (respondents) behalf, had
obtained from him a cash advance of P253,000, respondent denied
having given her authority to do so and having received the same.
At the witness stand, respondent, reiterating his allegations in his
Answer, claimed that petitioner was his over-all coordinator in charge
of the conduct of seminars for volunteers and the monitoring of other
matters bearing on his candidacy; and that while his campaign
manager, Juanito "Johnny" Cabalu (Cabalu), who was authorized to
approve details with regard to printing materials, presented him
some campaign materials, those were partly donated.17
When confronted with the official receipt issued to his wife
acknowledging her payment to JMG Publishing House of the amount
of P1,000,000, respondent claimed that it was his first time to see the
receipt, albeit he belatedly came to know from his wife and Cabalu
that the P1,000,000 represented "compensation [to petitioner] who
helped a lot in the campaign as a gesture of goodwill."18
Acknowledging that petitioner is engaged in the printing business,
respondent explained that he sometimes discussed with petitioner
strategies relating to his candidacy, he (petitioner) having actively
volunteered to help in his campaign; that his wife was not authorized
to enter into a contract with petitioner regarding campaign materials
as she knew her limitations; that he no longer questioned the
P1,000,000 his wife gave petitioner as he thought that it was just
proper to compensate him for a job well done; and that he came to
know about petitioners claim against him only after receiving a copy
of the complaint, which surprised him because he knew fully well that
the campaign materials were donations.19
Upon questioning by the trial court, respondent could not, however,
confirm if it was his understanding that the campaign materials
delivered by petitioner were donations from third parties.20
Finally, respondent, disclaiming knowledge of the Comelec rule that
if a campaign material is donated, it must be so stated on its face,
acknowledged that nothing of that sort was written on all the
materials made by petitioner.21
As adverted to earlier, the trial court rendered judgment in favor of
petitioner, the dispositive portion of which reads:
WHEREFORE, the plaintiff having proven its (sic) cause of action by
preponderance of evidence, the Court hereby renders a decision in
favor of the plaintiff ordering the defendant as follows:
1. To pay the plaintiff the sum of P1,177,906.00 plus 12% interest per
annum from the filing of this complaint until fully paid;
2. To pay the sum of P50,000.00 as attorneys fees and the costs of
suit.
SO ORDERED.22
Also as earlier adverted to, the Court of Appeals reversed the trial
courts decision and dismissed the complaint for lack of cause of
action.
In reversing the trial courts decision, the Court of Appeals held that
other than petitioners testimony, there was no evidence to support
his claim that Lilian was authorized by respondent to borrow money
on his behalf. It noted that the acknowledgment receipt23 signed by
Lilian did not specify in what capacity she received the money. Thus,
applying Article 1317 of the Civil Code, it held that petitioners claim
for P253,000 is unenforceable.
On the accounts claimed to be due JMG Publishing House
P640,310, Metro Angeles Printing P837,696, and St. Joseph
Printing Press P446,900, the appellate court, noting that since the
owners of the last two printing presses were not impleaded as
parties to the case and it was not shown that petitioner was
authorized to prosecute the same in their behalf, held that petitioner
could not collect the amounts due them.
Finally, the appellate court, noting that respondents wife had paid
P1,000,000 to petitioner, the latters claim of P640,310 (after
excluding the P253,000) had already been settled.
Hence, the present petition, faulting the appellate court to have
erred:
1. . . . when it dismissed the complaint on the ground that there is no
evidence, other than petitioners own testimony, to prove that Lilian
R. Soriano was authorized by the respondent to receive the cash
advance from the petitioner in the amount of P253,000.00.
xxxx
2. . . . when it dismissed the complaint, with respect to the amounts
due to the Metro Angeles Press and St. Joseph Printing Press on the
ground that the complaint was not brought by the real party in
interest.
x x x x25
By the contract of agency a person binds himself to render some
service or to do something in representation or on behalf of another,
with the consent or authority of the latter. Contracts entered into in
the name of another person by one who has been given no authority
or legal representation or who has acted beyond his powers are
classified as unauthorized contracts and are declared unenforceable,
unless they are ratified.
Generally, the agency may be oral, unless the law requires a specific
form. However, a special power of attorney is necessary for an agent
to, as in this case, borrow money, unless it be urgent and
indispensable for the preservation of the things which are under
administration. Since nothing in this case involves the preservation of
things under administration, a determination of whether Soriano had
the special authority to borrow money on behalf of respondent is in
order.
Lim Pin v. Liao Tian, et al.30 held that the requirement of a special
power of attorney refers to the nature of the authorization and not to
its form.
. . . The requirements are met if there is a clear mandate from the
principal specifically authorizing the performance of the act. As early
as 1906, this Court in Strong v. Gutierrez-Repide (6 Phil. 680) stated
that such a mandate may be either oral or written. The one thing vital
being that it shall be express. And more recently, We stated that, if
the special authority is not written, then it must be duly established
by evidence:
"the Rules require, for attorneys to compromise the litigation of
their clients, a special authority. And while the same does not state
that the special authority be in writing the Court has every reason to
expect that, if not in writing, the same be duly established by
evidence other than the self-serving assertion of counsel himself that
such authority was verbally given him."31 (Emphasis and
underscoring supplied)
Petitioner submits that his following testimony suffices to establish
that respondent had authorized Lilian to obtain a loan from him, viz:
Q : Another caption appearing on Exhibit "A" is cash advance, it
states given on 3-31-95 received by Mrs. Lilian Soriano in behalf of
Mrs. Annie Mercado, amount P253,000.00, will you kindly tell the
Court and explain what does that caption means?
A : It is the amount representing the money borrowed from me by the
defendant when one morning they came very early and talked to me
and told me that they were not able to go to the bank to get money
for the allowances of Poll Watchers who were having a seminar at
the headquarters plus other election related expenses during that
day, sir.
Q : Considering that this is a substantial amount which according to
you was taken by Lilian Soriano, did you happen to make her
acknowledge the amount at that time?
A : Yes, sir.32 (Emphasis supplied)
Petitioners testimony failed to categorically state, however, whether
the loan was made on behalf of respondent or of his wife. While
petitioner claims that Lilian was authorized by respondent, the
statement of account marked as Exhibit "A" states that the amount
was received by Lilian "in behalf of Mrs. Annie Mercado."
Invoking Article 187333 of the Civil Code, petitioner submits that
respondent informed him that he had authorized Lilian to obtain the
loan, hence, following Macke v. Camps34 which holds that one who
clothes another with apparent authority as his agent, and holds him
out to the public as such, respondent cannot be permitted to deny
the authority.
Petitioners submission does not persuade. As the appellate court
observed:
. . . Exhibit "B" [the receipt issued by petitioner] presented by plaintiff-
appellee to support his claim unfortunately only indicates the Two
Hundred Fifty Three Thousand Pesos (P253,0000.00) was received
by one Lilian R. Soriano on 31 March 1995, but without specifying for
what reason the said amount was delivered and in what capacity did
Lilian R. Soriano received [sic] the money. The note reads:
"3-31-95
261,120 ADVANCE MONEY FOR TRAINEE
RECEIVED BY
RECEIVED FROM JMG THE AMOUNT OF 253,000 TWO
HUNDRED FIFTY THREE THOUSAND PESOS
(SIGNED)
LILIAN R. SORIANO
3-31-95"
Nowhere in the note can it be inferred that defendant-appellant was
connected with the said transaction. Under Article 1317 of the New
Civil Code, a person cannot be bound by contracts he did not
authorize to be entered into his behalf.35 (Underscoring supplied)
It bears noting that Lilian signed in the receipt in her name alone,
without indicating therein that she was acting for and in behalf of
respondent. She thus bound herself in her personal capacity and not
as an agent of respondent or anyone for that matter.
It is a general rule in the law of agency that, in order to bind the
principal by a mortgage on real property executed by an agent, it
must upon its face purport to be made, signed and sealed in the
name of the principal, otherwise, it will bind the agent only. It is not
enough merely that the agent was in fact authorized to make the
mortgage, if he has not acted in the name of the principal. x x x36
(Emphasis and underscoring supplied)
On the amount due him and the other two printing presses, petitioner
explains that he was the one who personally and directly contracted
with respondent and he merely sub-contracted the two printing
establishments in order to deliver on time the campaign materials
ordered by respondent.
Respondent counters that the claim of sub-contracting is a change in
petitioners theory of the case which is not allowed on appeal.
In Oco v. Limbaring,37 this Court ruled:
The parties to a contract are the real parties in interest in an action
upon it, as consistently held by the Court. Only the contracting
parties are bound by the stipulations in the contract; they are the
ones who would benefit from and could violate it. Thus, one who is
not a party to a contract, and for whose benefit it was not expressly
made, cannot maintain an action on it. One cannot do so, even if the
contract performed by the contracting parties would incidentally inure
to one's benefit.38 (Underscoring supplied)
In light thereof, petitioner is the real party in interest in this case. The
trial courts findings on the matter were affirmed by the appellate
court.39 It erred, however, in not declaring petitioner as a real party
in interest insofar as recovery of the cost of campaign materials
made by petitioners mother and sister are concerned, upon the
wrong notion that they should have been, but were not, impleaded as
plaintiffs.
In sum, respondent has the obligation to pay the total cost of printing
his campaign materials delivered by petitioner in the total of
P1,924,906, less the partial payment of P1,000,000, or P924,906.
WHEREFORE, the petition is GRANTED. The Decision dated
December 8, 2004 and the Resolution dated April 14, 2005 of the
Court of Appeals are hereby REVERSED and SET ASIDE.
The April 10, 2002 Decision of the Regional Trial Court of Angeles
City, Branch 57, is REINSTATED mutatis mutandis, in light of the
foregoing discussions. The trial courts decision is modified in that
the amount payable by respondent to petitioner is reduced to
P924,906.
SO ORDERED.
ANGELES vs. PNR
FACTS:
PNR accepted Romualdez offer to buy PNRs scrap/unserviceable
rails located in Del Carmen and Lubao, Pampanga for the total
amount of P96,600.00 which Romualdez immediately paid and
authorized his Lizette Angeles to be his representative in the
withdrawal of the said scrap rails.
However, the PNR subsequently suspended the withdrawal due to
documentary discrepancies coupled by reported pilferages of PNR
scrap properties in Tarlac.
PNR, however, refused the demand of Lizette and her husband to
refund the P96,600 alleging that as per delivery receipt duly signed
by Lizette unserviceable rails had already been withdrawn worth
P114,781.80, an amount that exceeds the claim for refund.
The spouses Angeles filed suit against the PNR for specific
performance and damages. Meanwhile, Lizette W. Angeles passed
away and was substituted by her heirs, among whom is her
husband, herein petitioner Laureno T. Angeles.
RTC dismissed the complaint for lack of cause of as the spouses
Angeles are not the real parties-in-interest since Lizette was merely
a representative of Romualdez in the withdrawal of scrap or
unserviceable rails awarded to him and not an assignee to the
latter's rights with respect to the award. CA affirmed.
ISSUE:
Whether Angeles is just an agent hence not the real party in interest.
HELD:
Where agency exists, the third party's (in this case, PNR's) liability
on a contract is to the principal and not to the agent and the
relationship of the third party to the principal is the same as that in a
contract in which there is no agent. He cannot thus sue or be sued
on the contract. Since a contract may be violated only by the parties
thereto as against each other, the real party-in-interest, either as
plaintiff or defendant in an action upon that contract must, generally,
be a contracting party.
Upon scrutiny of the subject Romualdez's letter, it is at once
apparent that Lizette was to act just as a "representative" of
Romualdez in the "withdrawal of rails," and not an assignee.
If Lizette was without legal standing to sue and appear in this case,
there is more reason to hold that her petitioner husband, either as
her conjugal partner or her heir, is also without such standing.
LAUREANO T. ANGELES, Petitioner,
vs.
PHILIPPINE NATIONAL RAILWAYS (PNR) AND RODOLFO
FLORES, 1Respondents.
DECISION
GARCIA, J.:
Under consideration is this petition for review under Rule 45 of the
Rules of Court assailing and seeking to set aside the following
issuances of the Court of Appeals (CA) in CA-G.R. CV No. 54062, to
wit:
1. Decision 2 dated June 4, 2001, affirming an earlier decision of the
Regional Trial Court (RTC) of Quezon City, Branch 79, which
dismissed the complaint for specific performance and damages
thereat commenced by the petitioner against the herein respondents;
and
2. Resolution 3 dated September 17, 2001, denying the petitioner's
motion for reconsideration.
The facts:
On May 5, 1980, the respondent Philippine National Railways (PNR)
informed a certain Gaudencio Romualdez (Romualdez, hereinafter)
that it has accepted the latters offer to buy, on an "AS IS, WHERE
IS" basis, the PNRs scrap/unserviceable rails located in Del Carmen
and Lubao, Pampanga at P1,300.00 and P2,100.00 per metric ton,
respectively, for the total amount of P96,600.00. After paying the
stated purchase price, Romualdez addressed a letter to Atty.
Cipriano Dizon, PNRs Acting Purchasing Agent. Bearing date May
26, 1980, the letter reads:
Dear Atty. Dizon:
This is to inform you as President of San Juanico Enterprises, that I
have authorized the bearer, LIZETTE R. WIJANCO of No. 1606
Aragon St., Sta. Cruz, Manila, to be my lawful representative in the
withdrawal of the scrap/unserviceable rails awarded to me.
For this reason, I have given her the original copy of the award,
dated May 5, 1980 and O.R. No. 8706855 dated May 20, 1980 which
will indicate my waiver of rights, interests and participation in favor of
LIZETTE R. WIJANCO.
Thank you for your cooperation.
Very truly yours,
(Sgd.) Gaudencio Romualdez
The Lizette R. Wijanco mentioned in the letter was Lizette Wijanco-
Angeles, petitioner's now deceased wife. That very same day May
26, 1980 Lizette requested the PNR to transfer the location of
withdrawal for the reason that the scrap/unserviceable rails located
in Del Carmen and Lubao, Pampanga were not ready for hauling.
The PNR granted said request and allowed Lizette to withdraw
scrap/unserviceable rails in Murcia, Capas and San Miguel, Tarlac
instead. However, the PNR subsequently suspended the withdrawal
in view of what it considered as documentary discrepancies coupled
by reported pilferages of over P500,000.00 worth of PNR scrap
properties in Tarlac.
Consequently, the spouses Angeles demanded the refund of the
amount of P96,000.00. The PNR, however, refused to pay, alleging
that as per delivery receipt duly signed by Lizette, 54.658 metric tons
of unserviceable rails had already been withdrawn which, at
P2,100.00 per metric ton, were worth P114,781.80, an amount that
exceeds the claim for refund.
On August 10, 1988, the spouses Angeles filed suit against the PNR
and its corporate secretary, Rodolfo Flores, among others, for
specific performance and damages before the Regional Trial Court of
Quezon City. In it, they prayed that PNR be directed to deliver 46
metric tons of scrap/unserviceable rails and to pay them damages
and attorney's fees.
Issues having been joined following the filing by PNR, et al., of their
answer, trial ensued. Meanwhile, Lizette W. Angeles passed away
and was substituted by her heirs, among whom is her husband,
herein petitioner Laureno T. Angeles.
On April 16, 1996, the trial court, on the postulate that the spouses
Angeles are not the real parties-in-interest, rendered judgment
dismissing their complaint for lack of cause of action. As held by the
court, Lizette was merely a representative of Romualdez in the
withdrawal of scrap or unserviceable rails awarded to him and not an
assignee to the latter's rights with respect to the award.
Aggrieved, the petitioner interposed an appeal with the CA, which, as
stated at the threshold hereof, in its decision of June 4, 2001,
dismissed the appeal and affirmed that of the trial court. The
affirmatory decision was reiterated by the CA in its resolution of
September 17, 2001, denying the petitioners motion for
reconsideration.
Hence, the petitioners present recourse on the submission that the
CA erred in affirming the trial court's holding that petitioner and his
spouse, as plaintiffs a quo, had no cause of action as they were not
the real parties-in-interest in this case.
We DENY the petition.
At the crux of the issue is the matter of how the aforequoted May 26,
1980 letter of Romualdez to Atty. Dizon of the PNR should be taken:
was it meant to designate, or has it the effect of designating, Lizette
W. Angeles as a mere agent or as an assignee of his (Romualdez's)
interest in the scrap rails awarded to San Juanico Enterprises? The
CAs conclusion, affirmatory of that of the trial court, is that Lizette
was not an assignee, but merely an agent whose authority was
limited to the withdrawal of the scrap rails, hence, without personality
to sue.
Where agency exists, the third party's (in this case, PNR's) liability
on a contract is to the principal and not to the agent and the
relationship of the third party to the principal is the same as that in a
contract in which there is no agent. Normally, the agent has neither
rights nor liabilities as against the third party. He cannot thus sue or
be sued on the contract. Since a contract may be violated only by the
parties thereto as against each other, the real party-in-interest, either
as plaintiff or defendant in an action upon that contract must,
generally, be a contracting party.
The legal situation is, however, different where an agent is
constituted as an assignee. In such a case, the agent may, in his
own behalf, sue on a contract made for his principal, as an assignee
of such contract. The rule requiring every action to be prosecuted in
the name of the real party-in-interest recognizes the assignment of
rights of action and also recognizes that when one has a right
assigned to him, he is then the real party-in-interest and may
maintain an action upon such claim or right. 4
Upon scrutiny of the subject Romualdez's letter to Atty. Cipriano
Dizon dated May 26, 1980, it is at once apparent that Lizette was to
act just as a "representative" of Romualdez in the "withdrawal of
rails," and not an assignee. For perspective, we reproduce the
contents of said letter:
This is to inform you as President of San Juanico Enterprises, that I
have authorized the bearer, LIZETTE R. WIJANCO x x x to be my
lawful representative in the withdrawal of the scrap/unserviceable
rails awarded to me.
For this reason, I have given her the original copy of the award,
dated May 5, 1980 and O.R. No. 8706855 dated May 20, 1980 which
will indicate my waiver of rights, interests and participation in favor of
LIZETTE R. WIJANCO. (Emphasis added)
If Lizette was without legal standing to sue and appear in this case,
there is more reason to hold that her petitioner husband, either as
her conjugal partner or her heir, is also without such standing.
Petitioner makes much of the fact that the terms "agent" or "attorney-
in-fact" were not used in the Romualdez letter aforestated. It bears to
stress, however, that the words "principal" and "agent," are not the
only terms used to designate the parties in an agency relation. The
agent may also be called an attorney, proxy, delegate or, as here,
representative.
It cannot be over emphasized that Romualdez's use of the active
verb "authorized," instead of "assigned," indicated an intent on his
part to keep and retain his interest in the subject matter. Stated a bit
differently, he intended to limit Lizettes role in the scrap transaction
to being the representative of his interest therein.
Petitioner submits that the second paragraph of the Romualdez
letter, stating - "I have given [Lizette] the original copy of the award x
x x which will indicate my waiver of rights, interests and participation
in favor of Lizette R. Wijanco" - clarifies that Lizette was intended to
be an assignee, and not a mere agent.
We are not persuaded. As it were, the petitioner conveniently omitted
an important phrase preceding the paragraph which would have put
the whole matter in context. The phrase is "For this reason," and the
antecedent thereof is his (Romualdez) having appointed Lizette as
his representative in the matter of the withdrawal of the scrap items.
In fine, the key phrase clearly conveys the idea that Lizette was
given the original copy of the contract award to enable her to
withdraw the rails as Romualdezs authorized representative.
Article 1374 of the Civil Code provides that the various stipulations of
a contract shall be read and interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken
jointly. In fine, the real intention of the parties is primarily to be
determined from the language used and gathered from the whole
instrument. When put into the context of the letter as a whole, it is
abundantly clear that the rights which Romualdez waived or ceded in
favor of Lizette were those in furtherance of the agency relation that
he had established for the withdrawal of the rails.
At any rate, any doubt as to the intent of Romualdez generated by
the way his letter was couched could be clarified by the acts of the
main players themselves. Article 1371 of the Civil Code provides that
to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally
considered. In other words, in case of doubt, resort may be made to
the situation, surroundings, and relations of the parties.
The fact of agency was, as the trial court aptly observed, 5 confirmed
in subsequent letters from the Angeles spouses in which they
themselves refer to Lizette as "authorized representative" of San
Juanico Enterprises. Mention may also be made that the withdrawal
receipt which Lizette had signed indicated that she was doing so in a
representative capacity. One professing to act as agent for another is
estopped to deny his agency both as against his asserted principal
and third persons interested in the transaction which he engaged in.
Whether or not an agency has been created is a question to be
determined by the fact that one represents and is acting for another.
The appellate court, and before it, the trial court, had peremptorily
determined that Lizette, with respect to the withdrawal of the scrap in
question, was acting for Romualdez. And with the view we take of
this case, there were substantial pieces of evidence adduced to
support this determination. The desired reversal urged by the
petitioner cannot, accordingly, be granted. For, factual findings of the
trial court, adopted and confirmed by the CA, are, as a rule, final and
conclusive and may not be disturbed on appeal. 6 So it must be
here.
Petitioner maintains that the Romualdez letter in question was not in
the form of a special power of attorney, implying that the latter had
not intended to merely authorize his wife, Lizette, to perform an act
for him (Romualdez). The contention is specious. In the absence of
statute, no form or method of execution is required for a valid power
of attorney; it may be in any form clearly showing on its face the
agents authority. 7
The letter under consideration is sufficient to constitute a power of
attorney. Except as may be required by statute, a power of attorney
is valid although no notary public intervened in its execution. 9
A power of attorney must be strictly construed and pursued. The
instrument will be held to grant only those powers which are
specified therein, and the agent may neither go beyond nor deviate
from the power of attorney. 10 Contextually, all that Lizette was
authorized to do was to withdraw the unserviceable/scrap railings.
Allowing her authority to sue therefor, especially in her own name,
would be to read something not intended, let alone written in the
Romualdez letter.
Finally, the petitioner's claim that Lizette paid the amount of
P96,000.00 to the PNR appears to be a mere afterthought; it ought
to be dismissed outright under the estoppel principle. In earlier
proceedings, petitioner himself admitted in his complaint that it was
Romualdez who paid this amount.
WHEREFORE, the petition is DENIED and the assailed decision of
the CA is AFFIRMED.
Costs against the petitioner.
SO ORDERED.

A power of attorney is only but an instrument in writing by which a

person, as principal, appoints another as his agent and confers upon
him the authority to perform certain specified acts on behalf of the
principal. The written authorization itself is the power of attorney, and
this is clearly indicated by the fact that it has also been called a
"letter of attorney." Its primary purpose is not to define the authority
of the agent as between himself and his principal but to evidence the
authority of the agent to third parties with whom the agent deals. 8

SIASAT vs. IAC
FACTS:
Nacianceno succeeded in convincing officials of DepEd to purchase
without public bidding, one million pesos worth of national flags for
the use of public schools throughout the country. By hand-carrying
the different indorsements, she was able to expedite the approval of
the purchase but the Budget Division requested a formal offer to
deliver the flags before releasing the budget. Hence, the owner of
United Flag drew a document authorizing Nacianceno to represent
United Flag Industry to deal with any entity or organization, private or
government in connection with the marketing of their products-flags
and all its accessories, which will then entitle Nacianceno to a 30%
commission.
The day after the first delivery, Naciancenos authority to represent
the United Flag Industry was revoked by petitioner Primitivo Siasat,
who subsequently received payment for the second delivery of 7,833
flags without giving Naciancenos commission rationating that the
agency had already been revoked.
Nacianceno filed a complaint to recover her commission and the trial
court ruled in her favor, which was affirmed by the CA.
ISSSUE:
Whether Nacianceno is still entitled to receive commission for the
second delivery.
HELD:
We find Siasats argument regarding Naciancenos incapacity to
represent them in the transaction with the Department untenable.
There are several kinds of agents one of which is the general agent,
who is one authorized to do all acts pertaining to a business of a
certain kind or at a particular place, or all acts pertaining to a
business of a particular class or series.
One does not have to undertake a close scrutiny of the document
embodying the agreement between the petitioners and the
respondent to deduce that the 'latter was instituted as a general
agent. Indeed, it can easily be seen by the way general words were
employed in the agreement that no restrictions were intended as to
the manner the agency was to be carried out or in the place where it
was to be executed. The power granted to the respondent was so
broad that it practically covers the negotiations leading to, and the
execution of, a contract of sale of petitioners' merchandise with any
entity or organization.
The indorsement to the Budget Commission attests to the fact that
out of the total budget of the Department for the fiscal year 1975,
"P1,000,000.00 is for the purchase of national flags." It was divided
into three releases but due to the necessity of furnishing all of the
public schools in the country with the Philippine flag, Secretary
Manuel requested for the immediate release of the programmed
allotments intended for the third and fourth quarters. These
circumstances explain why two purchase orders and two deliveries
had to be made on one transaction.
If the contracts were separate and distinct from one another, the
whole or at least a substantial part of the government's supply
procurement process would have been repeated. In this case, what
were issued were mere indorsements for the release of funds and
authorization for the next purchase.
Since only one transaction was involved, we deny the petitioners'
contention that respondent Nacianceno is not entitled to the
stipulated commission on the second delivery because of the
revocation of the agency effected after the first delivery. The
revocation of agency could not prevent the respondent from earning
her commission because as the trial court opined, it came too late,
the contract of sale having been already perfected and partly
executed.
PRIMITIVO SIASAT and MARCELINO SIASAT, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and TERESITA
NACIANCENO, respondents.
GUTIERREZ, JR., J.:
Sometime in 1974, respondent Teresita Nacianceno succeeded in
convincing officials of the then Department of Education and Culture,
hereinafter called Department, to purchase without public bidding,
one million pesos worth of national flags for the use of public schools
throughout the country. The respondent was able to expedite the
approval of the purchase by hand-carrying the different indorsements
from one office to another, so that by the first week of September,
1974, all the legal requirements had been complied with, except the
release of the purchase orders. When Nacianceno was informed by
the Chief of the Budget Division of the Department that the purchase
orders could not be released unless a formal offer to deliver the flags
in accordance with the required specifications was first submitted for
approval, she contacted the owners of the United Flag Industry on
September 17, 1974. The next day, after the transaction was
discussed, the following document (Exhibit A) was drawn up:
Mrs. Tessie Nacianceno,
This is to formalize our agreement for you to represent United Flag
Industry to deal with any entity or organization, private or
government in connection with the marketing of our products-flags
and all its accessories.
For your service, you will be entitled to a commission of thirty
(30%) percent.
Signed
Mr. Primitive Siasat
Owner and Gen. Manager
On October 16, 1974, the first delivery of 7,933 flags was made by
the United Flag Industry. The next day, on October 17, 1974, the
respondent's authority to represent the United Flag Industry was
revoked by petitioner Primitivo Siasat.
According to the findings of the courts below, Siasat, after receiving
the payment of P469,980.00 on October 23, 1974 for the first
delivery, tendered the amount of P23,900.00 or five percent (5%) of
the amount received, to the respondent as payment of her
commission. The latter allegedly protested. She refused to accept
the said amount insisting on the 30% commission agreed upon. The
respondent was prevailed upon to accept the same, however,
because of the assurance of the petitioners that they would pay the
commission in full after they delivered the other half of the order. The
respondent states that she later on learned that petitioner Siasat had
already received payment for the second delivery of 7,833 flags.
When she confronted the petitioners, they vehemently denied receipt
of the payment, at the same time claiming that the respondent had
no participation whatsoever with regard to the second delivery of
flags and that the agency had already been revoked.
The respondent originally filed a complaint with the Complaints and
Investigation Office in Malacaang but when nothing came of the
complaint, she filed an action in the Court of First Instance of Manila
to recover the following commissions: 25%, as balance on the first
delivery and 30%, on the second delivery.
The trial court decided in favor of the respondent. The dispositive
portion of the decision reads as follows:
WHEREFORE, judgment is hereby rendered sentencing Primitivo
Siasat to pay to the plaintiff the sum of P281,988.00, minus the sum
P23,900.00, with legal interest from the date of this decision, and
ordering the defendants to pay jointly and solidarily the sum of
P25,000.00 as moral damages, and P25,000.00 as attorney's fees,
also with legal interest from the date of this decision, and the costs.
The decision was affirmed in toto by the Intermediate Appellate
Court. After their motion for reconsideration was denied, the
petitioners went to this Court on a petition for review on August 6,
1984.
In assailing the appellate court's decision, the petition tenders the
following arguments: first, the authorization making the respondent
the petitioner's representative merely states that she could deal with
any entity in connection with the marketing of their products for a
commission of 30%. There was no specific authorization for the sale
of 15,666 Philippine flags to the Department; second, there were two
transactions involved evidenced by the separate purchase orders
and separate delivery receipts, Exhibit 6-C for the purchase and
deliver on October 16, 1974, and Exhibits 7 to 7-C, for the purchase
and delivery on November 6, 1974. The revocation of agency
effected by the parties with mutual consent on October 17, 1974,
therefore, forecloses the respondent's claim of 30% commission on
the second transaction; and last, there was no basis for the granting
of attorney's fees and moral damages because there was no
showing of bad faith on the part of the petitioner. It was respondent
who showed bad faith in denying having received her commission on
the first delivery. The petitioner's counterclaim, therefore, should
have been granted.
This petition was initially dismissed for lack of merit in a minute
resolution.On a motion for reconsideration, however,this Court give
due course to the petition on November 14, 1984.
After a careful review of the records, we are constrained to sustain
with some modifications the decision of the appellate court.
We find respondent's argument regarding respondent's incapacity to
represent them in the transaction with the Department untenable.
There are several kinds of agents. To quote a commentator on the
matter:
An agent may be (1) universal: (2) general, or (3) special. A
universal; agent is one authorized to do all acts for his principal
which can lawfully be delegated to an agent. So far as such a
condition is possible, such an agent may be said to have universal
authority. (Mec. Sec. 58).
A general agent is one authorized to do all acts pertaining to a
business of a certain kind or at a particular place, or all acts
pertaining to a business of a particular class or series. He has
usually authority either expressly conferred in general terms or in
effect made general by the usages, customs or nature of the
business which he is authorized to transact.
An agent, therefore, who is empowered to transact all the business
of his principal of a particular kind or in a particular place, would, for
this reason, be ordinarily deemed a general agent. (Mec Sec. ,30).
A special agent is one authorized to do some particular act or to act
upon some particular occasion. lie acts usually in accordance with
specific instructions or under limitations necessarily implied from the
nature of the act to be done. (Mec. Sec. 61) (Padilla, Civil Law The
Civil Code Annotated, Vol. VI, 1969 Edition, p. 204).
One does not have to undertake a close scrutiny of the document
embodying the agreement between the petitioners and the
respondent to deduce that the 'latter was instituted as a general
agent. Indeed, it can easily be seen by the way general words were
employed in the agreement that no restrictions were intended as to
the manner the agency was to be carried out or in the place where it
was to be executed. The power granted to the respondent was so
broad that it practically covers the negotiations leading to, and the
execution of, a contract of sale of petitioners' merchandise with any
entity or organization.
There is no merit in petitioners' allegations that the contract of
agency between the parties was entered into under fraudulent
representation because respondent "would not disclose the agency
with which she was supposed to transact and made the petitioner
believe that she would be dealing with The Visayas", and that "the
petitioner had known of the transactions and/or project for the said
purchase of the Philippine flags by the Department of Education and
Culture and precisely it was the one being followed up also by the
petitioner."
If the circumstances were as claimed by the petitioners, they would
have exerted efforts to protect their interests by limiting the
respondent's authority. There was nothing to prevent the petitioners
from stating in the contract of agency that the respondent could
represent them only in the Visayas. Or to state that the Department
of Education and Culture and the Department of National Defense,
which alone would need a million pesos worth of flags, are outside
the scope of the agency. As the trial court opined, it is incredible that
they could be so careless after being in the business for fifteen
years.
A cardinal rule of evidence embodied in Section 7 Rule 130 of our
Revised Rules of Court states that "when the terms of an agreement
have been reduced to writing, it is to be considered as containing all
such terms, and, therefore, there can be between the parties and
their successors-in-interest, no evidence of the terms of the
agreement other than the contents of the writing", except in cases
specifically mentioned in the same rule. Petitioners have failed to
show that their agreement falls under any of these exceptions. The
respondent was given ample authority to transact with the
Department in behalf of the petitioners. Equally without merit is the
petitioners' proposition that the transaction involved two separate
contracts because there were two purchase orders and two
deliveries. The petitioners' evidence is overcome by other pieces of
evidence proving that there was only one transaction.
The indorsement of then Assistant Executive Secretary Roberto
Reyes to the Budget Commission on September 3, 1974 (Exhibit
"C") attests to the fact that out of the total budget of the Department
for the fiscal year 1975, "P1,000,000.00 is for the purchase of
national flags." This is also reflected in the Financial and Work Plan
Request for Allotment (Exhibit "F") submitted by Secretary Juan
Manuel for fiscal year 1975 which however, divided the allocation
and release of the funds into three, corresponding to the second,
third, and fourth quarters of the said year. Later correspondence
between the Department and the Budget Commission (Exhibits "D"
and "E") show that the first allotment of P500.000.00 was released
during the second quarter. However, due to the necessity of
furnishing all of the public schools in the country with the Philippine
flag, Secretary Manuel requested for the immediate release of the
programmed allotments intended for the third and fourth quarters.
These circumstances explain why two purchase orders and two
deliveries had to be made on one transaction.
The petitioners' evidence does not necessarily prove that there were
two separate transactions. Exhibit "6" is a general indorsement made
by Secretary Manuel for the purchase of the national flags for public
schools. It contains no reference to the number of flags to be ordered
or the amount of funds to be released. Exhibit "7" is a letter request
for a "similar authority" to purchase flags from the United Flag
Industry. This was, however, written by Dr. Narciso Albarracin who
was appointed Acting Secretary of the Department after Secretary
Manuel's tenure, and who may not have known the real nature of the
transaction.
If the contracts were separate and distinct from one another, the
whole or at least a substantial part of the government's supply
procurement process would have been repeated. In this case, what
were issued were mere indorsements for the release of funds and
authorization for the next purchase.

Since only one transaction was involved, we deny the petitioners'
contention that respondent Nacianceno is not entitled to the
stipulated commission on the second delivery because of the
revocation of the agency effected after the first delivery. The
revocation of agency could not prevent the respondent from earning
her commission because as the trial court opined, it came too late,
the contract of sale having been already perfected and partly
executed.
In Macondray & Co. v. Sellner (33 Phil. 370, 377), a case analogous
to this one in principle, this Court held:
We do not mean to question the general doctrine as to the power of
a principal to revoke the authority of his agent at will, in the absence
of a contract fixing the duration of the agency (subject, however, to
some well defined exceptions). Our ruling is that at the time fixed by
the manager of the plaintiff company for the termination of the
negotiations, the defendant real estate agent had already earned the
commissions agreed upon, and could not be deprived thereof by the
arbitrary action of the plaintiff company in declining to execute the
contract of sale for some reason personal to itself.
The principal cannot deprive his agent of the commission agreed
upon by cancelling the agency and, thereafter, dealing directly with
the buyer. (Infante v. Cunanan, 93 Phil. 691).
The appellate courts citation of its previous ruling in Heimbrod et al.
v. Ledesma (C.A. 49 O.G. 1507) is correct:
The appellee is entitled to recovery. No citation is necessary to show
that the general law of contracts the equitable principle of estoppel.
and the expense of another, uphold payment of compensation for
services rendered.
There is merit, however, in the petitioners' contention that the agent's
commission on the first delivery was fully paid. The evidence does
not sustain the respondent's claim that the petitioners paid her only
5% and that their right to collect another 25% commission on the first
delivery must be upheld.
When respondent Nacianceno asked the Malacanang Complaints
and Investigation Office to help her collect her commission, her
statement under oath referred exclusively to the 30% commission on
the second delivery. The statement was emphatic that "now" her
demand was for the 30% commission on the (second) release of
P469,980.00. The demand letter of the respondent's lawyer dated
November 13, 1984 asked petitioner Siasat only for the 30%
commission due from the second delivery. The fact that the
respondent demanded only the commission on the second delivery
without reference to the alleged unpaid balance which was only
slightly less than the amount claimed can only mean that the
commission on the first delivery was already fully paid, Considering
the sizeable sum involved, such an omission is too glaringly remiss
to be regarded as an oversight.
Moreover, the respondent's authorization letter (Exhibit "5") bears
her signature with the handwritten words "Fully Paid", inscribed
above it.
The respondent contested her signature as a forgery, Handwriting
experts from two government agencies testified on the matter. The
reason given by the trial court in ruling for the respondent is too
flimsy to warrant a finding of forgery.
The court stated that in thirteen documents presented as exhibits,
the private respondent signed her name as "Tessie Nacianceno"
while in this particular instance, she signed as "T. Nacianceno."
The stated basis is inadequate to sustain the respondent's allegation
of forgery. A variance in the manner the respondent signed her name
can not be considered as conclusive proof that the questioned
signature is a forgery. The mere fact that the respondent signed
thirteen documents using her full name does not rule out the
possibility of her having signed the notation "Fully Paid", with her
initial for the given came and the surname written in full. What she
was signing was a mere acknowledgment.
This leaves the expert testimony as the sole basis for the verdict of
forgery.
In support of their allegation of full payment as evidenced by the
signed authorization letter (Exhibit "5-A"), the petitioners presented
as witness Mr. Francisco Cruz. Jr., a senior document examiner of
the Philippine Constabulary Crime laboratory. In rebuttal, the
respondent presented Mr. Arcadio Ramos, a junior document
examiner of the National Bureau of Investigation.
While the experts testified in a civil case, the principles in criminal
cases involving forgery are applicable. Forgery cannot be presumed.
It must be proved.
In Borromeo v. Court of Appeals (131 SCRA 318, 326) we held that:
xxx xxx xxx
... Where the evidence, as here, gives rise to two probabilities, one
consistent with the defendant's innocence and another indicative of
his guilt, that which is favorable to the accused should be
considered. The constitutional presumption of innocence continues
until overthrown by proof of guilt beyond reasonable doubt, which
requires moral certainty which convinces and satisfies the reason
and conscience of those who are to act upon it. (People v. Clores, et
al., 125 SCRA 67; People v. Bautista, 81 Phil. 78).
We ruled in another case that where the supposed expert's
testimony would constitute the sole ground for conviction and there is
equally convincing expert testimony to the contrary, the constitutional
presumption of innocence must prevail. (Lorenzo Ga. Cesar v. Hon.
Sandiganbayan and People of the Philippines, 134 SCRA 105). In
the present case, the circumstances earlier mentioned taken with the
testimony of the PC senior document examiner lead us to rule
against forgery.
We also rule against the respondent's allegation that the petitioners
acted in bad faith when they revoked the agency given to the
respondent.
Fraud and bad faith are matters not to be presumed but matters to
be alleged with sufficient facts. To support a judgment for damages,
facts which justify the inference of a lack or absence of good faith
must be alleged and proven. (Bacolod-Murcia Milling Co., Inc. vs.
First Farmers Milling Co., Inc., Etc., 103 SCRA 436).
There is no evidence on record from which to conclude that the
revocation of the agency was deliberately effected by the petitioners
to avoid payment of the respondent's commission. What appears
before us is only the petitioner's use in court of such a factual
allegation as a defense against the respondent's claim. This alone
does not per se make the petitioners guilty of bad faith for that
defense should have been fully litigated.
Moral damages cannot be awarded in the absence of a wrongful act
or omission or of fraud or bad faith. (R & B Surety & Insurance Co.,
Inc. vs. Intermediate Appellate Court, 129 SCRA 736).
We therefore, rule that the award of P25,000.00 as moral damages
is without basis.
The additional award of P25,000.00 damages by way of attorney's
fees, was given by the courts below on the basis of Article 2208,
Paragraph 2, of the Civil Code, which provides: "When the
defendant's act or omission has compelled the plaintiff to litigate with
third persons or to incur expenses to protect his interests;" attorney's
fees may be awarded as damages. (Pirovano et al. v. De la Rama
Steamship Co., 96 Phil. 335).
The underlying circumstances of this case lead us to rule out any
award of attorney's fees. For one thing, the respondent did not come
to court with completely clean hands. For another, the petitioners
apparently believed they could legally revoke the agency in the
manner they did and deal directly with education officials handling
the purchase of Philippine flags. They had reason to sincerely
believe they did not have to pay a commission for the second
delivery of flags.
We cannot close this case without commenting adversely on the
inexplicably strange procurement policies of the Department of
Education and Culture in its purchase of Philippine flags. There is no
reason why a shocking 30% of the taxpayers' money should go to an
agent or facilitator who had no flags to sell and whose only work was
to secure and handcarry the indorsements of education and budget
officials. There are only a few manufacturers of flags in our country
with the petitioners claiming to have supplied flags for our public
schools on earlier occasions. If public bidding was deemed
unnecessary, the Department should have negotiated directly with
flag manufacturers. Considering the sad plight of underpaid and
overworked classroom teachers whose pitiful salaries and
allowances cannot sometimes be paid on time, a P300,000.00 fee
for a P1,000,000.00 purchase of flags is not only clearly unnecessary
but a scandalous waste of public funds as well.
WHEREFORE, the decision of the respondent court is hereby
MODIFIED. The petitioners are ordered to pay the respondent the
amount of ONE HUNDRED FOURTY THOUSAND NINE HUNDRED
AND NINETY FOUR PESOS (P140,994.00) as her commission on
the second delivery of flags with legal interest from the date of the
trial court's decision. No pronouncement as to costs.
SO ORDERED.
VELOSO vs. COURT OF APPEALS
FACTS:
Veloso was the owner of a parcel of land and its title was registered
in his name. The said title was subsequently cancelled and a new
one, was issued in the name of Aglaloma.
Veloso filed an action for annulment of documents, reconveyance of
property alleging that he was the absolute owner of the subject
property and he never authorized anybody, not even his wife, to sell
it.
However, based on the records at the Registry of Deeds, the transfer
of property was supported by a General Power of and Deed of
Absolute Sale, executed by his wife Irma Veloso, before she went
abroad. In the said document the wife was appearing as his attorney-
in-fact, and defendant Aglaloma Escario. Veloso, however, denied
having executed the power of attorney and alleged that his signature
was falsified.
Defendant Aglaloma Escario in her answer alleged that she was a
buyer in good faith and denied any knowledge of the alleged
irregularity.
RTC adjudged Aglaloma as the lawful owner of the property as she
was deemed an innocent purchaser for value. The assailed general
power of attorney was held to be valid and sufficient for the purpose.
The trial court ruled that there was no need for a special power of
attorney when the special power was already mentioned in the
general one. It also declared that plaintiff failed to substantiate his
allegation of fraud.
ISSUE:
Whether the sale was valid.
HELD:
An examination of the records showed that the assailed power of
attorney was valid and regular on its face. It was notarized and as
such, it carries the evidentiary weight conferred upon it with respect
to its due execution. While it is true that it was denominated as a
general power of attorney, a perusal thereof revealed that it stated an
authority to sell. Thus, there was no need to execute a separate and
special power of attorney since the general power of attorney had
expressly authorized the agent or attorney in fact the power to sell
the subject property. The special power of attorney can be included
in the general power when it is specified therein the act or
transaction for which the special power is required.
Whether the instrument be denominated as "general power of
attorney" or "special power of attorney", what matters is the extent of
the power or powers contemplated upon the agent or attorney in fact.
If the power is couched in general terms, then such power cannot go
beyond acts of administration. However, where the power to sell is
specific, it not being merely implied, much less couched in general
terms, there cannot be any doubt that the attorney in fact may
execute a valid sale.
The basis presented by the petitioner was inadequate to sustain his
allegation of forgery. Mere variance of the signatures cannot be
considered as conclusive proof that the same were forged. Forgery
cannot be presumed Petitioner, however, failed to prove his
allegation and simply relied on the apparent difference of the
signatures. His denial had not established that the signature on the
power of attorney was not his.
Finally; the trial court did not err in applying equitable estoppel in this
case. The principle of equitable estoppel states that where one or
two innocent persons must suffer a loss, he who by his conduct
made the loss possible must bear it. From the evidence adduced, it
should be the petitioner who should bear the loss.
FRANCISCO A. VELOSO, petitioner,
vs.
COURT OF APPEALS, AGLALOMA B. ESCARIO, assisted by her
husband GREGORIO L. ESCARIO, the REGISTER OF DEEDS
FOR THE CITY OF MANILA, respondents.
This petition for review assails the decision of the Court of Appeals,
dated July 29, 1991, the dispositive portion of which reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED IN
TOTO. Costs against appellant. 1
The following are the antecedent facts:
Petitioner Francisco Veloso was the owner of a parcel of land
situated in the district of Tondo, Manila, with an area of one hundred
seventy seven (177) square meters and covered by Transfer
Certificate of Title No. 49138 issued by the Registry of Deeds of
Manila. The title was registered in the name of Francisco A. Veloso,
single, 3 on October 4, 1957. 4 The said title was subsequently
cancelled and a new one, Transfer Certificate of Title No. 180685,
was issued in the name of Aglaloma B. Escario, married to Gregorio
L. Escario, on May 24, 1988. 5
On August 24, 1988, petitioner Veloso filed an action for annulment
of documents, reconveyance of property with damages and
preliminary injunction and/or restraining order. The complaint,
docketed as Civil Case No. 88-45926, was raffled to the Regional
Trial Court, Branch 45, Manila. Petitioner alleged therein that he was
the absolute owner of the subject property and he never authorized
anybody, not even his wife, to sell it. He alleged that he was in
possession of the title but when his wife, Irma, left for abroad, he
found out that his copy was missing. He then verified with the
Registry of Deeds of Manila and there he discovered that his title
was already cancelled in favor of defendant Aglaloma Escario. The
transfer of property was supported by a General Power of Attorney 6
dated November 29, 1985 and Deed of Absolute Sale, dated
November 2, 1987, executed by Irma Veloso, wife of the petitioner
and appearing as his attorney-in-fact, and defendant Aglaloma
Escario. 7 Petitioner Veloso, however, denied having executed the
power of attorney and alleged that his signature was falsified. He
also denied having seen or even known Rosemarie Reyes and
Imelda Santos, the supposed witnesses in the execution of the
power of attorney. He vehemently denied having met or transacted
with the defendant. Thus, he contended that the sale of the property,
and the subsequent transfer thereof, were null and void. Petitioner
Veloso, therefore, prayed that a temporary restraining order be
issued to prevent the transfer of the subject property; that the
General Power of Attorney, the Deed of Absolute Sale and the
Transfer Certificate of Title No. 180685 be annulled; and the subject
property be reconveyed to him.
Defendant Aglaloma Escario in her answer alleged that she was a
buyer in good faith and denied any knowledge of the alleged
irregularity. She allegedly relied on the general power of attorney of
Irma Veloso which was sufficient in form and substance and was
duly notarized. She contended that plaintiff (herein petitioner), had
no cause of action against her. In seeking for the declaration of
nullity of the documents, the real party in interest was Irma Veloso,
the wife of the plaintiff. She should have been impleaded in the case.
In fact, Plaintiff's cause of action should have been against his wife,
Irma. Consequently, defendant Escario prayed for the dismissal of
the complaint and the payment to her of damages. 8
Pre-trial was conducted. The sole issue to be resolved by the trial
court was whether or not there was a valid sale of the subject
property. 9
During the trial, plaintiff (herein petitioner) Francisco Veloso testified
that he acquired the subject property from the Philippine Building
Corporation, as evidenced by a Deed of Sale dated October 1, 1957.
10 He married Irma Lazatin on January 20, 1962. 11 Hence, the
property did not belong to their conjugal partnership. Plaintiff further
asserted that he did not sign the power of attorney and as proof that
his signature was falsified, he presented Allied Bank Checks Nos.
16634640, 16634641 and 16634643, which allegedly bore his
genuine signature.
Witness for the plaintiff Atty. Julian G. Tubig denied any participation
in the execution of the general power of attorney. He attested that he
did not sign thereon, and the same was never entered in his Notarial
Register on November 29, 1985.
In the decision of the trial court dated March 9, 1990, 12 defendant
Aglaloma Escario was adjudged the lawful owner of the property as
she was deemed an innocent purchaser for value. The assailed
general power of attorney was held to be valid and sufficient for the
purpose. The trial court ruled that there was no need for a special
power of attorney when the special power was already mentioned in
the general one. It also declared that plaintiff failed to substantiate
his allegation of fraud. The court also stressed that plaintiff was not
entirely blameless for although he admitted to be the only person
who had access to the title and other important documents, his wife
was still able to possess the copy. Citing Section 55 of Act 496, the
court held that Irma's possession and production of the certificate of
title was deemed a conclusive authority from the plaintiff to the
Register of Deeds to enter a new certificate. Then applying the
principle of equitable estoppel, plaintiff was held to bear the loss for it
was he who made the wrong possible. Thus:
WHEREFORE, the Court finds for the defendants and against
plaintiff
a. declaring that there was a valid sale of the subject property in
favor of the defendant;
b. denying all other claims of the parties for want of legal and
factual basis.
Without pronouncement as to costs.

SO ORDERED.
Not satisfied with the decision, petitioner Veloso filed his appeal with
the Court of Appeals. The respondent court affirmed in toto the
findings of the trial court.
Hence, this petition for review before Us.
This petition for review was initially dismissed for failure to submit an
affidavit of service of a copy of the petition on the counsel for private
respondent. 13 A motion for reconsideration of the resolution was
filed but it was denied in are resolution dated March 30, 1992. 14 A
second motion for reconsideration was filed and in a resolution dated
Aug. 3, 1992, the motion was granted and the petition for review was
reinstated. 15
A supplemental petition was filed on October 9, 1992 with the
following assignment of errors:
I Thus, there was no need to execute a separate and special power of
The Court of Appeals committed a grave error in not finding that the
forgery of the power of attorney (Exh . "C") had been adequately
proven, despite the preponderant evidence, and in doing so, it has
so far departed from the applicable provisions of law and the
decisions of this Honorable Court, as to warrant the grant of this
petition for review on certiorari.
II
There are principles of justice and equity that warrant a review of the
decision.
III
The Court of Appeals erred in affirming the decision of the trial court
which misapplied the principle of equitable estoppel since the
petitioner did not fail in his duty of observing due diligence in the
safekeeping of the title to the property.
We find petitioner's contentions not meritorious.
An examination of the records showed that the assailed power of
attorney was valid and regular on its face. It was notarized and as
such, it carries the evidentiary weight conferred upon it with respect
to its due execution. While it is true that it was denominated as a
general power of attorney, a perusal thereof revealed that it stated an
authority to sell, to wit:
2. To buy or sell, hire or lease, mortgage or otherwise
hypothecate lands, tenements and hereditaments or other forms of
real property, more specifically TCT No. 49138, upon such terms and
conditions and under such covenants as my said attorney shall deem
fit and proper. 16
attorney since the general power of attorney had expressly
authorized the agent or attorney in fact the power to sell the subject
property. The special power of attorney can be included in the
general power when it is specified therein the act or transaction for
which the special power is required.
The general power of attorney was accepted by the Register of
Deeds when the title to the subject property was cancelled and
transferred in the name of private respondent. In LRC Consulta No.
123, Register of Deeds of Albay, Nov. 10, 1956, it stated that:
Whether the instrument be denominated as "general power of
attorney" or "special power of attorney", what matters is the extent of
the power or powers contemplated upon the agent or attorney in fact.
If the power is couched in general terms, then such power cannot go
beyond acts of administration. However, where the power to sell is
specific, it not being merely implied, much less couched in general
terms, there can not be any doubt that the attorney in fact may
execute a valid sale. An instrument may be captioned as "special
power of attorney" but if the powers granted are couched in general
terms without mentioning any specific power to sell or mortgage or to
do other specific acts of strict dominion, then in that case only acts of
administration may be deemed conferred.
Petitioner contends that his signature on the power of attorney was
falsified. He also alleges that the same was not duly notarized for as
testified by Atty. Tubig himself, he did not sign thereon nor was it
ever recorded in his notarial register. To bolster his argument,
petitioner had presented checks, marriage certificate and his
residence certificate to prove his alleged genuine signature which
when compared to the signature in the power of attorney, showed
some difference.
We found, however, that the basis presented by the petitioner was
inadequate to sustain his allegation of forgery. Mere variance of the
signatures cannot be considered as conclusive proof that the same
were forged. Forgery cannot be presumed 17 Petitioner, however,
failed to prove his allegation and simply relied on the apparent
difference of the signatures. His denial had not established that the
signature on the power of attorney was not his.
We agree with the conclusion of the lower court that private
respondent was an innocent purchaser for value. Respondent
Aglaloma relied on the power of attorney presented by petitioner's
wife, Irma. Being the wife of the owner and having with her the title of
the property, there was no reason for the private respondent not to
believe in her authority. Moreover, the power of attorney was
notarized and as such, carried with it the presumption of its due
execution. Thus, having had no inkling on any irregularity and having
no participation thereof, private respondent was a buyer in good
faith. It has been consistently held that a purchaser in good faith is
one who buys property of another, without notice that some other
person has a right to, or interest in such property and pays a full and
fair price for the same, at the time of such purchase, or before he
has notice of the claim or interest of some other person in the
property. 18
Documents acknowledged before a notary public have the
evidentiary weight with respect to their due execution. The
questioned power of attorney and deed of sale, were notarized and
therefore, presumed to be valid and duly executed. Atty. Tubig
denied having notarized the said documents and alleged that his
signature had also been falsified. He presented samples of his
signature to prove his contention. Forgery should be proved by clear
and convincing evidence and whoever alleges it has the burden of
proving the same. Just like the petitioner, witness Atty. Tubig merely
pointed out that his signature was different from that in the power of
attorney and deed of sale. There had never been an accurate
examination of the signature, even that of the petitioner. To
determine forgery, it was held in Cesar vs. Sandiganbayan 19
(quoting Osborn, The Problem of Proof) that:
The process of identification, therefore, must include the
determination of the extent, kind, and significance of this
resemblance as well as of the variation. It then becomes necessary
to determine whether the variation is due to the operation of a
different personality, or is only the expected and inevitable variation
found in the genuine writing of the same writer. It is also necessary to
decide whether the resemblance is the result of a more or less skillful
imitation, or is the habitual and characteristic resemblance which
naturally appears in a genuine writing. When these two questions are
correctly answered the whole problem of identification is solved.
Even granting for the sake of argument, that the petitioner's
signature was falsified and consequently, the power of attorney and
the deed of sale were null and void, such fact would not revoke the
title subsequently issued in favor of private respondent Aglaloma. In
Tenio-Obsequio vs. Court of Appeals, 20 it was held, viz:
The right of an innocent purchaser for value must be respected and
protected, even if the seller obtained his title through fraud. The
remedy of the person prejudiced is to bring an action for damages
against those who caused or employed the fraud, and if the latter are
insolvent, an action against the Treasurer of the Philippines may be
filed for recovery of damages against the Assurance Fund.
Finally; the trial court did not err in applying equitable estoppel in this
case. The principle of equitable estoppel states that where one or
two innocent persons must suffer a loss, he who by his conduct
made the loss possible must bear it. From the evidence adduced, it
should be the petitioner who should bear the loss. As the court a quo
found:
Besides, the records of this case disclosed that the plaintiff is not
entirely free from blame. He admitted that he is the sole person who
has access to TCT No. 49138 and other documents appertaining
thereto (TSN, May 23, 1989, pp. 7-12) However, the fact remains
that the Certificate of Title, as well as other documents necessary for
the transfer of title were in the possession of plaintiff's wife, Irma L.
Veloso, consequently leaving no doubt or any suspicion on the part
of the defendant as to her authority. Under Section 55 of Act 496, as
amended, Irma's possession and production of the Certificate of Title
to defendant operated as "conclusive authority from the plaintiff to
the Register of Deeds to enter a new certificate." 21
Considering the foregoing premises, we found no error in the
appreciation of facts and application of law by the lower court which
will warrant the reversal or modification of the appealed decision.
ACCORDINGLY, the petition for review is hereby DENIED for lack of
merit.
CUISON vs. THE COURT OF APPEALS
FACTS:
Petitioner Kue Cuison is a sole proprietorship engaged in the
purchase and sale of newsprint, bond paper and scrap. Valiant
delivered various kinds of paper products amounting to P297,487.30
to a certain Lilian Tan of LT Trading pursuant to orders allegedly
placed by Tiu Huy Tiac who was then employed in the Binondo office
of Cuizon. For the said transaction Lilian Tan paid for the
merchandise by issuing several checks payable to cash at the
specific request of Tiu Huy Tiac, who in turn, issued nine (9)
postdated checks to private respondent as payment for the paper
products but the checks were later dishonored by the drawee bank.
Valiant made several demands for the payment of the merchandise
claiming that Tiu Huy Tiac was duly authorized by Cuison as the
manager of his Binondo office, to enter into the questioned
transactions with private respondent and Lilian Tan. Petitioner denied
any involvement in the transaction entered into by Tiu Huy Tiac and
refused to pay private respondent the amount corresponding to the
selling price of the subject merchandise.
Valiant filed an action against petitioner for the collection of
P297,487.30.
The trial court dismissed the complaint against petitioner for lack of
merit. CA reversed.
ISSUE:
Whether or not Tiu Huy Tiac possessed the required authority from
petitioner sufficient to hold the latter liable for the disputed
transaction.
HELD:
It is a well-established rule that one who clothes another with
apparent authority as his agent and holds him out to the public as
such cannot be permitted to deny the authority of such person to act
as his agent, to the prejudice of innocent third parties dealing with
such person in good faith and in the honest belief that he is what he
appears to be. From the facts and the evidence on record, there is
no doubt that this rule obtains. The petition must therefore fail.
It is evident from the records that by his own acts and admission,
Cuison held out Tiu Huy Tiac to the public as the manager of his
store in Sto. Cristo, Binondo, Manila. More particularly, petitioner
explicitly introduced Tiu Huy Tiac to Bernardino Villanueva, Valiants
manager, as his branch manager as testified to by Bernardino
Villanueva. Secondly, Lilian Tan, who has been doing business with
Cuison for quite a while, also testified that she knew Tiu Huy Tiac to
be the manager of petitioner's Sto. Cristo, Binondo branch. This
general perception of Tiu Huy Tiac as the manager of Cuisons Sto.
Cristo store is even made manifest by the fact that Tiu Huy Tiac is
known in the community to be the "kinakapatid" (godbrother) of
Cuison. In fact, even Cuison admitted his close relationship with Tiu
Huy Tiac when he said that they are "like brothers" There was thus
no reason for anybody especially those transacting business with
petitioner to even doubt the authority of Tiu Huy Tiac as his manager
in the Sto. Cristo Binondo branch.
By his representations, petitioner is now estopped from disclaiming
liability for the transaction entered by Tiu Huy Tiac on his behalf. It
matters not whether the representations are intentional or merely
negligent so long as innocent, third persons relied upon such
representations in good faith and for value.
"Even when the agent has exceeded his authority, the principal is
solidarily liable with the agent if the former allowed the latter to act as
though he had full powers."
The above-quoted article is new. It is intended to protect the rights of
innocent persons. In such a situation, both the principal and the
agent may be considered as joint tortfeasors whose liability is joint
and solidary.
KUE CUISON, doing business under the firm name and
style"KUE CUISON PAPER SUPPLY," petitioner,
vs.
THE COURT OF APPEALS, VALIANT INVESTMENT
ASSOCIATES, respondents.
BIDIN, J.:
This petition for review assails the decision of the respondent Court
of Appeals ordering petitioner to pay private respondent, among
others, the sum of P297,482.30 with interest. Said decision reversed
the appealed decision of the trial court rendered in favor of petitioner.
The case involves an action for a sum of money filed by respondent
against petitioner anchored on the following antecedent facts:
Petitioner Kue Cuison is a sole proprietorship engaged in the
purchase and sale of newsprint, bond paper and scrap, with places
of business at Baesa, Quezon City, and Sto. Cristo, Binondo, Manila.
Private respondent Valiant Investment Associates, on the other hand,
is a partnership duly organized and existing under the laws of the
Philippines with business address at Kalookan City.
From December 4, 1979 to February 15, 1980, private respondent
delivered various kinds of paper products amounting to P297,487.30
to a certain Lilian Tan of LT Trading. The deliveries were made by
respondent pursuant to orders allegedly placed by Tiu Huy Tiac who
was then employed in the Binondo office of petitioner. It was likewise
pursuant to Tiac's instructions that the merchandise was delivered to
Lilian Tan. Upon delivery, Lilian Tan paid for the merchandise by
issuing several checks payable to cash at the specific request of Tiu
Huy Tiac. In turn, Tiac issued nine (9) postdated checks to private
respondent as payment for the paper products. Unfortunately, sad
checks were later dishonored by the drawee bank.
Thereafter, private respondent made several demands upon
petitioner to pay for the merchandise in question, claiming that Tiu
Huy Tiac was duly authorized by petitioner as the manager of his
Binondo office, to enter into the questioned transactions with private
respondent and Lilian Tan. Petitioner denied any involvement in the
transaction entered into by Tiu Huy Tiac and refused to pay private
respondent the amount corresponding to the selling price of the
subject merchandise.
Left with no recourse, private respondent filed an action against
petitioner for the collection of P297,487.30 representing the price of
the merchandise. After due hearing, the trial court dismissed the
complaint against petitioner for lack of merit. On appeal, however,
the decision of the trial court was modified, but was in effect reversed
by the Court of Appeals, the dispositive portion of which reads:
WHEREFORE, the decision appealed from is MODIFIED in that
defendant-appellant Kue Cuison is hereby ordered to pay plaintiff-
appellant Valiant Investment Associates the sum of P297,487.30 with
12% interest from the filing of the complaint until the amount is fully
paid, plus the sum of 7% of the total amount due as attorney's fees,
and to pay the costs. In all other respects, the decision appealed
from is affirmed. (Rollo, p. 55)
In this petition, petitioner contends that:
THE HONORABLE COURT ERRED IN FINDING TIU HUY TIAC
AGENT OF DEFENDANT-APPELLANT CONTRARY TO THE
UNDISPUTED/ESTABLISHED FACTS AND CIRCUMSTANCES.
THE HONORABLE COURT ERRED IN FINDING DEFENDANT-
APPELLANT LIABLE FOR AN OBLIGATION UNDISPUTEDLY
BELONGING TO TIU HUY TIAC.
THE HONORABLE COURT ERRED IN REVERSING THE WELL-
FOUNDED DECISION OF THE TRIAL COURT, (Rollo, p, 19)
The issue here is really quite simple whether or not Tiu Huy Tiac
possessed the required authority from petitioner sufficient to hold the
latter liable for the disputed transaction.
This petition ought to have been denied outright, for in the final
analysis, it raises a factual issue. It is elementary that in petitions for
review under Rule 45, this Court only passes upon questions of law.
An exception thereto occurs where the findings of fact of the Court of
Appeals are at variance with the trial court, in which case the Court
reviews the evidence in order to arrive at the correct findings based
on the records.
As to the merits of the case, it is a well-established rule that one who
clothes another with apparent authority as his agent and holds him
out to the public as such cannot be permitted to deny the authority of
such person to act as his agent, to the prejudice of innocent third
parties dealing with such person in good faith and in the honest
belief that he is what he appears to be (Macke, et al, v. Camps, 7
Phil. 553 (1907]; Philippine National Bank. v Court of Appeals, 94
SCRA 357 [1979]). From the facts and the evidence on record, there
is no doubt that this rule obtains. The petition must therefore fail.
It is evident from the records that by his own acts and admission,
petitioner held out Tiu Huy Tiac to the public as the manager of his
store in Sto. Cristo, Binondo, Manila. More particularly, petitioner
explicitly introduced Tiu Huy Tiac to Bernardino Villanueva,
respondent's manager, as his (petitioner's) branch manager as
testified to by Bernardino Villanueva. Secondly, Lilian Tan, who has
been doing business with petitioner for quite a while, also testified
that she knew Tiu Huy Tiac to be the manager of petitioner's Sto.
Cristo, Binondo branch. This general perception of Tiu Huy Tiac as
the manager of petitioner's Sto. Cristo store is even made manifest
by the fact that Tiu Huy Tiac is known in the community to be the
"kinakapatid" (godbrother) of petitioner. In fact, even petitioner
admitted his close relationship with Tiu Huy Tiac when he said that
they are "like brothers" (Rollo, p. 54). There was thus no reason for
anybody especially those transacting business with petitioner to even
doubt the authority of Tiu Huy Tiac as his manager in the Sto. Cristo
Binondo branch.
In a futile attempt to discredit Villanueva, petitioner alleges that the
former's testimony is clearly self-serving inasmuch as Villanueva
worked for private respondent as its manager.
We disagree, The argument that Villanueva's testimony is self-
serving and therefore inadmissible on the lame excuse of his
employment with private respondent utterly misconstrues the nature
of "'self-serving evidence" and the specific ground for its exclusion.
As pointed out by this Court in Co v. Court of Appeals et, al., (99
SCRA 321 [1980]):
Self-serving evidence is evidence made by a party out of court at
one time; it does not include a party's testimony as a witness in
court. It is excluded on the same ground as any hearsay evidence,
that is the lack of opportunity for cross-examination by the adverse
party, and on the consideration that its admission would open the
door to fraud and to fabrication of testimony. On theother hand, a
party's testimony in court is sworn and affords the other party the
opportunity for cross-examination (emphasis supplied)
Petitioner cites Villanueva's failure, despite his commitment to do so
on cross-examination, to produce the very first invoice of the
transaction between petitioner and private respondent as another
ground to discredit Villanueva's testimony. Such failure, proves that
Villanueva was not only bluffing when he pretended that he can
produce the invoice, but that Villanueva was likewise prevaricating
when he insisted that such prior transactions actually took place.
Petitioner is mistaken. In fact, it was petitioner's counsel himself who
withdrew the reservation to have Villanueva produce the document in
court. As aptly observed by the Court of Appeals in its decision:
. . . However, during the hearing on March 3, 1981, Villanueva failed
to present the document adverted to because defendant-appellant's
counsel withdrew his reservation to have the former (Villanueva)
produce the document or invoice, thus prompting plaintiff-appellant
to rest its case that same day (t.s.n., pp. 39-40, Sess. of March 3,
1981). Now, defendant-appellant assails the credibility of Villanueva
for having allegedly failed to produce even one single document to
show that plaintiff-appellant have had transactions before, when in
fact said failure of Villanueva to produce said document is a direct
off-shoot of the action of defendant-appellant's counsel who
withdrew his reservation for the production of the document or
invoice and which led plaintiff-appellant to rest its case that very day.
(Rollo, p.52)
In the same manner, petitioner assails the credibility of Lilian Tan by
alleging that Tan was part of an intricate plot to defraud him.
However, petitioner failed to substantiate or prove that the subject
transaction was designed to defraud him. Ironically, it was even the
testimony of petitioner's daughter and assistant manager Imelda Kue
Cuison which confirmed the credibility of Tan as a witness. On the
witness stand, Imelda testified that she knew for a fact that prior to
the transaction in question, Tan regularly transacted business with
her father (petitioner herein), thereby corroborating Tan's testimony
to the same effect. As correctly found by the respondent court, there
was no logical explanation for Tan to impute liability upon petitioner.
Rather, the testimony of Imelda Kue Cuison only served to add
credence to Tan's testimony as regards the transaction, the liability
for which petitioner wishes to be absolved.
But of even greater weight than any of these testimonies, is
petitioner's categorical admission on the witness stand that Tiu Huy
Tiac was the manager of his store in Sto. Cristo, Binondo, to wit:
Court:
xxx xxx xxx
Q And who was managing the store in Sto. Cristo?
A At first it was Mr. Ang, then later Mr. Tiu Huy Tiac but I cannot
remember the exact year.
Q So, Mr. Tiu Huy Tiac took over the management,.
A Not that was because every afternoon, I was there, sir.
Q But in the morning, who takes charge?
A Tiu Huy Tiac takes charge of management and if there (sic)
orders for newsprint or bond papers they are always referred to the
compound in Baesa, sir. (t.s.n., p. 16, Session of January 20, 1981,
CA decision, Rollo, p. 50, emphasis supplied).
Such admission, spontaneous no doubt, and standing alone, is
sufficient to negate all the denials made by petitioner regarding the
capacity of Tiu Huy Tiac to enter into the transaction in question.
Furthermore, consistent with and as an obvious indication of the fact
that Tiu Huy Tiac was the manager of the Sto. Cristo branch, three
(3) months after Tiu Huy Tiac left petitioner's employ, petitioner even
sent, communications to its customers notifying them that Tiu Huy
Tiac is no longer connected with petitioner's business. Such
undertaking spoke unmistakenly of Tiu Huy Tiac's valuable position
as petitioner's manager than any uttered disclaimer. More than
anything else, this act taken together with the declaration of
petitioner in open court amount to admissions under Rule 130
Section 22 of the Rules of Court, to wit : "The act, declaration or
omission of a party as to a relevant fact may be given in evidence
against him." For well-settled is the rule that "a man's acts, conduct,
and declaration, wherever made, if voluntary, are admissible against
him, for the reason that it is fair to presume that they correspond with
the truth, and it is his fault if they do not. If a man's extrajudicial
admissions are admissible against him, there seems to be no reason
why his admissions made in open court, under oath, should not be
accepted against him." (U.S. vs. Ching Po, 23 Phil. 578, 583
[1912];).
Moreover, petitioner's unexplained delay in disowning the
transactions entered into by Tiu Huy Tiac despite several attempts
made by respondent to collect the amount from him, proved all the
more that petitioner was aware of the questioned commission was
tantamount to an admission by silence under Rule 130 Section 23 of
the Rules of Court, thus: "Any act or declaration made in the
presence of and within the observation of a party who does or says
nothing when the act or declaration is such as naturally to call for
action or comment if not true, may be given in evidence against him."
All of these point to the fact that at the time of the transaction Tiu Huy
Tiac was admittedly the manager of petitioner's store in Sto. Cristo,
Binondo. Consequently, the transaction in question as well as the
concomitant obligation is valid and binding upon petitioner.
By his representations, petitioner is now estopped from disclaiming
liability for the transaction entered by Tiu Huy Tiac on his behalf. It
matters not whether the representations are intentional or merely
negligent so long as innocent, third persons relied upon such
representations in good faith and for value As held in the case of
Manila Remnant Co. Inc. v. Court of Appeals, (191 SCRA 622
[1990]):
More in point, we find that by the principle of estoppel, Manila
Remnant is deemed to have allowed its agent to act as though it had
plenary powers. Article 1911 of the Civil Code provides:
"Even when the agent has exceeded his authority, the principal
issolidarily liable with the agent if the former allowed the latter to act
as though he had full powers." (Emphasis supplied).
The above-quoted article is new. It is intended to protect the rights of
innocent persons. In such a situation, both the principal and the
agent may be considered as joint tortfeasors whose liability is joint
and solidary.
Authority by estoppel has arisen in the instant case because by its
negligence, the principal, Manila Remnant, has permitted its agent,
A.U. Valencia and Co., to exercise powers not granted to it. That the
principal might not have had actual knowledge of theagent's misdeed
is of no moment.
Tiu Huy Tiac, therefore, by petitioner's own representations and
manifestations, became an agent of petitioner by estoppel, an
admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person
relying thereon (Article 1431, Civil Code of the Philippines). A party
cannot be allowed to go back on his own acts and representations to
the prejudice of the other party who, in good faith, relied upon them
(Philippine National Bank v. Intermediate Appellate Court, et al., 189
SCRA 680 [1990]).
Taken in this light,. petitioner is liable for the transaction entered into
by Tiu Huy Tiac on his behalf. Thus, even when the agent has
exceeded his authority, the principal is solidarily liable with the agent
if the former allowed the latter to fact as though he had full powers
(Article 1911 Civil Code), as in the case at bar.
Finally, although it may appear that Tiu Huy Tiac defrauded his
principal (petitioner) in not turning over the proceeds of the
transaction to the latter, such fact cannot in any way relieve nor
exonerate petitioner of his liability to private respondent. For it is an
equitable maxim that as between two innocent parties, the one who
made it possible for the wrong to be done should be the one to bear
the resulting loss (Francisco vs. Government Service Insurance
System, 7 SCRA 577 [1963]).
Inasmuch as the fundamental issue of the capacity or incapacity of
the purported agent Tiu Huy Tiac, has already been resolved, the
Court deems it unnecessary to resolve the other peripheral issues
raised by petitioner.
WHEREFORE, the instant petition in hereby DENIED for lack of
merit. Costs against petitioner.
SO ORDERED.
RURAL BANK OF BOMBON vs. CA
FACTS:
Ederlinda M. Gallardo executed a special power of attorney in favor
of Rufina S. Aquino authorizing him to secure a loan from any bank
or lending institution for any amount or otherwise mortgage her
property, to sign, or execute any deed of mortgage, receive the
proceeds thereof in cash or in check and to sign the receipt therefor
and thereafter endorse the check representing the proceeds of loan.
Gallardo discovered the property was mortgaged to pay personal
loans obtained by Aquino from the Bank solely for personal use and
benefit of Aquino; that the mortgagor in the deed was defendant
Aquino instead of plaintiff Gallardo; that correspondence relative to
the mortgage was sent to Aquino's address; and that defendant
Aquino.
For this reason, Gallardo filed a complaint against Aquino and the
Bank. Hence, the bank was temporarily restrained "from enforcing
the real estate mortgage and from foreclosing.
Rufino S. Aquino in his answer said that the plaintiff authorized him
to mortgage her property to a bank so that he could use the
proceeds to liquidate her obligation of P350,000 to him.
Judgment was RENDERED, declaring the deed of real estate
mortgage dated executed between Aquino with the appellee Rural
Bank unauthorized, void and unenforceable against plaintiff
Ederlinda Gallardo.
ISSUE:
Whether the Deed of Real Estate Mortgage executed by Rufino S.
Aquino, as attorney-in-fact of Ederlinda Gallardo in favor of the Rural
Bank valid.
HELD:
It is a general rule in the law of agency that, in order to bind the
principal by a mortgage on real property executed by an agent, it
must upon its face purport to be made, signed and sealed in the
name of the principal, otherwise, it will bind the agent only. It is not
enough merely that the agent was in fact authorized to make the
mortgage, if he has not acted in the name of the principal.
In view of this rule, Aquino's act of signing the Deed of Real Estate
Mortgage in his name alone as mortgagor, without any indication that
he was signing for and in behalf of the property owner, Ederlinda
Gallardo, bound himself alone in his personal capacity as a debtor of
the petitioner Bank and not as the agent or attorney-in-fact of
Gallardo.
In effect, with the execution of the mortgage under the circumstances
and assuming it to be valid but because the loan taken was to be
used exclusively for Aquino's business in the "bangus" and "sugpo"
production, Gallardo in effect becomes a surety who is made
primarily answerable for loans taken by Aquino in his personal
capacity in the event Aquino defaults in such payment. Under Art.
1878 of the Civil Code, to obligate the principal as a guarantor or
surety, a special power of attorney is required. No such special
power of attorney for Gallardo to be a surety of Aquino had been
executed.
Art. 1883. If an agent acts in his own name, the principal has no
right of action against the persons with whom the agent has
contracted; neither have such persons against the principal.
In such case the agent is the one directly bound in favor of the
person with whom he has contracted, as if the transaction were his
own, except when the contract involves things belonging to the
principal.
The above provision of the Civil Code relied upon by the petitioner
Bank, is not applicable to the case at bar. Herein respondent Aquino
acted purportedly as an agent of Gallardo, but actually acted in his
personal capacity. Involved herein are properties titled in the name of
respondent Gallardo against which the Bank proposes to foreclose
the mortgage constituted by an agent (Aquino) acting in his personal
capacity. Under these circumstances, we hold, as we did in
Philippine Sugar Estates Development Co. vs. Poizat, supra, that
Gallardo's property is not liable on the real estate mortgage:
There is no principle of law by which a person can become liable on
a real mortgage which she never executed either in person or by
attorney in fact.
RURAL BANK OF BOMBON (CAMARINES SUR), INC., petitioner,
vs.
HON. COURT OF APPEALS, EDERLINDA M. GALLARDO,
DANIEL MANZO and RUFINO S. AQUINO, respondents.
GRIO-AQUINO, J.:
This petition for review seeks reversal of the decision dated
September 18, 1990 of the Court of Appeals, reversing the decision
of the Regional Trial Court of Makati, Branch 150, which dismissed
the private respondents' complaint and awarded damages to the
petitioner, Rural Bank of Bombon.
On January 12, 1981, Ederlinda M. Gallardo, married to Daniel
Manzo, executed a special power of attorney in favor of Rufina S.
Aquino authorizing him:
1. To secure a loan from any bank or lending institution for any
amount or otherwise mortgage the property covered by Transfer
Certificate of Title No. S-79238 situated at Las Pias, Rizal, the
same being my paraphernal property, and in that connection, to sign,
or execute any deed of mortgage and sign other document requisite
and necessary in securing said loan and to receive the proceeds
thereof in cash or in check and to sign the receipt therefor and
thereafter endorse the check representing the proceeds of loan. (p.
10, Rollo.)
Thereupon, Gallardo delivered to Aquino both the special power of
attorney and her owner's copy of Transfer Certificate of Title No. S-
79238 (19963-A).
On August 26, 1981, a Deed of Real Estate Mortgage was executed
by Rufino S. Aquino in favor of the Rural Bank of Bombon
(Camarines Sur), Inc. (hereafter, defendant Rural Bank) over the
three parcels of land covered by TCT No. S-79238. The deed stated
that the property was being given as security for the payment of
"certain loans, advances, or other accommodations obtained by the
mortgagor from the mortgagee in the total sum of Three Hundred
Fifty Thousand Pesos only (P350,000.00), plus interest at the rate of
fourteen (14%) per annum . . ." (p. 11, Rollo).
On January 6, 1984, the spouses Ederlinda Gallardo and Daniel
Manzo filed an action against Rufino Aquino and the Bank because
Aquino allegedly left his residence at San Pascual, Hagonoy,
Bulacan, and transferred to an unknown place in Bicol. She
discovered that Aquino first resided at Sta. Isabel, Calabanga,
Camarines Sur, and then later, at San Vicente, Calabanga,
Camarines Sur, and that they (plaintiffs) were allegedly surprised to
discover that the property was mortgaged to pay personal loans
obtained by Aquino from the Bank solely for personal use and benefit
of Aquino; that the mortgagor in the deed was defendant Aquino
instead of plaintiff Gallardo whose address up to now is Manuyo, Las
Pias, M.M., per the title (TCT No. S-79238) and in the deed vesting
power of attorney to Aquino; that correspondence relative to the
mortgage was sent to Aquino's address at "Sta. Isabel, Calabanga,
Camarines Sur" instead of Gallardo's postal address at Las Pias,
Metro Manila; and that defendant Aquino, in the real estate
mortgage, appointed defendant Rural Bank as attorney in fact, and
in case of judicial foreclosure as receiver with corresponding power
to sell and that although without any express authority from Gallardo,
defendant Aquino waived Gallardo's rights under Section 12, Rule
39, of the Rules of Court and the proper venue of the foreclosure
suit.
On January 23, 1984, the trial court, thru the Honorable Fernando P.
Agdamag, temporarily restrained the Rural Bank "from enforcing the
real estate mortgage and from foreclosing it either judicially or
extrajudicially until further orders from the court" (p.36, Rollo).
Rufino S. Aquino in his answer said that the plaintiff authorized him
to mortgage her property to a bank so that he could use the
proceeds to liquidate her obligation of P350,000 to him. The
obligation to pay the Rural Bank devolved on Gallardo. Of late,
however, she asked him to pay the Bank but defendant Aquino set
terms and conditions which plaintiff did not agree to. Aquino asked
for payment to him of moral damages in the sum of P50,000 and
lawyer's fees of P35,000.
The Bank moved to dismiss the complaint and filed counter-claims
for litigation expenses, exemplary damages, and attorney's fees. It
also filed a crossclaim against Aquino for P350,000 with interest,
other bank charges and damages if the mortgage be declared
unauthorized.
Meanwhile, on August 30, 1984, the Bank filed a complaint against
Ederlinda Gallardo and Rufino Aquino for "Foreclosure of Mortgage"
docketed as Civil Case No. 8330 in Branch 141, RTC Makati. On
motion of the plaintiff, the foreclosure case and the annulment case
(Civil Case No. 6062) were consolidated.
On January 16, 1986, the trial court rendered a summary judgment
in Civil Case No. 6062, dismissing the complaint for annulment of
mortgage and declaring the Rural Bank entitled to damages the
amount of which will be determined in appropriate proceedings. The
court lifted the writ of preliminary injunction it previously issued.
On April 23, 1986, the trial court, in Civil Case No. 8330, issued an
order suspending the foreclosure proceedings until after the decision
in the annulment case (Civil Case No. 6062) shall have become final
and executory.
The plaintiff in Civil Case No. 6062 appealed to the Court of Appeals,
which on September 18, 1990, reversed the trial court. The
dispositive portion of the decision reads:
UPON ALL THESE, the summary judgment entered by the lower
court is hereby REVERSED and in lieu thereof, judgment is hereby
RENDERED, declaring the deed of real estate mortgage dated
August 26, 1981, executed between Rufino S. Aquino with the
marital consent of his wife Bibiana Aquino with the appellee Rural
Bank of Bombon, Camarines Sur, unauthorized, void and
unenforceable against plaintiff Ederlinda Gallardo; ordering the
reinstatement of the preliminary injunction issued at the onset of the
case and at the same time, ordering said injunction made
permanent.
Appellee Rural Bank to pay the costs. (p. 46, Rollo.)
Hence, this petition for review by the Rural Bank of Bombon,
Camarines Sur, alleging that the Court of Appeals erred:
1. in declaring that the Deed of Real Estate Mortgage was
unauthorized, void, and unenforceable against the private
respondent Ederlinda Gallardo; and
2. in not upholding the validity of the Real Estate Mortgage
executed by Rufino S. Aquino as attorney-in-fact for Gallardo, in
favor of the Rural Bank of Bombon, (Cam. Sur), Inc.
Both assignments of error boil down to the lone issue of the validity
of the Deed of Real Estate Mortgage dated August 26, 1981,
executed by Rufino S. Aquino, as attorney-in-fact of Ederlinda
Gallardo, in favor of the Rural Bank of Bombon (Cam. Sur), Inc.
The Rural Bank contends that the real estate mortgage executed by
respondent Aquino is valid because he was expressly authorized by
Gallardo to mortgage her property under the special power of
attorney she made in his favor which was duly registered and
annotated on Gallardo's title. Since the Special Power of Attorney did
not specify or indicate that the loan would be for Gallardo's benefit,
then it could be for the use and benefit of the attorney-in-fact,
Aquino.
However, the Court of Appeals ruled otherwise. It held:
The Special Power of Attorney above quoted shows the extent of
authority given by the plaintiff to defendant Aquino. But defendant
Aquino in executing the deed of Real Estate Mortgage in favor of the
rural bank over the three parcels of land covered by Gallardo's title
named himself as the mortgagor without stating that his signature on
the deed was for and in behalf of Ederlinda Gallardo in his capacity
as her attorney-in-fact.
At the beginning of the deed mention was made of "attorney-in-fact
of Ederlinda H. Gallardo," thus: " (T)his MORTGAGE executed by
Rufino S. Aquino attorney in fact of Ederlinda H. Gallardo, of legal
age, Filipino, married to Bibiana Panganiban with postal address at
Sta. Isabel . . .," but which of itself, was merely descriptive of the
person of defendant Aquino. Defendant Aquino even signed it plainly
as mortgagor with the marital consent yet of his wife Bibiana P.
Aquino who signed the deed as "wife of mortgagor."
xxx xxx xxx
The three (3) promissory notes respectively dated August 31, 1981,
September 23, 1981 and October 26, 1981, were each signed by
Rufino Aquino on top of a line beneath which is written "signature of
mortgagor" and by Bibiana P. Aquino on top of a line under which is
written "signature of spouse," without any mention that execution
thereof was for and in behalf of the plaintiff as mortgagor. It results,
borne out from what were written on the deed, that the amounts were
the personal loans of defendant Aquino. As pointed out by the
appellant, Aquino's wife has not been appointed co-agent of
defendant Aquino and her signature on the deed and on the
promissory notes can only mean that the obligation was personally
incurred by them and for their own personal account.
The deed of mortgage stipulated that the amount obtained from the
loans shall be used or applied only for "fishpond (bangus and sugpo
production)." As pointed out by the plaintiff, the defendant Rural
Bank in its Answer had not categorically denied the allegation in the
complaint that defendant Aquino in the deed of mortgage was the
intended user and beneficiary of the loans and not the plaintiff. And
the special power of attorney could not be stretched to include the
authority to obtain a loan in said defendant Aquino's own benefit. (pp.
40-41, Rollo.)
The decision of the Court of Appeals is correct. This case is
governed by the general rule in the law of agency which this Court,
applied in "Philippine Sugar Estates Development Co. vs. Poizat," 48
Phil. 536, 538:
It is a general rule in the law of agency that, in order to bind the
principal by a mortgage on real property executed by an agent, it
must upon its face purport to be made, signed and sealed in the
name of the principal, otherwise, it will bind the agent only. It is not
enough merely that the agent was in fact authorized to make the
mortgage, if he has not acted in the name of the principal. Neither is
it ordinarily sufficient that in the mortgage the agent describes
himself as acting by virtue of a power of attorney, if in fact the agent
has acted in his own name and has set his own hand and seal to the
mortgage. This is especially true where the agent himself is a party
to the instrument. However clearly the body of the mortgage may
show and intend that it shall be the act of the principal, yet, unless in
fact it is executed by the agent for and on behalf of his principal and
as the act and deed of the principal, it is not valid as to the principal.
In view of this rule, Aquino's act of signing the Deed of Real Estate
Mortgage in his name alone as mortgagor, without any indication that
he was signing for and in behalf of the property owner, Ederlinda
Gallardo, bound himself alone in his personal capacity as a debtor of
the petitioner Bank and not as the agent or attorney-in-fact of
Gallardo. The Court of Appeals further observed:
It will also be observed that the deed of mortgage was executed on
August 26, 1981 therein clearly stipulating that it was being executed
"as security for the payment of certain loans, advances or other
accommodation obtained by the Mortgagor from the Mortgagee in
the total sum of Three Hundred Fifty Thousand Pesos only
(P350,000.00)" although at the time no such loan or advance had
been obtained. The promissory notes were dated August 31,
September 23 and October 26, 1981 which were subsequent to the
execution of the deed of mortgage. The appellant is correct in
claiming that the defendant Rural Bank should not have agreed to
extend or constitute the mortgage on the properties of Gallardo who
had no existing indebtedness with it at the time.
Under the facts the defendant Rural Bank appeared to have ignored
the representative capacity of Aquino and dealt with him and his wife
in their personal capacities. Said appellee Rural Bank also did not
conduct an inquiry on whether the subject loans were to benefit the
interest of the principal (plaintiff Gallardo) rather than that of the
agent although the deed of mortgage was explicit that the loan was
for purpose of the bangus and sugpo production of defendant
Aquino.
In effect, with the execution of the mortgage under the circumstances
and assuming it to be valid but because the loan taken was to be
used exclusively for Aquino's business in the "bangus" and "sugpo"
production, Gallardo in effect becomes a surety who is made
primarily answerable for loans taken by Aquino in his personal
capacity in the event Aquino defaults in such payment. Under Art.
1878 of the Civil Code, to obligate the principal as a guarantor or
surety, a special power of attorney is required. No such special
power of attorney for Gallardo to be a surety of Aquino had been
executed. (pp. 42-43, Rollo.)
Petitioner claims that the Deed of Real Estate Mortgage is
enforceable against Gallardo since it was executed in accordance
with Article 1883 which provides:
Art. 1883. If an agent acts in his own name, the principal has no
right of action against the persons with whom the agent has
contracted; neither have such persons against the principal.
In such case the agent is the one directly bound in favor of the
person with whom he has contracted, as if the transaction were his
own, except when the contract involves things belonging to the
principal.
The above provision of the Civil Code relied upon by the petitioner
Bank, is not applicable to the case at bar. Herein respondent Aquino
acted purportedly as an agent of Gallardo, but actually acted in his
personal capacity. Involved herein are properties titled in the name of
respondent Gallardo against which the Bank proposes to foreclose
the mortgage constituted by an agent (Aquino) acting in his personal
capacity. Under these circumstances, we hold, as we did in
Philippine Sugar Estates Development Co. vs. Poizat, supra, that
Gallardo's property is not liable on the real estate mortgage:
There is no principle of law by which a person can become liable on
a real mortgage which she never executed either in person or by
attorney in fact. It should be noted that this is a mortgage upon real
property, the title to which cannot be divested except by sale on
execution or the formalities of a will or deed. For such reasons, the
law requires that a power of attorney to mortgage or sell real
property should be executed with all of the formalities required in a
deed. For the same reason that the personal signature of Poizat,
standing alone, would not convey the title of his wife in her own real
property, such a signature would not bind her as a mortgagor in real
property, the title to which was in her name. (p. 548.)
WHEREFORE, finding no reversible error in the decision of the Court
of Appeals, we AFFIRM it in toto. Costs against the petitioner.
DBP vs. COURT OF APPEALS
FACTS:
Dans, together with his wife Candida, his son and daughter-in-law,
applied for a loan of P500,000.00 with DBP, advised him to obtain a
mortgage redemption insurance (MRI) with the DBP Mortgage
Redemption Insurance Pool (DBP MRI Pool).
When the loan was approved, P1,476.00 as payment for the
premium and 10% service fee were deducted and Dan was asked to
accomplish and submit the "MRI Application for Insurance" and the
"Health Statement for DBP MRI Pool."
The amount deducted from the load was credited by DBP to the
savings account of the DBP MRI Pool. Accordingly, the DBP MRI
Pool was advised of the credit.
On September 3, 1987, Dans died of cardiac arrest. The DBP, upon
notice, relayed this information to the DBP MRI Pool. On September
23, 1987, the DBP MRI Pool notified DBP that Dans was not eligible
for MRI coverage, being over the acceptance age limit of 60 years at
the time of application.

Dans estate refused to accept the refund and ex gratia settlement of
DBP and instead filed a complaint for the collection of the insurance
proceeds.
The trial court rendered a decision in favor of Dans Estate and
against DBP but absolved DBP MRI Pool after the trial court found
no privity of contract between it and the deceased. CA affirmed.
ISSUE:
Whether DBP is liable.
HELD:
In dealing with Dans, DBP was wearing two legal hats: the first as a
lender, and the second as an insurance agent.
As an insurance agent, DBP made Dans go through the motion of
applying for said insurance, thereby leading him and his family to
believe that they had already fulfilled all the requirements for the MRI
and that the issuance of their policy was forthcoming. Apparently,
DBP had full knowledge that Dan's application was never going to be
approved.
Under Article 1987 of the Civil Code of the Philippines, "the agent
who acts as such is not personally liable to the party with whom he
contracts, unless he expressly binds himself or exceeds the limits of
his authority without giving such party sufficient notice of his powers."
The DBP is not authorized to accept applications for MRI when its
clients are more than 60 years of age. Knowing all the while that
Dans was ineligible for MRI coverage because of his advanced age,
DBP exceeded the scope of its authority when it accepted Dan's
application for MRI by collecting the insurance premium, and
deducting its agent's commission and service fee.
The liability of an agent who exceeds the scope of his authority
depends upon whether the third person is aware of the limits of the
agent's powers. There is no showing that Dans knew of the limitation
on DBP's authority to solicit applications for MRI.
If the third person dealing with an agent is unaware of the limits of
the authority conferred by the principal on the agent and he (third
person) has been deceived by the non-disclosure thereof by the
agent, then the latter is liable for damages to him.
The DBP's liability, however, cannot be for the entire value of the
insurance policy. To assume that were it not for DBP's concealment
of the limits of its authority, Dans would have secured an MRI from
another insurance company, and therefore would have been fully
insured by the time he died, is highly speculative. Considering his
advanced age, there is no absolute certainty that Dans could obtain
an insurance coverage from another company. It must also be noted
that Dans died almost immediately, i.e., on the nineteenth day after
applying for the MRI, and on the twenty-third day from the date of
release of his loan.
While Dans is not entitled to compensatory damages, he is entitled
to moral damages. No proof of pecuniary loss is required in the
assessment of said kind of damages (Civil Code of Philippines, Art.
2216). The same may be recovered in acts referred to in Article 2219
of the Civil Code.
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and the ESTATE OF THE LATE JUAN B.
DANS, represented by CANDIDA G. DANS, and the DBP
MORTGAGE REDEMPTION INSURANCE POOL, respondents.
Office of the Legal Counsel for petitioner.
Reyes, Santayana, Molo & Alegre for DBP Mortgage Redemption
Insurance Pool.
QUIASON, J.:
This is a petition for review on certiorari under Rule 45 of the
Revised Rules of Court to reverse and set aside the decision of the
Court of Appeals in CA-G.R CV No. 26434 and its resolution denying
reconsideration thereof.
We affirm the decision of the Court of Appeals with modification.
I administratrix, filed a complaint with the Regional Trial Court, Branch
In May 1987, Juan B. Dans, together with his wife Candida, his son
and daughter-in-law, applied for a loan of P500,000.00 with the
Development Bank of the Philippines (DBP), Basilan Branch. As the
principal mortgagor, Dans, then 76 years of age, was advised by
DBP to obtain a mortgage redemption insurance (MRI) with the DBP
Mortgage Redemption Insurance Pool (DBP MRI Pool).
A loan, in the reduced amount of P300,000.00, was approved by
DBP on August 4, 1987 and released on August 11, 1987. From the
proceeds of the loan, DBP deducted the amount of P1,476.00 as
payment for the MRI premium. On August 15, 1987, Dans
accomplished and submitted the "MRI Application for Insurance" and
the "Health Statement for DBP MRI Pool."
On August 20, 1987, the MRI premium of Dans, less the DBP service
fee of 10 percent, was credited by DBP to the savings account of the
DBP MRI Pool. Accordingly, the DBP MRI Pool was advised of the
credit.
On September 3, 1987, Dans died of cardiac arrest. The DBP, upon
notice, relayed this information to the DBP MRI Pool. On September
23, 1987, the DBP MRI Pool notified DBP that Dans was not eligible
for MRI coverage, being over the acceptance age limit of 60 years at
the time of application.
On October 21, 1987, DBP apprised Candida Dans of the
disapproval of her late husband's MRI application. The DBP offered
to refund the premium of P1,476.00 which the deceased had paid,
but Candida Dans refused to accept the same, demanding payment
of the face value of the MRI or an amount equivalent to the loan.
She, likewise, refused to accept an ex gratia settlement of
P30,000.00, which the DBP later offered.
On February 10, 1989, respondent Estate, through Candida Dans as
I, Basilan, against DBP and the insurance pool for "Collection of Sum
of Money with Damages." Respondent Estate alleged that Dans
became insured by the DBP MRI Pool when DBP, with full
knowledge of Dans' age at the time of application, required him to
apply for MRI, and later collected the insurance premium thereon.
Respondent Estate therefore prayed: (1) that the sum of
P139,500.00, which it paid under protest for the loan, be reimbursed;
(2) that the mortgage debt of the deceased be declared fully paid;
and (3) that damages be awarded.
The DBP and the DBP MRI Pool separately filed their answers, with
the former asserting a cross-claim against the latter.
At the pre-trial, DBP and the DBP MRI Pool admitted all the
documents and exhibits submitted by respondent Estate. As a result
of these admissions, the trial court narrowed down the issues and,
without opposition from the parties, found the case ripe for summary
judgment. Consequently, the trial court ordered the parties to submit
their respective position papers and documentary evidence, which
may serve as basis for the judgment.
On March 10, 1990, the trial court rendered a decision in favor of
respondent Estate and against DBP. The DBP MRI Pool, however,
was absolved from liability, after the trial court found no privity of
contract between it and the deceased. The trial court declared DBP
in estoppel for having led Dans into applying for MRI and actually
collecting the premium and the service fee, despite knowledge of his
age ineligibility. The dispositive portion of the decision read as
follows:
WHEREFORE, in view of the foregoing consideration and in the
furtherance of justice and equity, the Court finds judgment for the
plaintiff and against Defendant DBP, ordering the latter:
1. To return and reimburse plaintiff the amount of P139,500.00
plus legal rate of interest as amortization payment paid under
protest;
2. To consider the mortgage loan of P300,000.00 including all
interest accumulated or otherwise to have been settled, satisfied or
set-off by virtue of the insurance coverage of the late Juan B. Dans;
3. To pay plaintiff the amount of P10,000.00 as attorney's fees;
4. To pay plaintiff in the amount of P10,000.00 as costs of
litigation and other expenses, and other relief just and equitable.
The Counterclaims of Defendants DBP and DBP MRI POOL are
hereby dismissed. The Cross-claim of Defendant DBP is likewise
dismissed (Rollo, p. 79)
The DBP appealed to the Court of Appeals. In a decision dated
September 7, 1992, the appellate court affirmed in toto the decision
of the trial court. The DBP's motion for reconsideration was denied in
a resolution dated April 20, 1993.
Hence, this recourse.
II
When Dans applied for MRI, he filled up and personally signed a
"Health Statement for DBP MRI Pool" (Exh. "5-Bank") with the
following declaration:
I hereby declare and agree that all the statements and answers
contained herein are true, complete and correct to the best of my
knowledge and belief and form part of my application for insurance. It
is understood and agreed that no insurance coverage shall be
effected unless and until this application is approved and the full
premium is paid during my continued good health (Records, p. 40).
Under the aforementioned provisions, the MRI coverage shall take
effect: (1) when the application shall be approved by the insurance
pool; and (2) when the full premium is paid during the continued
good health of the applicant. These two conditions, being joined
conjunctively, must concur.
Undisputably, the power to approve MRI applications is lodged with
the DBP MRI Pool. The pool, however, did not approve the
application of Dans. There is also no showing that it accepted the
sum of P1,476.00, which DBP credited to its account with full
knowledge that it was payment for Dan's premium. There was, as a
result, no perfected contract of insurance; hence, the DBP MRI Pool
cannot be held liable on a contract that does not exist.
The liability of DBP is another matter.
It was DBP, as a matter of policy and practice, that required Dans,
the borrower, to secure MRI coverage. Instead of allowing Dans to
look for his own insurance carrier or some other form of insurance
policy, DBP compelled him to apply with the DBP MRI Pool for MRI
coverage. When Dan's loan was released on August 11, 1987, DBP
already deducted from the proceeds thereof the MRI premium. Four
days latter, DBP made Dans fill up and sign his application for MRI,
as well as his health statement. The DBP later submitted both the
application form and health statement to the DBP MRI Pool at the
DBP Main Building, Makati Metro Manila. As service fee, DBP
deducted 10 percent of the premium collected by it from Dans.
In dealing with Dans, DBP was wearing two legal hats: the first as a
lender, and the second as an insurance agent.

As an insurance agent, DBP made Dans go through the motion of
applying for said insurance, thereby leading him and his family to
believe that they had already fulfilled all the requirements for the MRI
and that the issuance of their policy was forthcoming. Apparently,
DBP had full knowledge that Dan's application was never going to be
approved. The maximum age for MRI acceptance is 60 years as
clearly and specifically provided in Article 1 of the Group Mortgage
Redemption Insurance Policy signed in 1984 by all the insurance
companies concerned (Exh. "1-Pool").
Under Article 1987 of the Civil Code of the Philippines, "the agent
who acts as such is not personally liable to the party with whom he
contracts, unless he expressly binds himself or exceeds the limits of
his authority without giving such party sufficient notice of his powers."
The DBP is not authorized to accept applications for MRI when its
clients are more than 60 years of age (Exh. "1-Pool"). Knowing all
the while that Dans was ineligible for MRI coverage because of his
advanced age, DBP exceeded the scope of its authority when it
accepted Dan's application for MRI by collecting the insurance
premium, and deducting its agent's commission and service fee.
The liability of an agent who exceeds the scope of his authority
depends upon whether the third person is aware of the limits of the
agent's powers. There is no showing that Dans knew of the limitation
on DBP's authority to solicit applications for MRI.
If the third person dealing with an agent is unaware of the limits of
the authority conferred by the principal on the agent and he (third
person) has been deceived by the non-disclosure thereof by the
agent, then the latter is liable for damages to him (V Tolentino,
Commentaries and Jurisprudence on the Civil Code of the
Philippines, p. 422 [1992], citing Sentencia [Cuba] of September 25,
1907). The rule that the agent is liable when he acts without authority
is founded upon the supposition that there has been some wrong or
omission on his part either in misrepresenting, or in affirming, or
concealing the authority under which he assumes to act (Francisco,
V., Agency 307 [1952], citing Hall v. Lauderdale, 46 N.Y. 70, 75).
Inasmuch as the non-disclosure of the limits of the agency carries
with it the implication that a deception was perpetrated on the
unsuspecting client, the provisions of Articles 19, 20 and 21 of the
Civil Code of the Philippines come into play.
Article 19 provides:
Every person must, in the exercise of his rights and in the
performance of his duties, act with justice give everyone his due and
observe honesty and good faith.
Article 20 provides:
Every person who, contrary to law, willfully or negligently causes
damage to another, shall indemnify the latter for the same.
Article 21 provides:
Any person, who willfully causes loss or injury to another in a manner
that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
The DBP's liability, however, cannot be for the entire value of the
insurance policy. To assume that were it not for DBP's concealment
of the limits of its authority, Dans would have secured an MRI from
another insurance company, and therefore would have been fully
insured by the time he died, is highly speculative. Considering his
advanced age, there is no absolute certainty that Dans could obtain
an insurance coverage from another company. It must also be noted
that Dans died almost immediately, i.e., on the nineteenth day after
applying for the MRI, and on the twenty-third day from the date of
release of his loan.
One is entitled to an adequate compensation only for such pecuniary
loss suffered by him as he has duly proved (Civil Code of the
Philippines, Art. 2199). Damages, to be recoverable, must not only
be capable of proof, but must be actually proved with a reasonable
degree of certainty (Refractories Corporation v. Intermediate
Appellate Court, 176 SCRA 539 [1989]; Choa Tek Hee v. Philippine
Publishing Co., 34 Phil. 447 [1916]). Speculative damages are too
remote to be included in an accurate estimate of damages (Sun Life
Assurance v. Rueda Hermanos, 37 Phil. 844 [1918]).
While Dans is not entitled to compensatory damages, he is entitled
to moral damages. No proof of pecuniary loss is required in the
assessment of said kind of damages (Civil Code of Philippines, Art.
2216). The same may be recovered in acts referred to in Article 2219
of the Civil Code.
The assessment of moral damages is left to the discretion of the
court according to the circumstances of each case (Civil Code of the
Philippines, Art. 2216). Considering that DBP had offered to pay
P30,000.00 to respondent Estate in ex gratia settlement of its claim
and that DBP's non-disclosure of the limits of its authority amounted
to a deception to its client, an award of moral damages in the amount
of P50,000.00 would be reasonable.
The award of attorney's fees is also just and equitable under the
circumstances (Civil Code of the Philippines, Article 2208 [11]).
WHEREFORE, the decision of the Court of Appeals in CA G.R.-CV
No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to
REIMBURSE respondent Estate of Juan B. Dans the amount of
P1,476.00 with legal interest from the date of the filing of the
complaint until fully paid; and (2) to PAY said Estate the amount of
Fifty Thousand Pesos (P50,000.00) as moral damages and the
amount of Ten Thousand Pesos (P10,000.00) as attorney's fees.
With costs against petitioner.
SO ORDERED.
GREEN VALLEY vs. IAC
Squibb and Green Valley entered into a letter agreement wherein
Green Valley was appointed as a non-exclusive distributor for Squibb
Veterinary Products, through which Green Valley is entitled certain
discounts.
For goods delivered to Green Valley but unpaid, Squibb filed suit to
collect.
The trial court as aforesaid gave judgment in favor of Squibb which
was affirmed by the Court of Appeals.
Green Valley claimed that the contract with Squibb was a mere
agency to sell; that the goods received were on consignment only
with the obligation to turn over the proceeds, less its commission and
since it had sold the goods but had not been able to collect from the
purchasers thereof, the action was premature.
ISSUE:
Whether the contract was an agency to sell or a contract of sale.
HELD:
We do not have to categorize the contract. Whether viewed as an
agency to sell or as a contract of sale, the liability of Green Valley is
indubitable. Even if the contract was an agency to sell, Green Valley
is liable because it sold on credit without authority from its principal.
The Civil Code has a provision exactly in point. It reads:
Art. 1905. The commission agent cannot, without the express or
implied consent of the principal, sell on credit. Should he do so, the
principal may demand from him payment in cash, but the
commission agent shall be entitled to any interest or benefit, which
may result from such sale.
GREEN VALLEY
vs.
THE INTERMEDIATE APPELLATE COURT and E.R. SQUIBB &
SONS PHILIPPINE CORPORATION, respondents.
ABAD SANTOS, J.:
This is a petition to review a decision of the defunct Court of Appeals
which affirmed the judgment of the trial court whereby:
... judgment is hereby rendered in favor of the plaintiff [E.R. Squibb &
Sons Philippine Corporation], ordering the defendant [Green Valley
Poultry & Allied Products, Inc.] to pay the sum of P48,374.74 plus
P96.00 with interest at 6% per annum from the filing of this action;
plus attorney's fees in the amount of P5,000.00 and to pay the costs.
On November 3, 1969, Squibb and Green Valley entered into a letter
agreement the text of which reads as follows:
E.R. Squibb & Sons Philippine Corporation is pleased to appoint
Green Valley Poultry & Allied Products, Inc. as a non-exclusive
distributor for Squibb Veterinary Products, as recommended by Dr.
Leoncio D. Rebong, Jr. and Dr. J.G. Cruz, Animal Health Division
Sales Supervisor.
As a distributor, Green Valley Poultry & Allied Products, Inc. will be
entitled to a discount as follows:
Feed Store Price (Catalogue)
Less 10%
Wholesale Price
Less 10%
Distributor Price
There are exceptions to the above price structure. At present, these
are:
1. Afsillin Improved 40 lbs. bag
The distributor commission for this product size is 8% off P120.00
2. Narrow Spectrum Injectible Antibiotics
These products are subject to price fluctuations. Therefore, they are
invoiced at net price per vial.
3. Deals and Special Offers are not subject to the above
distributor price structure. A 5% distributor commission is allowed
when the distributor furnishes copies for each sale of a complete
deal or special offer to a feedstore, drugstore or other type of
account.
Deals and Special Offers purchased for resale at regular price
invoiced at net deal or special offer price.
Prices are subject to change without notice. Squibb will endeavor to
advise you promptly of any price changes. However, prices in effect
at the tune orders are received by Squibb Order Department will
apply in all instances.
Green Valley Poultry & Allied Products, Inc. will distribute only for the
Central Luzon and Northern Luzon including Cagayan Valley areas.
We will not allow any transfer or stocks from Central Luzon and
Northern Luzon including Cagayan Valley to other parts of Luzon,
Visayas or Mindanao which are covered by our other appointed
Distributors. In line with this, you will follow strictly our stipulations
that the maximum discount you can give to your direct and turnover
accounts will not go beyond 10%.
It is understood that Green Valley Poultry and Allied Products, Inc.
will accept turn-over orders from Squibb representatives for delivery
to customers in your area. If for credit or other valid reasons a turn-
over order is not served, the Squibb representative will be notified
within 48 hours and hold why the order will not be served.
It is understood that Green Valley Poultry & Allied Products, Inc. will
put up a bond of P20,000.00 from a mutually acceptable bonding
company.
Payment for Purchases of Squibb Products will be due 60 days from
date of invoice or the nearest business day thereto. No payment will
be accepted in the form of post-dated checks. Payment by check
must be on current dating.
It is mutually agreed that this non-exclusive distribution agreement
can be terminated by either Green Valley Poultry & Allied Products,
Inc. or Squibb Philippines on 30 days notice.
I trust that the above terms and conditions will be met with your
approval and that the distributor arrangement will be one of mutual
satisfaction.
If you are agreeable, please sign the enclosed three (3) extra copies
of this letter and return them to this Office at your earliest
convenience.
Thank you for your interest and support of the products of E.R.
Squibb & Sons Philippines Corporation. (Rollo, pp. 12- 13.)
For goods delivered to Green Valley but unpaid, Squibb filed suit to
collect. The trial court as aforesaid gave judgment in favor of Squibb
which was affirmed by the Court of Appeals.
In both the trial court and the Court of Appeals, the parties advanced
their respective theories.
Green Valley claimed that the contract with Squibb was a mere
agency to sell; that it never purchased goods from Squibb; that the
goods received were on consignment only with the obligation to turn
over the proceeds, less its commission, or to return the goods if not
sold, and since it had sold the goods but had not been able to collect
from the purchasers thereof, the action was premature.
Upon the other hand, Squibb claimed that the contract was one of
sale so that Green Valley was obligated to pay for the goods
received upon the expiration of the 60-day credit period.
Both courts below upheld the claim of Squibb that the agreement
between the parties was a sales contract.
We do not have to categorize the contract. Whether viewed as an
agency to sell or as a contract of sale, the liability of Green Valley is
indubitable. Adopting Green Valley's theory that the contract is an
agency to sell, it is liable because it sold on credit without authority
from its principal. The Civil Code has a provision exactly in point. It
reads:
Art. 1905. The commission agent cannot, without the express or
implied consent of the principal, sell on credit. Should he do so, the
principal may demand from him payment in cash, but the
commission agent shall be entitled to any interest or benefit, which
may result from such sale.
WHEREFORE, the petition is hereby dismissed; the judgment of the
defunct Court of Appeals is affirmed with costs against the petitioner.
SEVILLA vs. CA
FACTS:
On the strength of a contract, Tourist World Service Inc. (TWS)
leased the premises belonging to Mrs. Segundina Noguera for the
formers use as a branch office. Lina Sevilla bound herself solidarily
liable with TWS for the prompt payment of the monthly rentals
thereon. When the branch office was opened, it was run by appellant
Sevilla payable to TWS by any airline for any fare brought in on the
efforts of Sevilla, 4% was to go to Sevilla and 3% was to be withheld
by TWS.
TWS appears to have been informed that Sevilla was connected with
a rival firm, the Philippine Travel Bureau, and, since the branch office
was anyhow losing, the TWS considered closing down its office. Two
resolutions of the TWS board of directors were passed to abolish the
office of the manager and vice president of the branch office and
authorizing the corporate secretary to receive the properties in the
said branch office.
Subsequently, the corporate secretary went to the branch office, and
finding the premises locked and being unable to contact Sevilla,
padlocked the premises to protect the interests of TWS.
When neither Sevilla nor her employees could enter the locked
premises, she filed a complaint against TWS with a prayer for the
issuance of a mandatory preliminary injunction.
The trial court dismissed the case holding that TWS, being the true
lessee, was within its prerogative to terminate the lease and padlock
the premises. It likewise found that Sevilla was a mere employee of
TWS and as such, was bound by the acts of her employer.
The CA affirmed. Hence this petition.
ISSUES:
1. Whether or not there was an employer-employee relationship
between TWS and Sevilla?
2. Whether or not the padlocking of the premises by TWS without
the knowledge and consent of Sevilla entitled the latter to the relief of
damages prayed for?
HELD
1. NO. It was a principal-agent relationship. Sevilla was not subject
to control by TWS either as to the result of the enterprise or as to the
means used in connection therewith. Sevilla was not in the
companys payroll. She retained 4% in commissions from airline
bookings, the remaining 3% going to TWS. Unlike an employee who
usually earns a fixed salary, she earned compensation in fluctuating
amounts depending on her booking successes. When Sevilla agreed
to man TWS Ermita branch office, she did so pursuant to a contract
of agency. It is the essence of this contract that the agent renders
services in representation or on behalf of another. In the case at
bar, Sevilla solicited airline fares, but she did so for and on behalf of
her principal, TWS.
But unlike simple grants of a power of attorney, the agency that we
hereby declare to be compatible with the intent of the parties, cannot
be revoked at will. The reason is that it is one coupled with an
interest, the agency having been created for mutual interest, of the
agent and the principal. It appears that Lina Sevilla is a bona fide
travel agent herself, and as such, she had acquired an interest in the
business entrusted to her. Moreover, she had assumed a personal
obligation for the operation thereof, holding herself solidarily liable for
the payment of rentals. She continued the business, using her own
name, after Tourist World had stopped further operations. Her
interest, obviously, is not to the commissions she earned as a result
of her business transactions, but one that extends to the very subject
matter of the power of management delegated to her. It is an agency
that, as we said, cannot be revoked at the pleasure of the principal.
Accordingly, the revocation complained of should entitle the
petitioner, Lina Sevilla, to damages.
CARLOS L. SEVILLA and LINA O. SEVILLA, petitioners-
appellants,
vs.
THE COURT OF APPEALS, TOURIST WORLD SERVICE, INC.,
ELISEO S.CANILAO, and SEGUNDINA NOGUERA, respondents-
appellees.
SARMIENTO , J.:
The petitioners invoke the provisions on human relations of the Civil
Code in this appeal by certiorari. The facts are beyond dispute:
xxx xxx xxx
On the strength of a contract (Exhibit A for the appellant Exhibit 2 for
the appellees) entered into on Oct. 19, 1960 by and between Mrs.
Segundina Noguera, party of the first part; the Tourist World Service,
Inc., represented by Mr. Eliseo Canilao as party of the second part,
and hereinafter referred to as appellants, the Tourist World Service,
Inc. leased the premises belonging to the party of the first part at
Mabini St., Manila for the former-s use as a branch office. In the said
contract the party of the third part held herself solidarily liable with
the party of the part for the prompt payment of the monthly rental
agreed on. When the branch office was opened, the same was run
by the herein appellant Una 0. Sevilla payable to Tourist World
Service Inc. by any airline for any fare brought in on the efforts of
Mrs. Lina Sevilla, 4% was to go to Lina Sevilla and 3% was to be
withheld by the Tourist World Service, Inc.
On or about November 24, 1961 (Exhibit 16) the Tourist World
Service, Inc. appears to have been informed that Lina Sevilla was
connected with a rival firm, the Philippine Travel Bureau, and, since
the branch office was anyhow losing, the Tourist World Service
considered closing down its office. This was firmed up by two
resolutions of the board of directors of Tourist World Service, Inc.
dated Dec. 2, 1961 (Exhibits 12 and 13), the first abolishing the office
of the manager and vice-president of the Tourist World Service, Inc.,
Ermita Branch, and the second,authorizing the corporate secretary to
receive the properties of the Tourist World Service then located at
the said branch office. It further appears that on Jan. 3, 1962, the
contract with the appellees for the use of the Branch Office premises
was terminated and while the effectivity thereof was Jan. 31, 1962,
the appellees no longer used it. As a matter of fact appellants used it
since Nov. 1961. Because of this, and to comply with the mandate of
the Tourist World Service, the corporate secretary Gabino Canilao
went over to the branch office, and, finding the premises locked, and,
being unable to contact Lina Sevilla, he padlocked the premises on
June 4, 1962 to protect the interests of the Tourist World Service.
When neither the appellant Lina Sevilla nor any of her employees
could enter the locked premises, a complaint wall filed by the herein
appellants against the appellees with a prayer for the issuance of
mandatory preliminary injunction. Both appellees answered with
counterclaims. For apparent lack of interest of the parties therein, the
trial court ordered the dismissal of the case without prejudice.
The appellee Segundina Noguera sought reconsideration of the
order dismissing her counterclaim which the court a quo, in an order
dated June 8, 1963, granted permitting her to present evidence in
support of her counterclaim.
On June 17,1963, appellant Lina Sevilla refiled her case against the
herein appellees and after the issues were joined, the reinstated
counterclaim of Segundina Noguera and the new complaint of
appellant Lina Sevilla were jointly heard following which the court a
quo ordered both cases dismiss for lack of merit, on the basis of
which was elevated the instant appeal on the following assignment of
errors:
I. THE LOWER COURT ERRED EVEN IN APPRECIATING
THE NATURE OF PLAINTIFF-APPELLANT MRS. LINA O.
SEVILLA'S COMPLAINT.
II. THE LOWER COURT ERRED IN HOLDING THAT
APPELLANT MRS. LINA 0. SEVILA'S ARRANGEMENT (WITH
APPELLEE TOURIST WORLD SERVICE, INC.) WAS ONE MERELY
OF EMPLOYER-EMPLOYEE RELATION AND IN FAILING TO
HOLD THAT THE SAID ARRANGEMENT WAS ONE OF JOINT
BUSINESS VENTURE.
III. THE LOWER COURT ERRED IN RULING THAT PLAINTIFF-
APPELLANT MRS. LINA O. SEVILLA IS ESTOPPED FROM
DENYING THAT SHE WAS A MERE EMPLOYEE OF DEFENDANT-
APPELLEE TOURIST WORLD SERVICE, INC. EVEN AS AGAINST
THE LATTER.
IV. THE LOWER COURT ERRED IN NOT HOLDING THAT
APPELLEES HAD NO RIGHT TO EVICT APPELLANT MRS. LINA
O. SEVILLA FROM THE A. MABINI OFFICE BY TAKING THE LAW
INTO THEIR OWN HANDS.
V. THE LOWER COURT ERRED IN NOT CONSIDERING AT
.ALL APPELLEE NOGUERA'S RESPONSIBILITY FOR APPELLANT
LINA O. SEVILLA'S FORCIBLE DISPOSSESSION OF THE A.
MABINI PREMISES.
VI. THE LOWER COURT ERRED IN FINDING THAT
APPELLANT APPELLANT MRS. LINA O. SEVILLA SIGNED
MERELY AS GUARANTOR FOR RENTALS.
On the foregoing facts and in the light of the errors assigned the
issues to be resolved are:
1. Whether the appellee Tourist World Service unilaterally disco
the telephone line at the branch office on Ermita;
2. Whether or not the padlocking of the office by the Tourist
World Service was actionable or not; and
3. Whether or not the lessee to the office premises belonging to
the appellee Noguera was appellees TWS or TWS and the appellant.
In this appeal, appealant Lina Sevilla claims that a joint bussiness
venture was entered into by and between her and appellee TWS with
offices at the Ermita branch office and that she was not an employee
of the TWS to the end that her relationship with TWS was one of a
joint business venture appellant made declarations showing:
1. Appellant Mrs. Lina 0. Sevilla, a prominent figure and wife of
an eminent eye, ear and nose specialist as well as a imediately
columnist had been in the travel business prior to the establishment
of the joint business venture with appellee Tourist World Service, Inc.
and appellee Eliseo Canilao, her compadre, she being the
godmother of one of his children, with her own clientele, coming
mostly from her own social circle (pp. 3-6 tsn. February 16,1965).
2. Appellant Mrs. Sevilla was signatory to a lease agreement
dated 19 October 1960 (Exh. 'A') covering the premises at A. Mabini
St., she expressly warranting and holding [sic] herself 'solidarily'
liable with appellee Tourist World Service, Inc. for the prompt
payment of the monthly rentals thereof to other appellee Mrs.
Noguera (pp. 14-15, tsn. Jan. 18,1964).
3. Appellant Mrs. Sevilla did not receive any salary from appellee
Tourist World Service, Inc., which had its own, separate office
located at the Trade & Commerce Building; nor was she an
employee thereof, having no participation in nor connection with said
business at the Trade & Commerce Building (pp. 16-18 tsn Id.).
4. Appellant Mrs. Sevilla earned commissions for her own
passengers, her own bookings her own business (and not for any of
the business of appellee Tourist World Service, Inc.) obtained from
the airline companies. She shared the 7% commissions given by the
airline companies giving appellee Tourist World Service, Lic. 3%
thereof aid retaining 4% for herself (pp. 18 tsn. Id.)
5. Appellant Mrs. Sevilla likewise shared in the expenses of
maintaining the A. Mabini St. office, paying for the salary of an office
secretary, Miss Obieta, and other sundry expenses, aside from
desicion the office furniture and supplying some of fice furnishings
(pp. 15,18 tsn. April 6,1965), appellee Tourist World Service, Inc.
shouldering the rental and other expenses in consideration for the
3% split in the co procured by appellant Mrs. Sevilla (p. 35 tsn Feb.
16,1965).
6. It was the understanding between them that appellant Mrs.
Sevilla would be given the title of branch manager for appearance's
sake only (p. 31 tsn. Id.), appellee Eliseo Canilao admit that it was
just a title for dignity (p. 36 tsn. June 18, 1965- testimony of appellee
Eliseo Canilao pp. 38-39 tsn April 61965-testimony of corporate
secretary Gabino Canilao (pp- 2-5, Appellants' Reply Brief)
Upon the other hand, appellee TWS contend that the appellant was
an employee of the appellee Tourist World Service, Inc. and as such
was designated manager. 1
xxx xxx xxx
The trial court 2 held for the private respondent on the premise that
the private respondent, Tourist World Service, Inc., being the true
lessee, it was within its prerogative to terminate the lease and
padlock the premises. 3 It likewise found the petitioner, Lina Sevilla,
to be a mere employee of said Tourist World Service, Inc. and as
such, she was bound by the acts of her employer. 4 The respondent
Court of Appeal 5 rendered an affirmance.
The petitioners now claim that the respondent Court, in sustaining
the lower court, erred. Specifically, they state:
I
THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND
GRAVELY ABUSED ITS DISCRETION IN HOLDING THAT "THE
PADLOCKING OF THE PREMISES BY TOURIST WORLD
SERVICE INC. WITHOUT THE KNOWLEDGE AND CONSENT OF
THE APPELLANT LINA SEVILLA ... WITHOUT NOTIFYING MRS.
LINA O. SEVILLA OR ANY OF HER EMPLOYEES AND WITHOUT
INFORMING COUNSEL FOR THE APPELLANT (SEVILIA), WHO
IMMEDIATELY BEFORE THE PADLOCKING INCIDENT, WAS IN
CONFERENCE WITH THE CORPORATE SECRETARY OF
TOURIST WORLD SERVICE (ADMITTEDLY THE PERSON WHO
PADLOCKED THE SAID OFFICE), IN THEIR ATTEMP AMICABLY
SETTLE THE CONTROVERSY BETWEEN THE APPELLANT
(SEVILLA) AND THE TOURIST WORLD SERVICE ... (DID NOT)
ENTITLE THE LATTER TO THE RELIEF OF DAMAGES" (ANNEX
"A" PP. 7,8 AND ANNEX "B" P. 2) DECISION AGAINST DUE
PROCESS WHICH ADHERES TO THE RULE OF LAW.
II
THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND
GRAVELY ABUSED ITS DISCRETION IN DENYING APPELLANT
SEVILLA RELIEF BECAUSE SHE HAD "OFFERED TO WITHDRAW
HER COMP PROVIDED THAT ALL CLAIMS AND
COUNTERCLAIMS LODGED BY BOTH APPELLEES WERE
WITHDRAWN." (ANNEX "A" P. 8)
III
THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND
GRAVELY ABUSED ITS DISCRETION IN DENYING-IN FACT NOT
PASSING AND RESOLVING-APPELLANT SEVILLAS CAUSE OF
ACTION FOUNDED ON ARTICLES 19, 20 AND 21 OF THE CIVIL
CODE ON RELATIONS.
IV
THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND
GRAVELY ABUSED ITS DISCRETION IN DENYING APPEAL
APPELLANT SEVILLA RELIEF YET NOT RESOLVING HER CLAIM
THAT SHE WAS IN JOINT VENTURE WITH TOURIST WORLD
SERVICE INC. OR AT LEAST ITS AGENT COUPLED WITH AN
INTEREST WHICH COULD NOT BE TERMINATED OR REVOKED
UNILATERALLY BY TOURIST WORLD SERVICE INC. 6

As a preliminary inquiry, the Court is asked to declare the true nature
of the relation between Lina Sevilla and Tourist World Service, Inc.
The respondent Court of see fit to rule on the question, the crucial
issue, in its opinion being "whether or not the padlocking of the
premises by the Tourist World Service, Inc. without the knowledge
and consent of the appellant Lina Sevilla entitled the latter to the
relief of damages prayed for and whether or not the evidence for the
said appellant supports the contention that the appellee Tourist
World Service, Inc. unilaterally and without the consent of the
appellant disconnected the telephone lines of the Ermita branch
office of the appellee Tourist World Service, Inc. 7 Tourist World
Service, Inc., insists, on the other hand, that Lina SEVILLA was a
mere employee, being "branch manager" of its Ermita "branch" office
and that inferentially, she had no say on the lease executed with the
private respondent, Segundina Noguera. The petitioners contend,
however, that relation between the between parties was one of joint
venture, but concede that "whatever might have been the true
relationship between Sevilla and Tourist World Service," the Rule of
Law enjoined Tourist World Service and Canilao from taking the law
into their own hands, 8 in reference to the padlocking now
questioned.
The Court finds the resolution of the issue material, for if, as the
private respondent, Tourist World Service, Inc., maintains, that the
relation between the parties was in the character of employer and
employee, the courts would have been without jurisdiction to try the
case, labor disputes being the exclusive domain of the Court of
Industrial Relations, later, the Bureau Of Labor Relations, pursuant to
statutes then in force. 9
In this jurisdiction, there has been no uniform test to determine the
evidence of an employer-employee relation. In general, we have
relied on the so-called right of control test, "where the person for
whom the services are performed reserves a right to control not only
the end to be achieved but also the means to be used in reaching
such end." 10 Subsequently, however, we have considered, in
addition to the standard of right-of control, the existing economic
conditions prevailing between the parties, like the inclusion of the
employee in the payrolls, in determining the existence of an
employer-employee relationship. 11
The records will show that the petitioner, Lina Sevilla, was not
subject to control by the private respondent Tourist World Service,
Inc., either as to the result of the enterprise or as to the means used
in connection therewith. In the first place, under the contract of lease
covering the Tourist Worlds Ermita office, she had bound herself in
solidum as and for rental payments, an arrangement that would be
like claims of a master-servant relationship. True the respondent
Court would later minimize her participation in the lease as one of
mere guaranty, 12 that does not make her an employee of Tourist
World, since in any case, a true employee cannot be made to part
with his own money in pursuance of his employer's business, or
otherwise, assume any liability thereof. In that event, the parties
must be bound by some other relation, but certainly not employment.
In the second place, and as found by the Appellate Court, '[w]hen the
branch office was opened, the same was run by the herein appellant
Lina O. Sevilla payable to Tourist World Service, Inc. by any airline
for any fare brought in on the effort of Mrs. Lina Sevilla. 13 Under
these circumstances, it cannot be said that Sevilla was under the
control of Tourist World Service, Inc. "as to the means used." Sevilla
in pursuing the business, obviously relied on her own gifts and
capabilities.
It is further admitted that Sevilla was not in the company's payroll.
For her efforts, she retained 4% in commissions from airline
bookings, the remaining 3% going to Tourist World. Unlike an
employee then, who earns a fixed salary usually, she earned
compensation in fluctuating amounts depending on her booking
successes.
The fact that Sevilla had been designated 'branch manager" does
not make her, ergo, Tourist World's employee. As we said,
employment is determined by the right-of-control test and certain
economic parameters. But titles are weak indicators.
In rejecting Tourist World Service, Inc.'s arguments however, we are
not, as a consequence, accepting Lina Sevilla's own, that is, that the
parties had embarked on a joint venture or otherwise, a partnership.
And apparently, Sevilla herself did not recognize the existence of
such a relation. In her letter of November 28, 1961, she expressly
'concedes your [Tourist World Service, Inc.'s] right to stop the
operation of your branch office 14 in effect, accepting Tourist World
Service, Inc.'s control over the manner in which the business was
run. A joint venture, including a partnership, presupposes generally a
of standing between the joint co-venturers or partners, in which each
party has an equal proprietary interest in the capital or property
contributed 15 and where each party exercises equal rights in the
conduct of the business. 16 furthermore, the parties did not hold
themselves out as partners, and the building itself was embellished
with the electric sign "Tourist World Service, Inc. 17in lieu of a distinct
partnership name.
It is the Court's considered opinion, that when the petitioner, Lina
Sevilla, agreed to (wo)man the private respondent, Tourist World
Service, Inc.'s Ermita office, she must have done so pursuant to a
contract of agency. It is the essence of this contract that the agent
renders services "in representation or on behalf of another. 18 In the
case at bar, Sevilla solicited airline fares, but she did so for and on
behalf of her principal, Tourist World Service, Inc. As compensation,
she received 4% of the proceeds in the concept of commissions. And
as we said, Sevilla herself based on her letter of November 28, 1961,
pre-assumed her principal's authority as owner of the business
undertaking. We are convinced, considering the circumstances and
from the respondent Court's recital of facts, that the ties had
contemplated a principal agent relationship, rather than a joint
managament or a partnership..
But unlike simple grants of a power of attorney, the agency that we
hereby declare to be compatible with the intent of the parties, cannot
be revoked at will. The reason is that it is one coupled with an
interest, the agency having been created for mutual interest, of the
agent and the principal. 19 It appears that Lina Sevilla is a bona fide
travel agent herself, and as such, she had acquired an interest in the
business entrusted to her. Moreover, she had assumed a personal
obligation for the operation thereof, holding herself solidarily liable for
the payment of rentals. She continued the business, using her own
name, after Tourist World had stopped further operations. Her
interest, obviously, is not to the commissions she earned as a result
of her business transactions, but one that extends to the very subject
matter of the power of management delegated to her. It is an agency
that, as we said, cannot be revoked at the pleasure of the principal.
Accordingly, the revocation complained of should entitle the
petitioner, Lina Sevilla, to damages.
As we have stated, the respondent Court avoided this issue,
confining itself to the telephone disconnection and padlocking
incidents. Anent the disconnection issue, it is the holding of the Court
of Appeals that there is 'no evidence showing that the Tourist World
Service, Inc. disconnected the telephone lines at the branch office.
20 Yet, what cannot be denied is the fact that Tourist World Service,
Inc. did not take pains to have them reconnected. Assuming,
therefore, that it had no hand in the disconnection now complained
of, it had clearly condoned it, and as owner of the telephone lines, it
must shoulder responsibility therefor.
The Court of Appeals must likewise be held to be in error with
respect to the padlocking incident. For the fact that Tourist World
Service, Inc. was the lessee named in the lease con-tract did not
accord it any authority to terminate that contract without notice to its
actual occupant, and to padlock the premises in such fashion. As this
Court has ruled, the petitioner, Lina Sevilla, had acquired a personal
stake in the business itself, and necessarily, in the equipment
pertaining thereto. Furthermore, Sevilla was not a stranger to that
contract having been explicitly named therein as a third party in
charge of rental payments (solidarily with Tourist World, Inc.). She
could not be ousted from possession as summarily as one would
eject an interloper.
The Court is satisfied that from the chronicle of events, there was
indeed some malevolent design to put the petitioner, Lina Sevilla, in
a bad light following disclosures that she had worked for a rival firm.
To be sure, the respondent court speaks of alleged business losses
to justify the closure '21 but there is no clear showing that Tourist
World Ermita Branch had in fact sustained such reverses, let alone,
the fact that Sevilla had moonlit for another company. What the
evidence discloses, on the other hand, is that following such an
information (that Sevilla was working for another company), Tourist
World's board of directors adopted two resolutions abolishing the
office of 'manager" and authorizing the corporate secretary, the
respondent Eliseo Canilao, to effect the takeover of its branch office
properties. On January 3, 1962, the private respondents ended the
lease over the branch office premises, incidentally, without notice to
her.
It was only on June 4, 1962, and after office hours significantly, that
the Ermita office was padlocked, personally by the respondent
Canilao, on the pretext that it was necessary to Protect the interests
of the Tourist World Service. " 22 It is strange indeed that Tourist
World Service, Inc. did not find such a need when it cancelled the
lease five months earlier. While Tourist World Service, Inc. would not
pretend that it sought to locate Sevilla to inform her of the closure,
but surely, it was aware that after office hours, she could not have
been anywhere near the premises. Capping these series of
"offensives," it cut the office's telephone lines, paralyzing completely
its business operations, and in the process, depriving Sevilla
articipation therein.
This conduct on the part of Tourist World Service, Inc. betrays a
sinister effort to punish Sevillsa it had perceived to be disloyalty on
her part. It is offensive, in any event, to elementary norms of justice
and fair play.
We rule therefore, that for its unwarranted revocation of the contract
of agency, the private respondent, Tourist World Service, Inc., should
be sentenced to pay damages. Under the Civil Code, moral
damages may be awarded for "breaches of contract where the
defendant acted ... in bad faith. 23
We likewise condemn Tourist World Service, Inc. to pay further
damages for the moral injury done to Lina Sevilla from its brazen
conduct subsequent to the cancellation of the power of attorney
granted to her on the authority of Article 21 of the Civil Code, in
relation to Article 2219 (10) thereof
ART. 21. Any person who wilfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy
shall compensate the latter for the damage. 24
ART. 2219. Moral damages 25 may be recovered in the following
and analogous cases:
xxx xxx xxx
(10) Acts and actions refered into article 21, 26, 27, 28, 29, 30, 32,
34, and 35.
The respondent, Eliseo Canilao, as a joint tortfeasor is likewise
hereby ordered to respond for the same damages in a solidary
capacity.
Insofar, however, as the private respondent, Segundina Noguera is
concerned, no evidence has been shown that she had connived with
Tourist World Service, Inc. in the disconnection and padlocking
incidents. She cannot therefore be held liable as a cotortfeasor.
The Court considers the sums of P25,000.00 as and for moral
damages,24 P10,000.00 as exemplary damages, 25 and P5,000.00
as nominal 26 and/or temperate 27 damages, to be just, fair, and
reasonable under the circumstances.

WHEREFORE, the Decision promulgated on January 23, 1975 as
well as the Resolution issued on July 31, 1975, by the respondent
Court of Appeals is hereby REVERSED and SET ASIDE. The private
respondent, Tourist World Service, Inc., and Eliseo Canilao, are
ORDERED jointly and severally to indemnify the petitioner, Lina
Sevilla, the sum of 25,00.00 as and for moral damages, the sum of
P10,000.00, as and for exemplary damages, and the sum of
P5,000.00, as and for nominal and/or temperate damages.
Costs against said private respondents.
SO ORDERED.
VALENZUELA vs. CA
FACTS:
Valenzuela is a General Agent of Philamgen and as such he was
authorized to solicit and sell in behalf of Philamgen all kinds of non-
life insurance 32.5% commission. From 1973 to 1975, Valenzuela
solicited marine insurance from one of his clients, the Delta Motors,
but Valenzuela did not receive his full commission which amounted
to P1.6 Million and P632,737 which was his commission for premium
paymenst made directly to Philamgen.
Philamgen expressed its intent to share in the commission due
Valenzuela but because of the refusal of Valenzuela, Philamgen and
its officers took drastic action against Valenzuela. They: (a) reversed
the commission due him by not crediting in his account the
commission earned from the Delta Motors, Inc. insurance (b) placed
agency transactions on a cash and carry basis; (c) threatened the
cancellation of policies issued by his agency; and (d) started to leak
out news that Valenzuela has a substantial account with Philamgen.
All of these acts resulted in the decline of his business as insurance
agent and subsequently, Philamgen terminated the General Agency
Agreement of Valenzuela.
Valenzuela filed a complaint against Philamgen.
The court ruled that since Philamgen are not justified in the
termination of plaintiff Arturo P. Valenzuela as one of their General
Agents, defendants shall be liable for the resulting damage and loss
of business of plaintiff Arturo P. Valenzuela
ISSUE:
Whether the agency between Valenzuela and Philamgen is coupled
with an interest.
HELD:
It is also evident from the records that the agency involving
Valenzuela and Philamgen is one "coupled with an interest," and,
therefore, should not be freely revocable at the unilateral will of the
latter.
In the case of Valenzuela, he was able to build up an Agency from
scratch in 1965 to a highly productive enterprise with gross billings of
about Two Million Five Hundred Thousand Pesos (P2,500,000.00)
premiums per annum. The records sustain the finding that the private
respondent started to covet a share of the insurance business that
Valenzuela had built up, developed and nurtured to profitability
through over thirteen (13) years of patient work and perseverance.
When Valenzuela refused to share his commission in the Delta
account, the boom suddenly fell on him.
The private respondents by the simple expedient of terminating the
General Agency Agreement appropriated the entire insurance
business of Valenzuela. With the termination of the General Agency
Agreement, Valenzuela would no longer be entitled to commission
on the renewal of insurance policies of clients sourced from his
agency. Worse, despite the termination of the agency, Philamgen
continued to hold Valenzuela jointly and severally liable with the
insured for unpaid premiums. Under these circumstances, it is clear
that Valenzuela had an interest in the continuation of the agency
when it was unceremoniously terminated not only because of the
commissions he should continue to receive from the insurance
business he has solicited and procured but also for the fact that by
the very acts of the respondents, he was made liable to Philamgen in
the event the insured fail to pay the premiums due. They are
estopped by their own positive averments and claims for damages.
Therefore, the respondents cannot state that the agency relationship
between Valenzuela and Philamgen is not coupled with interest.
ARTURO P. VALENZUELA and HOSPITALITA N. VALENZUELA,
petitioners,
vs.
THE HONORABLE COURT OF APPEALS, BIENVENIDO M.
ARAGON, ROBERT E. PARNELL, CARLOS K. CATOLICO and
THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY,
INC., respondents.
GUTIERREZ, JR., J.:
This is a petition for review of the January 29, 1988 decision of the
Court of Appeals and the April 27, 1988 resolution denying the
petitioners' motion for reconsideration, which decision and resolution
reversed the decision dated June 23,1986 of the Court of First
Instance of Manila, Branch 34 in Civil Case No. 121126 upholding
the petitioners' causes of action and granting all the reliefs prayed for
in their complaint against private respondents.
The antecedent facts of the case are as follows:
Petitioner Arturo P. Valenzuela (Valenzuela for short) is a General
Agent of private respondent Philippine American General Insurance
Company, Inc. (Philamgen for short) since 1965. As such, he was
authorized to solicit and sell in behalf of Philamgen all kinds of non-
life insurance, and in consideration of services rendered was entitled
to receive the full agent's commission of 32.5% from Philamgen
under the scheduled commission rates (Exhibits "A" and "1"). From
1973 to 1975, Valenzuela solicited marine insurance from one of his
clients, the Delta Motors, Inc. (Division of Electronics Airconditioning
and Refrigeration) in the amount of P4.4 Million from which he was
entitled to a commission of 32% (Exhibit "B"). However, Valenzuela
did not receive his full commission which amounted to P1.6 Million
from the P4.4 Million insurance coverage of the Delta Motors. During
the period 1976 to 1978, premium payments amounting to
P1,946,886.00 were paid directly to Philamgen and Valenzuela's
commission to which he is entitled amounted to P632,737.00.
In 1977, Philamgen started to become interested in and expressed
its intent to share in the commission due Valenzuela (Exhibits "III"
and "III-1") on a fifty-fifty basis (Exhibit "C"). Valenzuela refused
(Exhibit "D").
On February 8, 1978 Philamgen and its President, Bienvenido M.
Aragon insisted on the sharing of the commission with Valenzuela
(Exhibit E). This was followed by another sharing proposal dated
June 1, 1978. On June 16,1978, Valenzuela firmly reiterated his
objection to the proposals of respondents stating that: "It is with great
reluctance that I have to decline upon request to signify my
conformity to your alternative proposal regarding the payment of the
commission due me. However, I have no choice for to do otherwise
would be violative of the Agency Agreement executed between our
goodselves." (Exhibit B-1)
Because of the refusal of Valenzuela, Philamgen and its officers,
namely: Bienvenido Aragon, Carlos Catolico and Robert E. Parnell
took drastic action against Valenzuela. They: (a) reversed the
commission due him by not crediting in his account the commission
earned from the Delta Motors, Inc. insurance (Exhibit "J" and "2"); (b)
placed agency transactions on a cash and carry basis; (c) threatened
the cancellation of policies issued by his agency (Exhibits "H" to "H-
2"); and (d) started to leak out news that Valenzuela has a
substantial account with Philamgen. All of these acts resulted in the
decline of his business as insurance agent (Exhibits "N", "O", "K" and
"K-8"). Then on December 27, 1978, Philamgen terminated the
General Agency Agreement of Valenzuela (Exhibit "J", pp. 1-3,
Decision Trial Court dated June 23, 1986, Civil Case No. 121126,
Annex I, Petition).
The petitioners sought relief by filing the complaint against the
private respondents in the court a quo (Complaint of January 24,
1979, Annex "F" Petition). After due proceedings, the trial court
found:
xxx xxx xxx
Defendants tried to justify the termination of plaintiff Arturo P.
Valenzuela as one of defendant PHILAMGEN's General Agent by
making it appear that plaintiff Arturo P. Valenzuela has a substantial
account with defendant PHILAMGEN particularly Delta Motors, Inc.'s
Account, thereby prejudicing defendant PHILAMGEN's interest
(Exhibits 6,"11","11- "12- A"and"13-A").
Defendants also invoked the provisions of the Civil Code of the
Philippines (Article 1868) and the provisions of the General Agency
Agreement as their basis for terminating plaintiff Arturo P. Valenzuela
as one of their General Agents.
That defendants' position could have been justified had the
termination of plaintiff Arturo P. Valenzuela was (sic) based solely on
the provisions of the Civil Code and the conditions of the General
Agency Agreement. But the records will show that the principal
cause of the termination of the plaintiff as General Agent of
defendant PHILAMGEN was his refusal to share his Delta
commission.
That it should be noted that there were several attempts made by
defendant Bienvenido M. Aragon to share with the Delta commission
of plaintiff Arturo P. Valenzuela. He had persistently pursued the
sharing scheme to the point of terminating plaintiff Arturo P.
Valenzuela, and to make matters worse, defendants made it appear
that plaintiff Arturo P. Valenzuela had substantial accounts with
defendant PHILAMGEN.
Not only that, defendants have also started (a) to treat separately the
Delta Commission of plaintiff Arturo P. Valenzuela, (b) to reverse the
Delta commission due plaintiff Arturo P. Valenzuela by not crediting
or applying said commission earned to the account of plaintiff Arturo
P. Valenzuela, (c) placed plaintiff Arturo P. Valenzuela's agency
transactions on a "cash and carry basis", (d) sending threats to
cancel existing policies issued by plaintiff Arturo P. Valenzuela's
agency, (e) to divert plaintiff Arturo P. Valenzuela's insurance
business to other agencies, and (f) to spread wild and malicious
rumors that plaintiff Arturo P. Valenzuela has substantial account with
defendant PHILAMGEN to force plaintiff Arturo P. Valenzuela into
agreeing with the sharing of his Delta commission." (pp. 9-10,
Decision, Annex 1, Petition).
xxx xxx xxx
These acts of harrassment done by defendants on plaintiff Arturo P.
Valenzuela to force him to agree to the sharing of his Delta
commission, which culminated in the termination of plaintiff Arturo P.
Valenzuela as one of defendant PHILAMGEN's General Agent, do
not justify said termination of the General Agency Agreement entered
into by defendant PHILAMGEN and plaintiff Arturo P. Valenzuela.
That since defendants are not justified in the termination of plaintiff
Arturo P. Valenzuela as one of their General Agents, defendants
shall be liable for the resulting damage and loss of business of
plaintiff Arturo P. Valenzuela. (Arts. 2199/2200, Civil Code of the
Philippines). (Ibid, p. 11)
The court accordingly rendered judgment, the dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs
and against defendants ordering the latter to reinstate plaintiff Arturo
P. Valenzuela as its General Agent, and to pay plaintiffs, jointly and
severally, the following:
1. The amount of five hundred twenty-one thousand nine
hundred sixty four and 16/100 pesos (P521,964.16) representing
plaintiff Arturo P. Valenzuela's Delta Commission with interest at the
legal rate from the time of the filing of the complaint, which amount
shall be adjusted in accordance with Article 1250 of the Civil Code of
the Philippines;
2. The amount of seventy-five thousand pesos (P75,000.00) per
month as compensatory damages from 1980 until such time that
defendant Philamgen shall reinstate plaintiff Arturo P. Valenzuela as
one of its general agents;
3. The amount of three hundred fifty thousand pesos
(P350,000.00) for each plaintiff as moral damages;
4. The amount of seventy-five thousand pesos (P75,000.00) as
and for attorney's fees;
5. Costs of the suit. (Ibid., P. 12)
From the aforesaid decision of the trial court, Bienvenido Aragon,
Robert E. Parnell, Carlos K. Catolico and PHILAMGEN respondents
herein, and defendants-appellants below, interposed an appeal on
the following:
ASSIGNMENT OF ERRORS
I
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF
ARTURO P. VALENZUELA HAD NO OUTSTANDING ACCOUNT
WITH DEFENDANT PHILAMGEN AT THE TIME OF THE
TERMINATION OF THE AGENCY.
II
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF
ARTURO P. VALENZUELA IS ENTITLED TO THE FULL
COMMISSION OF 32.5% ON THE DELTA ACCOUNT.
III
THE LOWER COURT ERRED IN HOLDING THAT THE
TERMINATION OF PLAINTIFF ARTURO P. VALENZUELA WAS
NOT JUSTIFIED AND THAT CONSEQUENTLY DEFENDANTS ARE
LIABLE FOR ACTUAL AND MORAL DAMAGES, ATTORNEYS
FEES AND COSTS.
IV
ASSUMING ARGUENDO THAT THE AWARD OF DAMAGES
AGAINST DEFENDANT PHILAMGEN WAS PROPER, THE LOWER
COURT ERRED IN AWARDING DAMAGES EVEN AGAINST THE
INDIVIDUAL DEFENDANTS WHO ARE MERE CORPORATE
AGENTS ACTING WITHIN THE SCOPE OF THEIR AUTHORITY.
V
ASSUMING ARGUENDO THAT THE AWARD OF DAMAGES IN
FAVOR OF PLAINTIFF ARTURO P. VALENZUELA WAS PROPER,
THE LOWER COURT ERRED IN AWARDING DAMAGES IN
FAVOR OF HOSPITALITA VALENZUELA, WHO, NOT BEING THE
REAL PARTY IN INTEREST IS NOT TO OBTAIN RELIEF.
On January 29, 1988, respondent Court of Appeals promulgated its
decision in the appealed case. The dispositive portion of the decision
reads:
WHEREFORE, the decision appealed from is hereby modified
accordingly and judgment is hereby rendered ordering:
1. Plaintiff-appellee Valenzuela to pay defendant-appellant
Philamgen the sum of one million nine hundred thirty two thousand
five hundred thirty-two pesos and seventeen centavos
(P1,902,532.17), with legal interest thereon from the date of finality
of this judgment until fully paid.
2. Both plaintiff-appellees to pay jointly and severally
defendants-appellants the sum of fifty thousand pesos (P50,000.00)
as and by way of attorney's fees.
No pronouncement is made as to costs. (p. 44, Rollo)
There is in this instance irreconcilable divergence in the findings and
conclusions of the Court of Appeals, vis-a-vis those of the trial court
particularly on the pivotal issue whether or not Philamgen and/or its
officers can be held liable for damages due to the termination of the
General Agency Agreement it entered into with the petitioners. In its
questioned decision the Court of Appeals observed that:
In any event the principal's power to revoke an agency at will is so
pervasive, that the Supreme Court has consistently held that
termination may be effected even if the principal acts in bad faith,
subject only to the principal's liability for damages (Danon v. Antonio
A. Brimo & Co., 42 Phil. 133; Reyes v. Mosqueda, 53 O.G. 2158 and
Infante V. Cunanan, 93 Phil. 691, cited in Paras, Vol. V, Civil Code of
the Philippines Annotated [1986] 696).
The lower court, however, thought the termination of Valenzuela as
General Agent improper because the record will show the principal
cause of the termination of the plaintiff as General Agent of
defendant Philamgen was his refusal to share his Delta commission.
(Decision, p. 9; p. 13, Rollo, 41)
Because of the conflicting conclusions, this Court deemed it
necessary in the interest of substantial justice to scrutinize the
evidence and records of the cases. While it is an established
principle that the factual findings of the Court of Appeals are final and
may not be reviewed on appeal to this Court, there are however
certain exceptions to the rule which this Court has recognized and
accepted, among which, are when the judgment is based on a
misapprehension of facts and when the findings of the appellate
court, are contrary to those of the trial court (Manlapaz v. Court of
Appeals, 147 SCRA 236 [1987]); Guita v. Court of Appeals, 139
SCRA 576 [1986]). Where the findings of the Court of Appeals and
the trial court are contrary to each other, this Court may scrutinize
the evidence on record (Cruz v. Court of Appeals, 129 SCRA 222
[1984]; Mendoza v. Court of Appeals, 156 SCRA 597 [1987]; Maclan
v. Santos, 156 SCRA 542 [1987]). When the conclusion of the Court
of Appeals is grounded entirely on speculation, surmises or
conjectures, or when the inference made is manifestly mistaken,
absurd or impossible, or when there is grave abuse of discretion, or
when the judgment is based on a misapprehension of facts, and
when the findings of facts are conflict the exception also applies
(Malaysian Airline System Bernad v. Court of Appeals, 156 SCRA
321 [1987]).
After a painstaking review of the entire records of the case and the
findings of facts of both the court a quo and respondent appellate
court, we are constrained to affirm the trial court's findings and rule
for the petitioners.
We agree with the court a quo that the principal cause of the
termination of Valenzuela as General Agent of Philamgen arose from
his refusal to share his Delta commission. The records sustain the
conclusions of the trial court on the apparent bad faith of the private
respondents in terminating the General Agency Agreement of
petitioners. It is axiomatic that the findings of fact of a trial judge are
entitled to great weight (People v. Atanacio, 128 SCRA 22 [1984])
and should not be disturbed on appeal unless for strong and cogent
reasons, because the trial court is in a better position to examine the
evidence as well as to observe the demeanor of the witnesses while
testifying (Chase v. Buencamino, Sr., 136 SCRA 365 [1985]; People
v. Pimentel, 147 SCRA 25 [1987]; and Baliwag Trans., Inc. v. Court
of Appeals, 147 SCRA 82 [1987]). In the case at bar, the records
show that the findings and conclusions of the trial court are
supported by substantial evidence and there appears to be no
cogent reason to disturb them (Mendoza v. Court of Appeals. 156
SCRA 597 [1987]).
As early as September 30,1977, Philamgen told the petitioners of its
desire to share the Delta Commission with them. It stated that should
Delta back out from the agreement, the petitioners would be charged
interests through a reduced commission after full payment by Delta.
On January 23, 1978 Philamgen proposed reducing the petitioners'
commissions by 50% thus giving them an agent's commission of
16.25%. On February 8, 1978, Philamgen insisted on the reduction
scheme followed on June 1, 1978 by still another insistence on
reducing commissions and proposing two alternative schemes for
reduction. There were other pressures. Demands to settle accounts,
to confer and thresh out differences regarding the petitioners' income
and the threat to terminate the agency followed. The petitioners were
told that the Delta commissions would not be credited to their
account (Exhibit "J"). They were informed that the Valenzuela
agency would be placed on a cash and carry basis thus removing
the 60-day credit for premiums due. (TSN., March 26, 1979, pp. 54-
57). Existing policies were threatened to be cancelled (Exhibits "H"
and "14"; TSN., March 26, 1979, pp. 29-30). The Valenzuela
business was threatened with diversion to other agencies. (Exhibit
"NNN"). Rumors were also spread about alleged accounts of the
Valenzuela agency (TSN., January 25, 1980, p. 41). The petitioners
consistently opposed the pressures to hand over the agency or half
of their commissions and for a treatment of the Delta account distinct
from other accounts. The pressures and demands, however,
continued until the agency agreement itself was finally terminated.
It is also evident from the records that the agency involving petitioner
and private respondent is one "coupled with an interest," and,
therefore, should not be freely revocable at the unilateral will of the
latter.
In the insurance business in the Philippines, the most difficult and
frustrating period is the solicitation and persuasion of the prospective
clients to buy insurance policies. Normally, agents would encounter
much embarrassment, difficulties, and oftentimes frustrations in the
solicitation and procurement of the insurance policies. To sell
policies, an agent exerts great effort, patience, perseverance,
ingenuity, tact, imagination, time and money. In the case of
Valenzuela, he was able to build up an Agency from scratch in 1965
to a highly productive enterprise with gross billings of about Two
Million Five Hundred Thousand Pesos (P2,500,000.00) premiums
per annum. The records sustain the finding that the private
respondent started to covet a share of the insurance business that
Valenzuela had built up, developed and nurtured to profitability
through over thirteen (13) years of patient work and perseverance.
When Valenzuela refused to share his commission in the Delta
account, the boom suddenly fell on him.
The private respondents by the simple expedient of terminating the
General Agency Agreement appropriated the entire insurance
business of Valenzuela. With the termination of the General Agency
Agreement, Valenzuela would no longer be entitled to commission
on the renewal of insurance policies of clients sourced from his
agency. Worse, despite the termination of the agency, Philamgen
continued to hold Valenzuela jointly and severally liable with the
insured for unpaid premiums. Under these circumstances, it is clear
that Valenzuela had an interest in the continuation of the agency
when it was unceremoniously terminated not only because of the
commissions he should continue to receive from the insurance
business he has solicited and procured but also for the fact that by
the very acts of the respondents, he was made liable to Philamgen in
the event the insured fail to pay the premiums due. They are
estopped by their own positive averments and claims for damages.
Therefore, the respondents cannot state that the agency relationship
between Valenzuela and Philamgen is not coupled with interest.
"There may be cases in which an agent has been induced to assume
a responsibility or incur a liability, in reliance upon the continuance of
the authority under such circumstances that, if the authority be
withdrawn, the agent will be exposed to personal loss or liability"
(See MEC 569 p. 406).
Furthermore, there is an exception to the principle that an agency is
revocable at will and that is when the agency has been given not
only for the interest of the principal but for the interest of third
persons or for the mutual interest of the principal and the agent. In
these cases, it is evident that the agency ceases to be freely
revocable by the sole will of the principal (See Padilla, Civil Code
Annotated, 56 ed., Vol. IV p. 350). The following citations are
apropos:
The principal may not defeat the agent's right to indemnification by a
termination of the contract of agency (Erskine v. Chevrolet Motors
Co. 185 NC 479, 117 SE 706, 32 ALR 196).
Where the principal terminates or repudiates the agent's employment
in violation of the contract of employment and without cause ... the
agent is entitled to receive either the amount of net losses caused
and gains prevented by the breach, or the reasonable value of the
services rendered. Thus, the agent is entitled to prospective profits
which he would have made except for such wrongful termination
provided that such profits are not conjectural, or speculative but are
capable of determination upon some fairly reliable basis. And a
principal's revocation of the agency agreement made to avoid
payment of compensation for a result which he has actually
accomplished (Hildendorf v. Hague, 293 NW 2d 272; Newhall v.
Journal Printing Co., 105 Minn 44,117 NW 228; Gaylen Machinery
Corp. v. Pitman-Moore Co. [C.A. 2 NY] 273 F 2d 340)
If a principal violates a contractual or quasi-contractual duty which he
owes his agent, the agent may as a rule bring an appropriate action
for the breach of that duty. The agent may in a proper case maintain
an action at law for compensation or damages ... A wrongfully
discharged agent has a right of action for damages and in such
action the measure and element of damages are controlled generally
by the rules governing any other action for the employer's breach of
an employment contract. (Riggs v. Lindsay, 11 US 500, 3L Ed 419;
Tiffin Glass Co. v. Stoehr, 54 Ohio 157, 43 NE 2798)
At any rate, the question of whether or not the agency agreement is
coupled with interest is helpful to the petitioners' cause but is not the
primary and compelling reason. For the pivotal factor rendering
Philamgen and the other private respondents liable in damages is
that the termination by them of the General Agency Agreement was
tainted with bad faith. Hence, if a principal acts in bad faith and with
abuse of right in terminating the agency, then he is liable in
damages. This is in accordance with the precepts in Human
Relations enshrined in our Civil Code that "every person must in the
exercise of his rights and in the performance of his duties act with
justice, give every one his due, and observe honesty and good faith:
(Art. 19, Civil Code), and every person who, contrary to law, wilfully
or negligently causes damages to another, shall indemnify the latter
for the same (Art. 20, id). "Any person who wilfully causes loss or
injury to another in a manner contrary to morals, good customs and
public policy shall compensate the latter for the damages" (Art. 21,
id.).
As to the issue of whether or not the petitioners are liable to
Philamgen for the unpaid and uncollected premiums which the
respondent court ordered Valenzuela to pay Philamgen the amount
of One Million Nine Hundred Thirty-Two Thousand Five Hundred
Thirty-Two and 17/100 Pesos (P1,932,532,17) with legal interest
thereon until fully paid (Decision-January 20, 1988, p. 16; Petition,
Annex "A"), we rule that the respondent court erred in holding
Valenzuela liable. We find no factual and legal basis for the award.
Under Section 77 of the Insurance Code, the remedy for the non-
payment of premiums is to put an end to and render the insurance
policy not binding
Sec. 77 ... [N]otwithstanding any agreement to the contrary, no
policy or contract of insurance is valid and binding unless and until
the premiums thereof have been paid except in the case of a life or
industrial life policy whenever the grace period provision applies
(P.D. 612, as amended otherwise known as the Insurance Code of
1974)
In Philippine Phoenix Surety and Insurance, Inc. v. Woodworks, Inc.
(92 SCRA 419 [1979]) we held that the non-payment of premium
does not merely suspend but puts an end to an insurance contract
since the time of the payment is peculiarly of the essence of the
contract. And in Arce v. The Capital Insurance and Surety Co. Inc.
(117 SCRA 63, [1982]), we reiterated the rule that unless premium is
paid, an insurance contract does not take effect. Thus:
It is to be noted that Delgado (Capital Insurance & Surety Co., Inc. v.
Delgado, 9 SCRA 177 [1963] was decided in the light of the
Insurance Act before Sec. 72 was amended by the underscored
portion. Supra. Prior to the Amendment, an insurance contract was
effective even if the premium had not been paid so that an insurer
was obligated to pay indemnity in case of loss and correlatively he
had also the right to sue for payment of the premium. But the
amendment to Sec. 72 has radically changed the legal regime in that
unless the premium is paid there is no insurance. " (Arce v. Capitol
Insurance and Surety Co., Inc., 117 SCRA 66; Emphasis supplied)
In Philippine Phoenix Surety case, we held:
Moreover, an insurer cannot treat a contract as valid for the purpose
of collecting premiums and invalid for the purpose of indemnity.
(Citing Insurance Law and Practice by John Alan Appleman, Vol. 15,
p. 331; Emphasis supplied)
The foregoing findings are buttressed by Section 776 of the
insurance Code (Presidential Decree No. 612, promulgated on
December 18, 1974), which now provides that no contract of
Insurance by an insurance company is valid and binding unless and
until the premium thereof has been paid, notwithstanding any
agreement to the contrary (Ibid., 92 SCRA 425)
Perforce, since admittedly the premiums have not been paid, the
policies issued have lapsed. The insurance coverage did not go into
effect or did not continue and the obligation of Philamgen as insurer
ceased. Hence, for Philamgen which had no more liability under the
lapsed and inexistent policies to demand, much less sue Valenzuela
for the unpaid premiums would be the height of injustice and unfair
dealing. In this instance, with the lapsing of the policies through the
nonpayment of premiums by the insured there were no more
insurance contracts to speak of. As this Court held in the Philippine
Phoenix Surety case, supra "the non-payment of premiums does not
merely suspend but puts an end to an insurance contract since the
time of the payment is peculiarly of the essence of the contract."
The respondent appellate court also seriously erred in according
undue reliance to the report of Banaria and Banaria and Company,
auditors, that as of December 31, 1978, Valenzuela owed Philamgen
P1,528,698.40. This audit report of Banaria was commissioned by
Philamgen after Valenzuela was almost through with the
presentation of his evidence. In essence, the Banaria report started
with an unconfirmed and unaudited beginning balance of account of
P1,758,185.43 as of August 20, 1976. But even with that unaudited
and unconfirmed beginning balance of P1,758,185.43, Banaria still
came up with the amount of P3,865.49 as Valenzuela's balance as of
December 1978 with Philamgen (Exh. "38-A-3"). In fact, as of
December 31, 1976, and December 31, 1977, Valenzuela had no
unpaid account with Philamgen (Ref: Annexes "D", "D-1", "E",
Petitioner's Memorandum). But even disregarding these annexes
which are records of Philamgen and addressed to Valenzuela in due
course of business, the facts show that as of July 1977, the
beginning balance of Valenzuela's account with Philamgen
amounted to P744,159.80. This was confirmed by Philamgen itself
not only once but four (4) times on different occasions, as shown by
the records.
On April 3,1978, Philamgen sent Valenzuela a statement of account
with a beginning balance of P744,159-80 as of July 1977.
On May 23, 1978, another statement of account with exactly the
same beginning balance was sent to Valenzuela.
On November 17, 1978, Philamgen sent still another statement of
account with P744,159.80 as the beginning balance.
And on December 20, 1978, a statement of account with exactly the
same figure was sent to Valenzuela.
It was only after the filing of the complaint that a radically different
statement of accounts surfaced in court. Certainly, Philamgen's own
statements made by its own accountants over a long period of time
and covering examinations made on four different occasions must
prevail over unconfirmed and unaudited statements made to support
a position made in the course of defending against a lawsuit.
It is not correct to say that Valenzuela should have presented its own
records to refute the unconfirmed and unaudited finding of the
Banaria auditor. The records of Philamgen itself are the best
refutation against figures made as an afterthought in the course of
litigation. Moreover, Valenzuela asked for a meeting where the
figures would be reconciled. Philamgen refused to meet with him
and, instead, terminated the agency agreement.
After off-setting the amount of P744,159.80, beginning balance as of
July 1977, by way of credits representing the commission due from
Delta and other accounts, Valenzuela had overpaid Philamgen the
amount of P530,040.37 as of November 30, 1978. Philamgen cannot
later be heard to complain that it committed a mistake in its
computation. The alleged error may be given credence if committed
only once. But as earlier stated, the reconciliation of accounts was
arrived at four (4) times on different occasions where Philamgen was
duly represented by its account executives. On the basis of these
admissions and representations, Philamgen cannot later on assume
a different posture and claim that it was mistaken in its
representation with respect to the correct beginning balance as of
July 1977 amounting to P744,159.80. The Banaria audit report
commissioned by Philamgen is unreliable since its results are
admittedly based on an unconfirmed and unaudited beginning
balance of P1,758,185.43 as of August 20,1976.
As so aptly stated by the trial court in its decision:
Defendants also conducted an audit of accounts of plaintiff Arturo P.
Valenzuela after the controversy has started. In fact, after hearing
plaintiffs have already rested their case.
The results of said audit were presented in Court to show plaintiff
Arturo P. Valenzuela's accountability to defendant PHILAMGEN.
However, the auditor, when presented as witness in this case
testified that the beginning balance of their audit report was based on
an unaudited amount of P1,758,185.43 (Exhibit 46-A) as of August
20, 1976, which was unverified and merely supplied by the officers of
defendant PHILAMGEN.
Even defendants very own Exhibit 38- A-3, showed that plaintiff
Arturo P. Valenzuela's balance as of 1978 amounted to only
P3,865.59, not P826,128.46 as stated in defendant Bienvenido M.
Aragon's letter dated December 20,1978 (Exhibit 14) or
P1,528,698.40 as reflected in defendant's Exhibit 46 (Audit Report of
Banaria dated December 24, 1980).
These glaring discrepancy (sic) in the accountability of plaintiff Arturo
P. Valenzuela to defendant PHILAMGEN only lends credence to the
claim of plaintiff Arturo P. Valenzuela that he has no outstanding
account with defendant PHILAMGEN when the latter, thru defendant
Bienvenido M. Aragon, terminated the General Agency Agreement
entered into by plaintiff (Exhibit A) effective January 31, 1979 (see
Exhibits "2" and "2-A"). Plaintiff Arturo P. Valenzuela has shown that
as of October 31, 1978, he has overpaid defendant PHILAMGEN in
the amount of P53,040.37 (Exhibit "EEE", which computation was
based on defendant PHILAMGEN's balance of P744,159.80
furnished on several occasions to plaintiff Arturo P. Valenzuela by
defendant PHILAMGEN (Exhibits H-1, VV, VV-1, WW, WW-1 , YY ,
YY-2 , ZZ and , ZZ-2).
Prescinding from the foregoing, and considering that the private
respondents terminated Valenzuela with evident mala fide it
necessarily follows that the former are liable in damages.
Respondent Philamgen has been appropriating for itself all these
years the gross billings and income that it unceremoniously took
away from the petitioners. The preponderance of the authorities
sustain the preposition that a principal can be held liable for
damages in cases of unjust termination of agency. In Danon v.
Brimo, 42 Phil. 133 [1921]), this Court ruled that where no time for
the continuance of the contract is fixed by its terms, either party is at
liberty to terminate it at will, subject only to the ordinary requirements
of good faith. The right of the principal to terminate his authority is
absolute and unrestricted, except only that he may not do so in bad
faith.
satisfaction of the judgment. No more claims arising from or as a
result of the agency shall be entertained by the courts after that date.
ACCORDINGLY, the petition is GRANTED. The impugned decision
of January 29, 1988 and resolution of April 27, 1988 of respondent
court are hereby SET ASIDE. The decision of the trial court dated
January 23, 1986 in Civil Case No. 121126 is REINSTATED with the
MODIFICATIONS that the amount of FIVE HUNDRED TWENTY
ONE THOUSAND NINE HUNDRED SIXTY-FOUR AND 16/100
PESOS (P521,964.16) representing the petitioners Delta
commission shall earn only legal interests without any adjustments
under Article 1250 of the Civil Code and that the contractual
relationship between Arturo P. Valenzuela and Philippine American
General Insurance Company shall be deemed terminated upon the
satisfaction of the judgment as modified.
SO ORDERED.

The trial court in its decision awarded to Valenzuela the amount of

Seventy Five Thousand Pesos (P75,000,00) per month as
compensatory damages from June 1980 until its decision becomes
final and executory. This award is justified in the light of the evidence
extant on record (Exhibits "N", "N-10", "0", "0-1", "P" and "P-1")
showing that the average gross premium collection monthly of
Valenzuela over a period of four (4) months from December 1978 to
February 1979, amounted to over P300,000.00 from which he is
entitled to a commission of P100,000.00 more or less per month.
Moreover, his annual sales production amounted to P2,500,000.00
from where he was given 32.5% commissions. Under Article 2200 of
the new Civil Code, "indemnification for damages shall comprehend
not only the value of the loss suffered, but also that of the profits
which the obligee failed to obtain."

The circumstances of the case, however, require that the contractual

relationship between the parties shall be terminated upon the

CREDIT TRANSACTIONS
EASTERN SHIPPING LINES vs. CA
FACTS:
On December 4, 1981, two fiber drums of riboflavin were shipped
from Yokohama, Japan for delivery vessel "SS EASTERN COMET"
owned by defendant Eastern Shipping Lines. The shipment was
insured under plaintiff's Marine Insurance Policy No. 81/01177 for
P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was
discharged unto the custody of Metro Port Service which excepted
one drum for it is said to be in bad order, which damage was
unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation
received the shipment from defendant Metro Port Service with one
drum opened and without seal.
On January 8 and 14, 1982, defendant Allied Brokerage Corporation
made deliveries of the shipment to the consignee's warehouse. The
latter excepted to one drum which contained spillages, while the rest
of the contents was adulterated/fake.
Plaintiff contended that due to the losses/damage sustained by said
drum, the consignee suffered losses totaling P19,032.95, due to the
fault and negligence of defendants. As consequence of the loss, the
insurance company paid the consignee, so that it became
subrogated to all the rights of action of consignee against the
defendants Eastern Shipping, Metro Port and Allied Brokerage. The
insurance company filed before the trial court. The trial court ruled in
favor of plaintiff an ordered defendants to pay the former with
present legal interest of 12% per annum from the date of the filing of
the complaint. On appeal by defendants, the appellate court denied
the same and affirmed in toto the decision of the trial court.
ISSUE
(1) Whether the applicable rate of legal interest is 12% or 6%.
(2) Whether the payment of legal interest on the award for loss or
damage is to be computed from the time the complaint is filed from
the date the decision appealed from is rendered.
HELD
(1) The Court held that the legal interest is 6% computed from
the decision of the court a quo. When an obligation, not constituting
a loan or forbearance of money, is breached, an interest on the
amount of damaes awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest shall be adjudged on
unliquidated claims or damages except when or until the demand
can be established with reasonable certainty.
When the judgment of the court awarding a sum of money becomes
final and executor, the rate of legal interest shall be 12% per annum
from such finality until satisfaction, this interim period being deemed
to be by then an equivalent to a forbearance of money.
The interest due shall be 12% PA to be computed fro default, J or
EJD.

(2) From the date the judgment is made. Where the demand is
established with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or EJ but when such
certainty cannot be so reasonably established at the time the
demand is made, the interest shll begin to run only from the date of
judgment of the court is made.
(3) The Court held that it should be computed from the decision
rendered by the court a quo
SPOUSES MARIANO and GILDA FLORENDO vs. CA
FACTS:
Petitioner Gilda Florendo was employed with Respondent Bank from
May 17, 1976 until August 16, 1984 when she voluntarily resigned.
However, before her resignation, she, in her capacity as employee
was granted a housing loan of P148,000.00, payable within 25 years.
For this a Real Estate Mortgage and Promissory was executed.
That on March 19, 1985, (respondent bank) increased the interest
rate on (petitioner's) loan from 9% per annum to 17%, the said
increase to take effect on March 19, 1985, which was protested by
Florendo.
The trial court ruled in favor of respondent bank, and held that the
bank was vested with authority to increase the interest rate (and the
corresponding monthly amortizations) pursuant to said escalation
provisions. Petitioners promptly appealed, The respondent Court
subsequently affirmed.
ISSUE:
May a bank unilaterally raise the interest rate on a housing loan
granted an employee, by reason of the voluntary resignation of the
borrower?
HELD:
What is actually central to the disposition of this case is not really the
validity of the escalation clause but the retroactive enforcement of
the ManCom Resolution as against petitioner-employee. In the case
at bar, petitioners have put forth a telling argument that there is in
fact no Central Bank rule, regulation or other issuance which would
have triggered an application of the escalation clause as to her
factual situation.
In the case at bar, the loan was perfected on July 20, 1983. PD No.
116 became effective on January 29, 1973. CB Circular No. 416 was
issued on July 29, 1974. CB Circ. 504 was issued February 6, 1976.
CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any
interest rate ceiling prescribed under or pursuant to the Usury Law,
as amended, was promulgated in 1982. These and other relevant CB
issuances had already come into existence prior to the perfection of
the housing loan agreement and mortgage contract, and thus it may
be said that these regulations had been taken into consideration by
the contracting parties when they first entered into their loan
contract. In light of the CB issuances in force at that time, respondent
bank was fully aware that it could have imposed an interest rate
higher than 9% per annum rate for the housing loans of its
employees, but it did not. In the subject loan, the respondent bank
knowingly agreed that the interest rate on petitioners' loan shall
remain at 9% p.a. unless a CB issuance is passed authorizing an
increase (or decrease) in the rate on such employee loans and the
Provident Fund Board of Trustees acts accordingly. Thus, as far as
the parties were concerned, all other onerous factors, such as
employee resignations, which could have been used to trigger an
application of the escalation clause were considered barred or
waived. If the intention were otherwise, they especially
respondent bank should have included such factors in their loan
agreement.
ManCom Resolution No. 85-08, which is neither a rule nor a
resolution of the Monetary Board, cannot be used as basis for the
escalation in lieu of CB issuances, since paragraph (f) of the
mortgage contract very categorically specifies that any interest rate
increase be in accordance with "prevailing rules, regulations and
circulars of the Central Bank . . . as the Provident Fund Board . . .
may prescribe." The Banco Filipino and PNB doctrines are applicable
four-square in this case. As a matter of fact, the said escalation
clause further provides that the increased interest rate "shall only
take effect on the date of effectivity of (the) increase/decrease"
authorized by the CB rule, regulation or circular. Without such CB
issuance, any proposed increased rate will never become effective.
PHILIPPINE NATIONAL BANK vs. THE COURT OF APPEALS
FACTS:
Private respondents, who are owners of a NACIDA-registered
enterprise, obtained from petitioner PNB a loan initially pegged at
12% per annum interest. The contract agreement includes, among
others, a clause which allows PNB to raise the rate of interest
depending on the bank's future policies. During the term of the
agreement, PNB on several occasions imposed subsequent raises to
the applicable rate ranging from the original 12% up to 42%,
imposing also a 6% penalty per annum.
ISSUE:
Can a creditor raise the rate of interest based solely on a certain
clause in the contract and without consent from the debtor as to the
amount and rate of increase?
HELD:
No. It is basic that there can be no contract in the true sense in the
absence of the element of agreement, or of mutual assent of the
parties. If this assent is wanting on the part of the one who contracts,
his act has no more efficacy than if it had been done under duress or
by a person of unsound mind.
Similarly, contract changes must be made with the consent of the
contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect
of the agreement. In the case of loan contracts, it cannot be gainsaid
that the rate of interest is always a vital component, for it can make
or break a capital venture. Thus, any change must be mutually
agreed upon, otherwise, it is bereft of any binding effect. The Court
cannot countenance petitioner bank's posturing that the escalation
clause at bench gives it unbridled right to unilaterally upwardly adjust
the interest on private respondents' loan. That would completely take
away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of
mutuality in contracts.
PAULINO GULLAS vs. THE PHILIPPINE NATIONAL BANK
Facts:
Petitioner Gullas maintains a current account with herein respondent
PNB. He together with one Pedro Lopez signed as endorsers of a
Warrant issued by the US Veterans Bureau payable to the order of
one Francisco Bacos. PNB cashed the check but was subsequently
dishonored by the Insular Treasurer. PNB then sent notices to
petitioner which could not be delivered to him at the time because he
was in Manila. PNB in the letter informed the petitioner the
outstanding balance on his account was applied to the part payment
of the dishonored check. Upon petitioners return, he received the
notice of dishonor and immediately paid the unpaid balance of the
warrant. As a consequence of these, petitioner was inconvenienced
when his insurance was not paid due to lack of funds and was
publicized widely at his area to his mortification.
Issue:
Whether or not PNB has the right to apply petitioners deposit to his
debt to the bank.
Ruling: NO.
As a general rule, a bank has a right of set off of the deposits in its
hands for the payment of any indebtedness to it on the part of a
depositor. The Civil Code contains provisions regarding
compensation (set off) and deposit. The portions of Philippine law
provide that compensation shall take place when two persons are
reciprocally creditor and debtor of each other. In this connection, it
has been held that the relation existing between a depositor and a
bank is that of creditor and debtor. [General Rule]
Starting, therefore, from the premise that the Philippine National
Bank had with respect to the deposit of Gullas a right of set off, we
next consider if that remedy was enforced properly. The fact we
believe is undeniable that prior to the mailing of notice of dishonor,
and without waiting for any action by Gullas, the bank made use of
the money standing in his account to make good for the treasury
warrant.
Gullas was merely an indorser and had issued in good faith. As to an
indorser, the situation is different and notice should actually have
been given him in order that he might protect his interests. We
accordingly are of the opinion that the action of the bank was
prejudicial to Gullas.
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA
SANTOS, petitioners,
vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO,
ASST. CITY FISCAL FELIZARDO N. LOTA and CLEMENT DAVID,
respondents.
MAKASIAR, Actg. C.J.:+.wph!1 In I.S. No. 81-31938, David charged petitioners (together with one
This is a petition for prohibition and injunction with a prayer for the
immediate issuance of restraining order and/or writ of preliminary
injunction filed by petitioners on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by this
Court on the same date, a temporary restraining order was duly
issued ordering the respondents, their officers, agents,
representatives and/or person or persons acting upon their
(respondents') orders or in their place or stead to refrain from
proceeding with the preliminary investigation in Case No. 8131938 of
the Office of the City Fiscal of Manila (pp. 47-48, rec.). On January
24, 1983, private respondent Clement David filed a motion to lift
restraining order which was denied in the resolution of this Court
dated May 18, 1983.
As can be gleaned from the above, the instant petition seeks to
prohibit public respondents from proceeding with the preliminary
investigation of I.S. No. 81-31938, in which petitioners were charged
by private respondent Clement David, with estafa and violation of
Central Bank Circular No. 364 and related regulations regarding
foreign exchange transactions principally, on the ground of lack of
jurisdiction in that the allegations of the charged, as well as the
testimony of private respondent's principal witness and the evidence
through said witness, showed that petitioners' obligation is civil in
nature.
For purposes of brevity, We hereby adopt the antecedent facts
narrated by the Solicitor General in its Comment dated June
28,1982, as follows:t.hqw
On December 23,1981, private respondent David filed I.S. No. 81-
31938 in the Office of the City Fiscal of Manila, which case was
assigned to respondent Lota for preliminary investigation (Petition, p.
8).
Robert Marshall and the following directors of the Nation Savings
and Loan Association, Inc., namely Homero Gonzales, Juan Merino,
Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime V. Paz,
Paulino B. Dionisio, and one John Doe) with estafa and violation of
Central Bank Circular No. 364 and related Central Bank regulations
on foreign exchange transactions, allegedly committed as follows
(Petition, Annex "A"):t.hqw
"From March 20, 1979 to March, 1981, David invested with the
Nation Savings and Loan Association, (hereinafter called NSLA) the
sum of P1,145,546.20 on nine deposits, P13,531.94 on savings
account deposits (jointly with his sister, Denise Kuhne),
US$10,000.00 on time deposit, US$15,000.00 under a receipt and
guarantee of payment and US$50,000.00 under a receipt dated June
8, 1980 (au jointly with Denise Kuhne), that David was induced into
making the aforestated investments by Robert Marshall an Australian
national who was allegedly a close associate of petitioner Guingona
Jr., then NSLA President, petitioner Martin, then NSLA Executive
Vice-President of NSLA and petitioner Santos, then NSLA General
Manager; that on March 21, 1981 N LA was placed under
receivership by the Central Bank, so that David filed claims therewith
for his investments and those of his sister; that on July 22, 1981
David received a report from the Central Bank that only P305,821.92
of those investments were entered in the records of NSLA; that,
therefore, the respondents in I.S. No. 81-31938 misappropriated the
balance of the investments, at the same time violating Central Bank
Circular No. 364 and related Central Bank regulations on foreign
exchange transactions; that after demands, petitioner Guingona Jr.
paid only P200,000.00, thereby reducing the amounts
misappropriated to P959,078.14 and US$75,000.00."
Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition,
Annex' B') in which they stated the following.t.hqw
"That Martin became President of NSLA in March 1978 (after the
resignation of Guingona, Jr.) and served as such until October 30,
1980, while Santos was General Manager up to November 1980;
that because NSLA was urgently in need of funds and at David's
insistence, his investments were treated as special- accounts with
interest above the legal rate, an recorded in separate confidential
documents only a portion of which were to be reported because he
did not want the Australian government to tax his total earnings (nor)
to know his total investments; that all transactions with David were
recorded except the sum of US$15,000.00 which was a personal
loan of Santos; that David's check for US$50,000.00 was cleared
through Guingona, Jr.'s dollar account because NSLA did not have
one, that a draft of US$30,000.00 was placed in the name of one
Paz Roces because of a pending transaction with her; that the
Philippine Deposit Insurance Corporation had already reimbursed
David within the legal limits; that majority of the stockholders of
NSLA had filed Special Proceedings No. 82-1695 in the Court of First
Instance to contest its (NSLA's) closure; that after NSLA was placed
under receivership, Martin executed a promissory note in David's
favor and caused the transfer to him of a nine and on behalf (9 1/2)
carat diamond ring with a net value of P510,000.00; and, that the
liabilities of NSLA to David were civil in nature."
Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C')
stated the following:t.hqw
"That he had no hand whatsoever in the transactions between David
and NSLA since he (Guingona Jr.) had resigned as NSLA president
in March 1978, or prior to those transactions; that he assumed a
portion o; the liabilities of NSLA to David because of the latter's
insistence that he placed his investments with NSLA because of his
faith in Guingona, Jr.; that in a Promissory Note dated June 17, 1981
(Petition, Annex "D") he (Guingona, Jr.) bound himself to pay David
the sums of P668.307.01 and US$37,500.00 in stated installments;
that he (Guingona, Jr.) secured payment of those amounts with
second mortgages over two (2) parcels of land under a deed of
Second Real Estate Mortgage (Petition, Annex "E") in which it was
provided that the mortgage over one (1) parcel shall be cancelled
upon payment of one-half of the obligation to David; that he
(Guingona, Jr.) paid P200,000.00 and tendered another P300,000.00
which David refused to accept, hence, he (Guingona, Jr.) filed Civil
Case No. Q-33865 in the Court of First Instance of Rizal at Quezon
City, to effect the release of the mortgage over one (1) of the two
parcels of land conveyed to David under second mortgages."

At the inception of the preliminary investigation before respondent
Lota, petitioners moved to dismiss the charges against them for lack
of jurisdiction because David's claims allegedly comprised a purely
civil obligation which was itself novated. Fiscal Lota denied the
motion to dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners
filed the instant petition because: (a) the production of the Promisory
Notes, Banker's Acceptance, Certificates of Time Deposits and
Savings Account allegedly showed that the transactions between
David and NSLA were simple loans, i.e., civil obligations on the part
of NSLA which were novated when Guingona, Jr. and Martin
assumed them; and (b) David's principal witness allegedly testified
that the duplicate originals of the aforesaid instruments of
indebtedness were all on file with NSLA, contrary to David's claim
that some of his investments were not record (Petition, pp. 8-9).
Petitioners alleged that they did not exhaust available administrative
remedies because to do so would be futile (Petition, p. 9) [pp. 153-
157, rec.].
As correctly pointed out by the Solicitor General, the sole issue for
resolution is whether public respondents acted without jurisdiction
when they investigated the charges (estafa and violation of CB
Circular No. 364 and related regulations regarding foreign exchange
transactions) subject matter of I.S. No. 81-31938.
There is merit in the contention of the petitioners that their liability is
civil in nature and therefore, public respondents have no jurisdiction
over the charge of estafa.
A casual perusal of the December 23, 1981 affidavit. complaint filed
in the Office of the City Fiscal of Manila by private respondent David
against petitioners Teopisto Guingona, Jr., Antonio I. Martin and
Teresita G. Santos, together with one Robert Marshall and the other
directors of the Nation Savings and Loan Association, will show that
from March 20, 1979 to March, 1981, private respondent David,
together with his sister, Denise Kuhne, invested with the Nation
Savings and Loan Association the sum of P1,145,546.20 on time
deposits covered by Bankers Acceptances and Certificates of Time
Deposits and the sum of P13,531.94 on savings account deposits
covered by passbook nos. 6-632 and 29-742, or a total of
P1,159,078.14 (pp. 15-16, roc.). It appears further that private
respondent David, together with his sister, made investments in the
aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was
placed under receivership on March 21, 1981, petitioners Guingona
and Martin, upon the request of private respondent David, assumed
the obligation of the bank to private respondent David by executing
on June 17, 1981 a joint promissory note in favor of private
respondent acknowledging an indebtedness of Pl,336,614.02 and
US$75,000.00 (p. 80, rec.). This promissory note was based on the
statement of account as of June 30, 1981 prepared by the private
respondent (p. 81, rec.). The amount of indebtedness assumed
appears to be bigger than the original claim because of the added
interest and the inclusion of other deposits of private respondent's
sister in the amount of P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin
agreed to divide the said indebtedness, and petitioner Guingona
executed another promissory note antedated to June 17, 1981
whereby he personally acknowledged an indebtedness of
P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of
US$75,000.00) in favor of private respondent (p. 25, rec.). The
aforesaid promissory notes were executed as a result of deposits
made by Clement David and Denise Kuhne with the Nation Savings
and Loan Association.
Furthermore, the various pleadings and documents filed by private
respondent David, before this Court indisputably show that he has
indeed invested his money on time and savings deposits with the
Nation Savings and Loan Association.

It must be pointed out that when private respondent David invested
his money on nine. and savings deposits with the aforesaid bank, the
contract that was perfected was a contract of simple loan or mutuum
and not a contract of deposit. Thus, Article 1980 of the New Civil
Code provides that:t.hqw Nation Savings and Loan Association is that of creditor and debtor;
Article 1980. Fixed, savings, and current deposits of-money in banks
and similar institutions shall be governed by the provisions
concerning simple loan.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA
114,119 [1975], We said:t.hqw deposited. And, the failure of the Bank to return the amount
It should be noted that fixed, savings, and current deposits of money
in banks and similar institutions are hat true deposits. are considered
simple loans and, as such, are not preferred credits (Art. 1980 Civil
Code; In re Liquidation of Mercantile Batik of China Tan Tiong Tick
vs. American Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit
Co. vs. Chinese Grocers Association 65 Phil. 375; Fletcher American
National Bank vs. Ang Chong UM 66 PWL 385; Pacific Commercial
Co. vs. American Apothecaries Co., 65 PhiL 429; Gopoco Grocery
vs. Pacific Coast Biscuit CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central
Bank of the Philippines (96 SCRA 102 [1980]) that:t.hqw so because as clearly as stated in criminal complaints, the related
Bank deposits are in the nature of irregular deposits. They are really
'loans because they earn interest. All kinds of bank deposits, whether
fixed, savings, or current are to be treated as loans and are to be
covered by the law on loans (Art. 1980 Civil Code Gullas vs. Phil.
National Bank, 62 Phil. 519). Current and saving deposits, are loans
to a bank because it can use the same. The petitioner here in
making time deposits that earn interests will respondent Overseas
Bank of Manila was in reality a creditor of the respondent Bank and
not a depositor. The respondent Bank was in turn a debtor of
petitioner. Failure of the respondent Bank to honor the time deposit is
failure to pay its obligation as a debtor and not a breach of trust
arising from a depositary's failure to return the subject matter of the
deposit (Emphasis supplied).
Hence, the relationship between the private respondent and the
consequently, the ownership of the amount deposited was
transmitted to the Bank upon the perfection of the contract and it can
make use of the amount deposited for its banking operations, such
as to pay interests on deposits and to pay withdrawals. While the
Bank has the obligation to return the amount deposited, it has,
however, no obligation to return or deliver the same money that was
deposited will not constitute estafa through misappropriation
punishable under Article 315, par. l(b) of the Revised Penal Code,
but it will only give rise to civil liability over which the public
respondents have no- jurisdiction.
WE have already laid down the rule that:t.hqw
In order that a person can be convicted under the above-quoted
provision, it must be proven that he has the obligation to deliver or
return the some money, goods or personal property that he received
Petitioners had no such obligation to return the same money, i.e., the
bills or coins, which they received from private respondents. This is
civil complaints and the supporting sworn statements, the sums of
money that petitioners received were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the
Civil Code.t.hqw
"Art. 1933. By the contract of loan, one of the parties delivers to
another, either something not consumable so that the latter may use
the same for a certain time- and return it, in which case the contract
is called a commodatum; or money or other consumable thing, upon
the condition that the same amount of the same kind and quality
shall he paid in which case the contract is simply called a loan or
mutuum.
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with a stipulation to pay interest.
"In commodatum the bailor retains the ownership of the thing loaned
while in simple loan, ownership passes to the borrower.
"Art. 1953. A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to pay to
the creditor an equal amount of the same kind and quality."
It can be readily noted from the above-quoted provisions that in
simple loan (mutuum), as contrasted to commodatum the borrower
acquires ownership of the money, goods or personal property
borrowed Being the owner, the borrower can dispose of the thing
borrowed (Article 248, Civil Code) and his act will not be considered
misappropriation thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979];
Emphasis supplied).
But even granting that the failure of the bank to pay the time and
savings deposits of private respondent David would constitute a
violation of paragraph 1(b) of Article 315 of the Revised Penal Code,
nevertheless any incipient criminal liability was deemed avoided,
because when the aforesaid bank was placed under receivership by
the Central Bank, petitioners Guingona and Martin assumed the
obligation of the bank to private respondent David, thereby resulting
in the novation of the original contractual obligation arising from
deposit into a contract of loan and converting the original trust
relation between the bank and private respondent David into an
ordinary debtor-creditor relation between the petitioners and private
respondent. Consequently, the failure of the bank or petitioners
Guingona and Martin to pay the deposits of private respondent would
not constitute a breach of trust but would merely be a failure to pay
the obligation as a debtor.
Moreover, while it is true that novation does not extinguish criminal
liability, it may however, prevent the rise of criminal liability as long as
it occurs prior to the filing of the criminal information in court. Thus, in
Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that:t.
hqw
As pointed out in People vs. Nery, novation prior to the filing of the
criminal information as in the case at bar may convert the
relation between the parties into an ordinary creditor-debtor relation,
and place the complainant in estoppel to insist on the original
transaction or "cast doubt on the true nature" thereof.
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124
SCRA 578, 580-581 [1983] ), this Court reiterated the ruling in
People vs. Nery ( 10 SCRA 244 [1964] ), declaring that:t.hqw
The novation theory may perhaps apply prior to the filling of the
criminal information in court by the state prosecutors because up to
that time the original trust relation may be converted by the parties
into an ordinary creditor-debtor situation, thereby placing the
complainant in estoppel to insist on the original trust. But after the
justice authorities have taken cognizance of the crime and instituted
action in court, the offended party may no longer divest the
prosecution of its power to exact the criminal liability, as
distinguished from the civil. The crime being an offense against the
state, only the latter can renounce it (People vs. Gervacio, 54 Off.
Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8
Phil. 620).
It may be observed in this regard that novation is not one of the
means recognized by the Penal Code whereby criminal liability can
be extinguished; hence, the role of novation may only be to either
prevent the rise of criminal habihty or to cast doubt on the true nature
of the original basic transaction, whether or not it was such that its
breach would not give rise to penal responsibility, as when money
loaned is made to appear as a deposit, or other similar disguise is
resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S. vs. Villareal, 27
Phil. 481).
In the case at bar, there is no dispute that petitioners Guingona and
Martin executed a promissory note on June 17, 1981 assuming the
obligation of the bank to private respondent David; while the criminal
complaint for estafa was filed on December 23, 1981 with the Office
of the City Fiscal. Hence, it is clear that novation occurred long
before the filing of the criminal complaint with the Office of the City
Fiscal.
Consequently, as aforestated, any incipient criminal liability would be
avoided but there will still be a civil liability on the part of petitioners
Guingona and Martin to pay the assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of
Central Bank Circular No. 364 and other related regulations
regarding foreign exchange transactions by accepting foreign
currency deposit in the amount of US$75,000.00 without authority
from the Central Bank. They contend however, that the US dollars
intended by respondent David for deposit were all converted into
Philippine currency before acceptance and deposit into Nation
Savings and Loan Association.
Petitioners' contention is worthy of behelf for the following reasons:
1. It appears from the records that when respondent David was
about to make a deposit of bank draft issued in his name in the
amount of US$50,000.00 with the Nation Savings and Loan
Association, the same had to be cleared first and converted into
Philippine currency. Accordingly, the bank draft was endorsed by
respondent David to petitioner Guingona, who in turn deposited it to
his dollar account with the Security Bank and Trust Company.
Petitioner Guingona merely accommodated the request of the Nation
Savings and loan Association in order to clear the bank draft through
his dollar account because the bank did not have a dollar account.
Immediately after the bank draft was cleared, petitioner Guingona
authorized Nation Savings and Loan Association to withdraw the
same in order to be utilized by the bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first
into Philippine pesos before they were accepted and deposited in
Nation Savings and Loan Association, because the bank is
presumed to have followed the ordinary course of the business
which is to accept deposits in Philippine currency only, and that the
transaction was regular and fair, in the absence of a clear and
convincing evidence to the contrary (see paragraphs p and q, Sec. 5,
Rule 131, Rules of Court).
3. Respondent David has not denied the aforesaid contention of
herein petitioners despite the fact that it was raised. in petitioners'
reply filed on May 7, 1982 to private respondent's comment and in
the July 27, 1982 reply to public respondents' comment and
reiterated in petitioners' memorandum filed on October 30, 1982,
thereby adding more support to the conclusion that the
US$75,000.00 were really converted into Philippine currency before
they were accepted and deposited into Nation Savings and Loan
Association. Considering that this might adversely affect his case,
respondent David should have promptly denied petitioners'
allegation.
In conclusion, considering that the liability of the petitioners is purely
civil in nature and that there is no clear showing that they engaged in
foreign exchange transactions, We hold that the public respondents
acted without jurisdiction when they investigated the charges against
the petitioners. Consequently, public respondents should be
restrained from further proceeding with the criminal case for to allow
the case to continue, even if the petitioners could have appealed to
the Ministry of Justice, would work great injustice to petitioners and
would render meaningless the proper administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the
subject of prohibition and injunction, this court has recognized the
resort to the extraordinary writs of prohibition and injunction in
extreme cases, thus:t.hqw
On the issue of whether a writ of injunction can restrain the
proceedings in Criminal Case No. 3140, the general rule is that
"ordinarily, criminal prosecution may not be blocked by court
prohibition or injunction." Exceptions, however, are allowed in the
following instances:t.hqw
"1. for the orderly administration of justice;
"2. to prevent the use of the strong arm of the law in an
oppressive and vindictive manner;
"3. to avoid multiplicity of actions;
prosecution of certain chiropractors although, if convicted, they could
have appealed. We gave due course to their petition for the orderly
administration of justice and to avoid possible oppression by the
strong arm of the law. And in Arevalo vs. Nepomuceno, 63 Phil. 627,
the petition for certiorari challenging the trial court's action admitting
an amended information was sustained despite the availability of
appeal at the proper time.
WHEREFORE, THE PETITION IS HEREBY GRANTED; THE
TEMPORARY RESTRAINING ORDER PREVIOUSLY ISSUED IS
MADE PERMANENT. COSTS AGAINST THE PRIVATE
RESPONDENT.
SO ORDERED.

"4. to afford adequate protection to constitutional rights;

"5. in proper cases, because the statute relied upon is

unconstitutional or was held invalid" ( Primicias vs. Municipality of
Urdaneta, Pangasinan, 93 SCRA 462, 469-470 [1979]; citing Ramos
vs. Torres, 25 SCRA 557 [1968]; and Hernandez vs. Albano, 19
SCRA 95, 96 [1967]).

Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-
622 [1966]), We held that:t.hqw

The writs of certiorari and prohibition, as extraordinary legal

remedies, are in the ultimate analysis, intended to annul void
proceedings; to prevent the unlawful and oppressive exercise of
legal authority and to provide for a fair and orderly administration of
justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took
cognizance of a petition for certiorari and prohibition although the
accused in the case could have appealed in due time from the order SECOND DIVISION
complained of, our action in the premises being based on the public
welfare policy the advancement of public policy. In Dimayuga vs. G.R. Nos. 149840-41 March 31, 2006
Fajardo, 43 Phil. 304, We also admitted a petition to restrain the
SPS. FRANCISCO AND RUBY REYES, Petitioners,
vs.
BPI FAMILY SAVINGS BANK, INC., and MAGDALENA L.
LOMETILLO, in her capacity as ex-officio Provincial Sheriff for Iloilo,
Respondents.
DECISION
CORONA,J.:
Via this petition for review under Rule 45 of the Rules of Court,
petitioners assail the decision 1 of the Court of Appeals (CA) in CA-
G.R. SP Nos. 45629 and 45877 and its resolution denying their
motion for reconsideration.
The facts are simple.
On March 24, 1995, the Reyes spouses executed a real estate
mortgage on their property in Iloilo City in favor of respondent BPI
Family Savings Bank, Inc. (BPI-FSB) to secure a P15,000,000 loan
of Transbuilders Resources and Development Corporation
(Transbuilders). The mortgage contract between petitioners and BPI-
FSB provided, among others:
That for and in consideration of the above-mentioned sum received
by way of a loan, and other credit accommodations of whatever
nature obtained by the Borrower/Mortgagor, the Borrower/Mortgagor
by this Agreement, hereby constitutes a first mortgage, special and
voluntary over the property/ies specifically described in Annex "A",
together with all existing improvements as well as those that may
hereafter be made to exist or constructed thereon, inclusive of all
fruits and rents, in favor of the Bank, its successors and assigns. 2
When Transbuilders failed to pay its P15M loan within the stipulated
period of one year, the bank restructured the loan through a
promissory note executed by Transbuilders in its favor. The pertinent
provisions of the promissory note3 stated that:
1. The proceeds of the Note shall be applied to loan account no.
211083364; and
2. The new obligation of Transbuilders to respondent Bank for fifteen
million (P15,000,000.00) shall be paid in twenty (20) quarterly
installments commencing on September 28, 1996 and at an interest
rate of eighteen (18%) per annum.
Petitioners aver that they were not informed about the restructuring
of Transbuilders loan. In fact, when they learned of the new loan
agreement sometime in December 1996, they wrote BPI-FSB
requesting the cancellation of their mortgage and the return of their
certificate of title to the mortgaged property. They claimed that the
new loan novated the loan agreement of March 24, 1995. Because
the novation was without their knowledge and consent, they were
allegedly released from their obligation under the mortgage.
When BPI-FSB refused to cancel the mortgage, petitioners filed
separate petitions for mandamus and prohibition with the Regional
Trial Court (RTC) of Manila to compel the bank to return their
certificate of title and cancel the mortgage. BPI-FSB, on the other
hand, instituted extrajudicial foreclosure proceedings against
petitioners in Iloilo City after Transbuilders defaulted in its payments.
Consequently, a sheriffs notice of sale of petitioners property at
public auction was issued.
The Manila RTC dismissed petitioners actions for mandamus and
prohibition. Their appeal to the Court of Appeals was likewise
dismissed:
The mortgage contract between the petitioners and the respondent
BPI does not limit the obligation or loan for which it may stand to the
loan agreement between Transbuilders and BPI, dated March 24,
1995, considering that under the terms of that contract, the intent of
all the parties, including the petitioners, to secure future
indebtedness is apparent. On the whole, the contract of
loan/mortgage dated March 24, 1995, appears to include even the
new loan agreement between Transbuilders and BPI, entered into on
June 28, 1996.
xxx xxx xxx
There is likewise no merit to the petitioners submission that there
was a novation of the March 24, 1995 contract. There is no clear
intent of the parties to make the new contract completely supersede
and abolish the old loan/mortgage contract. The established rule is
that novation is never presumed. Novation will not be allowed unless
it is clearly shown by express agreement, or by acts of equal import.
Thus, to effect an objective novation it is imperative that the new
obligation expressly declares that the old obligation is thereby
extinguished or that the new obligation be on every point
incompatible with the new one. (Ajax Marketing & Development
Corporation v. Court of Appeals, 248 SCRA 222 [1995]) Without such
clear intent to abolish the old contract, there is no merit to affirm the
existence of a novation.
There is no basis therefore, to the charge that respondent BPI had
gravely erred in not surrendering the petitioners certificate of title, as
the mortgage undertaking of the petitioners has not been cancelled.
For the same reason, the respondent BPI acted within its prerogative
when it initiated extra-judicial foreclosure proceedings over the
petitioners property.
WHEREFORE, premises considered, the instant appeals from the
Decision of the Regional Trial Court of Iloilo City in CA-G.R. SP No.
45887 and the Order of dismissal of the Regional Trial Court of
Manila in CA-G.R. SP No. 45629 are hereby DISMISSED.
SO ORDERED.5 (emphasis ours)
Petitioners moved for a reconsideration of the decision but were
unsuccessful. Hence, this appeal.
The only issue for our consideration is whether there was a novation
of the mortgage loan contract between petitioners and BPI-FSB that
would result in the extinguishment of petitioners liability to the bank.
We agree with the CA that there was none.
Novation is defined as the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent one which
terminates the first, either by changing the object or principal
conditions, or by substituting the person of the debtor, or subrogating
a third person in the rights of the creditor.6
Article 1292 of the Civil Code on novation further provides:
Article 1292. In order that an obligation may be extinguished by
another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other.
The cancellation of the old obligation by the new one is a necessary
element of novation which may be effected either expressly or
impliedly. While there is really no hard and fast rule to determine
what might constitute sufficient change resulting in novation, the
touchstone, however, is irreconcilable incompatibility between the old
and the new obligations.7
In Garcia, Jr. v. Court of Appeals,8 we held that:
In every novation there are four essential requisites:(1) a previous
valid obligation; (2) the agreement of all the parties to the new
contract; (3) the extinguishment of the old contract; and (4) validity of
the new one. There must be consent of all the parties to the
substitution, resulting in the extinction of the old obligation and the
creation of a valid new one. The acceptance of the promissory note
by the plaintiff is not novation of the contract. The legal doctrine is
that an obligation to pay a sum of money is not novated in a new
instrument by changing the term of payment and adding other
obligations not incompatible with the old one. It is not proper to
consider an obligation novated as in the case at bar by the mere
granting of extension of payment which did not even alter its
essence. To sustain novation necessitates that the same be declared
in unequivocal terms or that there is complete and substantial
incompatibility between the two obligations. An obligation to pay a
sum of money is not novated in a new instrument wherein the old is
ratified by changing only the terms of payment and adding other
obligations not incompatible with the old one or wherein the old
contract is merely supplementing the old one.
Thus, the well-settled rule is that, with respect to obligations to pay a
sum of money, the obligation is not novated by an instrument that
expressly recognizes the old, changes only the terms of payment,
adds other obligations not incompatible with the old ones, or the new
contract merely supplements the old one.9
BPI-FSB and Transbuilders only extended the repayment term of the
loan from one year to twenty quarterly installments at 18% interest
per annum. There was absolutely no intention by the parties to
supersede or abrogate the old loan contract secured by the real
estate mortgage executed by petitioners in favor of BPI-FSB. In fact,
the intention of the new agreement was precisely to revive the old
obligation after the original period expired and the loan remained
unpaid. The novation of a contract cannot be presumed. In the
absence of an express agreement, novation takes place only when
the old and the new obligations are incompatible on every point. 10
Moreover, under the real estate mortgage executed by them in favor
of BPI-FSB, petitioners undertook to secure the P15M loan of
Transbuilders to BPI-FSB "and other credit accommodations of
whatever nature obtained by the Borrower/Mortgagor." While this
stipulation proved to be onerous to petitioners, neither the law nor
the courts will extricate a party from an unwise or undesirable
contract entered into with all the required formalities and with full
awareness of its consequences. 11 Petitioners voluntarily executed
the real estate mortgage on their property in favor of BPI-FSB to
secure the P15M loan of Transbuilders. They cannot now be allowed
to repudiate their obligation to the bank after Transbuilders default.
While petitioners liability was written in fine print and in a contract
prepared by BPI-FSB, it has been the consistent holding of this Court
that contracts of adhesion are not invalid per se. On numerous
occasions, we have upheld the binding effects of such contracts. 12
WHEREFORE, the petition is hereby DENIED for lack of merit.
SO ORDERED.
EN BANC
G.R. No. L-9073 November 17, 1958
TRADERS INSURANCE and SURETY COMPANY, plaintiff-
appellant,
vs.
DY ENG GIOK, PEDRO LOPEZ DEE and PEDRO E. DY-LIACCO,
defendants-appellees.
Sycip, Salazar, Atienza, Luna and Caparas for appellant.
Emigdio V. Arcilla for appellee, Dy Eng Giok.
Cezar Miraflor for appellee Pedro Lopez Dee.
Pascual G. Mier for appellee Pedro E. Dy-Liacco.
REYES J.B.L., J.:
Appeal interposed against that part of the decision of the Court of
First Instance of Manila (in its civil case No. 20305) absolving Pedro
Lopez Dee and Pedro E. Dy-Liacco from the obligation to reimburse
the plaintiff Traders Insurance and Surety Co.

From the stipulation of facts made by the parties in the court below, it
appears that from 1948 to 1952 the corporation "Destilleria Lim
Tuaco & Co., Inc." had one Dy Eng Giok as its provincial sales
agent, with the duty of turning over the proceeds of his sales to the
principal, the distillery company. As of August 3, 1951, the agent Dy
Eng Giok had an outstanding running account in favor of his principal
in the sum of P12,898.61.
On August 4, 1951, a surety bond (Annex A, complaint) was
executed by Dy Eng Giok, as principal and appellant Traders
Insurance and Surety Co., as solidary guarantor, whereby they
bound themselves, jointly and severally, in the sum of P10,000.00 in
favor of the Destilleria Lim Tuaco & Co., Inc., under the following
terms:
THE CONDITION OF THIS OBLIGATION Is SUCH THAT: Whereas,
the above bounden principal has entered in to a contract with the
aforementioned Company to act as their provincial sales agent and
to receive goods or their products under the said Principal's credit
account. The proceeds of the sales are to be turned over to the
Company.
WHEREAS, the contract requires the above bounden principal to
give a good and sufficient bond in the above stated sum to secure
the full and faithful fulfillment on its part of said contract; namely, to
guarantee the full payment of the Principal's obligation not to exceed
the above stated sum.
NOW THEREFORE, if the above bounden principal shall in all
respects duly and fully observe and perform all and singular the
aforesaid covenants, conditions, and agreements to the true intent
and meaning thereof, then this obligation shall be null and void;
otherwise, to remain in full force and effect.
LIABILITY of surety on this bond will expire on August 4, 1952 and
said bond will be cancelled TEN DAYS after its expiration, unless
surety is notified in writing of any existing obligations thereunder or
otherwise extended by the surety in writing. (Rec. App., pp. 7-8)
(Emphasis supplied)
On the same date, by Eng Giok, as principal, with Pedro Lopez Dee
and Pedro Dy-Liacco, as counterboundsmen, subscribed an
indemnity agreement (Annex B. of the complaint) in favor of
appellant Surety Company, whereby, in consideration of its surety
bond (Annex A), the three agreed to be obligated to the surety
company
INDEMNITY: To indemnify the COMPANY for any damage,
prejudice, loss, costs, payments, advances and expenses of
whatever kind and nature, including counsel or attorney's fees, which
the Company may, at any time, sustain or incur, as a consequence of
having executed the abovementioned bond, its renewals, extensions
or substitutions, and said attorney's fee shall not be less than (15%)
per cent of the amount claimed by the Company in each action, the
same to be due and payable, irrespective of whether the case is
settled judicially or extrajudicially. (Rec. App. pp. 9-10)
From August 4, 1951 to August 3, 1952, agent Dy Eng Giok
contracted obligations in favor of the Destilleria Lim Tuaco & Co., in
the total amount of P41,449.93; and during the same period, he
made remittances amounting to P41,864.49. The distillary company,
however, applied said remittances first to Dy Eng Giok's outstanding
balance prior to August 4, 1951 (before the suretyship agreement
was executed) in the sum of P12,898.61; and the balance of
P28,965.88 to Dy's obligations between August 4, 1951 and August
3, 1952. It then demanded payment of the remainder (P12,484.05)
from the agent, and later, from the appellant Surety Company. The
latter paid P10,000.00 (the maximum of its bond) on July 17, 1953,
apparently, without questioning the demand; and then sought
reimbursement from Dy Eng Giok and his counter guarantors,
appellees herein. Upon their failure to pay, it began the present
action to enforce collection.
After trial, the Court of First Instance of Manila absolved the counter-
guarantors Pedro Lopez Dee and Pedro Dy-Liacco, on the theory
that in so far as they are concerned, the payments made by Dy Eng
Giok from August 4, 1951 to August 3, 1952, in the sum of
P41,864.49, should have been applied to his obligations during that
period, which were the ones covered by the surety bond and the
counter-guaranty; and as these obligations only amounted to
P41,449.93, so that the payments exceeded the obligations, the
court concluded that the Surety Company incurred no liability and the
counterbondsmen in turn had nothing to answer for. The trial court,
however, sentenced Dy Eng Giok to repay to the Surety Company
P10,000 with interest at 12% per annum, plus P1,500 attorneys' fee
and the costs of the suit.
Not satisfied with the decision, the Traders Insurance & Surety
Company appealed to this Court on points of law.
We find the decision appealed from to be correct. There are two
reasons why the remittances by Dy Eng Giok in the sum of
P41,864.49 should be applied to the obligation of P41,449.93
contracted by him during the period covered by the suretyship
agreement, Annex A. The first is that, in the absence of express
stipulation, a guaranty or suretyship operates prospectively and not
retroactively; that is to say, it secures only the debts contracted after
the guaranty takes effect (El Vencedor vs. Canlas, 44 Phil. 699). This
rule is a consequence of the statutory directive that a guaranty is not
presumed, but must be express, and can not extend to more than
what is stipulated. (New Civil Code, Art. 2055). To apply the
payments made by the principal debtor to the obligations he
contracted prior to the guaranty is, in effect, to make the surety
answer for debts incurred outside of the guaranteed period, and this
can not be done without the express consent of the guarantor. Note
that the suretyship agreement, Annex A, did not guarantee the
payment of any outstanding balance due from the principal debtor,
Dy Eng Giok; but only that he would turn over the proceeds of the
sales to the "Destilleria Lim Tuaco & Co., Inc.", and this he has done,
since his remittances during the period of the guaranty exceed the
value of his sales. There is no evidence that these remittances did
not come from his sales.
A similar situation was dealt with in our decision in the case of
Municipality of Lemery vs. Mendoza, 48 Phil. 415, wherein we said
(pp. 422-423):
As we have previously stated Mendoza has paid to the municipality
the full sum of P23,000. In our opinion this discharged the sureties
from all further liability. The circumstance that the sum of P23,000
which Mendoza paid may have been applied by the municipality to
Mendoza's indebtedness for the first year of the lease is without
significance as against the sureties, since the sureties were not
parties to the contract of lease (Exhibit D) and are liable only upon
the contract of suretyship (Exhibit E), which calls for the payments of
only P23,000 by the principal. It is, just rule of jurisprudence,
recognized in article 1827 of the Civil Code, that the obligation of a
surety must be express and cannot be extended by implication
beyond its specified limits.
We do not overlook the fact that the obligating clause in Exhibit E
binds the sureties in the amount of P46,000, but, as in all bonds, that
obligation was intended as an assurance of the performance of the
principal obligation and when the principal obligation was
discharged, the larger obligation expressed in the contract of
suretyship ceased to have any vitality.
The second reason is that, since the obligations of Dy Eng Giok
between August 4, 1951 to August 4, 1952, were guaranteed, while
his indebtedness prior to that period was not secured, then in the
absence of express application by the debtor, or of any receipt
issued by the creditor specifying a particular imputation of the
payment (New Civil Code, Art. 1252), any partial payments made by
him should be imputed or applied to the debts that were guaranteed,
since they are regarded as the more onerous debts from the
standpoint of the debtor (New Civil Code, Art. 1254).
ART. 1254. When the payment cannot be applied in accordance
with the preceding rules, or if application can not be inferred from
other circumstances, the debt which is most onerous to the debtor,
among those due, shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment
shall be applied to all of them proportionately.
Debts covered by a guaranty are deemed more onerous to the
debtor than the simple obligations because, in their case, the debtor
may be subjected to action not only by the creditor, but also by the
guarantor, and this even before the guaranteed debt is paid by the
guarantor (Art. 2071, New Civil Code); hence, the payment of the
guaranteed debt liberates the debtor from liability to the creditor as
well as to the guarantor, while payment of the unsecured obligation
only discharges him from possible action by only one party, the
unsecured creditor.
The rule that guaranteed debts are to be deemed more onerous to
the debtor than those not guaranteed, and entitled to priority in the
application of the debtor's payments, was already recognized in the
Roman Law (Ulpian, fr. ad Sabinum, Digest, Lib. 46, Tit 3, Law 4, in
fine), and has passed to us through the Spanish Civil Code. Manresa
in his Commentaries to Art. 1174 of that Code (8 Manresa, Vol. 1, 5th
Ed., p. 603) expressly says:
Atendiendo al gravamen, la deuda garantida es mas onerosa que la
simple.
And this is also the rule in Civil law countries, like France (Dalloz,
Jurisprudence General Vo. obligation, sec. 2033; Planiol, Traite
Elem. (2d Ed). Vol. 2, No. 454) and Louisiana (Caltex Oil & Gas, Co.
vs. Smith, 175 La. 678, 144 So. 243; Everett vs. Graye, 3 La. App.
136): also Italy (7 Giorgi, Teoria delle Obbl. p. 167).
It is thus clear that the payment voluntarily made by appellant was
improper since it was not liable under its bond; consequently, it can
not demand reimbursement from the counterbondsmen but only from
Dy Eng Giok, who was anyway benefited pro tanto by the Surety
Company's payment.
The present case is to be clearly distinguished from Hongkong
Shanghai Bank vs. Aldanese, 48 Phil., 990, and Commonwealth vs.
Far Eastern Surety & Insurance Co., 83 Phil., 305, 46 Off. Gaz. 4879
and similar rulings, wherein the debt in each case owned the creditor
one single debt of which only a portion was guaranteed. In those
cases, we have ruled that the guarantors had no right to demand that
the partial payments made by the principal debtor should be applied
precisely to the portion guaranteed. The reason is apparent: the legal
rules of imputation of payments presuppose that the debtor owes
several distinct debts of the same nature; and does not distinguish
between portions of the same debt. Hence, where the debtor only
owes one debt, all partial payments must necessarily be applied to
that debt, and the guarantor answers for any unpaid balance,
provided it does not exceed the limits of the guaranty. Any other
solution would defeat the purpose of the security. In the case before
us, however, the guaranty secured the performance by the debtor of
his obligation to remit to the distillery company the proceeds of his
sales during the period of the guaranty (August 4, 1951 to August 4,
1952). This obligation is entirely distinct and separate from his
obligation to remit the proceeds of his sales during a different period,
say before August 4, 1951. The debtor, therefore, actually owed two
distinct debts: for the value of his sales before August 4, 1951 and
for the import of the sales between that date and August 4, 1952.
There being two debts, his partial payments had necessarily to be
applied (in the absence of express imputation) first to the obligation
that was more onerous for him, which was the one secured by the
guaranty.
It is legally unimportant that the creditor should have applied the
payment to the prior indebtedness. Where the debtor has not
expressly elected any particular obligation to which the payment
should be applied, the application by the creditor, in order to be valid
and lawful, depends: (1) upon his expressing such application in the
corresponding receipt and (2) upon the debtor's assent, shown by
his acceptance of the receipt without protest. This is the import of
paragraph 2 of Art. 1252 of the New Civil Code:
If the debtor accepts from the creditor a receipt in which an
application of the payment is made, the former cannot complain of
the same, unless there is a cause for invalidating the contract.
Ultimately, therefore, the application by a creditor depends upon the
debtor acquiescence thereto. In the present case, as already noted,
there is no evidence that the receipts for payment expressed any
imputation, or that the debtor agreed to the same.
The appellant Surety Company avers that the counterbondsmen can
not question the payment made by it to Destilleria Lim Tuaco on the
debt of Dy Eng Giok, because their counterbond or indemnity
agreement (Annex B, par. 7) provided that:
INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY:
Any payment of disbursement made by the COMPANY on account of
the abovementioned Bond, its renewals, extensions or substitutions,
either in the belief that the Company was obligated to make such
payment or in the belief that said payment was necessary in order to
avoid greater losses or obligations for which the Company might be
liable by virtue of the terms of the abovementioned Bond, its
renewals, extensions or substitutions shall be final and will not be
disputed by the undersigned who jointly and severally bind
themselves to indemnify the COMPANY for any and all such
payments as stated in the preceding clauses. (Rec. App., p. 11)
We agree with the appellee that this kind of clauses are void and
unenforceable, as against public policy, "because they enlarge the
field for fraud, because in these instruments the promissor bargains
away his right to a day in court and because the effect of the
instrument is to strike down the right of appeal accorded by the
statute." (see National Bank vs. Manila Oil Refining Co., 43 Phil.
467)
Finding no error in the judgment appealed from, the same is
affirmed. Costs against appellant. So ordered.
SECOND DIVISION
G.R. No. 154183 August 7, 2003
SPOUSES VICKY TAN TOH and LUIS TOH, petitioners,
vs.
SOLID BANK CORPORATION, FIRST BUSINESS PAPER
CORPORATION, KENNETH NG LI and MA. VICTORIA NG LI,
respondents.
BELLOSILLO, J.:
RESPONDENT SOLID BANK CORPORATION AGREED TO
EXTEND an "omnibus line" credit facility worth P10 million in favor of
respondent First Business Paper Corporation (FBPC). The terms
and conditions of the agreement as well as the checklist of
documents necessary to open the credit line were stipulated in a
"letter-advise" of the Bank dated 16 May 1993 addressed to FBPC
and to its President, respondent Kenneth Ng Li.1 The "letter-advise"2
was effective upon "compliance with the documentary
requirements."3
The documents essential for the credit facility and submitted for this
purpose were the (a) Board Resolution or excerpts of the Board of
Directors Meeting, duly ratified by a Notary Public, authorizing the
loan and security arrangement as well as designating the officers to
negotiate and sign for FBPC specifically stating authority to
mortgage, pledge and/or assign the properties of the corporation; (b)
agreement to purchase Domestic Bills; and, (c) Continuing Guaranty
for any and all amounts signed by petitioner-spouses Luis Toh and
Vicky Tan Toh, and respondent-spouses Kenneth and Ma. Victoria
Ng Li.4 The spouses Luis Toh and Vicky Tan Toh were then
Chairman of the Board and Vice-President, respectively, of FBPC,
while respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li
were President and General Manager, respectively, of the same
corporation.5
It is not disputed that the credit facility as well as its terms and
conditions was not cancelled or terminated, and that there was no
prior notice of such fact as required in the "letter-advise," if any was
done.
On 10 May 1993, more than thirty (30) days from date of the "letter-
advise," petitioner-spouses Luis Toh and Vicky Tan Toh and
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li signed
the required Continuing Guaranty, which was embodied in a public
document prepared solely by respondent Bank.6 The terms of the
instrument defined the contract arising therefrom as a surety
agreement and provided for the solidary liability of the signatories
thereto for and in consideration of "loans or advances" and "credit in
any other manner to, or at the request or for the account" of FBPC.
The Continuing Guaranty set forth no maximum limit on the
indebtedness that respondent FBPC may incur and for which the
sureties may be liable, stating that the credit facility "covers any and
all existing indebtedness of, and such other loans and credit facilities
which may hereafter be granted to FIRST BUSINESS PAPER
CORPORATION." The surety also contained a de facto acceleration
clause if "default be made in the payment of any of the instruments,
indebtedness, or other obligation" guaranteed by petitioners and
respondents. So as to strengthen this security, the Continuing
Guaranty waived rights of the sureties against delay or absence of
notice or demand on the part of respondent Bank, and gave future
consent to the Bank's action to "extend or change the time payment,
and/or the manner, place or terms of payment," including renewal, of
the credit facility or any part thereof in such manner and upon such
terms as the Bank may deem proper without notice to or further
assent from the sureties.
The effectivity of the Continuing Guaranty was not contingent upon
any event or cause other than the written revocation thereof with
notice to the Bank that may be executed by the sureties.
On 16 June 1993 respondent FBPC started to avail of the credit
facility and procure letters of credit.7 On 17 November 1993 FBPC
opened thirteen (13) letters of credit and obtained loans totaling
P15,227,510.00.8 As the letters of credit were secured, FBPC
through its officers Kenneth Ng Li, Ma. Victoria Ng Li and Redentor
Padilla as signatories executed a series of trust receipts over the
goods allegedly purchased from the proceeds of the loans.9
On 13 January 1994 respondent Bank received information that
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had
fraudulently departed from their conjugal home.10 On 14 January
1994 the Bank served a demand letter upon FBPC and petitioner
Luis Toh invoking the acceleration clause11 in the trust receipts of
FBPC and claimed payment for P10,539,758.68 as unpaid overdue
accounts on the letters of credit plus interests and penalties within
twenty-four (24) hours from receipt thereof.12 The Bank also invoked
the Continuing Guaranty executed by petitioner-spouses Luis Toh
and Vicky Tan Toh who were the only parties known to be within
national jurisdiction to answer as sureties for the credit facility of
FBPC.13
On 17 January 1994 respondent Bank filed a complaint for sum of
money with ex parte application for a writ of preliminary attachment
against FBPC, spouses Kenneth Ng Li and Ma. Victoria Ng Li, and
spouses Luis Toh and Vicky Tan Toh, docketed as Civil Case No.
64047 of RTC-Br. 161, Pasig City.14 Alias summonses were served
upon FBPC and spouses Luis Toh and Vicky Tan Toh but not upon
Kenneth Ng Li and Ma. Victoria Ng Li who had apparently
absconded.15
Meanwhile, with the implementation of the writ of preliminary
attachment resulting in the impounding of purported properties of
FBPC, the trial court was deluged with third-party claims contesting
the propriety of the attachment.16 In the end, the Bank relinquished
possession of all the attached properties to the third-party claimants
except for two (2) insignificant items as it allegedly could barely cope
with the yearly premiums on the attachment bonds.17
Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint answer to
the complaint where they admitted being part of FBPC from its
incorporation on 29 August 1991, which was then known as "MNL
Paper, Inc.," until its corporate name was changed to "First Business
Paper Corporation."18 They also acknowledged that on 6 March
1992 Luis Toh was designated as one of the authorized corporate
signatories for transactions in relation to FBPC's checking account
with respondent Bank.19 Meanwhile, for failing to file an answer,
respondent FBPC was declared in default.20
Petitioner-spouses however could not be certain whether to deny or
admit the due execution and authenticity of the Continuing
Guaranty.21 They could only allege that they were made to sign
papers in blank and the Continuing Guaranty could have been one of
them.
Still, as petitioners asserted, it was impossible and absurd for them
to have freely and consciously executed the surety on 10 May 1993,
the date appearing on its face22 since beginning March of that year
they had already divested their shares in FBPC and assigned them
in favor of respondent Kenneth Ng Li although the deeds of
assignment were notarized only on 14 June 1993.23 Petitioners also
contended that through FBPC Board Resolution dated 12 May 1993
petitioner Luis Toh was removed as an authorized signatory for
FBPC and replaced by respondent-spouses Kenneth Ng Li and Ma.
Victoria Ng Li and Redentor Padilla for all the transactions of FBPC
with respondent Bank.24 They even resigned from their respective
positions in FBPC as reflected in the 12 June 1993 Secretary's
Certificate submitted to the Securities and Exchange Commission25
as petitioner Luis Toh was succeeded as Chairman by respondent
Ma. Victoria Ng Li, while one Mylene C. Padilla took the place of
petitioner Vicky Tan Toh as Vice-President.26
Finally, petitioners averred that sometime in June 1993 they obtained
from respondent Kenneth Ng Li their exclusion from the several
surety agreements they had entered into with different banks, i.e.,
Hongkong and Shanghai Bank, China Banking Corporation, Far East
Bank and Trust Company, and herein respondent Bank.27 As a
matter of record, these other banks executed written surety
agreements that showed respondent Kenneth Ng Li as the only
surety of FBPC's indebtedness.28
On 16 May 1996 the trial court promulgated its Decision in Civil Case
No. 64047 finding respondent FBPC liable to pay respondent Solid
Bank Corporation the principal of P10,539,758.68 plus twelve
percent (12%) interest per annum from finality of the Decision until
fully paid, but absolving petitioner-spouses Luis Toh and Vicky Tan
Toh of any liability to respondent Bank.29 The court a quo found that
petitioners "voluntarily affixed their signature[s]" on the Continuing
Guaranty and were thus "at some given point in time willing to be
liable under those forms,"30 although it held that petitioners were not
bound by the surety contract since the letters of credit it was
supposed to secure were opened long after petitioners had ceased
to be part of FBPC.31
The trial court described the Continuing Guaranty as effective only
while petitioner-spouses were stockholders and officers of FBPC
since respondent Bank compelled petitioners to underwrite FBPC's
indebtedness as sureties without the requisite investigation of their
personal solvency and capability to undertake such risk.32 The lower
court also believed that the Bank knew of petitioners' divestment of
their shares in FBPC and their subsequent resignation as officers
thereof as these facts were obvious from the numerous public
documents that detailed the changes and substitutions in the list of
authorized signatories for transactions between FBPC and the Bank,
including the many trust receipts being signed by persons other than
petitioners,33 as well as the designation of new FBPC officers which
came to the notice of the Bank's Vice-President Jose Chan Jr. and
other officers.34

On 26 September 1996 the RTC-Br. 161 of Pasig City denied
reconsideration of its Decision.35
On 9 October 1996 respondent Bank appealed the Decision to the
Court of Appeals, docketed as CA-G.R. CV No. 55957.36 Petitioner-
spouses did not move for reconsideration nor appeal the finding of
the trial court that they voluntarily executed the Continuing Guaranty.
The appellate court modified the Decision of the trial court and held
that by signing the Continuing Guaranty, petitioner-spouses became
solidarily liable with FBPC to pay respondent Bank the amount of
P10,539,758.68 as principal with twelve percent (12%) interest per
annum from finality of the judgment until completely paid.37 The
Court of Appeals ratiocinated that the provisions of the surety
agreement did not "indicate that Spouses Luis and Vicky Toh x x x
signed the instrument in their capacities as Chairman of the Board
and Vice-President, respectively, of FBPC only."38 Hence, the court
a quo deduced, "[a]bsent any such indication, it was error for the trial
court to have presumed that the appellees indeed signed the same
not in their personal capacities."39 The appellate court also ruled
that as petitioners failed to execute any written revocation of the
Continuing Guaranty with notice to respondent Bank, the instrument
remained in full force and effect when the letters of credit were
availed of by respondent FBPC.40
Finally, the Court of Appeals rejected petitioners' argument that there
were "material alterations" in the provisions of the "letter-advise," i.e.,
that only domestic letters of credit were opened when the credit
facility was for importation of papers and other materials, and that
marginal deposits were not paid, contrary to the requirements stated
in the "letter-advise."41 The simple response of the appellate court to
this challenge was, first, the "letter-advise" itself authorized the
issuance of domestic letters of credit, and second, the several
waivers extended by petitioners in the Continuing Guaranty, which
included changing the time and manner of payment of the
indebtedness, justified the action of respondent Bank not to charge
marginal deposits.42
Petitioner-spouses moved for reconsideration of the Decision, and
after respondent Bank's comment, filed a lengthy Reply with Motion
for Oral Argument.43 On 2 July 2002 reconsideration of the Decision
was denied on the ground that no new matter was raised to warrant
the reversal or modification thereof.44 Hence, this Petition for
Review.
Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the Court
of Appeals denied them due process when it did not grant their
motion for reconsideration and without "bother[ing] to consider [their]
Reply with Motion for Oral Argument." They maintain that the
Continuing Guaranty is not legally valid and binding against them for
having been executed long after they had withdrawn from FBPC.
Lastly, they claim that the surety agreement has been extinguished
by the material alterations thereof and of the "letter-advise" which
were allegedly brought about by (a) the provision of an acceleration
clause in the trust receipts; (b) the flight of their co-sureties,
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li; (c) the
grant of credit facility despite the non-payment of marginal deposits
in an amount beyond the credit limit of P10 million pesos; (d) the
inordinate delay of the Bank in demanding the payment of the
indebtedness; (e) the presence of ghost deliveries and fictitious
purchases using the Bank's letters of credit and trust receipts; (f) the
extension of the due dates of the letters of credit without the required
25% partial payment per extension; (g) the approval of another letter
of credit, L/C 93-0042, even after respondent-spouses Kenneth Ng Li
and Ma. Victoria Ng Li had defaulted on their previous obligations;
and, (h) the unmistakable pattern of fraud.
Respondent Solid Bank maintains on the other hand that the
appellate court is presumed to have passed upon all points raised by
petitioners' Reply with Motion for Oral Argument as this pleading
formed part of the records of the appellate court. It also debunks the
claim of petitioners that they were inexperienced and ignorant parties
who were taken advantage of in the Continuing Guaranty since
petitioners are astute businessmen who are very familiar with the
"ins" and "outs" of banking practice. The Bank further argues that the
notarization of the Continuing Guaranty discredits the
uncorroborated assertions against the authenticity and due
execution thereof, and that the Decision of the trial court in the civil
case finding the surety agreement to be valid and binding is now res
judicata for failure of petitioners to appeal therefrom. As a final point,
the Bank refers to the various waivers made by petitioner-spouses in
the Continuing Guaranty to justify the extension of the due dates of
the letters of credit.
To begin with, we find no merit in petitioners' claim that the Court of
Appeals deprived them of their right to due process when the court a
quo did not address specifically and explicitly their Reply with Motion
for Oral Argument. While the Resolution of the appellate court of 2
July 2002 made no mention thereof in disposing of their arguments
on reconsideration, it is presumed that "all matters within an issue
raised in a case were laid before the court and passed upon it."45 In
the absence of evidence to the contrary, we must rule that the court
a quo discharged its task properly. Moreover, a reading of the
assailed Resolution clearly makes reference to a "careful review of
the records," which undeniably includes the Reply with Motion for
Oral Argument, hence there is no reason for petitioners to
asseverate otherwise.
This Court holds that the Continuing Guaranty is a valid and binding
contract of petitioner-spouses as it is a public document that enjoys
the presumption of authenticity and due execution. Although
petitioners as appellees may raise issues that have not been
assigned as errors by respondent Bank as party-appellant, i.e.,
unenforceability of the surety contract, we are bound by the
consistent finding of the courts a quo that petitioner-spouses Luis
Toh and Vicky Tan Toh "voluntarily affixed their signature[s]" on the
surety agreement and were thus "at some given point in time willing
to be liable under those forms."46 In the absence of clear, convincing
and more than preponderant evidence to the contrary, our ruling
cannot be otherwise.
Similarly, there is no basis for petitioners to limit their responsibility
thereon so long as they were corporate officers and stockholders of
FBPC. Nothing in the Continuing Guaranty restricts their contractual
undertaking to such condition or eventuality. In fact the obligations
assumed by them therein subsist "upon the undersigned, the heirs,
executors, administrators, successors and assigns of the
undersigned, and shall inure to the benefit of, and be enforceable by
you, your successors, transferees and assigns," and that their
commitment "shall remain in full force and effect until written notice
shall have been received by [the Bank] that it has been revoked by
the undersigned." Verily, if petitioners intended not to be charged as
sureties after their withdrawal from FBPC, they could have simply
terminated the agreement by serving the required notice of
revocation upon the Bank as expressly allowed therein.47 In Garcia
v. Court of Appeals[48] we ruled
Regarding the petitioner's claim that he is liable only as a corporate
officer of WMC, the surety agreement shows that he signed the
same not in representation of WMC or as its president but in his
personal capacity. He is therefore personally bound. There is no law
that prohibits a corporate officer from binding himself personally to
answer for a corporate debt. While the limited liability doctrine is
intended to protect the stockholder by immunizing him from personal
liability for the corporate debts, he may nevertheless divest himself of
this protection by voluntarily binding himself to the payment of the
corporate debts. The petitioner cannot therefore take refuge in this
doctrine that he has by his own acts effectively waived.
But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety
agreement they signed so must we also hold respondent Bank to its
representations in the "letter-advise" of 16 May 1993. Particularly, as
to the extension of the due dates of the letters of credit, we cannot
exclude from the Continuing Guaranty the preconditions of the Bank
that were plainly stipulated in the "letter-advise." Fairness and justice
dictate our doing so, for the Bank itself liberally applies the provisions
of cognate agreements whenever convenient to enforce its
contractual rights, such as, when it harnessed a provision in the trust
receipts executed by respondent FBPC to declare its entire
indebtedness as due and demandable and thereafter to exact
payment thereof from petitioners as sureties.49 In the same manner,
we cannot disregard the provisions of the "letter-advise" in sizing up
the panoply of commercial obligations between the parties herein.
Insofar as petitioners stipulate in the Continuing Guaranty that
respondent Bank "may at any time, or from time to time, in [its]
discretion x x x extend or change the time payment," this provision
even if understood as a waiver is confined per se to the grant of an
extension and does not surrender the prerequisites therefor as
mandated in the "letter-advise." In other words, the authority of the
Bank to defer collection contemplates only authorized extensions,
that is, those that meet the terms of the "letter-advise."
Certainly, while the Bank may extend the due date at its discretion
pursuant to the Continuing Guaranty, it should nonetheless comply
with the requirements that domestic letters of credit be supported by
fifteen percent (15%) marginal deposit extendible three (3) times for
a period of thirty (30) days for each extension, subject to twenty-five
percent (25%) partial payment per extension. This reading of the
Continuing Guaranty is consistent with Philippine National Bank v.
Court of Appeals50 that any doubt on the terms and conditions of the
surety agreement should be resolved in favor of the surety.
Furthermore, the assurance of the sureties in the Continuing
Guaranty that "[n]o act or omission of any kind on [the Bank's] part in
the premises shall in any event affect or impair this guaranty"51 must
also be read "strictissimi juris" for the reason that petitioners are only
accommodation sureties, i.e., they received nothing out of the
security contract they signed.52 Thus said, the acts or omissions of
the Bank conceded by petitioners as not affecting nor impairing the
surety contract refer only to those occurring "in the premises," or
those that have been the subject of the waiver in the Continuing
Guaranty, and stretch to no other. Stated otherwise, an extension of
the period for enforcing the indebtedness does not by itself bring
about the discharge of the sureties unless the extra time is not
permitted within the terms of the waiver, i.e., where there is no
payment or there is deficient settlement of the marginal deposit and
the twenty-five percent (25%) consideration, in which case the illicit
extension releases the sureties. Under Art. 2055 of the Civil Code,
the liability of a surety is measured by the terms of his contract, and
while he is liable to the full extent thereof, his accountability is strictly
limited to that assumed by its terms.
It is admitted in the Complaint of respondent Bank before the trial
court that several letters of credit were irrevocably extended for
ninety (90) days with alarmingly flawed and inadequate consideration
- the indispensable marginal deposit of fifteen percent (15%) and the
twenty-five percent (25%) prerequisite for each extension of thirty
(30) days. It bears stressing that the requisite marginal deposit and
security for every thirty (30) - day extension specified in the "letter-
advise" were not set aside or abrogated nor was there any prior
notice of such fact, if any was done.
Moreover, these irregular extensions were candidly admitted by
Victor Ruben L. Tuazon, an account officer and manager of
respondent Bank and its lone witness in the civil case
Q: You extended it even if there was no marginal deposit?
A: Yes.
Q: And even if partial payment is less than 25%?
A: Yes x x x x
Q: You have repeatedly extended despite the insufficiency
partial payment requirement?
A: I would say yes.53

The foregoing extensions of the letters of credit made by respondent
Bank without observing the rigid restrictions for exercising the
privilege are not covered by the waiver stipulated in the Continuing
Guaranty. Evidently, they constitute illicit extensions prohibited under
Art. 2079 of the Civil Code, "[a]n extension granted to the debtor by
the creditor without the consent of the guarantor extinguishes the
guaranty." This act of the Bank is not mere failure or delay on its part
to demand payment after the debt has become due, as was the case
in unpaid five (5) letters of credit which the Bank did not extend,
defer or put off,54 but comprises conscious, separate and binding
agreements to extend the due date, as was admitted by the Bank
itself
Q: How much was supposed to be paid on 14 September 1993,
the original LC of P1,655,675.13?
A: Under LC 93-0017 first matured on 14 September 1993. We
rolled it over, extended it to December 13, 1993 but they made
partial payment that is why we extended it.
Q: The question to you now is how much was paid? How much
is supposed to be paid on September 14, 1993 on the basis of the
original amount of P1,655,675.13?
A: Whenever this obligation becomes due and demandable
except when you roll it over so there is novation there on the original
obligations55 (underscoring supplied).
As a result of these illicit extensions, petitioner-spouses Luis Toh and
Vicky Tan Toh are relieved of their obligations as sureties of
respondent FBPC under Art. 2079 of the Civil Code.
Further, we note several suspicious circumstances that militate
against the enforcement of the Continuing Guaranty against the
accommodation sureties. Firstly, the guaranty was executed more
than thirty (30) days from the original acceptance period as required
in the "letter-advise." Thereafter, barely two (2) days after the
Continuing Guaranty was signed, corporate agents of FBPC were
replaced on 12 May 1993 and other adjustments in the corporate
structure of FBPC ensued in the month of June 1993, which the
Bank did not investigate although such were made known to it.
By the same token, there is no explanation on record for the utter
worthlessness of the trust receipts in favor of the Bank when these
documents ought to have added more security to the indebtedness
of FBPC. The Bank has in fact no information whether the trust
receipts were indeed used for the purpose for which they were
obtained.56 To be sure, the goods subject of the trust receipts were
not entirely lost since the security officer of respondent Bank who
conducted surveillance of FBPC even had the chance to intercept
the surreptitious transfer of the items under trust: "We saw two (2)
delivery vans with Plates Nos. TGH 257 and PAZ 928 coming out of
the compound x x x [which were] taking out the last supplies stored
in the compound."57 In addition, the attached properties of FBPC,
except for two (2) of them, were perfunctorily abandoned by
respondent Bank although the bonds therefor were considerably
reduced by the trial court.58
The consequence of these omissions is to discharge the surety,
petitioners herein, under Art. 2080 of the Civil Code,59 or at the very
least, mitigate the liability of the surety up to the value of the property
or lien released
If the creditor x x x has acquired a lien upon the property of a
principal, the creditor at once becomes charged with the duty of
retaining such security, or maintaining such lien in the interest of the
surety, and any release or impairment of this security as a primary
resource for the payment of a debt, will discharge the surety to the
extent of the value of the property or lien released x x x x [for] there
immediately arises a trust relation between the parties, and the
creditor as trustee is bound to account to the surety for the value of
the security in his hands.60
For the same reason, the grace period granted by respondent Bank
represents unceremonious abandonment and forfeiture of the fifteen
percent (15%) marginal deposit and the twenty-five percent (25%)
partial payment as fixed in the "letter-advise." These payments are
unmistakably additional securities intended to protect both
respondent Bank and the sureties in the event that the principal
debtor FBPC becomes insolvent during the extension period.
Compliance with these requisites was not waived by petitioners in
the Continuing Guaranty. For this unwarranted exercise of discretion,
respondent Bank bears the loss; due to its unauthorized extensions
to pay granted to FBPC, petitioner-spouses Luis Toh and Vicky Tan
Toh are discharged as sureties under the Continuing Guaranty.
Resolution of 2 July 2002 denying reconsideration thereof are
REVERSED and SET ASIDE.
The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City in
Civil Case No. 64047, Solid Bank Corporation v. First Business
Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and
Vicky Tan Toh, finding First Business Paper Corporation liable to pay
respondent Solid Bank Corporation the principal of P10,539,758.68
plus twelve percent (12%) interest per annum until fully paid, but
absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any
liability to respondent Solid Bank Corporation is REINSTATED and
AFFIRMED. No costs.

Finally, the foregoing omission or negligence of respondent Bank in SO ORDERED.

failing to safe-keep the security provided by the marginal deposit and
the twenty-five percent (25%) requirement results in the material
alteration of the principal contract, i.e., the "letter-advise," and
consequently releases the surety.61 This inference was admitted by
the Bank through the testimony of its lone witness that "[w]henever
this obligation becomes due and demandable, except when you roll EN BANC
it over, (so) there is novation there on the original obligations." As
has been said, "if the suretyship contract was made upon the
condition that the principal shall furnish the creditor additional
security, and the security being furnished under these conditions is G.R. No. L-30817 September 29, 1972
afterwards released by the creditor, the surety is wholly discharged,
without regard to the value of the securities released, for such a DOMINADOR DIZON, doing business under the firm name
transaction amounts to an alteration of the main contract."62 "Pawnshop of Dominador Dizon", petitioner,
vs.
WHEREFORE, the instant Petition for Review is GRANTED. The LOURDES G. SUNTAY, respondent.
Decision of the Court of Appeals dated 12 December 2001 in CA-
G.R. CV No. 55957, Solid Bank Corporation v. First Business Paper Andres T. Velarde for petitioner.
Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky
Tan Toh, holding petitioner-spouses Luis Toh and Vicky Tan Toh Rafael G. Suntay for respondent.
solidarily liable with First Business Paper Corporation to pay Solid
Bank Corporation the amount of P10,539,758.68 as principal with
twelve percent (12%) interest per annum until fully paid, and its
FERNANDO, J.:p
In essence there is nothing novel in this petition for review of a
decision of the Court of Appeals affirming a lower court judgment
sustaining the right of an owner of a diamond ring, respondent
Lourdes G. Suntay, as against the claim of petitioner Dominador
Dizon, who owns and operates a pawnshop. The diamond ring was
turned over to a certain Clarita R. Sison, for sale on commission,
along with other pieces of jewelry of respondent Suntay. It was then
pledged to petitioner. Since what was done was violative of the terms
of the agency, there was an attempt on her part to recover
possession thereof from petitioner, who refused. She had to file an
action then for its recovery. She was successful, as noted above,
both in the lower court and thereafter in the Court of Appeals. She
prevailed as she had in her favor the protection accorded by Article
559 of the Civil
Code. 1 The matter was then elevated to us by petitioner. Ordinarily,
our discretion would have been exercised against giving due course
to such petition for review. The vigorous plea however, grounded on
estoppel, by his counsel, Atty. Andres T. Velarde, persuaded us to act
otherwise. After a careful perusal of the respective contentions of the
parties, we fail to perceive any sufficient justification for a departure
from the literal language of the applicable codal provision as
uniformly interpreted by this Court in a number of decisions. The
invocation of estoppel is therefore unavailing. We affirm.
The statement of the case as well as the controlling facts may be
found in the Court of Appeals decision penned by Justice Perez.
Thus: "Plaintiff is the owner of a three-carat diamond ring valued at
P5,500.00. On June 13, 1962, the plaintiff and Clarita R. Sison
entered into a transaction wherein the plaintiff's ring was delivered to
Clarita R. Sison for sale on commission. Upon receiving the ring,
Clarita R. Sison executed and delivered to the plaintiff the receipt ... .
The plaintiff had already previously known Clarita R. Sison as the
latter is a close friend of the plaintiff's cousin and they had frequently
met each other at the place of the plaintiff's said cousin. In fact,
about one year before their transaction of June 13, 1962 took place,
Clarita R. Sison received a piece of jewelry from the plaintiff to be
sold for P500.00, and when it was sold, Clarita R. Sison gave the
price to the plaintiff. After the lapse of a considerable time without
Clarita R. Sison having returned to the plaintiff the latter's ring, the
plaintiff made demands on Clarita R. Sison for the return of her ring
but the latter could not comply with the demands because, without
the knowledge of the plaintiff, on June 15, 1962 or three days after
the ring above-mentioned was received by Clarita R. Sison from the
plaintiff, said ring was pledged by Melia Sison, niece of the husband
of Clarita R. Sison, evidently in connivance with the latter, with the
defendant's pawnshop for P2,600.00 ... ." 2 Then came this portion
of the decision under review: "Since the plaintiff insistently
demanded from Clarita R. Sison the return of her ring, the latter
finally delivered to the former the pawnshop ticket ... which is the
receipt of the pledge with the defendant's pawnshop of the plaintiff's
ring. When the plaintiff found out that Clarita R. Sison pledged, she
took steps to file a case of estafa against the latter with the fiscal's
office. Subsequently thereafter, the plaintiff, through her lawyer,
wrote a letter ... dated September 22, 1962, to the defendant asking
for the delivery to the plaintiff of her ring pledged with defendant's
pawnshop under pawnshop receipt serial-B No. 65606, dated June
15, 1962 ... . Since the defendant refused to return the ring, the
plaintiff filed the present action with the Court of First Instance of
Manila for the recovery of said ring, with P500.00 as attorney's fees
and costs. The plaintiff asked for the provisional remedy of replevin
by the delivery of the ring to her, upon her filing the requisite bond,
pending the final determination of the action. The lower court issued
the writ of replevin prayed for by plaintiff and the latter was able to
take possession of the ring during the pendency of the action upon
her filing the requisite bond." 3 It was then noted that the lower court
rendered judgment declaring that plaintiff, now respondent Suntay,
had the right to the possession of the ring in question. Petitioner
Dizon, as defendant, sought to have the judgment reversed by the
Court of Appeals. It did him no good. The decision of May 19, 1969,
now on review, affirmed the decision of the lower court.
In the light of the facts as thus found by the Court of Appeals, well-
nigh conclusive on use, with the applicable law being what it is, this
petition for review cannot prosper. To repeat, the decision of the
Court of Appeals stands.
1. There is a fairly recent restatement of the force and effect of
the governing codal norm in De Gracia v. Court of Appeals. 4 Thus:
"The controlling provision is Article 559 of the Civil Code. It reads
thus: 'The possession of movable property acquired in good faith is
equivalent to a title. Nevertheless, one who has lost any movable or
has been unlawfully deprived thereof may recover it from the person
in possession of the same. If the possessor of a movable lost of
which the owner has been unlawfully deprived, has acquired it in
good faith at a public sale, the owner cannot obtain its return without
reimbursing the price paid therefor.' Respondent Angelina D.
Guevara, having been unlawfully deprived of the diamond ring in
question, was entitled to recover it from petitioner Consuelo S. de
Garcia who was found in possession of the same. The only
exception the law allows is when there is acquisition in good faith of
the possessor at a public sale, in which case the owner cannot
obtain its return without reimbursing the price. As authoritatively
interpreted in Cruz v. Pahati, the right of the owner cannot be
defeated even by proof that there was good faith in the acquisition by
the possessor. There is a reiteration of this principle in Aznar v.
Yapdiangco. Thus: 'Suffice it to say in this regard that the right of the
owner to recover personal property acquired in good faith by another,
is based on his being dispossessed without his consent. The
common law principle that were one of two innocent persons must
suffer by a fraud perpetrated by another, the law imposes the loss
upon the party who, by his misplaced confidence, has enabled the
fraud to be committed, cannot be applied in a case which is covered
by an express provision of the new Civil Code, specifically Article
559. Between a common law principle and a statutory provision, the
latter must prevail in this jurisdiction." " 5
2. It must have been a recognition of the compulsion exerted by
the above authoritative precedents that must have caused petitioner
to invoke the principle of estoppel. There is clearly a
misapprehension. Such a contention is devoid of any persuasive
force.
Estoppel as known to the Rules of Court 6 and prior to that to the
Court of Civil Procedure, 7 has its roots in equity. Good faith is its
basis. 8 It is a response to the demands of moral right and natural
justice. 9 For estoppel to exist though, it is indispensable that there
be a declaration, act or omission by the party who is sought to be
bound. Nor is this all. It is equally a requisite that he, who would
claim the benefits of such a principle, must have altered his position,
having been so intentionally and deliberately led to comport himself
thus, by what was declared or what was done or failed to be done. If
thereafter a litigation arises, the former would not be allowed to
disown such act, declaration or omission. The principle comes into
full play. It may successfully be relied upon. A court is to see to it
then that there is no turning back on one's word or a repudiation of
one's act. So it has been from our earliest decisions. As Justice
Mapa pointed out in the first case, a 1905 decision, Rodriguez v.
Martinez, 10 a party should not be permitted "to go against his own
acts to the prejudice of [another]. Such a holding would be contrary
to the most rudimentary principles of justice and law." 11 He is not, in
the language of Justice Torres, in Irlanda v. Pitargue, 12 promulgated
in 1912, "allowed to gainsay [his] own acts or deny rights which [he
had] previously recognized." 13 Some of the later cases are to the
effect that an unqualified and unconditional acceptance of an
agreement forecloses a claim for interest not therein provided. 14
Equally so the circumstance that about a month after the date of the
conveyance, one of the parties informed the other of his being a
minor, according to Chief Justice Paras, "is of no moment, because
[the former's] previous misrepresentation had already estopped him
from disavowing the contract. 15 It is easily understandable why,
under the circumstances disclosed, estoppel is a frail reed to hang
on to. There was clearly the absence of an act or omission, as a
result of which a position had been assumed by petitioner, who if
such elements were not lacking, could not thereafter in law be
prejudiced by his belief in what had been misrepresented to him. 16
As was put by Justice Labrador, "a person claimed to be estopped
must have knowledge of the fact that his voluntary acts would
deprive him of some rights because said voluntary acts are
inconsistent with said rights." 17 To recapitulate, there is this
pronouncement not so long ago, from the pen of Justice Makalintal,
who reaffirmed that estoppel "has its origin in equity and, being
based on moral right and natural justice, finds applicability wherever
and whenever the special circumstances of a case so demand." 18
How then can petitioner in all seriousness assert that his appeal
finds support in the doctrine of estoppel? Neither the promptings of
equity nor the mandates of moral right and natural justice come to
his rescue. He is engaged in a business where presumably ordinary
prudence would manifest itself to ascertain whether or not an
individual who is offering a jewelry by way of a pledge is entitled to
do so. If no such care be taken, perhaps because of the difficulty of
resisting opportunity for profit, he should be the last to complain if
thereafter the right of the true owner of such jewelry should be
recognized. The law for this sound reason accords the latter
protection. So it has always been since Varela v.
Finnick, 19 a 1907 decision. According to Justice Torres: "In the
present case not only has the ownership and the origin of the jewels
misappropriated been unquestionably proven but also that the
accused, acting fraudulently and in bad faith, disposed of them and
pledged them contrary to agreement, with no right of ownership, and
to the prejudice of the injured party, who was thereby illegally
deprived of said jewels; therefore, in accordance with the provisions
of article 464, the owner has an absolute right to recover the jewels
from the possession of whosoever holds them, ... ." 20 There have
been many other decisions to the same effect since then. At least
nine may be cited. 21 Nor could any other outcome be expected,
considering the civil code provisions both in the former Spanish
legislation 22 and in the present Code. 23 Petitioner ought to have
been on his guard before accepting the pledge in question. Evidently
there was no such precaution availed of. He therefore, has only
himself to blame for the fix he is now in. It would be to stretch the
concept of estoppel to the breaking point if his contention were to
prevail. Moreover, there should have been a realization on his part
that courts are not likely to be impressed with a cry of distress
emanating from one who is in a business authorized to impose a
higher rate of interest precisely due to the greater risk assumed by
him. A predicament of this nature then does not suffice to call for less
than undeviating adherence to the literal terms of a codal provision.
Moreover, while the activity he is engaged in is no doubt legal, it is
not to be lost sight of that it thrives on taking advantage of the
necessities precisely of that element of our population whose lives
are blighted by extreme poverty. From whatever angle the question
is viewed then, estoppel certainly cannot be justly invoked.
WHEREFORE, the decision of the Court of Appeals of May 19, 1969
is affirmed, with costs against petitioner.
Concepcion, C.J., Zaldivar, Makasiar, Antonio and Esguerra, JJ.,
concur.
Makalintal and Barredo, JJ., took no part.
Castro, J., reserves his vote.
Separate Opinions
TEEHANKEE, J., concurring:
I concur in the main opinion of Mr. Justice Fernando, tracing and
confirming the long settled and uniform jurisprudence since 1905
based on the express statutory provision of article 559 of our Civil
Code (formerly article 464 of the old Civil Code) that the owner "who
has lost any movable or has been unlawfully deprived thereof may
recover it from the person in possession of the same," the only
exception expressly provided in the codal article being that "if the
possessor of a movable lost of which the owner has been unlawfully
deprived, has acquired it in good faith at a public sale, the owner
cannot obtain its return without reimbursing the price paid therefor." 1
Senator Tolentino's submittal in his commentaries on the Civil Code
"that the better view is to consider 'unlawfully deprived' as limited to
unlawful taking, such as theft or robbery, and should not include
disposition through abuse of confidence. Thus, if the owner has
entrusted personal property to a bailee, such as for transportation,
pledge, loan or deposit, without transmitting ownership, and the latter
alienates it to a third person who acquires it in good faith, the owner
cannot recover it from such third person, "is, as he himself admits,
based on the express provision of the French Code which allows the
true owner of personal property to recover it from the possessor in
good faith without reimbursement only "if it has been stolen from
him." He concedes likewise that "our Code, following the Spanish
code, uses broader language than that used in the French code"
since our Code provides that the owner who has been "unlawfully
deprived" of personal property may recover it from the possessor
without reimbursement, with the sole exception where the possessor
acquired the article in good faith at a public sale. 2
He thus concedes finally that "(T)here are writers who believe that
the phrase 'unlawfully deprived' in our Code does not have the same
meaning as stolen in the French code; that it is used in the general
sense, and is not used in the specific sense of deprivation by robbery
or theft. Under this view, it extends to all cases where there has been
no valid transmission of ownership, including the case where the
proprietor has entrusted the thing to a borrower, depositary, or lessee
who has sold the same. It is believed that the owner in such case is
undoubtedly unlawfully deprived of his property, and may recover the
same from a possessor in good faith" (citing De Buen: 2-II Colin &
Capitant 1008; 1 Bonet
234) 3 and cites the long unbroken line of decisions of the Court of
Appeals and of this Court upholding the import of the broader
language of the codal article in question.
Indeed, if our legislature had intended to narrow the scope of the
term "unlawfully deprived" to "stolen" as advocated by Tolentino, it
certainly would have adopted and used such a narrower term rather
than the broad language of article 464 of the old Spanish Civil Code
with its long-established and accepted meaning in accordance with
our jurisprudence.
Petitioner's contentions at bar had long been disposed of in the
Court's 1911 decision of Arenas vs. Raymundo, 4 per Mr. Justice
Florentino Torres, reiterating the doctrine of the earlier cases and
holding that
Even supposing that the defendant Raymundo had acted in good
faith in accepting the pledge of the jewelry in litigation, even then he
would not be entitled to retain it until the owner thereof reimburse
him for the amount loaned to the embezzler, since the said owner of
the jewelry, the plaintiff, did not make any contract with the pledgee,
that would obligate him to pay the amount loaned to Perello, and the
trial record does not disclose any evidence, even circumstantial, that
the plaintiff Arenas consented to or had knowledge of the pledging of
her jewelry in the pawnshop of the defendant.
For this reason, and because Concepcion Perello was not the
legitimate owner of the jewelry which she pledged to the defendant
Raymundo, for a certain sum that she received from the latter as a
loan, the contract of pledge entered into by both, is of course, null
and void, and, consequently the jewelry so pawned can not serve as
security for the payment of the sum loaned, nor can the latter be
collected out of the value of the said jewelry.
Article 1857 of the Civil Code prescribes as one of the essential
requisites of the contracts of pledge and of mortgage, that the thing
pledged or mortgaged must belong to the person who pledges or
mortgages it. This essential requisite for the contract of pledge
between Perello and the defendant being absent as the former was
not the owner of the jewelry given in pledge, the contract is as devoid
of value and force as if it had not been made, and as it was executed
with marked violation of an express provision of the law, it can not
confer upon the defendant any rights in the pledged jewelry, nor
impose any obligation toward him on the part of the owner thereof,
since the latter was deprived of her possession by means of the
illegal pledging of the said jewelry, a criminal act.
Between the supposed good faith of the defendant Raymundo and
the undisputed good faith of the plaintiff Arenas, the owner of the
jewelry, neither law nor justice permit that the latter, after being the
victim of embezzlement, should have to choose one of the two
extremes of a dilemma, both of which, without legal ground or
reason, are injurious and prejudicial to her interests and rights, that
is, she must either lose her jewelry or pay a large sum received by
the embezzler as a loan from the defendant, when the plaintiff
Arenas is not related to the latter by any legal or contractual bond out
of which legal obligations arise.
xxx xxx xxx
The business of pawnshops, in exchange for the high and onerous
interest which constitutes its enormous profits, is always exposed to
the contingency of receiving in pledge or security for the loans,
jewels and other articles that have been robbed, stolen, or
embezzled from their legitimate owners; and as the owner of the
pawnshop accepts the pledging of jewelry from the first bearer who
offers the same and asks for money on it, without assuring himself
whether such bearer is or is not the owner thereof, he can not, by
such procedure, expect from the law better and more preferential
protection than the owner of the jewels or other articles, who was
deprived thereof by means of a crime and is entitled to be excused
by the courts.
Antonio Matute, the owner of another pawnshop, being convinced
that he was wrong, refrained from appealing from the judgment
wherein he was sentenced to return, without redemption, to the
plaintiffs, another jewel of great value which had been pledged to
him by the same Perello. He undoubtedly had in mind some of the
previous decisions of this court, one of which was against himself.
By the same token, the contention that the owner may recover the
lost article of which he has been unlawfully deprived without
reimbursement of the sum received by the embezzler from the
pawnshop only after a criminal conviction of the embezzler, is to add
a requirement that is not in the codal article and to unduly prejudice
the victim of embezzlement, as pointed out by the Court in Arenas,
supra.
The civil action that the owner must resort to for the recovery of his
personal property of which he has been unlawfully deprived as
against the possessor (where the latter refuses to honor the claim,
presumably on same valid doubts as to the genuineness of the
claim) gives the possessor every adequate protection and
opportunity to contest the owner's claim of recovery. The owner must
therein establish by competent evidence his lawful claim, and show
to the court's satisfaction his lawful ownership of the article claimed
and that he had been unlawfully deprived thereof.
I therefore find no reason to set aside the long settled interpretation
given by our jurisprudence to article 559 (formerly article 464) of our
Civil Code in accordance with its clear and unambiguous language,
as reaffirmed in the case at bar.
Separate Opinions
TEEHANKEE, J., concurring:
I concur in the main opinion of Mr. Justice Fernando, tracing and
confirming the long settled and uniform jurisprudence since 1905
based on the express statutory provision of article 559 of our Civil
Code (formerly article 464 of the old Civil Code) that the owner "who
has lost any movable or has been unlawfully deprived thereof may
recover it from the person in possession of the same," the only
exception expressly provided in the codal article being that "if the
possessor of a movable lost of which the owner has been unlawfully
deprived, has acquired it in good faith at a public sale, the owner
cannot obtain its return without reimbursing the price paid therefor." 1
Senator Tolentino's submittal in his commentaries on the Civil Code
"that the better view is to consider 'unlawfully deprived' as limited to
unlawful taking, such as theft or robbery, and should not include
disposition through abuse of confidence. Thus, if the owner has
entrusted personal property to a bailee, such as for transportation,
pledge, loan or deposit, without transmitting ownership, and the latter
alienates it to a third person who acquires it in good faith, the owner
cannot recover it from such third person, "is, as he himself admits,
based on the express provision of the French Code which allows the
true owner of personal property to recover it from the possessor in
good faith without reimbursement only "if it has been stolen from
him." He concedes likewise that "our Code, following the Spanish
code, uses broader language than that used in the French code"
since our Code provides that the owner who has been "unlawfully
deprived" of personal property may recover it from the possessor
without reimbursement, with the sole exception where the possessor
acquired the article in good faith at a public sale. 2
He thus concedes finally that "(T)here are writers who believe that
the phrase 'unlawfully deprived' in our Code does not have the same
meaning as stolen in the French code; that it is used in the general
sense, and is not used in the specific sense of deprivation by robbery
or theft. Under this view, it extends to all cases where there has been
no valid transmission of ownership, including the case where the
proprietor has entrusted the thing to a borrower, depositary, or lessee
who has sold the same. It is believed that the owner in such case is
undoubtedly unlawfully deprived of his property, and may recover the
same from a possessor in good faith" (citing De Buen: 2-II Colin &
Capitant 1008; 1 Bonet
234) 3 and cites the long unbroken line of decisions of the Court of
Appeals and of this Court upholding the import of the broader
language of the codal article in question.
Indeed, if our legislature had intended to narrow the scope of the
term "unlawfully deprived" to "stolen" as advocated by Tolentino, it
certainly would have adopted and used such a narrower term rather
than the broad language of article 464 of the old Spanish Civil Code
with its long-established and accepted meaning in accordance with
our jurisprudence.
Petitioner's contentions at bar had long been disposed of in the
Court's 1911 decision of Arenas vs. Raymundo, 4 per Mr. Justice
Florentino Torres, reiterating the doctrine of the earlier cases and
holding that
Even supposing that the defendant Raymundo had acted in good
faith in accepting the pledge of the jewelry in litigation, even then he
would not be entitled to retain it until the owner thereof reimburse
him for the amount loaned to the embezzler, since the said owner of
the jewelry, the plaintiff, did not make any contract with the pledgee,
that would obligate him to pay the amount loaned to Perello, and the
trial record does not disclose any evidence, even circumstantial, that
the plaintiff Arenas consented to or had knowledge of the pledging of
her jewelry in the pawnshop of the defendant.
For this reason, and because Concepcion Perello was not the
legitimate owner of the jewelry which she pledged to the defendant
Raymundo, for a certain sum that she received from the latter as a
loan, the contract of pledge entered into by both, is of course, null
and void, and, consequently the jewelry so pawned can not serve as
security for the payment of the sum loaned, nor can the latter be
collected out of the value of the said jewelry.
Article 1857 of the Civil Code prescribes as one of the essential
requisites of the contracts of pledge and of mortgage, that the thing
pledged or mortgaged must belong to the person who pledges or
mortgages it. This essential requisite for the contract of pledge
between Perello and the defendant being absent as the former was
not the owner of the jewelry given in pledge, the contract is as devoid
of value and force as if it had not been made, and as it was executed
with marked violation of an express provision of the law, it can not
confer upon the defendant any rights in the pledged jewelry, nor
impose any obligation toward him on the part of the owner thereof,
since the latter was deprived of her possession by means of the
illegal pledging of the said jewelry, a criminal act.
Between the supposed good faith of the defendant Raymundo and
the undisputed good faith of the plaintiff Arenas, the owner of the
jewelry, neither law nor justice permit that the latter, after being the
victim of embezzlement, should have to choose one of the two
extremes of a dilemma, both of which, without legal ground or
reason, are injurious and prejudicial to her interests and rights, that
is, she must either lose her jewelry or pay a large sum received by
the embezzler as a loan from the defendant, when the plaintiff
Arenas is not related to the latter by any legal or contractual bond out
of which legal obligations arise.
xxx xxx xxx
The business of pawnshops, in exchange for the high and onerous
interest which constitutes its enormous profits, is always exposed to
the contingency of receiving in pledge or security for the loans,
jewels and other articles that have been robbed, stolen, or
embezzled from their legitimate owners; and as the owner of the
pawnshop accepts the pledging of jewelry from the first bearer who
offers the same and asks for money on it, without assuring himself
whether such bearer is or is not the owner thereof, he can not, by
such procedure, expect from the law better and more preferential
protection than the owner of the jewels or other articles, who was
deprived thereof by means of a crime and is entitled to be excused
by the courts.
Antonio Matute, the owner of another pawnshop, being convinced
that he was wrong, refrained from appealing from the judgment
wherein he was sentenced to return, without redemption, to the
plaintiffs, another jewel of great value which had been pledged to
him by the same Perello. He undoubtedly had in mind some of the
previous decisions of this court, one of which was against himself.
By the same token, the contention that the owner may recover the
lost article of which he has been unlawfully deprived without
reimbursement of the sum received by the embezzler from the
pawnshop only after a criminal conviction of the embezzler, is to add
a requirement that is not in the codal article and to unduly prejudice
the victim of embezzlement, as pointed out by the Court in Arenas,
supra.
The civil action that the owner must resort to for the recovery of his
personal property of which he has been unlawfully deprived as
against the possessor (where the latter refuses to honor the claim,
presumably on same valid doubts as to the genuineness of the
claim) gives the possessor every adequate protection and
opportunity to contest the owner's claim of recovery. The owner must
therein establish by competent evidence his lawful claim, and show
to the court's satisfaction his lawful ownership of the article claimed
and that he had been unlawfully deprived thereof.
I therefore find no reason to set aside the long settled interpretation
given by our jurisprudence to article 559 (formerly article 464) of our
Civil Code in accordance with its clear and unambiguous language,
as reaffirmed in the case at bar.
 In the present petition, petitioners assail the validity of a deed of
assignment over an apartment unit and the leasehold rights over the
land on which the building housing the said apartment stands for
allegedly being in the nature of a pactum commissorium.

The facts are not disputed.

Petitioners Uy Tong (also known as Henry Uy) and Kho Po Giok

(SPOUSES) used to be the owners of Apartment No. 307 of the
Ligaya Building, together with the leasehold right for ninety- nine (99)
years over the land on which the building stands. The land is
registered in the name of Ligaya Investments, Inc. as evidenced by
Transfer Certificate of Title No. 79420 of the Registry of Deeds of the
City of Manila. It appears that Ligaya Investments, Inc. owned the
building which houses the apartment units but sold Apartment No.
307 and leased a portion of the land in which the building stands to
the SPOUSES.
THIRD DivISION
In February, 1969, the SPOUSES purchased from private
G.R. No. 77465 May 21, 1988 respondent Bayanihan Automotive, Inc. (BAYANIHAN) seven (7)
units of motor vehicles for a total amount of P47,700.00 payable in
SPOUSES UY TONG & KHO PO GIOK, petitioners, three (3) installments. The transaction was evidenced by a written
vs. "Agreement" wherein the terms of payment had been specified as
HONORABLE COURT OF APPEALS, HONORABLE BIENVENIDO follows:
C. EJERCITO, Judge of the Court of First Instance of Manila, Branch
XXXVII and BAYANIHAN AUTOMOTIVE CORPORATION, That immediately upon signing of this Agreement, the VENDEE shall
respondents. pay unto the VENDOR the amount of Seven Thousand Seven
Hundred (P7,000.00) Pesos, Philippine Currency, and the amount of
Platon A. Baysa for petitioner. Fifteen Thousand (P15,000.00) Pesos shah be paid on or before
March 30, 1969 and the balance of Twenty Five Thousand
Manuel T. Ybarra for respondents. (P25,000.00) Pesos shall be paid on or before April 30, 1969, the
said amount again to be secured by another postdated check with
maturity on April 30, 1969 to be drawn by the VENDEE;

CORTES, J.: That it is fully understood that should the two (2) aforementioned
checks be not honored on their respective maturity dates, herein
VENDOR will give VENDEE another sixty (60) days from maturity
dates, within which to pay or redeem the value of the said checks;
That if for any reason the VENDEE should fail to pay her
aforementioned obligation to the VENDOR, the latter shall become
automatically the owner of the former's apartment which is located at
No. 307, Ligaya Building, Alvarado St., Binondo, Manila, with the
only obligation on its part to pay unto the VENDEE the amount of
Three Thousand Five Hundred Thirty Five (P3,535.00) Pesos,
Philippine Currency; and in such event the VENDEE shall execute
the corresponding Deed of absolute Sale in favor of the VENDOR
and or the Assignment of Leasehold Rights. [emphasis supplied].
(Quoted in Decision in Civil Case No. 80420, Exhibit "A" of Civil
Case No. 1315321].
After making a downpayment of P7,700.00, the SPOUSES failed to
pay the balance of P40,000.00. Due to these unpaid balances,
BAYANIHAN filed an action for specific performance against the
SPOUSES docketed as Civil Case No. 80420 with the Court of First
Instance of Manila.
On October 28, 1978, after hearing, judgment was rendered in favor
of BAYANIHAN in a decision the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered, ordering the
defendants, jointly and severally, to pay the plaintiffs, the sum of
P40,000.00, with interest at the legal rate from July 1, 1970 until full
payment. In the event of their failure to do so within thirty (30) days
from notice of this judgment, they are hereby ordered to execute the
corresponding deed of absolute sale in favor of the plaintiff and/or
the assignment of leasehold rights over the defendant's apartment
located at 307 Ligaya Building, Alvarado Street, Binondo, Manila,
upon the payment by the plaintiff to the defendants of the sum of
P3,535.00. [emphasis supplied].
Pursuant to said judgment, an order for execution pending appeal
was issued by the trial court and a deed of assignment dated May
27, 1972, was executed by the SPOUSES [Exhibit "B", CFI Records,
p. 127] over Apartment No. 307 of the Ligaya Building together with
the leasehold right over the land on which the building stands. The
SPOUSES acknowledged receipt of the sum of P3,000.00 more or
less, paid by BAYANIHAN pursuant to the said judgment.
Notwithstanding the execution of the deed of assignment the
SPOUSES remained in possession of the premises. Subsequently,
they were allowed to remain in the premises as lessees for a
stipulated monthly rental until November 30,1972.
Despite the expiration of the said period, the SPOUSES failed to
surrender possession of the premises in favor of BAYANIHAN. This
prompted BAYANIHAN to file an ejectment case against them in the
City Court of Manila docketed as Civil Case No. 240019. This action
was however dismissed on the ground that BAYANIHAN was not the
real party in interest, not being the owner of the building.
On February 7, 1979, after demands to vacate the subject apartment
made by BAYANIHAN's counsel was again ignored by the
SPOUSES, an action for recovery of possession with damages was
filed with the Court of First Instance of Manila, docketed as Civil
Case No. 121532 against the SPOUSES and impleading Ligaya
Investments, Inc. as party defendant. On March 17, 1981, decision in
said case was rendered in favor of BAYANIHAN ordering the
following:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff
and against the defendants spouses UY TONG and KHO GIOK and
defendant Ligaya Investment, Inc., dismissing defendants'
counterclaim and ordering:
1. The defendants spouses UY TONG and KHO PO GIOK and any
andlor persons claiming right under them, to vacate, surrender and
deliver possession of Apartment 307, Ligaya Building, located at 64
Alvarado Street, Binondo, Manila to the plaintiff;
2. Ordering defendant Ligaya Investment, Inc. to recognize the
right of ownership and possession of the plaintiff over Apartment No.
307, Ligaya Building;
3. Ordering Ligaya Investment, Inc. to acknowledge plaintiff as
assignee-lessee in liue of defendants spouses Uy Tong and Kho Po
Giok over the lot on which the building was constructed;
4. Ordering the defendants spouses Uy Tong and Kho Po Giok to
pay to the plaintiff the sum of P200.00 commencing from June, 1971
to November 30, 1972, or a total amount of P3,400.00 as rental for
the apartment, and the sum of P200.00 from December 1, 1972 until
the premises are finally vacated and surrendered to the plaintiff, as
reasonable compensation for the use of the apartment; and
5. Ordering the defendants spouses Uy Tong and Kho Po Giok to
pay P3,000.00 as and for attorney's fees to the plaintiff, and the
costs of this suit.
Not satisfied with this decision, the SPOUSES appealed to the Court
of Appeals. On October 2,1984, the respondent Court of Appeals
affirmed in toto the decision appealed from [Petition, Annex "A",
Rollo, pp. 15-20]. A motion for reconsideration of the said decision
was denied by the respondent Court in a resolution dated February
11, 1987 [Petition, Annex "C", Rollo, pp. 31- 34].
Petitioners-SPOUSES in seeking a reversal of the decision of the
Court of Appeals rely on the following reasons:
I. The deed of assignment is null and void because it is in the nature
of a pactum commissorium and/or was borne out of the same.
II. The genuineness and due Prosecution of the deed of assignment
was not deemed admitted by petitioner.
III. The deed of assignment is unenforceable because the condition
for its execution was not complied with.
IV. The refusal of petitioners to vacate and surrender the premises in
question to private respondent is justified and warranted by the
circumstances obtaining in the instant case.
I. In support of the first argument, petitioners bring to the fore
the contract entered into by the parties whereby petitioner Kho Po
Giok agreed that the apartment in question will automatically become
the property of private respondent BAYANIHAN upon her mere
failure to pay her obligation. This agreement, according to the
petitioners is in the nature of a pactum commissorium which is null
and void, hence, the deed of assignment which was borne out of the
same agreement suffers the same fate.
The prohibition on pactum commissorium stipulations is provided for
by Article 2088 of the Civil Code:
Art. 2088. The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of the same. Any stipulation to the
contrary is null and void.
The aforequoted provision furnishes the two elements for pactum
commissorium to exist: (1) that there should be a pledge or mortgage
wherein a property is pledged or mortgaged by way of security for
the payment of the principal obligation; and (2) that there should be a
stipulation for an automatic appropriation by the creditor of the thing
pledged or mortgaged in the event of non-payment of the principal
obligation within the stipulated period.
A perusal of the terms of the questioned agreement evinces no basis
for the application of the pactum commissorium provision. First, there
is no indication of 'any contract of mortgage entered into by the
parties. It is a fact that the parties agreed on the sale and purchase
of trucks.
Second, there is no case of automatic appropriation of the property
by BAYANIHAN. When the SPOUSES defaulted in their payments of
the second and third installments of the trucks they purchased,
BAYANIHAN filed an action in court for specific performance. The
trial court rendered favorable judgment for BAYANIHAN and ordered
the SPOUSES to pay the balance of their obligation and in case of
failure to do so, to execute a deed of assignment over the property
involved in this case. The SPOUSES elected to execute the deed of
assignment pursuant to said judgment.
Clearly, there was no automatic vesting of title on BAYANIHAN
because it took the intervention of the trial court to exact fulfillment of
the obligation, which, by its very nature is ". . anathema to the
concept of pacto commissorio" [Northern Motors, Inc. v. Herrera,
G.R. No. L-32674, February 22, 1973, 49 SCRA 392]. And even
granting that the original agreement between the parties had the
badges of pactum commissorium, the deed of assignment does not
suffer the same fate as this was executed pursuant to a valid
judgment in Civil Case No. 80420 as can be gleaned from its very
terms and conditions:
DEED OF ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS:
This deed made and entered into by Uy Tiong also known as Henry
Uy and Kho Po Giok, both of legal age, husband and wife,
respectively, and presently residing at 307 Ligaya Bldg., Alvarado
St., Binondo, Manila, and hereinafter to be known and called as the
ASSIGNORS, in favor of Bayanihan Automotive Corporation, an
entity duly organized and existing under the laws of the Philippines,
with principal business address at 1690 Otis St., Paco, Manila and
hereinafter to be known and called the ASSIGNEE;
-witnesseth-
WHEREAS, the ASSIGNEE has filed a civil complaint for "Specific
Performance with Damages" against the ASSIGNORS in the Court
of First Instance of Manila, Branch V, said case having been
docketed as Civil Case No. 80420;
WHEREAS, the ASSIGNEE was able to obtain a judgment against
the ASSIGNOR wherein the latter was ordered by the court as
follows, to wit:
WHEREFORE, judgment is hereby rendered ordering the
defendants, jointly and severally to pay the plaintiff the sum of
P40,000.00, with interest at the legal rate from July 31, 1970 until full
payment. In the event of their failure to do so within thirty (30) days
from notice of this judgment, they are hereby ordered to execute the
corresponding deed of absolute sale in favor of the plaintiff and/or
the assignment of leasehold, rights over the defendants' apartment
located at No. 307 Ligaya Building, Alvarado Street, Binondo, Manila,
upon the payment by the plaintiff to the defendants the sum of P
3,535.00. The defendants shall pay the costs.
WHEREAS, the court, upon petition by herein ASSIGNEE and its
deposit of sufficient bond, has ordered for the immediate execution
of the said decision even pending appeal of the aforesaid decision;
WHEREAS, the ASSIGNORS have elected to just execute the
necessary deed of sale and/or assignment of leasehold rights over
the apartment mentioned in the decision in favor of the herein
ASSIGNEE;
NOW, THEREFORE, for and in consideration of the foregoing
premises, the ASSIGNORS have transferred assigned and ceded,
and by these presents do hereby transfer, assign and cede all their
rights and interests over that place known as Apartment No. 307 at
the Ligaya Building which is located at No. 864 Alvarado St.,
Binondo, Manila, together with the corresponding leasehold rights
over the lot on which the said building is constructed, in favor of the
hererein ASSIGNEE, its heirs or assigns.
IN WITNESS WHEREOF, We have hereunto signed our names this
27th day of May, 1971 at Manila, Philippines.
UY TONG/HENRY UY KHO PO GIOK
Assignor Assignor
ACR-2151166 Manila 1/13/51 ACR-C-001620
Manila March 3, 1965
This being the case, there is no reason to impugn the validity of the
said deed of assignment.
II. The SPOUSES take exception to the ruling of the Court of
Appeals that their failure to deny the genuineness and due execution
of the deed of assignment was deemed an admission thereof. The
basis for this exception is the SPOUSES' insistence that the deed of
assignment having been borne out of pactum commissorio is not
subject to ratification and its invalidity cannot be waived.
There is no compelling reason to reverse the abovementioned ruling
of the appellate court. Considering this Court's above conclusion that
the deed of assignment is not invalid, it follows that when an action
founded on this written instrument is filed, the rule on contesting its
genuineness and due execution must be followed.
That facts reveal that the action in Civil Case No. 121532 was
founded on the deed of assignment. However, the SPOUSES, in
their answer to the complaint, failed to deny under oath and
specifically the genuineness and due execution of the said deed.
Perforce, under Section 8, Rule 8 of the Revised Rules of Court, the
SPOUSES are deemed to have admitted the deed's genuineness
and due execution. Besides, they themselves admit that ". . . the
contract was duly executed and that the same is genuine" [Sur-
Rejoinder, Rollo, p. 67]. They cannot now claim otherwise.
III. The SPOUSES also question the enforceability of the deed of
assignment. They contend that the deed is unenforceable because
the condition for its execution was not complied with. What
petitioners SPOUSES refer to is that portion of the disposition in Civil
Case No. 80420 requiring BAYANIHAN to pay the former the sum of
P 3,535.00. To buttress their claim of non- compliance, they invoke
the following receipt issued by the SPOUSES to show that
BAYANIHAN was P535.00 short of the complete payment.
RECEIPT
This is to acknowledge the fact that the amount of THREE
THOUSAND (P3,000.00) PESOS, more or less as indicated in the
judgment of the Hon. Conrado Vasquez, Presiding Judge of the
Court of First Instance of Manila, Branch V, in Civil Case entitled
"Bayanihan Automotive Corp. v. Pho (sic) Po Giok, etc." and
docketed as Civil Case No. 80420 has been applied for the payment
of the previous rentals of the property which is the subject matter of
the aforesaid judgment. [emphasis supplied.]
(Sgd.) Pho (sic) Po Glok
(Sgd.) Henry Uy
August 21, 1971
The issue presented involves a question of fact which is not within
this Court's competence to look into. Suffice it to say that this Court
is of the view that findings and conclusion of the trial court and the
Court of Appeals on the question of whether there was compliance
by BAYANIHAN of its obligation under the decision in Civil Case No.
80420 to pay the SPOUSES the sum of P3,535.00 is borne by the
evidence on record. The Court finds merit in the following findings of
the trial court:
... Defendants 'contention that the P 3,535.00 required in the
decision in Civil Case No. 80420 as a condition for the execution of
the deed of assignment was not paid by the plaintiff to the
defendants is belied by the fact that the defendants acknowledged
payment of P3,000.00, more or less, in a receipt dated August 21,
1971. This amount was expressly mentioned in this receipt as
indicated in the judgment of the Honorable Conrado Vasquez,
presiding Judge of the CFI of Manila, Branch V, in Civil Case entitled
Bayanihan Automotive Corp. versus Kho Po Giok, docketed as Civil
Case No. 80420, and also expressly mentioned as having been
applied for the payment of the previous rentals of the property
subject matter of the said judgment. Nothing could be more explicit.
The contention that there is still a difference of P535.00 is had to
believe because the spouses Kho Po Giok and Uy Tong executed
the deed of assignment without first demanding from the plaintiff the
payment of P535.00. Indeed, as contended by the plaintiff, for it to
refuse to pay this small amount and thus gave defendants a reason
not to execute the Deed of Assignment. is hard to believe
Defendants further confirm by the joint manifestation of plaintiff and
defendants, duly assisted by counsel, Puerto and Associates, dated
September, 1971, Exhibit "O", wherein it was stated that plaintiff has
fully complied with its obligation to the defendants caused upon it
(sic) by the pronouncement of the judgment as a condition for the
execution of their (sic) leasehold rights of defendants, as evidenced
by the receipt duly executed by the defendants, and which was
already submitted in open court for the consideration of the sum of
P3,535.00. [Emphasis supplied]. [Decision, Civil Case No. 121532,
pp. 3-4].
This Court agrees with private respondent BAYANIHAN's reasoning
that inasmuch as the decision in Civil Case No. 80420 imposed upon
the parties correlative obligations which were simultaneously
demandable so much so that if private respondent refused to comply
with its obligation under the judgment to pay the sum of P 3,535.00
then it could not compel petitioners to comply with their own
obligation to execute the deed of assignment over the subject
premises. The fact that petitioners executed the deed of assignment
with the assistance of their counsel leads to no other conclusion that
private respondent itself had paid the full amount.
IV. Petitioners attempt to justify their continued refusal to vacate
the premises subject of this litigation on the following grounds:
(a) The deed of assingnment is in the nature of a pactum
commissorium and, therefore, null and void.
(b) There was no full compliance by private respondent of the
condition imposed in the deed of assignment.
(c) Proof that petitioners have been allowed to stay in the
premises, is the very admission of private respondent who declared
that petitioners were allowed to stay in the premises until November
20, 1972. This admission is very significant. Private respondent
merely stated that there was a term-until November 30, 1972-in
order to give a semblance of validity to its attempt to dispossess
herein petitioners of the subject premises. In short, this is one way of
rendering seemingly illegal petitioners 'possession of the premises
after November 30, 1972.
The first two classifications are mere reiterations of the arguments
presented by the petitioners and which had been passed upon
already in this decision. As regards the third ground, it is enough to
state that the deed of assignment has vested in the private
respondent the rights and interests of the SPOUSES over the
apartment unit in question including the leasehold rights over the
land on which the building stands. BAYANIHAN is therefore entitled
to the possession thereof. These are the clear terms of the deed of
assignment which cannot be superseded by bare allegations of fact
that find no support in the record.
WHEREFORE, the petition is hereby DENIED for lack of merit and
the decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.

FIRST DIVISION
G.R. No. L-56718 January 17, 1985
ACME SHOE RUBBER & PLASTIC CORPORATION, petitioner
vs.
THE COURT OF APPEALS and DOMESTIC INSURANCE
COMPANY OF THE PHILIPPINES, respondents.
N.J. Quisumbing & Associates for petitioner.
Pelaez, Adriano & Gregorio Law Office for private respondent.
MELENCIO-HERRERA, J.:
On hand is a Petition for Review on certiorari of the Decision of the
then Court of Appeals (CA-G. R. No. 58917-R), denying recovery on
an insurance policy, thereby reversing the judgment of the Court of
First Instance of Rizal Branch XII, at Caloocan City, which had
allowed such recovery.
Since 1946, petitioner ACME Shoe Rubber and Plastic Corporation
(ACME, for brevity) had been insuring yearly against fire its building,
machines and general merchandise, located at Caloocan City, with
respondent Domestic Insurance Company of the Philippines (the
INSURER, for short). On May 14,1962, ACME continued to insure its
properties with the INSURER and was issued Policy No. 24887 in
the amount of P200,000.00 for the period May 15, 1962 up to May
15, 1963. On May 14,1963, the INSURER issued Renewal Receipt
No. 22989 to cover the period May 15,1963 to May 15,1964 (Exhibit
"D"). On January 8,1964, ACME paid P3,331.26 as premium. The
INSURER applied the payment as renewal premium for the period
May 15, 1963 to May 15, 1964.
On May 15, 1964, the INSURER issued Renewal Receipt No. 30127
(Exhibit "E") for the renewal premium of P3,331.26 for the period
May 15, 1964 to May 15, 1965. Stamped on it was the
Note: Subject to "Receipt of Payment Clause" and "Credit
Agreement" attached hereto and forming part hereof.
The clauses mentioned, which were attached as riders to Renewal
Receipt No. 30127, respectively read as follows:
RECEIPT OF PAYMENT CLAUSE
IT IS HEREBY DECLARED AND AGREED that notwithstanding
anything to the contrary contained in the within policy, this insurance
will be deemed valid and binding upon the Company only when the
premium and documentary stamps therefor have actually been paid
in full and duly acknowledged in an official receipt signed by an
authorized official/representative of the Company (Exhibit'E-l')
CREDIT AGREEMENT
The premium corresponding to the first ninety days of the term of this
policy or any renewal thereof is hereby considered paid for the
purpose only of making this Policy valid and binding during said
portion of the term. Thereafter, this Policy shall automatically become
void and ineffective (without prejudice to the obligation of the Insured
to pay the corresponding short period premium for the said 90 days)
unless prior to the expiration of said period the Insured shall have
actually paid to the Company the total premium and the
documentary stamps stipulated in this Policy. (Exhibit'E-2')
On May 26, 1964, ACME, through its President, signed the following
PROMISSORY NOTE
18th May, 1964
Received RR #30127 to be applied on Policy No. 24887 for which
I/we promise to pay DOMESTIC INSURANCE CO. OF THE
PHILIPPINES or order, within ninety days from the effective date of
this policy, 15th May, 1964, the premium and documentary stamps in
the sum of P3,331.26. Should I/we fail to pay this promissory note
when due, I/we agree that the said policy should stand automatically
cancelled, without further notice by the Company or election on
my/our part, and I/we shall then be liable to pay only the short period
premium corresponding to 90 days.
_________________________________
ACME SHOE RUBBER & PLASTIC CORP.
(Signed)
(Exhibit 'H')
ACME's properties were completely destroyed by fire on October 13,
1964. ACME filed its insurance claim but the INSURER disclaimed
liability on the ground that as of the date of loss, the properties
burned were not covered by insurance.
On March 20, 1965, ACME sued on the policy before the Court of
First Instance of Rizal Branch XII, Caloocan City, for the collection of
the insurance proceeds and for damages in the form of lost profits by
reason of the delay in payment.
The Trial Court found the INSURER liable in the amount of
P200,000.00, representing the insurance coverage with legal interest
thereon, plus P57,500.00 as consequential damages, "and the sum
of P7,500.00 and 25% of whatever amount may be recovered as
attorney's fees plus costs." The Trial Court opined that there was a
clear intention on the INSURER's part to grant ACME a credit
extension for the payment of the premium due; and that to allow the
INSURER to apply the premium ACME paid on January 8, 1964 to a
policy which had become automatically cancelled according to the
INSURER's own theory, would be to allow it to unjustly enrich itself at
ACME's expense.
On appeal respondent Appellate Court reversed the Trial Court and
dismissed the suit on the ground that, as of the moment of loss,
ACME's properties were not insured and the INSURER could not be
held liable for any indemnity as a result of the loss.
ACME then filed the present Petition contending that:
I
The Court of Appeals erred in failing to resolve the issue of unjust
enrichment.
II
The Court of Appeals erred in ruling that there was no insurance
contract since respondent insurer accepted a one-year premium on
January 8, 1964.
III
The Court of Appeals erred in ruling that petitioner and the lower
court gave Republic Act 3540 retroactive application.
IV
The Court of Appeals erred in deciding this case on the issue of
intention express or implied since the issue is one of effect of the
new law whose policy is superior to the intention of the parties.
Upon the facts, the evidence, and the law, we sustain the Appellate
Court. By the express terms of the Promissory Note signed by its
President, ACME was fully aware that the policy would be
automatically cancelled on August 13, 1964, the 90th day from
March 14, 1964, if it did not pay the premium before the former da .
There is also evidence to the effect that various reminders by the
INSURER for payment remained unheeded (Exhibit "10"). Not
having paid the 1964-1965 premium within the extension granted,
and pursuant to R.A. No. 3540, the policy was automatically
cancelled and there was no insurance coverage to speak of as of the
date of the fire on October 13, 1964.
ACME contends, however, that the INSURER 'accepted (the) one-
year premium on January 8, 1964 and it had no right to apply it to
the payment of a period of coverage prior thereto when under
Republic Act 3540 the policy was void and respondent insurer could
have validly disclaimed liability for loss had one occureed then".
The pertinent provision of Republic Act No. 3540, approved on June
20, 1963, and put into effect by the Office of the Insurance
Commissioner beginning October 1, 1963 (Exhibit 11 "), reads:
Sec. 72. An insurer is entitled to payment of the premium as soon as
the thing insured is exposed to the peril insured against, unless there
is clear agreement to grant the insured credit extension of the
premium due. No policy issued by an insurance company is valid
and binding unless and until the premium thereof has been paid.
Since Republic Act No. 3540 was approved only on June 20, 1963
and was put into effect only beginning October 1, 1963, it could not
retroactively affect the renewal of the insurance policy on May 15,
1963, or prior to the Act's effective date. ACME's premium payment
of January 8, 1964, therefore, was properly applied to the 1963-1964
premium. The Trial Court's opinion that there was a clear agreement
to grant ACME credit extension for 1964-1965 is negated by ACME's
Promissory Note binding itself to pay "within ninety days from the
effective date of this policy, 15th May, 1964 ... the premium and
documentary stamps in the sum of P3,331.26 ..." . indubitably, the
credit extension granted ACME was only for 90 days.
not contain the "Receipt of Payment" and "Credit Agreement"
clauses. By 1964, however, the situation had changed by the
passage of said Act by the express provision of which no policy could
be valid and binding unless and until the premium thereof had been
paid.
ACME's claim that the INSURER would unjustly enrich itself if it were
to be allowed to apply the one-year premium it received to a past
period when the policy was void and the INSURER had incurred no
risk, is flawed for the reason already stated that Renewal Receipt
No. 22989 for 1963-1964 had been issued on May 14,1963 before
R.A. No. 3540 was approved on June 20, 1963 and implemented on
October 1, 1963 (Exhibit "11"). It is axiomatic that laws have no
retroactive effect unless the contrary is provided (Article 4, Civil
Code; Manila Trading & Supply Company vs. Santos, et al, 66 PhiL
237 [1938]). What became automatically cancelled by R.A. No.3540
was the 1964-1965 policy for ACME's failure to pay the premium
within the 90-day extension granted, and in accordance with the
express terms of the Promissory Note that it had signed.
WHEREFORE, the judgment under review is hereby affirmed.
Without pronouncement as to costs.
SO ORDERED.

If, in the past, ACME had been granted credit extensions, the
Promissory Note it had signed did away with such credit
arrangement. Moreover, it was prior to the advent of Republic Act
No. 3540 when renewal receipts that the INSURER had issued did

EN BANC
G.R. No. 127876 December 17, 1999
ROXAS & CO., INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, DEPARTMENT OF
AGRARIAN REFORM, SECRETARY OF AGRARIAN REFORM,
DAR REGIONAL DIRECTOR FOR REGION IV, MUNICIPAL
AGRARIAN REFORM OFFICER OF NASUGBU, BATANGAS and
DEPARTMENT OF AGRARIAN REFORM ADJUDICATION BOARD,
respondents.
PUNO, J.:
This case involves three (3) haciendas in Nasugbu, Batangas owned
by petitioner and the validity of the acquisition of these haciendas by
the government under Republic Act No. 6657, the Comprehensive
Agrarian Reform Law of 1988.
Petitioner Roxas & Co. is a domestic corporation and is the
registered owner of three haciendas, namely, Haciendas Palico,
Banilad and Caylaway, all located in the Municipality of Nasugbu,
Batangas. Hacienda Palico is 1,024 hectares in area and is
registered under Transfer Certificate of Title (TCT) No. 985. This land
is covered by Tax Declaration Nos. 0465, 0466, 0468, 0470, 0234
and 0354. Hacienda Banilad is 1,050 hectares in area, registered
under TCT No. 924 and covered by Tax Declaration Nos. 0236, 0237
and 0390. Hacienda Caylaway is 867.4571 hectares in area and is
registered under TCT Nos. T-44662, T-44663, T-44664 and T-44665.
The events of this case occurred during the incumbency of then
President Corazon C. Aquino. In February 1986, President Aquino
issued Proclamation No. 3 promulgating a Provisional Constitution.
As head of the provisional government, the President exercised
legislative power "until a legislature is elected and convened under a
new Constitution." 1 In the exercise of this legislative power, the
President signed on July 22, 1987, Proclamation No. 131 instituting a
Comprehensive Agrarian Reform Program and Executive Order No.
229 providing the mechanisms necessary to initially implement the
program.
On July 27, 1987, the Congress of the Philippines formally convened
and took over legislative power from the President. 2 This Congress
passed Republic Act No. 6657, the Comprehensive Agrarian Reform
Law (CARL) of 1988. The Act was signed by the President on June
10, 1988 and took effect on June 15, 1988.
Before the law's effectivity, on May 6, 1988, petitioner filed with
respondent DAR a voluntary offer to sell Hacienda Caylaway
pursuant to the provisions of E.O. No. 229. Haciendas Palico and
Banilad were later placed under compulsory acquisition by
respondent DAR in accordance with the CARL.
Hacienda Palico
On September 29, 1989, respondent DAR, through respondent
Municipal Agrarian Reform Officer (MARO) of Nasugbu, Batangas,
sent a notice entitled "Invitation to Parties" to petitioner. The
Invitation was addressed to "Jaime Pimentel, Hda. Administrator,
Hda. Palico." 3 Therein, the MARO invited petitioner to a conference
on October 6, 1989 at the DAR office in Nasugbu to discuss the
results of the DAR investigation of Hacienda Palico, which was
"scheduled for compulsory acquisition this year under the
Comprehensive Agrarian Reform Program." 4
On October 25, 1989, the MARO completed three (3) Investigation
Reports after investigation and ocular inspection of the Hacienda. In
the first Report, the MARO found that 270 hectares under Tax
Declaration Nos. 465, 466, 468 and 470 were "flat to undulating (0-
8% slope)" and actually occupied and cultivated by 34 tillers of
sugarcane. 5 In the second Report, the MARO identified as "flat to
undulating" approximately 339 hectares under Tax Declaration No.
0234 which also had several actual occupants and tillers of
sugarcane; 6 while in the third Report, the MARO found
approximately 75 hectare under Tax Declaration No. 0354 as "flat to
undulating" with 33 actual occupants and tillers also of sugarcane. 7
On October 27, 1989, a "Summary Investigation Report" was
submitted and signed jointly by the MARO, representatives of the
Barangay Agrarian Reform Committee (BARC) and Land Bank of the
Philippines (LBP), and by the Provincial Agrarian Reform Officer
(PARO). The Report recommended that 333.0800 hectares of
Hacienda Palico be subject to compulsory acquisition at a value of
P6,807,622.20. 8 The following day, October 28, 1989, two (2) more
Summary Investigation Reports were submitted by the same officers
and representatives. They recommended that 270.0876 hectares
and 75.3800 hectares be placed under compulsory acquisition at a
compensation of P8,109,739.00 and P2,188,195.47, respectively. 9
On December 12, 1989, respondent DAR through then Department
Secretary Miriam D. Santiago sent a "Notice of Acquisition" to
petitioner. The Notice was addressed as follows:
Roxas y Cia, Limited
Soriano Bldg., Plaza Cervantes
Manila, Metro Manila. 10
Petitioner was informed that 1,023.999 hectares of its land in
Hacienda Palico were subject to immediate acquisition and
distribution by the government under the CARL; that based on the
DAR's valuation criteria, the government was offering compensation
of P3.4 million for 333.0800 hectares; that whether this offer was to
be accepted or rejected, petitioner was to inform the Bureau of Land
Acquisition and Distribution (BLAD) of the DAR; that in case of
petitioner's rejection or failure to reply within thirty days, respondent
DAR shall conduct summary administrative proceedings with notice
to petitioner to determine just compensation for the land; that if
petitioner accepts respondent DAR's offer, or upon deposit of the
compensation with an accessible bank if it rejects the same, the DAR
shall take immediate possession of the land. 11
Almost two years later, on September 26, 1991, the DAR Regional
Director sent to the LBP Land Valuation Manager three (3) separate
Memoranda entitled "Request to Open Trust Account." Each
Memoranda requested that a trust account representing the
valuation of three portions of Hacienda Palico be opened in favor of
the petitioner in view of the latter's rejection of its offered value. 12
Meanwhile in a letter dated May 4, 1993, petitioner applied with the
DAR for conversion of Haciendas Palico and Banilad from
agricultural to non-agricultural lands under the provisions of the
CARL. 13 On July 14, 1993, petitioner sent a letter to the DAR
Regional Director reiterating its request for conversion of the two
haciendas. 14
Despite petitioner's application for conversion, respondent DAR
proceeded with the acquisition of the two Haciendas. The LBP trust
accounts as compensation for Hacienda Palico were replaced by
respondent DAR with cash and LBP bonds. 15 On October 22, 1993,
from the mother title of TCT No. 985 of the Hacienda, respondent
DAR registered Certificate of Land Ownership Award (CLOA) No.
6654. On October 30, 1993, CLOA's were distributed to farmer
beneficiaries. 16
Hacienda Banilad
On August 23, 1989, respondent DAR, through respondent MARO of
Nasugbu, Batangas, sent a notice to petitioner addressed as follows:
Mr. Jaime Pimentel
Hacienda Administrator
Hacienda Banilad
Nasugbu, Batangas 17
The MARO informed Pimentel that Hacienda Banilad was subject to
compulsory acquisition under the CARL; that should petitioner wish
to avail of the other schemes such as Voluntary Offer to Sell or
Voluntary Land Transfer, respondent DAR was willing to provide
assistance thereto. 18
On September 18, 1989, the MARO sent an "Invitation to Parties"
again to Pimentel inviting the latter to attend a conference on
September 21, 1989 at the MARO Office in Nasugbu to discuss the
results of the MARO's investigation over Hacienda Banilad. 19
On September 21, 1989, the same day the conference was held, the
MARO submitted two (2) Reports. In his first Report, he found that
approximately 709 hectares of land under Tax Declaration Nos. 0237
and 0236 were "flat to undulating (0-8% slope)." On this area were
discovered 162 actual occupants and tillers of sugarcane. 20 In the
second Report, it was found that approximately 235 hectares under
Tax Declaration No. 0390 were "flat to undulating," on which were 92
actual occupants and tillers of sugarcane. 21
The results of these Reports were discussed at the conference.
Present in the conference were representatives of the prospective
farmer beneficiaries, the BARC, the LBP, and Jaime Pimentel on
behalf of the landowner. 22 After the meeting, on the same day,
September 21, 1989, a Summary Investigation Report was submitted
jointly by the MARO, representatives of the BARC, LBP, and the
PARO. They recommended that after ocular inspection of the
property, 234.6498 hectares under Tax Declaration No. 0390 be
subject to compulsory acquisition and distribution by CLOA. 23 The
following day, September 22, 1989, a second Summary Investigation
was submitted by the same officers. They recommended that
737.2590 hectares under Tax Declaration Nos. 0236 and 0237 be
likewise placed under compulsory acquisition for distribution. 24
On December 12, 1989, respondent DAR, through the Department
Secretary, sent to petitioner two (2) separate "Notices of Acquisition"
over Hacienda Banilad. These Notices were sent on the same day
as the Notice of Acquisition over Hacienda Palico. Unlike the Notice
over Hacienda Palico, however, the Notices over Hacienda Banilad
were addressed to:
Roxas y Cia. Limited
7th Floor, Cacho-Gonzales Bldg. 101 Aguirre St., Leg.
Makati, Metro Manila. 25
Respondent DAR offered petitioner compensation of P15,108,995.52
for 729.4190 hectares and P4,428,496.00 for 234.6498 hectares. 26
On September 26, 1991, the DAR Regional Director sent to the LBP
Land Valuation Manager a "Request to Open Trust Account" in
petitioner's name as compensation for 234.6493 hectares of
Hacienda Banilad. 27 A second "Request to Open Trust Account"
was sent on November 18, 1991 over 723.4130 hectares of said
Hacienda. 28
On December 18, 1991, the LBP certified that the amounts of
P4,428,496.40 and P21,234,468.78 in cash and LBP bonds had
been earmarked as compensation for petitioner's land in Hacienda
Banilad. 29
On May 4, 1993, petitioner applied for conversion of both Haciendas
Palico and Banilad.
Hacienda Caylaway
Hacienda Caylaway was voluntarily offered for sale to the
government on May 6, 1988 before the effectivity of the CARL. The
Hacienda has a total area of 867.4571 hectares and is covered by
four (4) titles TCT Nos. T-44662, T-44663, T-44664 and T-44665.
On January 12, 1989, respondent DAR, through the Regional
Director for Region IV, sent to petitioner two (2) separate Resolutions
accepting petitioner's voluntary offer to sell Hacienda Caylaway,
particularly TCT Nos. T-44664 and T-44663. 30 The Resolutions
were addressed to:
Roxas & Company, Inc.
7th Flr. Cacho-Gonzales Bldg.
Aguirre, Legaspi Village
Makati, M. M 31
On September 4, 1990, the DAR Regional Director issued two
separate Memoranda to the LBP Regional Manager requesting for
the valuation of the land under TCT Nos. T-44664 and T-44663. 32
On the same day, respondent DAR, through the Regional Director,
sent to petitioner a "Notice of Acquisition" over 241.6777 hectares
under TCT No. T-44664 and 533.8180 hectares under TCT No. T-
44663. 33 Like the Resolutions of Acceptance, the Notice of
Acquisition was addressed to petitioner at its office in Makati, Metro
Manila.
Nevertheless, on August 6, 1992, petitioner, through its President,
Eduardo J. Roxas, sent a letter to the Secretary of respondent DAR
withdrawing its VOS of Hacienda Caylaway. The Sangguniang
Bayan of Nasugbu, Batangas allegedly authorized the
reclassification of Hacienda Caylaway from agricultural to non-
agricultural. As a result, petitioner informed respondent DAR that it
was applying for conversion of Hacienda Caylaway from agricultural
to other
uses. 34
In a letter dated September 28, 1992, respondent DAR Secretary
informed petitioner that a reclassification of the land would not
exempt it from agrarian reform. Respondent Secretary also denied
petitioner's withdrawal of the VOS on the ground that withdrawal
could only be based on specific grounds such as unsuitability of the
soil for agriculture, or if the slope of the land is over 18 degrees and
that the land is undeveloped. 35
Despite the denial of the VOS withdrawal of Hacienda Caylaway, on
May 11, 1993, petitioner filed its application for conversion of both
Haciendas Palico and Banilad. 36 On July 14, 1993, petitioner,
through its President, Eduardo Roxas, reiterated its request to
withdraw the VOS over Hacienda Caylaway in light of the following:
1) Certification issued by Conrado I. Gonzales, Officer-in-
Charge, Department of Agriculture, Region 4, 4th Floor, ATI (BA)
Bldg., Diliman, Quezon City dated March 1, 1993 stating that the
lands subject of referenced titles "are not feasible and economically
sound for further agricultural development.
2) Resolution No. 19 of the Sangguniang Bayan of Nasugbu,
Batangas approving the Zoning Ordinance reclassifying areas
covered by the referenced titles to non-agricultural which was
enacted after extensive consultation with government agencies,
including [the Department of Agrarian Reform], and the requisite
public hearings.
3) Resolution No. 106 of the Sangguniang Panlalawigan of
Batangas dated March 8, 1993 approving the Zoning Ordinance
enacted by the Municipality of Nasugbu.
4) Letter dated December 15, 1992 issued by Reynaldo U.
Garcia of the Municipal Planning & Development, Coordinator and
Deputized Zoning Administrator addressed to Mrs. Alicia P. Logarta
advising that the Municipality of Nasugbu, Batangas has no objection
to the conversion of the lands subject of referenced titles to non-
agricultural. 37
On August 24, 1993 petitioner instituted Case No. N-0017-96-46
(BA) with respondent DAR Adjudication Board (DARAB) praying for
the cancellation of the CLOA's issued by respondent DAR in the
name of several persons. Petitioner alleged that the Municipality of
Nasugbu, where the haciendas are located, had been declared a
tourist zone, that the land is not suitable for agricultural production,
and that the Sangguniang Bayan of Nasugbu had reclassified the
land to non-agricultural.
In a Resolution dated October 14, 1993, respondent DARAB held
that the case involved the prejudicial question of whether the
property was subject to agrarian reform, hence, this question should
be submitted to the Office of the Secretary of Agrarian Reform for
determination. 38
On October 29, 1993, petitioner filed with the Court of Appeals CA-
G.R. SP No. 32484. It questioned the expropriation of its properties
under the CARL and the denial of due process in the acquisition of
its landholdings.
Meanwhile, the petition for conversion of the three haciendas was
denied by the MARO on November 8, 1993.
Petitioner's petition was dismissed by the Court of Appeals on April
28, 1994. 39 Petitioner moved for reconsideration but the motion was
denied on January 17, 1997 by respondent court. 40
Hence, this recourse. Petitioner assigns the following errors:
A. RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
HOLDING THAT PETITIONER'S CAUSE OF ACTION IS
PREMATURE FOR FAILURE TO EXHAUST ADMINISTRATIVE
REMEDIES IN VIEW OF THE PATENT ILLEGALITY OF THE
RESPONDENTS' ACTS, THE IRREPARABLE DAMAGE CAUSED
BY SAID ILLEGAL ACTS, AND THE ABSENCE OF A PLAIN,
SPEEDY AND ADEQUATE REMEDY IN THE ORDINARY COURSE
OF LAW ALL OF WHICH ARE EXCEPTIONS TO THE SAID
DOCTRINE.
B. RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
HOLDING THAT PETITIONER'S LANDHOLDINGS ARE SUBJECT
TO COVERAGE UNDER THE COMPREHENSIVE AGRARIAN
REFORM LAW, IN VIEW OF THE UNDISPUTED FACT THAT
PETITIONER'S LANDHOLDINGS HAVE BEEN CONVERTED TO
NON-AGRICULTURAL USES BY PRESIDENTIAL PROCLAMATION
NO. 1520 WHICH DECLARED THE MUNICIPALITY NASUGBU,
BATANGAS AS A TOURIST ZONE, AND THE ZONING
ORDINANCE OF THE MUNICIPALITY OF NASUGBU RE-
CLASSIFYING CERTAIN PORTIONS OF PETITIONER'S
LANDHOLDINGS AS NON-AGRICULTURAL, BOTH OF WHICH
PLACE SAID LANDHOLDINGS OUTSIDE THE SCOPE OF
AGRARIAN REFORM, OR AT THE VERY LEAST ENTITLE
PETITIONER TO APPLY FOR CONVERSION AS CONCEDED BY
RESPONDENT DAR.
C. RESPONDENT COURT OF APPEALS GRAVELY ERRED
WHEN IT FAILED TO DECLARE THE PROCEEDINGS BEFORE
RESPONDENT DAR VOID FOR FAILURE TO OBSERVE DUE
PROCESS, CONSIDERING THAT RESPONDENTS BLATANTLY
DISREGARDED THE PROCEDURE FOR THE ACQUISITION OF
PRIVATE LANDS UNDER R.A. 6657, MORE PARTICULARLY, IN
FAILING TO GIVE DUE NOTICE TO THE PETITIONER AND TO
PROPERLY IDENTIFY THE SPECIFIC AREAS SOUGHT TO BE
ACQUIRED.
D. RESPONDENT COURT OF APPEALS GRAVELY ERRED
WHEN IT FAILED TO RECOGNIZE THAT PETITIONER WAS
BRAZENLY AND ILLEGALLY DEPRIVED OF ITS PROPERTY
WITHOUT JUST COMPENSATION, CONSIDERING THAT
PETITIONER WAS NOT PAID JUST COMPENSATION BEFORE IT
WAS UNCEREMONIOUSLY STRIPPED OF ITS LANDHOLDINGS
THROUGH THE ISSUANCE OF CLOA'S TO ALLEGED FARMER
BENEFICIARIES, IN VIOLATION OF R.A. 6657. 41
The assigned errors involve three (3) principal issues: (1) whether
this Court can take cognizance of this petition despite petitioner's
failure to exhaust administrative remedies; (2) whether the
acquisition proceedings over the three haciendas were valid and in
accordance with law; and (3) assuming the haciendas may be
reclassified from agricultural to non-agricultural, whether this court
has the power to rule on this issue.
I. Exhaustion of Administrative Remedies.
In its first assigned error, petitioner claims that respondent Court of
Appeals gravely erred in finding that petitioner failed to exhaust
administrative remedies. As a general rule, before a party may be
allowed to invoke the jurisdiction of the courts of justice, he is
expected to have exhausted all means of administrative redress.
This is not absolute, however. There are instances when judicial
action may be resorted to immediately. Among these exceptions are:
(1) when the question raised is purely legal; (2) when the
administrative body is in estoppel; (3) when the act complained of is
patently illegal; (4) when there is urgent need for judicial intervention;
(5) when the respondent acted in disregard of due process; (6) when
the respondent is a department secretary whose acts, as an alter
ego of the President, bear the implied or assumed approval of the
latter; (7) when irreparable damage will be suffered; (8) when there is
no other plain, speedy and adequate remedy; (9) when strong public
interest is involved; (10) when the subject of the controversy is
private land; and (11) in quo warranto proceedings. 42
Petitioner rightly sought immediate redress in the courts. There was
a violation of its rights and to require it to exhaust administrative
remedies before the DAR itself was not a plain, speedy and
adequate remedy.
Respondent DAR issued Certificates of Land Ownership Award
(CLOA's) to farmer beneficiaries over portions of petitioner's land
without just compensation to petitioner. A Certificate of Land
Ownership Award (CLOA) is evidence of ownership of land by a
beneficiary under R.A. 6657, the Comprehensive Agrarian Reform
Law of 1988. 43 Before this may be awarded to a farmer beneficiary,
the land must first be acquired by the State from the landowner and
ownership transferred to the former. The transfer of possession and
ownership of the land to the government are conditioned upon the
receipt by the landowner of the corresponding payment or deposit by
the DAR of the compensation with an accessible bank. Until then,
title remains with the landowner. 44 There was no receipt by
petitioner of any compensation for any of the lands acquired by the
government.
The kind of compensation to be paid the landowner is also specific.
The law provides that the deposit must be made only in "cash" or
"LBP bonds." 45 Respondent DAR's opening of trust account
deposits in petitioner' s name with the Land Bank of the Philippines
does not constitute payment under the law. Trust account deposits
are not cash or LBP bonds. The replacement of the trust account
with cash or LBP bonds did not ipso facto cure the lack of
compensation; for essentially, the determination of this compensation
was marred by lack of due process. In fact, in the entire acquisition
proceedings, respondent DAR disregarded the basic requirements of
administrative due process. Under these circumstances, the
issuance of the CLOA's to farmer beneficiaries necessitated
immediate judicial action on the part of the petitioner.
II. The Validity of the Acquisition Proceedings Over the
Haciendas.
Petitioner's allegation of lack of due process goes into the validity of
the acquisition proceedings themselves. Before we rule on this
matter, however, there is need to lay down the procedure in the
acquisition of private lands under the provisions of the law.
A. Modes of Acquisition of Land under R. A. 6657
Republic Act No. 6657, the Comprehensive Agrarian Reform Law of
1988 (CARL), provides for two (2) modes of acquisition of private
land: compulsory and voluntary. The procedure for the compulsory
acquisition of private lands is set forth in Section 16 of R.A. 6657,
viz:
Sec. 16. Procedure for Acquisition of Private Lands. For
purposes of acquisition of private lands, the following procedures
shall be followed:
a). After having identified the land, the landowners and the
beneficiaries, the DAR shall send its notice to acquire the land to the
owners thereof, by personal delivery or registered mail, and post the
same in a conspicuous place in the municipal building and barangay
hall of the place where the property is located. Said notice shall
contain the offer of the DAR to pay a corresponding value in
accordance with the valuation set forth in Sections 17, 18, and other
pertinent provisions hereof.
b) Within thirty (30) days from the date of receipt of written notice
by personal delivery or registered mail, the landowner, his
administrator or representative shall inform the DAR of his
acceptance or rejection of the offer.
c) If the landowner accepts the offer of the DAR, the LBP shall
pay the landowner the purchase price of the land within thirty (30)
days after he executes and delivers a deed of transfer in favor of the
Government and surrenders the Certificate of Title and other
muniments of title.
d) In case of rejection or failure to reply, the DAR shall conduct
summary administrative proceedings to determine the compensation
for the land requiring the landowner, the LBP and other interested
parties to submit evidence as to the just compensation for the land,
within fifteen (15) days from receipt of the notice. After the expiration
of the above period, the matter is deemed submitted for decision.
The DAR shall decide the case within thirty (30) days after it is
submitted for decision.
e) Upon receipt by the landowner of the corresponding payment,
or, in case of rejection or no response from the landowner, upon the
deposit with an accessible bank designated by the DAR of the
compensation in cash or in LBP bonds in accordance with this Act,
the DAR shall take immediate possession of the land and shall
request the proper Register of Deeds to issue a Transfer Certificate
of Title (TCT) in the name of the Republic of the Philippines. The
DAR shall thereafter proceed with the redistribution of the land to the
qualified beneficiaries.
f) Any party who disagrees with the decision may bring the
matter to the court of proper jurisdiction for final determination of just
compensation.
In the compulsory acquisition of private lands, the landholding, the
landowners and the farmer beneficiaries must first be identified. After
identification, the DAR shall send a Notice of Acquisition to the
landowner, by personal delivery or registered mail, and post it in a
conspicuous place in the municipal building and barangay hall of the
place where the property is located. Within thirty days from receipt of
the Notice of Acquisition, the landowner, his administrator or
representative shall inform the DAR of his acceptance or rejection of
the offer. If the landowner accepts, he executes and delivers a deed
of transfer in favor of the government and surrenders the certificate
of title. Within thirty days from the execution of the deed of transfer,
the Land Bank of the Philippines (LBP) pays the owner the purchase
price. If the landowner rejects the DAR's offer or fails to make a
reply, the DAR conducts summary administrative proceedings to
determine just compensation for the land. The landowner, the LBP
representative and other interested parties may submit evidence on
just compensation within fifteen days from notice. Within thirty days
from submission, the DAR shall decide the case and inform the
owner of its decision and the amount of just compensation. Upon
receipt by the owner of the corresponding payment, or, in case of
rejection or lack of response from the latter, the DAR shall deposit
the compensation in cash or in LBP bonds with an accessible bank.
The DAR shall immediately take possession of the land and cause
the issuance of a transfer certificate of title in the name of the
Republic of the Philippines. The land shall then be redistributed to
the farmer beneficiaries. Any party may question the decision of the
DAR in the regular courts for final determination of just
compensation.
The DAR has made compulsory acquisition the priority mode of the
land acquisition to hasten the implementation of the Comprehensive
Agrarian Reform Program (CARP). 46 Under Section 16 of the
CARL, the first step in compulsory acquisition is the identification of
the land, the landowners and the beneficiaries. However, the law is
silent on how the identification process must be made. To fill in this
gap, the DAR issued on July 26, 1989 Administrative Order No. 12,
Series or 1989, which set the operating procedure in the
identification of such lands. The procedure is as follows:
II. OPERATING PROCEDURE
A. The Municipal Agrarian Reform Officer, with the assistance of
the pertinent Barangay Agrarian Reform Committee (BARC), shall:
1. Update the masterlist of all agricultural lands covered under
the CARP in his area of responsibility. The masterlist shall include
such information as required under the attached CARP Masterlist
Form which shall include the name of the landowner, landholding
area, TCT/OCT number, and tax declaration number.
2. Prepare a Compulsory Acquisition Case Folder (CACF) for
each title (OCT/TCT) or landholding covered under Phase I and II of
the CARP except those for which the landowners have already filed
applications to avail of other modes of land acquisition. A case folder
shall contain the following duly accomplished forms:
a) CARP CA Form 1 MARO Investigation Report
b) CARP CA Form 2 Summary Investigation Report of
Findings and Evaluation
c) CARP CA Form 3 Applicant's Information Sheet
d) CARP CA Form 4 Beneficiaries Undertaking
e) CARP CA Form 5 Transmittal Report to the PARO
The MARO/BARC shall certify that all information contained in the
above-mentioned forms have been examined and verified by him
and that the same are true and correct.
3. Send a Notice of Coverage and a letter of invitation to a
conference/meeting to the landowner covered by the Compulsory
Case Acquisition Folder. Invitations to the said conference/meeting
shall also be sent to the prospective farmer-beneficiaries, the BARC
representative(s), the Land Bank of the Philippines (LBP)
representative, and other interested parties to discuss the inputs to
the valuation of the property. He shall discuss the MARO/BARC
investigation report and solicit the views, objection, agreements or
suggestions of the participants thereon. The landowner shall also be
asked to indicate his retention area. The minutes of the meeting shall
be signed by all participants in the conference and shall form an
integral part of the CACF.
4. Submit all completed case folders to the Provincial Agrarian
Reform Officer (PARO).
B. The PARO shall:
1. Ensure that the individual case folders are forwarded to him
by his MAROs.
2. Immediately upon receipt of a case folder, compute the
valuation of the land in accordance with A.O. No. 6, Series of 1988.
47 The valuation worksheet and the related CACF valuation forms
shall be duly certified correct by the PARO and all the personnel who
participated in the accomplishment of these forms.
3. In all cases, the PARO may validate the report of the MARO
through ocular inspection and verification of the property. This ocular
inspection and verification shall be mandatory when the computed
value exceeds = 500,000 per estate.
4. Upon determination of the valuation, forward the case folder,
together with the duly accomplished valuation forms and his
recommendations, to the Central Office. The LBP representative and
the MARO concerned shall be furnished a copy each of his report.
C. DAR Central Office, specifically through the Bureau of Land
Acquisition and Distribution (BLAD), shall:
1. Within three days from receipt of the case folder from the
PARO, review, evaluate and determine the final land valuation of the
property covered by the case folder. A summary review and
evaluation report shall be prepared and duly certified by the BLAD
Director and the personnel directly participating in the review and
final valuation.
2. Prepare, for the signature of the Secretary or her duly
authorized representative, a Notice of Acquisition (CARP CA Form 8)
for the subject property. Serve the Notice to the landowner
personally or through registered mail within three days from its
approval. The Notice shall include, among others, the area subject of
compulsory acquisition, and the amount of just compensation offered
by DAR.
3. Should the landowner accept the DAR's offered value, the
BLAD shall prepare and submit to the Secretary for approval the
Order of Acquisition. However, in case of rejection or non-reply, the
DAR Adjudication Board (DARAB) shall conduct a summary
administrative hearing to determine just compensation, in
accordance with the procedures provided under Administrative Order
No. 13, Series of 1989. Immediately upon receipt of the DARAB's
decision on just compensation, the BLAD shall prepare and submit to
the Secretary for approval the required Order of Acquisition.
4. Upon the landowner's receipt of payment, in case of
acceptance, or upon deposit of payment in the designated bank, in
case of rejection or non-response, the Secretary shall immediately
direct the pertinent Register of Deeds to issue the corresponding
Transfer Certificate of Title (TCT) in the name of the Republic of the
Philippines. Once the property is transferred, the DAR, through the
PARO, shall take possession of the land for redistribution to qualified
beneficiaries.
Administrative Order No. 12, Series of 1989 requires that the
Municipal Agrarian Reform Officer (MARO) keep an updated master
list of all agricultural lands under the CARP in his area of
responsibility containing all the required information. The MARO
prepares a Compulsory Acquisition Case Folder (CACF) for each title
covered by CARP. The MARO then sends the landowner a "Notice of
Coverage" and a "letter of invitation" to a "conference/meeting" over
the land covered by the CACF. He also sends invitations to the
prospective farmer-beneficiaries the representatives of the Barangay
Agrarian Reform Committee (BARC), the Land Bank of the
Philippines (LBP) and other interested parties to discuss the inputs to
the valuation of the property and solicit views, suggestions,
objections or agreements of the parties. At the meeting, the
landowner is asked to indicate his retention area.
The MARO shall make a report of the case to the Provincial Agrarian
Reform Officer (PARO) who shall complete the valuation of the land.
Ocular inspection and verification of the property by the PARO shall
be mandatory when the computed value of the estate exceeds
P500,000.00. Upon determination of the valuation, the PARO shall
forward all papers together with his recommendation to the Central
Office of the DAR. The DAR Central Office, specifically, the Bureau
of Land Acquisition and Distribution (BLAD), shall review, evaluate
and determine the final land valuation of the property. The BLAD
shall prepare, on the signature of the Secretary or his duly
authorized representative, a Notice of Acquisition for the subject
property. 48 From this point, the provisions of Section 16 of R.A.
6657 then apply. 49
For a valid implementation of the CAR program, two notices are
required: (1) the Notice of Coverage and letter of invitation to a
preliminary conference sent to the landowner, the representatives of
the BARC, LBP, farmer beneficiaries and other interested parties
pursuant to DAR A.O. No. 12, Series of 1989; and (2) the Notice of
Acquisition sent to the landowner under Section 16 of the CARL.
The importance of the first notice, i.e., the Notice of Coverage and
the letter of invitation to the conference, and its actual conduct
cannot be understated. They are steps designed to comply with the
requirements of administrative due process. The implementation of
the CARL is an exercise of the State's police power and the power of
eminent domain. To the extent that the CARL prescribes retention
limits to the landowners, there is an exercise of police power for the
regulation of private property in accordance with the Constitution. 50
But where, to carry out such regulation, the owners are deprived of
lands they own in excess of the maximum area allowed, there is also
a taking under the power of eminent domain. The taking
contemplated is not a mere limitation of the use of the land. What is
required is the surrender of the title to and physical possession of the
said excess and all beneficial rights accruing to the owner in favor of
the farmer beneficiary. 51 The Bill of Rights provides that "[n]o
person shall be deprived of life, liberty or property without due
process of law." 52 The CARL was not intended to take away
property without due process of law. 53 The exercise of the power of
eminent domain requires that due process be observed in the taking
of private property.
DAR A.O. No. 12, Series of 1989, from whence the Notice of
Coverage first sprung, was amended in 1990 by DAR A.O. No. 9,
Series of 1990 and in 1993 by DAR A.O. No. 1, Series of 1993. The
Notice of Coverage and letter of invitation to the conference meeting
were expanded and amplified in said amendments.
DAR A.O. No. 9, Series of 1990 entitled "Revised Rules Governing
the Acquisition of Agricultural Lands Subject of Voluntary Offer to Sell
and Compulsory Acquisition Pursuant to R.A. 6657," requires that:
B. MARO
1. Receives the duly accomplished CARP Form Nos. 1 & 1.1
including supporting documents.
2. Gathers basic ownership documents listed under 1.a or 1.b
above and prepares corresponding VOCF/CACF by
landowner/landholding.
3. Notifies/invites the landowner and representatives of the LBP,
DENR, BARC and prospective beneficiaries of the schedule of ocular
inspection of the property at least one week in advance.
4. MARO/LAND BANK FIELD OFFICE/BARC
a) Identify the land and landowner, and determine the suitability
for agriculture and productivity of the land and jointly prepare Field
Investigation Report (CARP Form No. 2), including the Land Use
Map of the property.
b) Interview applicants and assist them in the preparation of the
Application For Potential CARP Beneficiary (CARP Form No. 3).
c) Screen prospective farmer-beneficiaries and for those found
qualified, cause the signing of the respective Application to Purchase
and Farmer's Undertaking (CARP Form No. 4).
d) Complete the Field Investigation Report based on the result of
the ocular inspection/investigation of the property and documents
submitted. See to it that Field Investigation Report is duly
accomplished and signed by all concerned.
5. MARO
a) Assists the DENR Survey Party in the conduct of a boundary/
subdivision survey delineating areas covered by OLT, retention,
subject of VOS, CA (by phases, if possible), infrastructures, etc.,
whichever is applicable.
b) Sends Notice of Coverage (CARP Form No. 5) to landowner
concerned or his duly authorized representative inviting him for a
conference.
c) Sends Invitation Letter (CARP Form No. 6) for a
conference/public hearing to prospective farmer-beneficiaries,
landowner, representatives of BARC, LBP, DENR, DA, NGO's,
farmers' organizations and other interested parties to discuss the
following matters:
Result of Field Investigation
Inputs to valuation
Issues raised
Comments/recommendations by all parties concerned.
d) Prepares Summary of Minutes of the conference/public
hearing to be guided by CARP Form No. 7.
e) Forwards the completed VOCF/CACF to the Provincial
Agrarian Reform Office (PARO) using CARP Form No. 8 (Transmittal
Memo to PARO).
xxx xxx xxx
DAR A.O. No. 9, Series of 1990 lays down the rules on both
Voluntary Offer to Sell (VOS) and Compulsory Acquisition (CA)
transactions involving lands enumerated under Section 7 of the
CARL. 54 In both VOS and CA. transactions, the MARO prepares
the Voluntary Offer to Sell Case Folder (VOCF) and the Compulsory
Acquisition Case Folder (CACF), as the case may be, over a
particular landholding. The MARO notifies the landowner as well as
representatives of the LBP, BARC and prospective beneficiaries of
the date of the ocular inspection of the property at least one week
before the scheduled date and invites them to attend the same. The
MARO, LBP or BARC conducts the ocular inspection and
investigation by identifying the land and landowner, determining the
suitability of the land for agriculture and productivity, interviewing and
screening prospective farmer beneficiaries. Based on its
investigation, the MARO, LBP or BARC prepares the Field
Investigation Report which shall be signed by all parties concerned.
In addition to the field investigation, a boundary or subdivision survey
of the land may also be conducted by a Survey Party of the
Department of Environment and Natural Resources (DENR) to be
assisted by the MARO. 55 This survey shall delineate the areas
covered by Operation Land Transfer (OLT), areas retained by the
landowner, areas with infrastructure, and the areas subject to VOS
and CA. After the survey and field investigation, the MARO sends a
"Notice of Coverage" to the landowner or his duly authorized
representative inviting him to a conference or public hearing with the
farmer beneficiaries, representatives of the BARC, LBP, DENR,
Department of Agriculture (DA), non-government organizations,
farmer's organizations and other interested parties. At the public
hearing, the parties shall discuss the results of the field investigation,
issues that may be raised in relation thereto, inputs to the valuation
of the subject landholding, and other comments and
recommendations by all parties concerned. The Minutes of the coverage and for LO to select
conference/public hearing shall form part of the VOCF or CACF
which files shall be forwarded by the MARO to the PARO. The PARO his retention area, if he desires
reviews, evaluates and validates the Field Investigation Report and
other documents in the VOCF/CACF. He then forwards the records to avail of his right of retention;
to the RARO for another review.
and at the same time invites him
DAR A.O. No. 9, Series of 1990 was amended by DAR A.O. No. 1,
Series of 1993. DAR A.O. No. 1, Series of 1993 provided, among to join the field investigation to
others, that:
be conducted on his property
IV. OPERATING PROCEDURES:
which should be scheduled at
Steps Responsible Activity Forms/
least two weeks in advance of
Agency/Unit Document
said notice.
(requirements)
A copy of said Notice shall CARP
A. Identification and
be posted for at least one Form No. 17
Documentation
week on the bulletin board of
xxx xxx xxx
the municipal and barangay
5 DARMO Issue Notice of Coverage CARP
halls where the property is
to LO by personal delivery Form No. 2
located. LGU office concerned
with proof of service, or
notifies DAR about compliance
registered mail with return
with posting requirements thru
card, informing him that his
return indorsement on CARP
property is now under CARP
Form No. 17.
representatives of the DENR and
6 DARMO Send notice to the LBP, CARP
prospective ARBs are not available
BARC, DENR representatives Form No. 3
provided, they were given due
and prospective ARBs of the schedule of the field investigation
notice of the time and date of
to be conducted on the subject
investigation to be conducted.
property.
Similarly, if the LBP representative
7 DARMO With the participation of CARP
is not available or could not come
BARC the LO, representatives of Form No. 4
on the scheduled date, the field
LBP the LBP, BARC, DENR Land Use
investigation shall also be conducted,
DENR and prospective ARBs, Map
after which the duly accomplished
Local Office conducts the investigation on
Part I of CARP Form No. 4 shall
subject property to identify
be forwarded to the LBP
the landholding, determines
representative for validation. If he agrees
its suitability and productivity;
to the ocular inspection report of DAR,
and jointly prepares the Field
he signs the FIR (Part I) and
Investigation Report (FIR)
accomplishes Part II thereof.
and Land Use Map. However,
In the event that there is a
the field investigation shall
difference or variance between
proceed even if the LO, the
the findings of the DAR and the
the Application of Purchase Form No. 5
LBP as to the propriety of
and Farmer's Undertaking
covering the land under CARP,
(APFU).
whether in whole or in part, on
9 DARMO Furnishes a copy of the CARP
the issue of suitability to agriculture,
duly accomplished FIR to Form No. 4
degree of development or slope,
the landowner by personal
and on issues affecting idle lands,
delivery with proof of
the conflict shall be resolved by
service or registered mail
a composite team of DAR, LBP,
will return card and posts
DENR and DA which shall jointly
a copy thereof for at least
conduct further investigation
one week on the bulletin
thereon. The team shall submit its
board of the municipal
report of findings which shall be
and barangay halls where
binding to both DAR and LBP,
the property is located.
pursuant to Joint Memorandum
LGU office concerned CARP
Circular of the DAR, LBP, DENR
notifies DAR about Form No. 17
and DA dated 27 January 1992.
compliance with posting
8 DARMO Screen prospective ARBs
requirement thru return
BARC and causes the signing of CARP
endorsement on CARP
xxx xxx xxx.
Form No. 17.
DAR A.O. No. 1, Series of 1993, modified the identification process
B. Land Survey and increased the number of government agencies involved in the
identification and delineation of the land subject to acquisition. 56
10 DARMO Conducts perimeter or Perimeter This time, the Notice of Coverage is sent to the landowner before the
conduct of the field investigation and the sending must comply with
And/orsegregation survey or specific requirements. Representatives of the DAR Municipal Office
(DARMO) must send the Notice of Coverage to the landowner by
DENR delineating areas covered Segregation "personal delivery with proof of service, or by registered mail with
return card," informing him that his property is under CARP coverage
Local Office by OLT, "uncarpableSurvey Plan and that if he desires to avail of his right of retention, he may choose
which area he shall retain. The Notice of Coverage shall also invite
areas such as 18% slope the landowner to attend the field investigation to be scheduled at
least two weeks from notice. The field investigation is for the purpose
and above, unproductive/ of identifying the landholding and determining its suitability for
agriculture and its productivity. A copy of the Notice of Coverage
unsuitable to agriculture, shall be posted for at least one week on the bulletin board of the
municipal and barangay halls where the property is located. The date
retention, infrastructure. of the field investigation shall also be sent by the DAR Municipal
Office to representatives of the LBP, BARC, DENR and prospective
In case of segregation or farmer beneficiaries. The field investigation shall be conducted on
the date set with the participation of the landowner and the various
subdivision survey, the representatives. If the landowner and other representatives are
absent, the field investigation shall proceed, provided they were duly
plan shall be approved notified thereof. Should there be a variance between the findings of
the DAR and the LBP as to whether the land be placed under
by DENR-LMS. agrarian reform, the land's suitability to agriculture, the degree or
development of the slope, etc., the conflict shall be resolved by a
C. Review and Completion composite team of the DAR, LBP, DENR and DA which shall jointly
conduct further investigation. The team's findings shall be binding on
of Documents both DAR and LBP. After the field investigation, the DAR Municipal
Office shall prepare the Field Investigation Report and Land Use
11. DARMO Forward VOCF/CACF CARP Map, a copy of which shall be furnished the landowner "by personal
delivery with proof of service or registered mail with return card."
to DARPO. Form No. 6 Another copy of the Report and Map shall likewise be posted for at
least one week in the municipal or barangay halls where the property
is located.
Clearly then, the notice requirements under the CARL are not
confined to the Notice of Acquisition set forth in Section 16 of the law.
They also include the Notice of Coverage first laid down in DAR A.O.
No. 12, Series of 1989 and subsequently amended in DAR A.O. No.
9, Series of 1990 and DAR A.O. No. 1, Series of 1993. This Notice of
Coverage does not merely notify the landowner that his property
shall be placed under CARP and that he is entitled to exercise his
retention right; it also notifies him, pursuant to DAR A.O. No. 9,
Series of 1990, that a public hearing, shall be conducted where he
and representatives of the concerned sectors of society may attend
to discuss the results of the field investigation, the land valuation and
other pertinent matters. Under DAR A.O. No. 1, Series of 1993, the
Notice of Coverage also informs the landowner that a field
investigation of his landholding shall be conducted where he and the
other representatives may be present.
B. The Compulsory Acquisition of Haciendas Palico and Banilad
In the case at bar, respondent DAR claims that it, through MARO
Leopoldo C. Lejano, sent a letter of invitation entitled "Invitation to
Parties" dated September 29, 1989 to petitioner corporation, through
Jaime Pimentel, the administrator of Hacienda Palico. 57 The
invitation was received on the same day it was sent as indicated by a
signature and the date received at the bottom left corner of said
invitation. With regard to Hacienda Banilad, respondent DAR claims
that Jaime Pimentel, administrator also of Hacienda Banilad, was
notified and sent an invitation to the conference. Pimentel actually
attended the conference on September 21, 1989 and signed the
Minutes of the meeting on behalf of petitioner corporation. 58 The
Minutes was also signed by the representatives of the BARC, the
LBP and farmer beneficiaries. 59 No letter of invitation was sent or
conference meeting held with respect to Hacienda Caylaway
because it was subject to a Voluntary Offer to Sell to respondent
DAR. 60
When respondent DAR, through the Municipal Agrarian Reform
Officer (MARO), sent to the various parties the Notice of Coverage
and invitation to the conference, DAR A.O. No. 12, Series of 1989
was already in effect more than a month earlier. The Operating
Procedure in DAR Administrative Order No. 12 does not specify how
notices or letters of invitation shall be sent to the landowner, the
representatives of the BARC, the LBP, the farmer beneficiaries and
other interested parties. The procedure in the sending of these
notices is important to comply with the requisites of due process
especially when the owner, as in this case, is a juridical entity.
Petitioner is a domestic
corporation, 61 and therefore, has a personality separate and distinct
from its shareholders, officers and employees.
The Notice of Acquisition in Section 16 of the CARL is required to be
sent to the landowner by "personal delivery or registered mail."
Whether the landowner be a natural or juridical person to whose
address the Notice may be sent by personal delivery or registered
mail, the law does not distinguish. The DAR Administrative Orders
also do not distinguish. In the proceedings before the DAR, the
distinction between natural and juridical persons in the sending of
notices may be found in the Revised Rules of Procedure of the DAR
Adjudication Board (DARAB). Service of pleadings before the
DARAB is governed by Section 6, Rule V of the DARAB Revised
Rules of Procedure. Notices and pleadings are served on private
domestic corporations or partnerships in the following manner:
Sec. 6. Service upon Private Domestic Corporation or
Partnership. If the defendant is a corporation organized under the
laws of the Philippines or a partnership duly registered, service may
be made on the president, manager, secretary, cashier, agent, or any
of its directors or partners.
Similarly, the Revised Rules of Court of the Philippines, in Section
13, Rule 14 provides:
Sec. 13. Service upon private domestic corporation or
partnership. If the defendant is a corporation organized under the
laws of the Philippines or a partnership duly registered, service may
be made on the president, manager, secretary, cashier, agent, or any
of its directors.
Summonses, pleadings and notices in cases against a private
domestic corporation before the DARAB and the regular courts are
served on the president, manager, secretary, cashier, agent or any of
its directors. These persons are those through whom the private
domestic corporation or partnership is capable of action. 62
Jaime Pimentel is not the president, manager, secretary, cashier or
director of petitioner corporation. Is he, as administrator of the two
Haciendas, considered an agent of the corporation?
The purpose of all rules for service of process on a corporation is to
make it reasonably certain that the corporation will receive prompt
and proper notice in an action against it. 63 Service must be made
on a representative so integrated with the corporation as to make it a
priori supposable that he will realize his responsibilities and know
what he should do with any legal papers served on him, 64 and bring
home to the corporation notice of the filing of the action. 65
Petitioner's evidence does not show the official duties of Jaime
Pimentel as administrator of petitioner's haciendas. The evidence
does not indicate whether Pimentel's duties is so integrated with the
corporation that he would immediately realize his responsibilities and
know what he should do with any legal papers served on him. At the
time the notices were sent and the preliminary conference
conducted, petitioner's principal place of business was listed in
respondent DAR's records as "Soriano Bldg., Plaza Cervantes,
Manila," 66 and "7th Flr. Cacho-Gonzales Bldg., 101 Aguirre St.,
Makati, Metro Manila." 67 Pimentel did not hold office at the principal
place of business of petitioner. Neither did he exercise his functions
in Plaza Cervantes, Manila nor in Cacho-Gonzales Bldg., Makati,
Metro Manila. He performed his official functions and actually resided
in the haciendas in Nasugbu, Batangas, a place over two hundred
kilometers away from Metro Manila.
Curiously, respondent DAR had information of the address of
petitioner's principal place of business. The Notices of Acquisition
over Haciendas Palico and Banilad were addressed to petitioner at
its offices in Manila and Makati. These Notices were sent barely
three to four months after Pimentel was notified of the preliminary
conference. 68 Why respondent DAR chose to notify Pimentel
instead of the officers of the corporation was not explained by the
said respondent.
Nevertheless, assuming that Pimentel was an agent of petitioner
corporation, and the notices and letters of invitation were validly
served on petitioner through him, there is no showing that Pimentel
himself was duly authorized to attend the conference meeting with
the MARO, BARC and LBP representatives and farmer beneficiaries
for purposes of compulsory acquisition of petitioner's landholdings.
Even respondent DAR's evidence does not indicate this authority. On
the contrary, petitioner claims that it had no knowledge of the letter-
invitation, hence, could not have given Pimentel the authority to bind
it to whatever matters were discussed or agreed upon by the parties
at the preliminary conference or public hearing. Notably, one year
after Pimentel was informed of the preliminary conference, DAR A.O.
No. 9, Series of 1990 was issued and this required that the Notice of
Coverage must be sent "to the landowner concerned or his duly
authorized representative." 69
Assuming further that petitioner was duly notified of the CARP
coverage of its haciendas, the areas found actually subject to CARP
were not properly identified before they were taken over by
respondent DAR. Respondents insist that the lands were identified
because they are all registered property and the technical description
in their respective titles specifies their metes and bounds.
Respondents admit at the same time, however, that not all areas in
the haciendas were placed under the comprehensive agrarian
reform program invariably by reason of elevation or character or use
of the land. 70
The acquisition of the landholdings did not cover the entire expanse
of the two haciendas, but only portions thereof. Hacienda Palico has
an area of 1,024 hectares and only 688.7576 hectares were
targetted for acquisition. Hacienda Banilad has an area of 1,050
hectares but only 964.0688 hectares were subject to CARP. The
haciendas are not entirely agricultural lands. In fact, the various tax
declarations over the haciendas describe the landholdings as
"sugarland," and "forest, sugarland, pasture land, horticulture and
woodland." 71
Under Section 16 of the CARL, the sending of the Notice of
Acquisition specifically requires that the land subject to land reform
be first identified. The two haciendas in the instant case cover vast
tracts of land. Before Notices of Acquisition were sent to petitioner,
however, the exact areas of the landholdings were not properly
segregated and delineated. Upon receipt of this notice, therefore,
petitioner corporation had no idea which portions of its estate were
subject to compulsory acquisition, which portions it could rightfully
retain, whether these retained portions were compact or contiguous,
and which portions were excluded from CARP coverage. Even
respondent DAR's evidence does not show that petitioner, through
its duly authorized representative, was notified of any ocular
inspection and investigation that was to be conducted by respondent
DAR. Neither is there proof that petitioner was given the opportunity
to at least choose and identify its retention area in those portions to
be acquired compulsorily. The right of retention and how this right is
exercised, is guaranteed in Section 6 of the CARL, viz:
Sec. 6. Retention Limits. . . . .
The right to choose the area to be retained, which shall be compact
or contiguous, shall pertain to the landowner; Provided, however,
That in case the area selected for retention by the landowner is
tenanted, the tenant shall have the option to choose whether to
remain therein or be a beneficiary in the same or another agricultural
land with similar or comparable features. In case the tenant chooses
to remain in the retained area, he shall be considered a leaseholder
and shall lose his right to be a beneficiary under this Act. In case the
tenant chooses to be a beneficiary in another agricultural land, he
loses his right as a leaseholder to the land retained by the
landowner. The tenant must exercise this option within a period of
one (1) year from the time the landowner manifests his choice of the
area for retention.
Under the law, a landowner may retain not more than five hectares
out of the total area of his agricultural land subject to CARP. The
right to choose the area to be retained, which shall be compact or
contiguous, pertains to the landowner. If the area chosen for
retention is tenanted, the tenant shall have the option to choose
whether to remain on the portion or be a beneficiary in the same or
another agricultural land with similar or comparable features.
C. The Voluntary Acquisition of Hacienda Caylaway
Petitioner was also left in the dark with respect to Hacienda
Caylaway, which was the subject of a Voluntary Offer to Sell (VOS).
The VOS in the instant case was made on May 6, 1988, 72 before
the effectivity of R.A. 6657 on June 15, 1988. VOS transactions were
first governed by DAR Administrative Order No. 19, series of 1989,
73 and under this order, all VOS filed before June 15, 1988 shall be
heard and processed in accordance with the procedure provided for
in Executive Order No. 229, thus:
III. All VOS transactions which are now pending before the DAR
and for which no payment has been made shall be subject to the
notice and hearing requirements provided in Administrative Order
No. 12, Series of 1989, dated 26 July 1989, Section II, Subsection A,
paragraph 3.
All VOS filed before 15 June 1988, the date of effectivity of the
CARL, shall be heard and processed in accordance with the
procedure provided for in Executive Order No. 229.
xxx xxx xxx.
Sec. 9 of E.O. 229 provides:
Sec. 9. Voluntary Offer to Sell. The government shall
purchase all agricultural lands it deems productive and suitable to
farmer cultivation voluntarily offered for sale to it at a valuation
determined in accordance with Section 6. Such transaction shall be
exempt from the payment of capital gains tax and other taxes and
fees.
Executive Order 229 does not contain the procedure for the
identification of private land as set forth in DAR A.O. No. 12, Series
of 1989. Section 5 of E.O. 229 merely reiterates the procedure of
acquisition in Section 16, R.A. 6657. In other words, the E.O. is silent
as to the procedure for the identification of the land, the notice of
coverage and the preliminary conference with the landowner,
representatives of the BARC, the LBP and farmer beneficiaries.
Does this mean that these requirements may be dispensed with
regard to VOS filed before June 15, 1988? The answer is no.
First of all, the same E.O. 229, like Section 16 of the CARL, requires
that the land, landowner and beneficiaries of the land subject to
agrarian reform be identified before the notice of acquisition should
be issued. 74 Hacienda Caylaway was voluntarily offered for sale in
1989. The Hacienda has a total area of 867.4571 hectares and is
covered by four (4) titles. In two separate Resolutions both dated
January 12, 1989, respondent DAR, through the Regional Director,
formally accepted the VOS over the two of these four
titles. 75 The land covered by two titles has an area of 855.5257
hectares, but only 648.8544 hectares thereof fell within the coverage
of R.A. 6657. 76 Petitioner claims it does not know where these
portions are located.
Respondent DAR, on the other hand, avers that surveys on the land
covered by the four titles were conducted in 1989, and that petitioner,
as landowner, was not denied participation therein, The results of the
survey and the land valuation summary report, however, do not
indicate whether notices to attend the same were actually sent to
and received by petitioner or its duly authorized representative. 77 To
reiterate, Executive Order No. 229 does not lay down the operating
procedure, much less the notice requirements, before the VOS is
accepted by respondent DAR. Notice to the landowner, however,
cannot be dispensed with. It is part of administrative due process
and is an essential requisite to enable the landowner himself to
exercise, at the very least, his right of retention guaranteed under the
CARL.
III. The Conversion of the three Haciendas.
It is petitioner's claim that the three haciendas are not subject to
agrarian reform because they have been declared for tourism, not
agricultural
purposes. 78 In 1975, then President Marcos issued Proclamation
No. 1520 declaring the municipality of Nasugbu, Batangas a tourist
zone. Lands in Nasugbu, including the subject haciendas, were
allegedly reclassified as non-agricultural 13 years before the
effectivity of R. A. No. 6657. 79 In 1993, the Regional Director for
Region IV of the Department of Agriculture certified that the
haciendas are not feasible and sound for agricultural development.
80 On March 20, 1992, pursuant to Proclamation No. 1520, the
Sangguniang Bayan of Nasugbu, Batangas adopted Resolution No.
19 reclassifying certain areas of Nasugbu as non-agricultural. 81
This Resolution approved Municipal Ordinance No. 19, Series of
1992, the Revised Zoning Ordinance of Nasugbu 82 which zoning
ordinance was based on a Land Use Plan for Planning Areas for
New Development allegedly prepared by the University of the
Philippines. 83 Resolution No. 19 of the Sangguniang Bayan was
approved by the Sangguniang Panlalawigan of Batangas on March
8, 1993. 84

Petitioner claims that proclamation No. 1520 was also upheld by
respondent DAR in 1991 when it approved conversion of 1,827
hectares in Nasugbu into a tourist area known as the Batulao Resort
Complex, and 13.52 hectares in Barangay Caylaway as within the
potential tourist belt. 85 Petitioner present evidence before us that
these areas are adjacent to the haciendas subject of this petition,
hence, the haciendas should likewise be converted. Petitioner urges
this Court to take cognizance of the conversion proceedings and rule
accordingly. 6
We do not agree. Respondent DAR's failure to observe due process
in the acquisition of petitioner's landholdings does not ipso facto give
this Court the power to adjudicate over petitioner's application for
conversion of its haciendas from agricultural to non-agricultural. The
agency charged with the mandate of approving or disapproving
applications for conversion is the DAR.
At the time petitioner filed its application for conversion, the Rules of
Procedure governing the processing and approval of applications for
land use conversion was the DAR A.O. No. 2, Series of 1990. Under
this A.O., the application for conversion is filed with the MARO where
the property is located. The MARO reviews the application and its
supporting documents and conducts field investigation and ocular
inspection of the property. The findings of the MARO are subject to
review and evaluation by the Provincial Agrarian Reform Officer
(PARO). The PARO may conduct further field investigation and
submit a supplemental report together with his recommendation to
the Regional Agrarian Reform Officer (RARO) who shall review the
same. For lands less than five hectares, the RARO shall approve or
disapprove applications for conversion. For lands exceeding five
hectares, the RARO shall evaluate the PARO Report and forward the
records and his report to the Undersecretary for Legal Affairs.
Applications over areas exceeding fifty hectares are approved or
disapproved by the Secretary of Agrarian Reform.
The DAR's mandate over applications for conversion was first laid
down in Section 4 (j) and Section 5 (l) of Executive Order No. 129-A,
Series of 1987 and reiterated in the CARL and Memorandum
Circular No. 54, Series of 1993 of the Office of the President. The
DAR's jurisdiction over applications for conversion is provided as
follows:
A. The Department of Agrarian Reform (DAR) is mandated to
"approve or disapprove applications for conversion, restructuring or
readjustment of agricultural lands into non-agricultural uses,"
pursuant to Section 4 (j) of Executive Order No. 129-A, Series of
1987.
B. Sec. 5 (l) of E.O. 129-A, Series of 1987, vests in the DAR,
exclusive authority to approve or disapprove applications for
conversion of agricultural lands for residential, commercial, industrial
and other land uses.
C. Sec. 65 of R.A. No. 6657, otherwise known as the
Comprehensive Agrarian Reform Law of 1988, likewise empowers
the DAR to authorize under certain conditions, the conversion of
agricultural lands.
D. Sec. 4 of Memorandum Circular No. 54, Series of 1993 of the
Office of the President, provides that "action on applications for land
use conversion on individual landholdings shall remain as the
responsibility of the DAR, which shall utilize as its primary reference,
documents on the comprehensive land use plans and accompanying
ordinances passed upon and approved by the local government
units concerned, together with the National Land Use Policy,
pursuant to R.A. No. 6657 and E.O. No. 129-A. 87
Applications for conversion were initially governed by DAR A.O. No.
1, Series of 1990 entitled "Revised Rules and Regulations Governing
Conversion of Private Agricultural Lands and Non-Agricultural Uses,"
and DAR A.O. No. 2, Series of 1990 entitled "Rules of Procedure
Governing the Processing and Approval of Applications for Land Use
Conversion." These A.O.'s and other implementing guidelines,
including Presidential issuances and national policies related to land
use conversion have been consolidated in DAR A.O. No. 07, Series
of 1997. Under this recent issuance, the guiding principle in land use
conversion is:
to preserve prime agricultural lands for food production while, at the
same time, recognizing the need of the other sectors of society
(housing, industry and commerce) for land, when coinciding with the
objectives of the Comprehensive Agrarian Reform Law to promote
social justice, industrialization and the optimum use of land as a
national resource for public welfare. 88
"Land Use" refers to the manner of utilization of land, including its
allocation, development and management. "Land Use Conversion"
refers to the act or process of changing the current use of a piece of
agricultural land into some other use as approved by the DAR. 89
The conversion of agricultural land to uses other than agricultural
requires field investigation and conferences with the occupants of the
land. They involve factual findings and highly technical matters within
the special training and expertise of the DAR. DAR A.O. No. 7,
Series of 1997 lays down with specificity how the DAR must go
about its task. This time, the field investigation is not conducted by
the MARO but by a special task force, known as the Center for Land
Use Policy Planning and Implementation (CLUPPI-DAR Central
Office). The procedure is that once an application for conversion is
filed, the CLUPPI prepares the Notice of Posting. The MARO only
posts the notice and thereafter issues a certificate to the fact of
posting. The CLUPPI conducts the field investigation and dialogues
with the applicants and the farmer beneficiaries to ascertain the
information necessary for the processing of the application. The
Chairman of the CLUPPI deliberates on the merits of the
investigation report and recommends the appropriate action. This
recommendation is transmitted to the Regional Director, thru the
Undersecretary, or Secretary of Agrarian Reform. Applications
involving more than fifty hectares are approved or disapproved by
the Secretary. The procedure does not end with the Secretary,
however. The Order provides that the decision of the Secretary may
be appealed to the Office of the President or the Court of Appeals, as
the case may be, viz:
Appeal from the decision of the Undersecretary shall be made to the
Secretary, and from the Secretary to the Office of the President or
the Court of Appeals as the case may be. The mode of
appeal/motion for reconsideration, and the appeal fee, from
Undersecretary to the Office of the Secretary shall be the same as
that of the Regional Director to the Office of the Secretary. 90
Indeed, the doctrine of primary jurisdiction does not warrant a court
to arrogate unto itself authority to resolve a controversy the
jurisdiction over which is initially lodged with an administrative body
of special competence. 91 Respondent DAR is in a better position to
resolve petitioner's application for conversion, being primarily the
agency possessing the necessary expertise on the matter. The
power to determine whether Haciendas Palico, Banilad and
Caylaway are non-agricultural, hence, exempt from the coverage of
the CARL lies with the DAR, not with this Court.
Finally, we stress that the failure of respondent DAR to comply with
the requisites of due process in the acquisition proceedings does not
give this Court the power to nullify the CLOA's already issued to the
farmer beneficiaries. To assume the power is to short-circuit the
administrative process, which has yet to run its regular course.
Respondent DAR must be given the chance to correct its procedural
lapses in the acquisition proceedings. In Hacienda Palico alone,
CLOA's were issued to 177 farmer beneficiaries in 1993. 92 Since
then until the present, these farmers have been cultivating their
lands. 93 It goes against the basic precepts of justice, fairness and
equity to deprive these people, through no fault of their own, of the
land they till. Anyhow, the farmer beneficiaries hold the property in
trust for the rightful owner of the land.
IN VIEW WHEREOF, the petition is granted in part and the
acquisition proceedings over the three haciendas are nullified for
respondent DAR's failure to observe due process therein. In
accordance with the guidelines set forth in this decision and the
applicable administrative procedure, the case is hereby remanded to
respondent DAR for proper acquisition proceedings and
determination of petitioner's application for conversion.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Vitug, Mendoza, Panganiban, Purisima,
Buena, Gonzaga-Reyes and De Leon, Jr., JJ., concur.
Melo, J., please see concurring and dissenting opinion.
Ynares-Santiago, J., concurring and dissenting opinion.
Kapunan, J., I join in the concurring and dissenting opinion of Justice
C. Y. Santiago.
Quisumbing, J., I join the in the concurring and dissenting opinion of
J. Santiago.
Pardo, J., I join the concurring and dissenting opinion of J. Santiago.
Separate Opinions
MELO, J., concurring and dissenting opinion;
I concur in the ponencia of Justice Ynares-Santiago, broad and
exhaustive as it is in its treatment of the issues. However, I would like
to call attention to two or three points which I believe are deserving
of special emphasis.
The apparent incongruity or shortcoming in the petition is DAR's
disregard of a law which settled the non-agricultural nature of the
property as early as 1975. Related to this are the inexplicable
contradictions between DAR's own official issuances and its
challenged actuations in this particular case.
Presidential Proclamation No. 1520 has the force and effect of law
unless repealed. This law declared Nasugbu, Batangas as a tourist
zone.
Considering the new and pioneering stage of the tourist industry in
1975, it can safely be assumed that Proclamation 1520 was the
result of empirical study and careful determination, not political or
extraneous pressures. It cannot be disregarded by DAR or any other
department of Government.
In Province of Camarines Sur, et al. vs. Court of Appeals, et al. (222
SCRA 173, 182 [1993]), we ruled that local governments need not
obtain the approval of DAR to reclassify lands from agricultural to
non-agricultural use. In the present case, more than the exercise of
that power, the local governments were merely putting into effect a
law when they enacted the zoning ordinances in question.
Any doubts as to the factual correctness of the zoning
reclassifications are answered by the February 2, 1993 certification
of the Department of Agriculture that the subject landed estates are
not feasible and economically viable for agriculture, based on the
examination of their slope, terrain, depth, irrigability, fertility, acidity,
and erosion considerations.
I agree with the ponencia's rejection of respondent's argument that
agriculture is not incompatible and may be enforced in an area
declared by law as a tourist zone. Agriculture may contribute to the
scenic views and variety of countryside profiles but the issue in this
case is not the beauty of ricefields, cornfields, or coconut groves.
May land found to be non-agricultural and declared as a tourist zone
by law, be withheld from the owner's efforts to develop it as such?
There are also plots of land within Clark Field and other commercial-
industrial zones capable of cultivation but this does not subject them
to compulsory land reform. It is the best use of the land for tourist
purposes, free trade zones, export processing or the function to
which it is dedicated that is the determining factor. Any cultivation is
temporary and voluntary.
The other point I wish to emphasize is DAR's failure to follow its own
administrative orders and regulations in this case.
The contradictions between DAR administrative orders and its
actions in the present case may be summarized:
1. DAR Administrative Order No. 6, Series of 1994, subscribes to
Department of Justice Opinion No. 44, Series of 1990 that lands
classified as non-agricultural prior to June 15, 1988 when the CARP
Law was passed are exempt from its coverage. By what right can
DAR now ignore its own Guidelines in this case of land declared as
forming a tourism zone since 1975?
2. DAR Order dated January 22, 1991 granted the conversion of
the adjacent and contiguous property of Group Developers and
Financiers, Inc. (GDFI) into the Batulao Tourist Resort. Why should
DAR have a contradictory stance in the adjoining property of Roxas
and Co., Inc. found to be similar in nature and declared as such?
3. DAR Exemption Order, Case No. H-9999-050-97 dated May
17, 1999 only recently exempted 13.5 hectares of petitioner's
property also found in Caylaway together, and similarly situated, with
the bigger parcel (Hacienda Caylaway) subject of this petition from
CARL coverage. To that extent, it admits that its earlier blanket
objections are unfounded.
4. DAR Administrative Order No. 3, Series of 1996 identifies the
land outside of CARP coverage as:
(a) Land found by DAR as no longer suitable for agriculture and
which cannot be given appropriate valuation by the Land Bank;
(b) Land where DAR has already issued a conversion order;
(c) Land determined as exempt under DOJ Opinions Nos. 44 and
181; or
(d) Land declared for non-agricultural use by Presidential
Proclamation.
It is readily apparent that the land in this case falls under all the
above categories except the second one. DAR is acting contrary to
its own rules and regulations.
I should add that DAR has affirmed in a Rejoinder (August 20, 1999)
the issuance and effectivity of the above administrative orders.
DAR Administrative Order No. 3, Series of 1996, Paragraph 2 of Part
II, Part III and Part IV outlines the procedure for reconveyance of
land where CLOAs have been improperly issued. The procedure is
administrative, detailed, simple, and speedy. Reconveyance is
implemented by DAR which treats the procedure as "enshrined . . .
in Section 50 of Republic Act No. 6657" (Respondent's Rejoinder).
Administrative Order No. 3, Series of 1996 shows there are no
impediments to administrative or judicial cancellations of CLOA's
improperly issued over exempt property. Petitioner further submits,
and this respondent does not refute, that 25 CLOAs covering 3,338
hectares of land owned by the Manila Southcoast Development
Corporation also found in Nasugbu, Batangas, have been cancelled
on similar grounds as those in the case at bar.
The CLOAs in the instant case were issued over land declared as
non-agricultural by a presidential proclamation and confirmed as
such by actions of the Department of Agriculture and the local
government units concerned. The CLOAs were issued over adjoining
lands similarly situated and of like nature as those declared by DAR
as exempt from CARP coverage. The CLOAs were surprisingly
issued over property which were the subject of pending cases still
undecided by DAR. There should be no question over the CLOAs
having been improperly issued, for which reason, their cancellation is
warranted.

YNARES-SANTIAGO, J., concurring and dissenting opinion;
I concur in the basic premises of the majority opinion. However, I
dissent in its final conclusions and the dispositive portion.
With all due respect, the majority opinion centers on procedure but
unfortunately ignores the substantive merits which this procedure
should unavoidably sustain.
The assailed decision of the Court of Appeals had only one basic
reason for its denial of the petition, i.e., the application of the doctrine
of non-exhaustion of administrative remedies. This Court's majority
ponencia correctly reverses the Court of Appeals on this issue. The
ponencia now states that the issuance of CLOA's to farmer
beneficiaries deprived petitioner Roxas & Co. of its property without
just compensation. It rules that the acts of the Department of
Agrarian Reform are patently illegal. It concludes that petitioner's
rights were violated, and thus to require it to exhaust administrative
remedies before DAR was not a plain, speedy, and adequate
remedy. Correctly, petitioner sought immediate redress from the
Court of Appeals to this Court.
However, I respectfully dissent from the judgment which remands the
case to the DAR. If the acts of DAR are patently illegal and the rights
of Roxas & Co. violated, the wrong decisions of DAR should be
reversed and set aside. It follows that the fruits of the wrongful acts,
in this case the illegally issued CLOAs, must be declared null and
void.
Petitioner Roxas & Co. Inc. is the registered owner of three (3)
haciendas located in Nasugbu, Batangas, namely: Hacienda Palico
comprising of an area of 1,024 hectares more or less, covered by
Transfer Certificate of Title No. 985 (Petition, Annex "G"; Rollo, p.
203); Hacienda Banilad comprising an area of 1,050 hectares and
covered by TCT No. 924 (Petition, Annex "I"; Rollo, p. 205); and
Hacienda Caylaway comprising an area of 867.4571 hectares and
covered by TCT Nos. T-44655 (Petition, Annex "O"; Rollo, p. 216), T-
44662 (Petition, Annex "P"; Rollo, p. 217), T-44663 (Petition, Annex
"Q"; Rollo, p. 210) and T-44664 (Petition, Annex "R"; Rollo, p. 221).
Sometime in 1992 and 1993, petitioner filed applications for
conversion with DAR. Instead of either denying or approving the
applications, DAR ignored and sat on them for seven (7) years. In
the meantime and in acts of deceptive lip-service, DAR excluded
some small and scattered lots in Palico and Caylaway from CARP
coverage. The majority of the properties were parceled out to alleged
farmer-beneficiaries, one at a time, even as petitioner's applications
were pending and unacted upon.
The majority ponencia cites Section 16 of Republic Act No. 6657 on
the procedure for acquisition of private lands.
The ponencia cites the detailed procedures found in DAR
Administrative Order No. 12, Series of 1989 for the identification of
the land to be acquired. DAR did not follow its own prescribed
procedures. There was no valid issuance of a Notice of Coverage
and a Notice of Acquisition.
The procedure on the evaluation and determination of land valuation,
the duties of the Municipal Agrarian Reform Officer (MARO), the
Barangay Agrarian Reform Committee (BARC), Provincial Agrarian
Reform Officer (PARO) and the Bureau of Land Acquisition and
Distribution (BLAD), the documentation and reports on the step-by-
step process, the screening of prospective Agrarian Reform
Beneficiaries (ARBs), the land survey and segregation survey plan,
and other mandatory procedures were not followed. The landowner
was not properly informed of anything going on.
Equally important, there was no payment of just compensation. I
agree with the ponencia that due process was not observed in the
taking of petitioner's properties. Since the DAR did not validly
acquire ownership over the lands, there was no acquired property to
validly convey to any beneficiary. The CLOAs were null and void
from the start.
Petitioner states that the notices of acquisition were sent by
respondents by ordinary mail only, thereby disregarding the
procedural requirement that notices be served personally or by
registered mail. This is not disputed by respondents, but they allege
that petitioner changed its address without notifying the DAR.
Notably, the procedure prescribed speaks of only two modes of
service of notices of acquisition personal service and service by
registered mail. The non-inclusion of other modes of service can only
mean that the legislature intentionally omitted them. In other words,
service of a notice of acquisition other than personally or by
registered mail is not valid. Casus omissus pro omisso habendus
est. The reason is obvious. Personal service and service by
registered mail are methods that ensure the receipt by the
addressee, whereas service by ordinary mail affords no reliable proof
of receipt.
Since it governs the extraordinary method of expropriating private
property, the CARL should be strictly construed. Consequently,
faithful compliance with its provisions, especially those which relate
to the procedure for acquisition of expropriated lands, should be
observed. Therefore, the service by respondent DAR of the notices
of acquisition to petitioner by ordinary mail, not being in conformity
with the mandate of R.A. 6657, is invalid and ineffective.
With more reason, the compulsory acquisition of portions of
Hacienda Palico, for which no notices of acquisition were issued by
the DAR, should be declared invalid.
The entire ponencia, save for the last six (6) pages, deals with the
mandatory procedures promulgated by law and DAR and how they
have not been complied with. There can be no debate over the
procedures and their violation. However, I respectfully dissent in the
conclusions reached in the last six pages. Inspite of all the violations,
the deprivation of petitioner's rights, the non-payment of just
compensation, and the consequent nullity of the CLOAs, the Court is
remanding the case to the DAR for it to act on the petitioner's
pending applications for conversion which have been unacted upon
for seven (7) years.
Petitioner had applications for conversion pending with DAR. Instead
of deciding them one way or the other, DAR sat on the applications
for seven (7) years. At that same time it rendered the applications
inutile by distributing CLOAs to alleged tenants. This action is even
worse than a denial of the applications because DAR had effectively
denied the application against the applicant without rendering a
formal decision. This kind of action preempted any other kind of
decision except denial. Formal denial was even unnecessary. In the
case of Hacienda Palico, the application was in fact denied on
November 8, 1993.
There are indisputable and established factors which call for a more
definite and clearer judgment.
The basic issue in this case is whether or not the disputed property is
agricultural in nature and covered by CARP. That petitioner's lands
are non-agricultural in character is clearly shown by the evidence
presented by petitioner, all of which were not disputed by
respondents. The disputed property is definitely not subject to CARP.
The nature of the land as non-agricultural has been resolved by the
agencies with primary jurisdiction and competence to decide the
issue, namely (1) a Presidential Proclamation in 1975; (2)
Certifications from the Department of Agriculture; (3) a Zoning
Ordinance of the Municipality of Nasugbu, approved by the Province
of Batangas; and (4) by clear inference and admissions,
Administrative Orders and Guidelines promulgated by DAR itself.
The records show that on November 20, 1975 even before the
enactment of the CARP law, the Municipality of Nasugbu, Batangas
was declared a "tourist zone" in the exercise of lawmaking power by
then President Ferdinand E. Marcos under Proclamation No. 1520
(Rollo, pp. 122-123). This Presidential Proclamation is indubitably
part of the law of the land.
On 20 March 1992 the Sangguniang Bayan of Nasugbu promulgated
its Resolution No. 19, a zonification ordinance (Rollo, pp. 124-200),
pursuant to its powers under Republic Act No. 7160, i.e., the Local
Government Code of 1991. The municipal ordinance was approved
by the Sangguniang Panlalawigan of Batangas (Rollo, p. 201). Under
this enactment, portions of the petitioner's properties within the
municipality were re-zonified as intended and appropriate for non-
agricultural uses. These two issuances, together with Proclamation
1520, should be sufficient to determine the nature of the land as non-
agricultural. But there is more.
The records also contain a certification dated March 1, 1993 from the
Director of Region IV of the Department of Agriculture that the
disputed lands are no longer economically feasible and sound for
agricultural purposes (Rollo, p. 213).
DAR itself impliedly accepted and determined that the municipality of
Nasugbu is non-agricultural when it affirmed the force and effect of
Presidential Proclamation 1520. In an Order dated January 22, 1991,
DAR granted the conversion of the adjoining and contiguous
landholdings owned by Group Developer and Financiers, Inc. in
Nasugbu pursuant to the Presidential Proclamation. The property
alongside the disputed properties is now known as "Batulao Resort
Complex". As will be shown later, the conversion of various other
properties in Nasugbu has been ordered by DAR, including a
property disputed in this petition, Hacienda Caylaway.
Inspite of all the above, the Court of Appeals concluded that the
lands comprising petitioner's haciendas are agricultural, citing,
among other things, petitioner's acts of voluntarily offering Hacienda
Caylaway for sale and applying for conversion its lands from
agricultural to non-agricultural.
Respondents, on the other hand, did not only ignore the
administrative and executive decisions. It also contended that the
subject land should be deemed agricultural because it is neither
residential, commercial, industrial or timber. The character of a
parcel of land, however, is not determined merely by a process of
elimination. The actual use which the land is capable of should be
the primordial factor.
RA 6657 explicitly limits its coverage thus:
The Comprehensive Agrarian Reform Law of 1998 shall cover,
regardless of tenurial arrangement and commodity produced, all
public and private agricultural lands as provided in Proclamation No.
131 and Executive Order No. 229, including other lands of the public
domain suitable for agriculture.
More specifically, the following lands are covered by the
Comprehensive Agrarian Reform Program:
(a) All alienable and disposable lands of the public domain
devoted to or suitable for agriculture. No reclassification of forest or
mineral lands to agricultural lands shall be undertaken after the
approval of this Act until Congress, taking into account, ecological,
developmental and equity considerations, shall have determined by
law, the specific limits of the public domain;
(b) All lands of the public domain in excess of the specific limits
as determined by Congress in the preceding paragraph;
(c) All other lands owned by the Government devoted to or
suitable for agriculture; and
(d) All private lands devoted to or suitable for a agriculture
regardless of the agricultural products raised or that can be raised
thereon." (RA 6657, Sec. 4; emphasis provided)
In Luz Farms v. Secretary of the Department of Agrarian Reform and
Natalia Realty, Inc. v. Department of Agrarian Reform, this Court had
occasion to rule that agricultural lands are only those which are
arable and suitable.
It is at once noticeable that the common factor that classifies land
use as agricultural, whether it be public or private land, is its
suitability for agriculture. In this connection, RA 6657 defines
"agriculture" as follows:
Agriculture, Agricultural Enterprises or Agricultural Activity means the
cultivation of the soil, planting of crops, growing of fruit trees, raising
of livestock, poultry or fish, including the harvesting of such farm
products, and other farm activities, and practices performed by a
farmer in conjunction with such farming operations done by persons
whether natural or juridical. (RA 6657, sec. 3[b])
In the case at bar, petitioner has presented certifications issued by
the Department of Agriculture to the effect that Haciendas Palico,
Banilad and Caylaway are not feasible and economically viable for
agricultural development due to marginal productivity of the soil,
based on an examination of their slope, terrain, depth, irrigability,
fertility, acidity, and erosion factors (Petition, Annex "L", Rollo, p. 213;
Annex "U", Rollo, p. 228). This finding should be accorded respect
considering that it came from competent authority, said Department
being the agency possessed with the necessary expertise to
determine suitability of lands to agriculture. The DAR Order dated
January 22, 1991 issued by respondent itself stated that the adjacent
land now known as the Batulao Resort Complex is hilly,
mountainous, and with long and narrow ridges and deep gorges. No
permanent sites are planted. Cultivation is by kaingin method. This
confirms the findings of the Department of Agriculture.
Parenthetically, the foregoing finding of the Department of Agriculture
also explains the validity of the reclassification of petitioner's lands
by the Sangguniang Bayan of Nasugbu, Batangas, pursuant to
Section 20 of the Local Government Code of 1991. It shows that the
condition imposed by respondent Secretary of Agrarian Reform on
petitioner for withdrawing its voluntary offer to sell Hacienda
Caylaway, i.e., that the soil be unsuitable for agriculture, has been
adequately met. In fact, the DAR in its Order in Case No. A-9999-
050-97, involving a piece of land also owned by petitioner and
likewise located in Caylaway, exempted it from the coverage of
CARL (Order dated May 17, 1999; Annex "D" of Petitioner's
Manifestation), on these grounds.
Furthermore, and perhaps more importantly, the subject lands are
within an area declared in 1975 by Presidential Proclamation No.
1520 to be part of a tourist zone. This determination was made when
the tourism prospects of the area were still for the future. The studies
which led to the land classification were relatively freer from
pressures and, therefore, more objective and open-minded.
Respondent, however, contends that agriculture is not incompatible
with the lands' being part of a tourist zone since "agricultural
production, by itself, is a natural asset and, if properly set, can
command tremendous aesthetic value in the form of scenic views
and variety of countryside profiles." (Comment, Rollo, 579).
The contention is untenable. Tourist attractions are not limited to
scenic landscapes and lush greeneries. Verily, tourism is enhanced
by structures and facilities such as hotels, resorts, rest houses,
sports clubs and golf courses, all of which bind the land and render it
unavailable for cultivation. As aptly described by petitioner:
The development of resorts, golf courses, and commercial centers is
inconsistent with agricultural development. True, there can be limited
agricultural production within the context of tourism development.
However, such small scale farming activities will be dictated by, and
subordinate to the needs or tourism development. In fact, agricultural
use of land within Nasugbu may cease entirely if deemed necessary
by the Department of Tourism (Reply, Rollo, p. 400).
The lands subject hereof, therefore, are non-agricultural. Hence, the
voluntary offer to sell Hacienda Caylaway should not be deemed an
admission that the land is agricultural. Rather, the offer was made by
petitioner in good faith, believing at the time that the land could still
be developed for agricultural production. Notably, the offer to sell
was made as early as May 6, 1988, before the soil thereon was
found by the Department of Agriculture to be unsuitable for
agricultural development (the Certifications were issued on 2
February 1993 and 1 March 1993). Petitioner's withdrawal of its
voluntary offer to sell, therefore, was not borne out of a whimsical or
capricious change of heart. Quite simply, the land turned out to be
outside of the coverage of the CARL, which by express provision of
RA 6657, Section 4, affects only public and private agricultural lands.
As earlier stated, only on May 17, 1999, DAR Secretary Horacio
Morales, Jr. approved the application for a lot in Caylaway, also
owned by petitioner, and confirmed the seven (7) documentary
evidences proving the Caylaway area to be non-agricultural (DAR
Order dated 17 May 1999, in Case No. A-9999-050-97, Annex "D"
Manifestation).
The DAR itself has issued administrative circulars governing lands
which are outside of CARP and may not be subjected to land reform.
Administrative Order No. 3, Series of 1996 declares in its policy
statement what landholdings are outside the coverage of CARP. The
AO is explicit in providing that such non-covered properties shall be
reconveyed to the original transferors or owners.
These non-covered lands are:
a. Land, or portions thereof, found to be no longer suitable for
agriculture and, therefore, could not be given appropriate valuation
by the Land Bank of the Philippines (LBP);
b. Those were a Conversion Order has already been issued by
the DAR allowing the use of the landholding other than for
agricultural purposes in accordance with Section 65 of R.A. No. 6657
and Administrative Order No. 12, Series of 1994;
c. Property determined to be exempted from CARP coverage
pursuant to Department of Justice Opinion Nos. 44 and 181; or
d. Where a Presidential Proclamation has been issued declaring
the subject property for certain uses other than agricultural. (Annex
"F", Manifestation dated July 23, 1999)
The properties subject of this Petition are covered by the first, third,
and fourth categories of the Administrative Order. The DAR has
disregarded its own issuances which implement the law.
To make the picture clearer, I would like to summarize the law,
regulations, ordinances, and official acts which show beyond
question that the disputed property is non-agricultural, namely:
(a) The Law. Proclamation 1520 dated November 20, 1975 is part
of the law of the land. It declares the area in and around Nasugbu,
Batangas, as a Tourist Zone. It has not been repealed, and has in
fact been used by DAR to justify conversion of other contiguous and
nearby properties of other parties.
(b) Ordinances of Local Governments. Zoning ordinance of the
Sangguniang Bayan of Nasugbu, affirmed by the Sangguniang
Panlalawigan of Batangas, expressly defines the property as tourist,
not agricultural. The power to classify its territory is given by law to
the local governments.
(c) Certification of the Department of Agriculture that the property
is not suitable and viable for agriculture. The factual nature of the
land, its marginal productivity and non-economic feasibility for
cultivation, are described in detail.
(d) Acts of DAR itself which approved conversion of contiguous or
adjacent land into the Batulao Resorts Complex. DAR described at
length the non-agricultural nature of Batulao and of portion of the
disputed property, particularly Hacienda Caylaway.
(e) DAR Circulars and Regulations. DAR Administrative Order
No. 6, Series of 1994 subscribes to the Department of Justice
opinion that the lands classified as non-agricultural before the CARP
Law, June 15, 1988, are exempt from CARP. DAR Order dated
January 22, 1991 led to the Batulao Tourist Area. DAR Order in Case
No. H-9999-050-97, May 17, 1999, exempted 13.5 hectares of
Caylaway, similarly situated and of the same nature as Batulao, from
coverage. DAR Administrative Order No. 3, Series of 1996, if
followed, would clearly exclude subject property from coverage.
As earlier shown, DAR has, in this case, violated its own circulars,
rules and regulations.
In addition to the DAR circulars and orders which DAR itself has not
observed, the petitioner has submitted a municipal map of Nasugbu,
Batangas (Annex "E", Manifestation dated July 23, 1999). The
geographical location of Palico, Banilad, and Caylaway in relation to
the GDFI property, now Batulao Tourist Resort, shows that the
properties subject of this case are equally, if not more so, appropriate
for conversion as the GDFI resort.
Petitioner's application for the conversion of its lands from
agricultural to non-agricultural was meant to stop the DAR from
proceeding with the compulsory acquisition of the lands and to seek
a clear and authoritative declaration that said lands are outside of the
coverage of the CARL and can not be subjected to agrarian reform.
Petitioner assails respondent's refusal to convert its lands to non-
agricultural use and to recognize Presidential Proclamation No.
1520, stating that respondent DAR has not been consistent in its
treatment of applications of this nature. It points out that in the other
case involving adjoining lands in Nasugbu, Batangas, respondent
DAR ordered the conversion of the lands upon application of Group
Developers and Financiers, Inc. Respondent DAR, in that case,
issued an Order dated January 22, 1991 denying the motion for
reconsideration filed by the farmers thereon and finding that:
In fine, on November 27, 1975, or before the movants filed their
instant motion for reconsideration, then President Ferdinand E.
Marcos issued Proclamation No. 1520, declaring the municipalities of
Maragondon and Ternate in the province of Cavite and the
municipality of Nasugbu in the province of Batangas as tourist zone.
Precisely, the landholdings in question are included in such
proclamation. Up to now, this office is not aware that said issuance
has been repealed or amended (Petition, Annex "W"; Rollo, p. 238).
The DAR Orders submitted by petitioner, and admitted by DAR in its
Rejoinder (Rejoinder of DAR dated August 20, 1999), show that DAR
has been inconsistent to the extent of being arbitrary.
Apart from the DAR Orders approving the conversion of the adjoining
property now called Batulao Resort Complex and the DAR Order
declaring parcels of the Caylaway property as not covered by CARL,
a major Administrative Order of DAR may also be mentioned.
The Department of Justice in DOJ Opinion No. 44 dated March 16,
1990 (Annex "A" of Petitioner's Manifestation) stated that DAR was
given authority to approve land conversions only after June 15, 1988
when RA 6657, the CARP Law, became effective. Following the DOJ
Opinion, DAR issued its AO No. 06, Series of 1994 providing for the
Guidelines on Exemption Orders (Annex "B", Id.). The DAR
Guidelines state that lands already classified as non-agricultural
before the enactment of CARL are exempt from its coverage.
Significantly, the disputed properties in this case were classified as
tourist zone by no less than a Presidential Proclamation as early as
1975, long before 1988.
The above, petitioner maintains, constitute unequal protection of the
laws. Indeed, the Constitution guarantees that "(n)o person shall be
deprived of life, liberty or property without due process of law, nor
shall any person be denied the equal protection of the laws"
(Constitution, Art. III, Sec. 1). Respondent DAR, therefore, has no
alternative but to abide by the declaration in Presidential
Proclamation 1520, just as it did in the case of Group Developers
and Financiers, Inc., and to treat petitioners' properties in the same
way it did the lands of Group Developers, i.e., as part of a tourist
zone not suitable for agriculture.
On the issue of non-payment of just compensation which results in a
taking of property in violation of the Constitution, petitioner argues
that the opening of a trust account in its favor did not operate as
payment of the compensation within the meaning of Section 16 (e) of
RA 6657. In Land Bank of the Philippines v. Court of Appeals (249
SCRA 149, at 157 [1995]), this Court struck down as null and void
DAR Administrative Circular No. 9, Series of 1990, which provides
for the opening of trust accounts in lieu of the deposit in cash or in
bonds contemplated in Section 16 (e) of RA 6657.
It is very explicit therefrom (Section 16 [e]) that the deposit must be
made only in "cash" or in "LBP bonds." Nowhere does it appear nor
can it be inferred that the deposit can be made in any other form. If it
were the intention to include a "trust account" among the valid
modes of deposit, that should have been made express, or at least,
qualifying words ought to have appeared from which it can be fairly
deduced that a "trust account" is allowed. In sum, there is no
ambiguity in Section 16(e) of RA 6657 to warrant an expanded
construction of the term "deposit."
xxx xxx xxx
In the present suit, the DAR clearly overstepped the limits of its
powers to enact rules and regulations when it issued Administrative
Circular No. 9. There is no basis in allowing the opening of a trust
account in behalf of the landowner as compensation for his property
because, as heretofore discussed, section 16(e) of RA 6657 is very
specific that the deposit must be made only in "cash" or in "LBP
bonds." In the same vein, petitioners cannot invoke LRA Circular
Nos. 29, 29-A and 54 because these implementing regulations
cannot outweigh the clear provision of the law. Respondent court
therefore did not commit any error in striking down Administrative
Circular No. 9 for being null and void.
There being no valid payment of just compensation, title to
petitioner's landholdings cannot be validly transferred to the
Government. A close scrutiny of the procedure laid down in Section
16 of RA 6657 shows the clear legislative intent that there must first
be payment of the fair value of the land subject to agrarian reform,
either directly to the affected landowner or by deposit of cash or LBP
bonds in the DAR-designated bank, before the DAR can take
possession of the land and request the register of deeds to issue a
transfer certificate of title in the name of the Republic of the
Philippines. This is only proper inasmuch as title to private property
can only be acquired by the government after payment of just
compensation In Association of Small Landowners in the Philippines
v. Secretary of Agrarian Reform (175 SCRA 343, 391 [1989]), this
Court held:
The CARP Law, for its part, conditions the transfer of possession and
ownership of the land to the government on receipt of the landowner
of the corresponding payment or the deposit by the DAR of the
compensation in cash or LBP bonds with an accessible bank. Until
then, title also remains with the landowner. No outright change of
ownership is contemplated either.
Necessarily, the issuance of the CLOAs by respondent DAR on
October 30, 1993 and their distribution to farmer-beneficiaries were
illegal inasmuch as no valid payment of compensation for the lands
was as yet effected. By law, Certificates of Land Ownership Award
are issued only to the beneficiaries after the DAR takes actual
possession of the land (RA 6657, Sec. 24), which in turn should only
be after the receipt by the landowner of payment or, in case of
rejection or no response from the landowner, after the deposit of the
compensation for the land in cash or in LBP bonds (RA 6657, Sec.
16[e]).
Respondents argue that the Land Bank ruling should not be made to
apply to the compulsory acquisition of petitioner's landholdings in
1993, because it occurred prior to the promulgation of the said
decision (October 6, 1995). This is untenable. Laws may be given
retroactive effect on constitutional considerations, where the
prospective application would result in a violation of a constitutional
right. In the case at bar, the expropriation of petitioner's lands was
effected without a valid payment of just compensation, thus violating
the Constitutional mandate that "(p)rivate property shall not be taken
for public use without just compensation" (Constitution, Art. III, Sec.
9). Hence, to deprive petitioner of the benefit of the Land Bank ruling
on the mere expedient that it came later than the actual expropriation
would be repugnant to petitioner's fundamental rights.
The controlling last two (2) pages of the ponencia state:
Finally, we stress that the failure of respondent DAR to comply with
the requisites of due process in the acquisition proceedings does not
give this Court the power to nullify the CLOA's already issued to the
farmer beneficiaries. To assume the power is to short-circuit the
administrative process, which has yet to run its regular course.
Respondent DAR must be given the chance to correct its procedural
lapses in the acquisition proceedings. In Hacienda Palico alone,
CLOA's were issued to 177 farmer beneficiaries in 1993. Since then
until the present, these farmers have been cultivating their lands. It
goes against the basic precepts of justice, fairness and equity to
deprive these people, through no fault of their own, of the land they
till. Anyhow, the farmer beneficiaries hold the property in trust for the
rightful owner of the land.
I disagree with the view that this Court cannot nullify illegally issued
CLOA's but must ask the DAR to first reverse and correct itself.
Given the established facts, there was no valid transfer of petitioner's
title to the Government. This being so, there was also no valid title to
transfer to third persons; no basis for the issuance of CLOAs.
Equally important, CLOAs do not have the nature of Torrens Title.
Administrative cancellation of title is sufficient to invalidate them.
The Court of Appeals said so in its Resolution in this case. It stated:
Contrary to the petitioner's argument that issuance of CLOAs to the
beneficiaries prior to the deposit of the offered price constitutes
violation of due process, it must be stressed that the mere issuance
of the CLOAs does not vest in the farmer/grantee ownership of the
land described therein.
At most the certificate merely evidences the government's
recognition of the grantee as the party qualified to avail of the
statutory mechanisms for the acquisition of ownership of the land.
Thus failure on the part of the farmer/grantee to comply with his
obligations is a ground for forfeiture of his certificate of transfer.
Moreover, where there is a finding that the property is indeed not
covered by CARP, then reversion to the landowner shall
consequently be made, despite issuance of CLOAs to the
beneficiaries. (Resolution dated January 17, 1997, p. 6)
DAR Administrative Order 03, Series of 1996 (issued on August 8,
1996; Annex "F" of Petitioner's Manifestation) outlines the procedure
for the reconveyance to landowners of properties found to be outside
the coverage of CARP. DAR itself acknowledges that they can
administratively cancel CLOAs if found to be erroneous. From the
detailed provisions of the Administrative Order, it is apparent that
there are no impediments to the administrative cancellation of
CLOAs improperly issued over exempt properties. The procedure is
followed all over the country. The DAR Order spells out that CLOAs
are not Torrens Titles. More so if they affect land which is not
covered by the law under which they were issued. In its Rejoinder,
respondent DAR states:
3.2. And, finally, on the authority of DAR/DARAB to cancel
erroneously issued Emancipation Patents (EPs) or Certificate of
Landownership Awards (CLOAs), same is enshrined, it is respectfully
submitted, in Section 50 of Republic Act No. 6657.
In its Supplemental Manifestation, petitioner points out, and this has
not been disputed by respondents, that DAR has also
administratively cancelled twenty five (25) CLOAs covering Nasugbu
properties owned by the Manila Southcoast Development
Corporation near subject Roxas landholdings. These lands were
found not suitable for agricultural purposes because of soil and
topographical characteristics similar to those of the disputed
properties in this case.
The former DAR Secretary, Benjamin T. Leong, issued DAR Order
dated January 22, 1991 approving the development of property
adjacent and contiguous to the subject properties of this case into
the Batulao Tourist Resort. Petitioner points out that Secretary
Leong, in this Order, has decided that the land
1. Is, as contended by the petitioner GDFI "hilly, mountainous,
and characterized by poor soil condition and nomadic method of
cultivation, hence not suitable to agriculture."
2. Has as contiguous properties two haciendas of Roxas y Cia
and found by Agrarian Reform Team Leader Benito Viray to be
"generally rolling, hilly and mountainous and strudded (sic) with long
and narrow ridges and deep gorges. Ravines are steep grade ending
in low dry creeks."
3. Is found in an. area where "it is quite difficult to provide
statistics on rice and corn yields because there are no permanent
sites planted. Cultivation is by Kaingin Method."
4. Is contiguous to Roxas Properties in the same area where
"the people entered the property surreptitiously and were difficult to
stop because of the wide area of the two haciendas and that the
principal crop of the area is sugar . . .." (emphasis supplied).
I agree with petitioner that under DAR AO No. 03, Series of 1996,
and unlike lands covered by Torrens Titles, the properties falling
under improperly issued CLOAs are cancelled by mere
administrative procedure which the Supreme Court can declare in
cases properly and adversarially submitted for its decision. If CLOAs
can under the DAR's own order be cancelled administratively, with
more reason can the courts, especially the Supreme Court, do so
when the matter is clearly in issue.
With due respect, there is no factual basis for the allegation in the
motion for intervention that farmers have been cultivating the
disputed property.
The property has been officially certified as not fit for agriculture
based on slope, terrain, depth, irrigability, fertility, acidity, and
erosion. DAR, in its Order dated January 22, 1991, stated that "it is
quite difficult to provide statistics on rice and corn yields (in the
adjacent property) because there are no permanent sites planted.
Cultivation is by kaingin method." Any allegations of cultivation,
feasible and viable, are therefore falsehoods.
The DAR Order on the adjacent and contiguous GDFI property
states that "(T)he people entered the property surreptitiously and
were difficult to stop . . .."
The observations of Court of Appeals Justices Verzola and Magtolis
in this regard, found in their dissenting opinion (Rollo, p. 116), are
relevant:
2.9 The enhanced value of land in Nasugbu, Batangas, has
attracted unscrupulous individuals who distort the spirit of the
Agrarian Reform Program in order to turn out quick profits. Petitioner
has submitted copies of CLOAs that have been issued to persons
other than those who were identified in the Emancipation Patent
Survey Profile as legitimate Agrarian Reform beneficiaries for
particular portions of petitioner's lands. These persons to whom the
CLOAs were awarded, according to petitioner, are not and have
never been workers in petitioner's lands. Petitioners say they are not
even from Batangas but come all the way from Tarlac. DAR itself is
not unaware of the mischief in the implementation of the CARL in
some areas of the country, including Nasugbu. In fact, DAR
published a "WARNING TO THE PUBLIC" which appeared in the
Philippine Daily Inquirer of April 15, 1994 regarding this malpractice.
2.10 Agrarian Reform does not mean taking the agricultural
property of one and giving it to another and for the latter to unduly
benefit therefrom by subsequently "converting" the same property
into non-agricultural purposes.
2.11 The law should not be interpreted to grant power to the State,
thru the DAR, to choose who should benefit from multi-million peso
deals involving lands awarded to supposed agrarian reform
beneficiaries who then apply for conversion, and thereafter sell the
lands as non-agricultural land.
Respondents, in trying to make light of this problem, merely
emphasize that CLOAs are not titles. They state that "rampant selling
of rights", should this occur, could be remedied by the cancellation or
recall by DAR.
In the recent case of "Hon. Carlos O. Fortich, et. al. vs. Hon. Renato
C. Corona, et. al." (G.R. No. 131457, April 24, 1998), this Court
found the CLOAs given to the respondent farmers to be improperly
issued and declared them invalid. Herein petitioner Roxas and Co.,
Inc. has presented a stronger case than petitioners in the
aforementioned case. The procedural problems especially the need
for referral to the Court of Appeals are not present. The instant
petition questions the Court of Appeals decision which acted on the
administrative decisions. The disputed properties in the present case
have been declared non-agricultural not so much because of local
government action but by Presidential Proclamation. They were
found to be non-agricultural by the Department of Agriculture, and
through unmistakable implication, by DAR itself. The zonification by
the municipal government, approved by the provincial government, is
not the only basis.
On a final note, it may not be amiss to stress that laws which have
for their object the preservation and maintenance of social justice are
not only meant to favor the poor and underprivileged. They apply
with equal force to those who, notwithstanding their more
comfortable position in life, are equally deserving of protection from
the courts. Social justice is not a license to trample on the rights of
the rich in the guise of defending the poor, where no act of injustice
or abuse is being committed against them. As we held in Land Bank
(supra.):
It has been declared that the duty of the court to protect the weak
and the underprivileged should not be carried out to such an extent
as to deny justice to the landowner whenever truth and justice
happen to be on his side. As eloquently stated by Justice Isagani
Cruz:
. . . social justice or any justice for that matter is for the
deserving, whether he be a millionaire in his mansion or a pauper in
his hovel. It is true that, in case of reasonable doubt, we are called
upon to tilt the balance in favor of the poor simply because they are
poor, to whom the Constitution fittingly extends its sympathy and
compassion. But never is it justified to prefer the poor simply
because they are poor, or to eject the rich simply because they are
rich, for justice must always be served, for poor and rich alike,
according to the mandate of the law.
IN THE LIGHT OF THE FOREGOING, I vote to grant the petition for
certiorari; and to declare Haciendas Palico, Banilad and Caylaway,
all situated in Nasugbu, Batangas, to be non-agricultural and outside
the scope of Republic Act No. 6657. I further vote to declare the
Certificates of Land Ownership Award issued by respondent
Department of Agrarian Reform null and void and to enjoin
respondents from proceeding with the compulsory acquisition of the
lands within the subject properties. I finally vote to DENY the motion
for intervention.

SECOND DIVISION
G.R. No. L-48359. March 30, 1993.
MANOLO P. CERNA, petitioner, vs. THE HONORABLE COURT OF
APPEALS and CONRAD C. LEVISTE, respondents.
Zosa & Quijano Law Offices for petitioner.
Benjamin H. Aquino for private respondent.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS & CONTRACTS; SOLIDARY
LIABILITY, NOT PRESUMED. Only Delgado signed the
promissory note and accordingly, he was the only one bound by the
contract of loan. Nowhere did it appear in the promissory note that
petitioner was a co-debtor. The law is clear that "(c)ontracts take
effect only between the parties . . ." But by some stretch of the
imagination, petitioner was held solidarily liable for the debt allegedly
because he was a co-mortgagor of the principal debtor, Delgado.
This ignores the basic precept that "(t)here is solidarily liability only
when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity." The contract of loan, as
evidenced by the promissory note, was signed by Delgado only.
Petitioner had no part in the said contract. Thus, nowhere could it be
seen from the agreement that petitioner was solidarily bound with
Delgado for the payment of the loan.
2. ID.; ID.; SIGNATORY TO THE PRINCIPAL CONTRACT OF
LOAN, PRIMARILY LIABLE; THIRD-PARTY MORTGAGOR NOT
SOLIDARILY BOUND WITH THE PRINCIPAL DEBTOR. There is
no legal provision nor jurisprudence in our jurisdiction which makes a
third person who secures the fulfillment of another's obligation by
mortgaging his own property to be solidarily bound with the principal
obligor. A chattel mortgage may be "an accessory contract" to a
contract of loan, but that fact alone does not make a third-party
mortgagor solidarily bound with the principal debtor in fulfilling the
principal obligation that is, to pay the loan. The signatory to the
principal contract loan remains to be primarily bound. It is only
upon the default of the latter that the creditor may have been
recourse on the mortgagors by foreclosing the mortgaged properties
in lieu of an action for the recovery of the amount of the loan. And the
liability of the third-party mortgagors extends only to the property
mortgaged. Should there be any deficiency, the creditors has
recourse on the principal debtor.
3. ID.; ID.; ID.; A SPECIAL POWER OF ATTORNEY
AUTHORIZING THE MORTGAGE OF CERTAIN PROPERTIES DID
NOT MAKE THE ATTORNEY-IN-FACT A MORTGAGOR. The
mortgage contract was also signed only by Delgado as mortgagor.
The Special Power of Attorney did not make petitioner a mortgagor.
All it did was to authorized Delgado to mortgage certain properties
belonging to petitioner. And this is in compliance with the
requirement in Article 2085 of the Civil Code which states that: "Art.
2085. The following requisites are essential to the contracts of
pledge and mortgage: (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." In effect,
petitioner lent his car to Delgado so that the latter may mortgage the
same to secure his debt. Thus, from the contract itself, it was clear
that only Delgado was the mortgagor regardless of the fact the he
used properties belonging to a third person to secure his debt.
4. REMEDIAL LAW; CIVIL ACTIONS; FILING OF COLLECTION
SUIT BARRED THE FORECLOSURE OF MORTGAGE. We
agree with petitioner that the filing of collection suit barred the
foreclosure of the mortgage. Thus: "A mortgage who files a suit for
collection abandons the remedy of foreclosure of the chattel
mortgage constituted over the personal property as security for the
debt or value of the promissory note which he seeks to recover in the
said collection suit." The reason for this rule is that: ". . . when,
however, the mortgage elects to file a suit for collection, not
foreclosure, thereby abandoning the chattel as basis for relief, he
clearly manifest his lack of desire and interest to go after the
mortgaged property as security for the promissory note . . ."
5. ID.; MORTGAGE DEBT DUE FROM ESTATE; OPTIONS
GIVEN TO CREDITORS UNDER SEC. 7, RULE 86, NEW RULES
OF COURT. Leviste, having chosen to file the collection suit,
could not now run after petitioner for the satisfaction of the debt. This
is even more true in this case because of the death of the principal
debtor, Delgado. Leviste was pursuing a money claim against a
deceased person. Section 7, Rule 86 of the Rules of Court provides:
"Sec. 7. Mortgage debt due from estate. A creditor holding a claim
against the deceased secured by mortgaged or other collateral
security, may abandon the security and prosecute his claim in the
manner provided in this rule, and share in the general distribution of
the assets of the estate; or he may foreclose his mortgage or realize
upon his security, by action in court, making the executor or
administrator a party defendant, and if there is a judgment for a
deficiency, after the sale of the mortgaged premises, or the property
pledged, in the foreclosure or the other proceeding to realize upon
security, he may claim his deficiency judgment in the manner
provided in the preceding section; or he may upon his mortgage or
other security alone, and foreclosure the same at any time within the
period of the statue of limitations, and in that event he shall not be
admitted as a creditor, and shall receive no share in the distribution
of the other assets of the estate; . . ."
DECISION
CAMPOS, JR., J p:
Before us is a Petition for Review on Certiorari of the decision ** of
the Court of Appeals in CA G.R. No. SP-07237, dated March 31,
1978.
The facts of this case are as follows:
On or about October 16, 1972, Celerino Delgado (Delgado) and
Conrad Leviste (Leviste) entered into a loan agreement which was
evidenced by a promissory note worded as follows:
"FOR VALUE RECEIVED, I, CELERINO DELGADO, with postal
address at 98 K-11 St., Kamias Rd., Quezon City, promise to pay to
the order of CONRAD C. LEVISTE, NINETY (90) DAYS after date, at
his office at 215 Buendia Ave., Makati Rizal, then total sum of
SEVENTEEN THOUSAND FIVE HUNDRED (P17,500.00) PESOS,
Philippine Currency without necessity of demand, with interest at the
rate of TWELVE (12%) PERCENT per annum;" 1
On the same date, Delgado executed a chattel mortgage 2 over a
Willy's jeep owned by him. And acting as the attorney-in-fact of
herein petitioner, Manolo P. Cerna (petitioner), he also mortgage a
"Taunus' car owned by the latter.
The period lapsed without Delgado paying the loan. This prompted
Leviste to a file a collection suit docketed as Civil Case No. 17507 3
with the Court of First Instance of Rizal, Branch XXII against Delgado
and petitioner as solidary debtors. Herein petitioner filed his first
Motion to Dismiss 4 on April 4, 1973. The grounds cited in the Motion
were lank of cause of action against petitioner and the death of
Delgado. Anent the latter, petitioner claimed that the claim should be
filed in the proceedings for the settlement of Delgado's estate as the
action did not survive Delgado's death. Moreover, he also stated that
since Leviste already opted to collect on the note, he could no longer
foreclose the mortgage. This Motion to Dismiss was denied on
August 15, 1973 by Judge Nicanor S. Sison. Thereafter, petitioner
filed with the Court of Appeals a special civil action for certiorari,
mandamus, and prohibition with preliminary injunction docketed as
CA G.R. No. 03088 on the ground that the respondent judge
committed grave abuse of discretion in refusing to dismiss the
complaint. On June 28, 1976, the Court of Appeals 5 denied the
petition because herein petitioner failed to prove the death of
Delgado and the consequent settlement proceedings regarding the
latter's estate. Neither did petitioner adequately prove his claim that
the special power of attorney in favor of Delgado was forged.
On February 18, 1977, petitioner filed his second Motion to Dismiss
on the ground that the trial court, now presided by Judge Nelly L.
Romero Valdellon, acquired no jurisdiction over deceased defendant,
that the claim did not survive, and that there was no cause of action
against him. On May 13, 1977, the said judge dismissed the motion
in an order hereunder quoted, to wit:
"Considering the second motion to dismiss filed by respondent
Manolo Cerna on March 4, 1977, as well as plaintiff's opposition
thereto reiteration of the same grounds raised in the first motion to
dismiss dated April 4, 1973, this Court hereby reiterates its resolution
found in its order dated August 15, 1973." 6
Petitioner filed a motion to reconsider the said order but this was
denied. Then, on October 17, 1977, he filed another petition for
certiorari and prohibition docketed as CA G.R. No. SP-07237 with
the Court of Appeals. This petition was dismissed by the said court in
a decision which stated, thus:
"WHEREFORE, the herein petition insofar as it alleges lack of cause
of action on the part of the herein petitioner is concerned, is hereby
dismissed and/or denied and the writ of preliminary injunction
previously issued by this Court is hereby lifted and/or set aside;
insofar, however, as the case against the deceased Celerino
Delgado is concerned, the petition is granted, that is, the complaint in
the lower court against Celerino Delgado should be dismissed. No
costs." 7
Thereafter, the instant petition for review was filed. Petitioner raised
the following legal issue:
". . . NOW, INASMUCH AS THE COMPLAINT IS ONLY FOR
COLLECTION OF A SUM OF MONEY BASED ON THE
PROMISSORY NOTE, SHOULD NOT THE COMPLAINANT BE
DISMISSED FOR LACK OF CAUSE OF ACTION AS AGAINST
MANOLO P. CERNA WHO IS NOT A DEBTOR UNDER THE
PROMISSORY NOTE CONSIDERING THAT ACCORDING TO
SETTLED JURISPRUDENCE THE FILING OF A COLLECTION
SUIT IS DEEMED AN ABANDONMENT OF THE SECURITY OF
THE CHATTEL MORTGAGE?" 8
In holding petitioner liable, the Court of Appeals held that petitioner
and Delgado were solidary debtors. Thus, it held:
"But the herein petitioner pleads that the complaint states no cause
of actions against the defendants Manolo P. Cerna on the following
grounds: 1) that the petitioner did not sign as joint obligator in the
promissory note signed by the deceased Celerino Delgado hence,
even if the allegations of the complaint are hypothetically admitted
there is no cause of action against the herein petitioner because
having proceeded against the promissory note he is deemed to have
abandoned the foreclosure of the chattel mortgage contract. This
contention deserves scant consideration. The chattel mortgage
contract, prima facie shows that it created the joint and solidary
obligation of petitioner and Celerino Delgado against private
respondent." 9 (Emphasis Ours)
We do not agree. Only Delgado signed the promissory note and
accordingly, he was the only one bound by the contract of loan.
Nowhere did it appear in the promissory note that petitioner was a
co-debtor. The law is clear that "(c)ontracts take effect only between
the parties . . ." 10
But by some stretch of the imagination, petitioner was held solidarily
liable for the debt allegedly because he was a co-mortgagor of the
principal debtor, Delgado. This ignores the basic precept that "(t)here
is solidarily liability only when the obligation expressly so states, or
when the law or the nature of the obligation requires solidarity." 11
We have already stated that the contract of loan, as evidenced by
the promissory note, was signed by Delgado only. Petitioner had no
part in the said contract. Thus, nowhere could it be seen from the
agreement that petitioner was solidarily bound with Delgado for the
payment of the loan.
There is also no legal provision nor jurisprudence in our jurisdiction
which makes a third person who secures the fulfillment of another's
obligation by mortgaging his own property to be solidarily bound with
the principal obligor. A chattel mortgage may be "an accessory
contract" 12 to a contract of loan, but that fact alone does not make a
third-party mortgagor solidarily bound with the principal debtor in
fulfilling the principal obligation that is, to pay the loan. The signatory
to the principal contract loan remains to be primarily bound. It
is only upon the default of the latter that the creditor may have been
recourse on the mortgagors by foreclosing the mortgaged properties
in lieu of an action for the recovery of the amount of the loan. And the
liability of the third-party mortgagors extends only to the property
mortgaged. Should there be any deficiency, the creditors has
recourse on the principal debtor.
In this case, however, the mortgage contract was also signed only by
Delgado as mortgagor. It is true that the contract stated the following:
"That this CHATTEL MORTGAGE, made and entered into this 16th
day of October, 1972 at Makati, Rizal, by and between:
CELERINO DELGADO, . . . as Attorney-in -Fact of Manolo P. Cerna .
. . by virtue of a Special Power of Attorney executed by said Manolo
P. Cerna in my favor under the date of October 10, 1972 and
acknowledged before Orlando J. Coruna . . . herein referred to as the
MORTGAGOR; - and -
CONRAD C. LEVISTE, . . . hereinafter referred to as the
MORTGAGEE." 13
But this alone does not make petitioner a co-mortgagor especially so
since only Delgado singed the chattel mortgage as mortgagor. The
Special Power of Attorney did not make petitioner a mortgagor. All it
did was to authorized Delgado to mortgage certain properties
belonging to petitioner. And this is in compliance with the
requirement in Article 2085 of the Civil Code which states that:
"Art. 2085. The following requisites are essential to the contracts
of pledge and mortgage:
xxx xxx xxx
(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." (Emphasis Ours.)
In effect, petitioner lent his car to Delgado so that the latter may
mortgage the same to secure his debt. Thus, from the contract itself,
it was clear that only Delgado was the mortgagor regardless of the
fact the he used properties belonging to a third person to secure his
debt.
Granting, however, that petitioner was obligated under the mortgage
contract to answer for Delgado's indebtedness, under the
circumstances, petitioner could not be held liable because the
complaint was for recovery of a sum of money, and not for the
foreclosure of the security. We agree with petitioner that the filing of
collection suit barred the foreclosure of the mortgage. Thus:
"A mortgage who files a suit for collection abandons the remedy of
foreclosure of the chattel mortgage constituted over the personal
property as security for the debt or value of the promissory note
which he seeks to recover in the said collection suit." 14
The reason for this rule is that:
". . . when, however, the mortgage elects to file a suit for collection,
not foreclosure, thereby abandoning the chattel as basis for relief, he
clearly manifest his lack of desire and interest to go after the
mortgaged property as security for the promissory note . . ." 15
Hence, Leviste, having chosen to file the collection suit, could not
now run after petitioner for the satisfaction of the debt. This is even
more true in this case because of the death of the principal debtor,
Delgado. Leviste was pursuing a money claim against a deceased
person. Section 7, Rule 86 of the Rules of Court Provides:
"Sec. 7. Mortgage debt due from estate. A creditor holding a
claim against the deceased secured by mortgaged or other collateral
security, may abandon the security and prosecute his claim in the
manner provided in this rule, and share in the general distribution of
the assets of the estate; or he may foreclose his mortgage or realize
upon his security, by action in court, making the executor or
administrator a party defendant, and if there is a judgment for a
deficiency, after the sale of the mortgaged premises, or the property
pledged, in the foreclosure or the other proceeding to realize upon
security, he may claim his deficiency judgment in the manner
provided in the preceding section; or he may upon his mortgage or
other security alone, and foreclosure the same at any time within the
period of the statue of limitations, and in that event he shall not be
admitted as a creditor, and shall receive no share in the distribution
of the other assets of the estate; . . ."
The above-quoted provision is substantially similar to Section 708 of
the Code of Civil Procedure which states:
"Sec. 708. A creditor holding against the deceased, secured by
mortgage or other collateral security, may abandon the security and
prosecute his claim before the committee, and share in the mortgage
or realize upon his security, by ordinary action in court, making the
executor or administrator a party defendant; . . ."
The Supreme Court, in the case of Osorio vs. San Agustin, 16 has
made the following interpretation of the said provision,, to wit:
"It is clear by the provisions quoted section that a person holding a
mortgage against the estate of a deceased person may abandon
such security and prosecute his claim before the committee, and
share in the distribution of the general assets of the estate. It
provides also that he may, at his own election, foreclose the
mortgage and realize upon his security. But the law does not provide
that he may have both remedies. If he elects one he must abandon
the other. If he fails in one he fails utterly."
But while there is a merit in the substantial allegations of this petition,
We are constrained to deny the petition on procedural grounds. The
facts of this case reveal that the decision under review in the
decision in the second certiorari and prohibition case lodged
petitioner against the judge trying the civil case. It appeared that after
the denial of the first motion to dismiss, petitioner filed CA-G.R. No.
03088 wherein petitioner alleged grave abuse of discretion on the
part of Judge Sison. The first petition was denied by the Court of
Appeals. The decision became final. The second motion to dismiss,
based on the same grounds, was thereafter filed. It was likewise
denied and another petition for certiorari and prohibition was again
instituted. The decision in the latter case is now under review.
We agree with the contention of private respondent, that the action
has been barred by the principle of res judicata.
It appears in this case that the second motion was filed to circumvent
the effects of the finality of the decision of the Court of Appeals in
Ca-G.R. No. 03088. Petitioner intended the second motion and the
subsequent proceedings as remedies for his lapsed appeal. We
cannot such behavior. It delayed the proceedings in this case and
unduly burdened the courts. Petitioner should have allowed the trial
of the case to go on where his defenses could still be presented and
heard.
WHEREFORE, in view of the forgoing,, the Petition is hereby
DISMISSED. With costs. AQUINO, J.:

SO ORDERED. Respondent Honesto Ong and City Sheriff of Manila filed a motion
for the reconsideration of this Court's resolution of August 29, 1975.
In that resolution, it was held that the lien of Northern Motors, Inc., as
chattel mortgagee, over certain taxicabs is superior to the levy made
on the said cabs by Honesto Ong, the assignee of the unsecured
judgment creditor of the chattel mortgagor, Manila Yellow Taxicab
Co., Inc.

On the other hand, Northern Motors, Inc. in its motion for the partial
reconsideration of the same August 29 resolution, prayed for the
reversal of the lower court's orders cancelling the bond filed by
Filwriters Guaranty Assurance Corporation. Northern Motors, Inc.
further prayed that the sheriff should be required to deliver to it the
proceeds of the execution sale of the mortgaged taxicabs without
deducting the expenses of execution.

1. Respondents' motion for reconsideration. Honesto Ong in

his motion invokes his supposed "legal and equity status" vis-a-vis
the mortgaged taxicabs. He contends that his only recourse was to
levy upon the taxicabs which were in the possession of the judgment
debtor, Manila Yellow Taxicab Co. Inc., whereas, Northern Motors,
EN BANC Inc., as unpaid seller and mortgagee, "has still an independent legal
remedy" against the mortgagor for the recovery of the unpaid
balance of the price.

G.R. No. L-40018 December 15, 1975 That contention is not a justification for setting aside the holding that
Ong had no right to levy upon the mortgaged taxicabs and that he
NORTHERN MOTORS, INC., petitioner, could have levied only upon the mortgagor's equity of redemption.
vs. The essence of the chattel mortgage is that the mortgaged chattels
HON. JORGE R. COQUIA, etc., et al., respondents, FILINVEST should answer for the mortgage credit and not for the judgment
CREDIT CORPORATION, intervenor. credit of the mortgagor's unsecured creditor. The mortgagee is not
obligated to file an "independent action" for the enforcement of his
RESOLUTION credit. To require him to do so would be a nullification of his lien and
would defeat the purpose of the chattel mortgage which is to give
him preference over the mortgaged chattels for the satisfaction of his
credit. (See art. 2087, Civil Code).
It is relevant to note that intervenor Filinvest Credit Corporation, the
assignee of a portion of the chattel mortgage credit, realized that to
vindicate its claim by independent action would be illusory. For that
pragmatic reason, it was constrained to enter into a compromise with
Honesto Ong by agreeing to pay him P145,000. That amount was
characterized by Northern Motors, Inc. as the "ransom" for the
taxicabs levied upon by the sheriff at the behest of Honesto Ong.
Honesto Ong's theory that Manila Yellow Taxicab's breach of the
chattel mortgage should not affect him because he is not privy of
such contract is untenable. The registration of the chattel mortgage
is an effective and binding notice to him of its existence (Ong Liong
Tiak vs. Luneta Motor Company, 66 Phil 459). The mortgage creates
a real right (derecho real, jus in re or jus ad rem, XI Enciclopedia
Juridica Espaola 294) or a lien which, being recorded, follows the
chattel wherever it goes.
Honesto Ong's contention that Northern Motors, Inc., was negligent
because it did not sue the sheriff within the 120-day period provided
for in section 17, Rule 39 of the Rules of Court is not correct. Such
action was filed on April 14, 1975 in the Court of First Instance of
Rizal, Pasig Branch XIII, in Civil Case No. 21065 entitled "Northern
Motors, Inc. vs. Filwriters Guaranty Assurance Corporation, et al.".
However, instead of Honesto Ong, his assignor, Tropical Commercial
Corporation, was impleaded as a defendant therein. That might
explain his unawareness of the pendency of such action.
The other arguments of Honesto Ong in his motion may be boiled
down to the proposition that the levy made by mortgagor's judgment
creditor against the chattel mortgagor should prevail over the chattel
mortgage credit. That proposition is devoid of any legal sanction and
is glaringly contrary to the nature of a chattel mortgage. To uphold
that contention is to destroy the essence of chattel mortgage as a
paramount encumbrance on the mortgaged chattel.
Respondent Ong admits "that the mortgagee's right to the mortgaged
property is superior to that of the judgment creditor". But he contends
that the rights of the purchasers of the cars at the execution sale
should be respected. He reasons out they were not parties to the
mortgage and that they acquired the cars prior to the mortgagee's
assertion of its rights thereto.
That contention is not well-taken. The third-party claim filed by
Northern Motors, Inc. should have alerted the purchasers to the risk
which they were taking when they took part in the auction sale.
Moreover, at an execution sale the buyers acquire only the right of
the judgment debtor which in this case was a mere right or equity of
redemption. The sale did not extinguish the pre-existing mortgage
lien (See sec. 25, Rule 39, Rules of Court; Potenciano vs. Dineros
and Provincial Sheriff of Rizal, 97 Phil, 196; Lara vs. Bayona, 97 Phil.
951; Hacbang vs. Leyte Autobus Co., Inc., L-7907, May 30, 1963, 8
SCRA 103).
Some arguments adduced by Honesto Ong in his motion were
intended to protect the interests of the mortgagor, Manila Yellow
Taxicab Co., Inc., which he erroneously characterized as a
"respondent" (it is not a respondent in this case). Ong argues that
the proceeds of the execution sale, which was held on December 18,
1974, should be delivered to Northern Motors, Inc. "only to such
extent as has exceeded the amount paid by respondent Manila
Yellow Taxicab to" Northern Motors, Inc. That argument is not clear.
Ong probably means that the installments already paid by Manila
Yellow Taxicab Co., Inc. to Northern Motors, Inc. should be deducted
from the proceeds of the execution sale. If that is the point which
Ong is trying to put across, and it is something which does not
directly affect him, then, that matter should be raised by Manila
Yellow Taxicab Co., Inc. in the replevin case, Civil Case No. 20536 of
the Court of First Instance of Rizal, Pasig Branch VI, entitled
"Northern Motors, Inc. versus Manila Yellow Taxicab Co., Inc. et al."
Ong's contention, that the writ of execution, which was enforced
against the seven taxicabs (whose sale at public auction was
stopped) should have precedence over the mortgage lien, cannot be
sustained. Those cabs cannot be sold at an execution sale because,
as explained in the resolution under reconsideration, the levy
thereon was wrongful.
The motion for reconsideration of Ong and the sheriff should be
denied.
2. Petitioners motion for partial reconsideration. The lower
court in its order of January 3, 1975 cancelled the indemnity bonds
for P480,000 filed on December 18, 1975 by Filwriters Guaranty
Assurance Corporation for Tropical Commercial Co., Inc. The bonds
were cancelled without notice to Northern Motors, Inc. as third-party
claimant.
We already held that the cancellation of the bonds constituted a
grave abuse of discretion but we previously denied petitioner's
prayer for the reinstatement of the bonds because Northern Motors
Inc. had given the impression that it had not filed any action for
damages against the sheriff within the one hundred twenty-day
period contemplated in Section 17, Rule 39 of the Rules of Court.
As already noted above, the truth is that such an action for damages
was filed on April 14, 1975 against the surety, the sheriff and the
judgment creditor in Civil Case No. 21065 of the Court of First
Instance of Rizal, Pasig Branch XIII. The action involves the
indemnity bond for P240,000 (No. 0032 posted on December 18,
1974).
It may also be noted that in a prior case, Civil Case No. 20536 of the
Court of First Instance of Rizal at Pasig, entitled "Northern Motors,
Inc. vs. Manila Yellow Taxicab Co., Inc., et al.", a replevin case
(where an amended complaint dated January 15, 1975 was filed),
the surety, Filwriters Guaranty Assurance Corporation, was
impleaded as a defendant by reason of its bond for P240,000.
Northern Motors, Inc. in that case prayed that the surety be ordered
to pay to it damages in the event that the eight taxicabs could not be
surrendered to the mortgagee.
Northern Motors, Inc., in its instant motion for partial reconsideration,
reiterates its petition for the reinstatement of the bond filed by
Filwriters Guaranty Assurance Corporation. If the said bond is not
reinstated or if the lower court's orders cancelling it are allowed to
stand, the aforementioned Civil Cases Nos. 20536 and 21065 would
be baseless or futile actions against the surety. That injustice should
be corrected. Hence, our resolution of August 29, 1975, insofar as it
did not disturb the lower court's orders cancelling the indemnity
bonds, should be reconsidered.
Northern Motors. Inc. further prays for the reconsideration of that
portion of our resolution allowing the sheriff to deduct expenses from
the proceeds of the execution sale for the eight taxicabs which sale
was held on December 18, 1974. It argues that Honesto Ong or
Manila Yellow Taxicab Co., Inc. should shoulder such expenses of
execution.
We already held that the execution was not justified and that
Northern Motors, Inc., as mortgagee, was entitled to the possession
of the eight taxicabs. Those cabs should not have been levied upon
and sold at public auction to satisfy the judgment credit which was
inferior to the chattel mortgage. Since the cabs could no longer be
recovered because apparently they had been transferred to persons
whose addresses are unknown (see par. 12, page 4, Annex B of
motion), the proceeds of the execution sale may be regarded as a
partial substitute for the unrecovarable cabs (See arts. 1189[2] and
1269, Civil Code; Urrutia & Co. vs. Baco River Plantation Co., 26
Phil. 632). Northern Motors, Inc. is entitled to the entire proceeds
without deduction of the expenses of execution.
WHEREFORE, private respondents' motion for reconsideration is
denied and petitioner's motion for partial reconsideration is granted.
The resolution of August 29, 1975 is modified in the sense that the
lower court's orders of January 3 and 6, 1975, cancelling the
indemnity bond for P240,000 (as reaffirmed in its order of January
17, 1975), are set aside. The said indemnity bond for P240,000 is
regarded as in full force and Respondent Sheriff of Manila is further
directed to deliver to Northern Motors, Inc. the entire proceeds of the
execution sale held on December 18, 1974 for the eight taxicabs
which were mortgaged to that firm.
SO ORDERED.
SECOND DIVISION
G.R. No. L-40018 August 29, 1975
NORTHERN MOTORS, INC., petitioner,
vs.
THE HONORABLE JORGE R. COQUIA, Executive Judge of the
Court of First Instance of Manila, HONESTO ONG, THE SHERIFF
OF MANILA, DOMINADOR Q. CACPAL, The Acting Executive
Sheriff of Manila, and/or his duly authorized deputy sheriff or
representative, FILINVEST CREDIT CORPORATION, intervenor.
RESOLUTION
AQUINO, J.:
Northern Motors, Inc., in its motion for the reconsideration of this
Court's decision promulgated on March 21, 1975, raised anew the
issue of whether its chattel mortgage lien over certain taxicabs,
which were levied upon by the mortgagor's unsecured judgment
creditor, could be asserted in the case where the judgment was
rendered or should be ventilated in an independent action, as held in
that decision. It invoked the additional ground that it has an unpaid
vendor's lien on the mortgaged taxicabs.
As set forth in the decision, the factual background of that issue is as
follows:
Manila Yellow Taxicab Co., Inc. in May and June, 1974 purchased on
the installment plan from Northern Motors, Inc, two hundred Holden
Torana cars at the price of P28,250 for each car. It made a down
payment of P1,000 on each car. It executed chattel mortgages on the
cars in favor of Northern Motors, Inc. as security for the promissory
notes covering the balance of the price. The notes and the chattel
mortgages for 172 cars were assigned to Filinvest Credit
Corporation.
Tropical Commercial Co., Inc. obtained a judgment for P167,311.27
against Manila Yellow Taxicab Co., Inc. in Civil Case No. 71584 of
the Court of First Instance of Manila. Part of that judgment or the
sum of P110,000 was eventually assigned to Honesto Ong for an
unspecified valuable consideration.
To satisfy the judgment credit, the sheriff on December 12, 1974
levied upon twenty taxicabs of which eight were mortgaged to
Northern Motors, Inc. and twelve to Filinvest Credit Corporation
under the assignment already mentioned.
Northern Motors, Inc. and Filinvest Credit Corporation filed the
corresponding third-party claims with the sheriff. On December 18,
1974 Tropical Commercial Co., Inc. posted indemnity bonds. On that
same day, at two-thirty in the afternoon, the cars were sold at public
auction although there was an alleged agreement that the cars would
be sold at four o'clock. Later, the lower court cancelled the indemnity
bonds without notice to the third-party claimants.
The sheriff made an additional levy on thirty-five mortgaged taxicabs
to satisfy the unpaid balance of the judgment. Of those thirty-five
taxicabs, seven were mortgaged to Northern Motors, Inc. while
twenty-eight were mortgaged to Filinvest Credit Corporation. Again,
Northern Motors, Inc. and Filinvest Credit Corporation filed third-
party claims. The auction sale was scheduled on January 23, 1975.
The lower court in its resolution of January 17, 1975 refused to
reinstate the indemnity bonds. It ruled that the chattel mortgagee
was not entitled to the possession of the mortgaged taxicabs by the
mere fact of the execution of the mortgage and that the mortgage
lien followed the chattel whoever might be its actual possessor.
On January 23, 1975 Northern Motors, Inc. filed its certiorari petition
in this case to annul the resolution of January 17, 1975 and to stop
the second auction sale. This Court issued a restraining order
against the scheduled auction sale, the writ of execution and the
disposition of the proceeds of the first execution sale. Filinvest Credit
Corporation was allowed to intervene in the action.
In the decision sought to be reconsidered, the petition was denied
and the restraining order was dissolved. We ruled that the
mortgagee's remedy is to vindicate its claim in a proper action as
provided in section 17, Rule 39 of the Rules of Court, and that its
mortgage lien attached to the taxicabs wherever they might be.
Upon motion of Northern Motors, Inc. on the ground that the decision
had not yet become final, the restraining order was maintained.
(Filinvest Credit Corporation did not file any motion for
reconsideration because it had entered into a compromise with Ong.
It agreed to pay Ong, through his counsel, P145,000 for the release
of twenty-eight taxicabs. It realized that an independent action would
be illusory).
Northern Motors, Inc. contends in its motion for reconsideration that
as chattel mortgagee and unpaid vendor it has the better right to the
possession of the mortgaged taxicabs and that claims should be
resolved in the case where the writ of execution was issued and not
in a separate action which allegedly would be an ineffective remedy.
It further contends that the lower court gravely abused its discretion
in cancelling the indemnity bonds posted by the judgment creditor of
the chattel mortgagor.
It insists that it is entitled to the possession of the taxicabs because
the condition of the chattel mortgages had already been broken and,
for that reason, the Serra ruling (infra) does not apply to this case. It
alleges that some of the buyers at the auction sale were fictitious and
that the cars valued at P28,250 each were sold for less than P3,000
each.
The judgment creditor and the sheriff, in their opposition to the
motion for reconsideration, reiterate their contention that the chattel
mortgagee's remedy is in an independent action, as held in Serra vs.
Rodriguez, L-25546, April 22, 1974, 56 SCRA 538, per Makasiar, J. It
was ruled in the Serra case that a chattel mortgagee could not be
regarded as a third-party claimant within the meaning of section 14,
Rule 57 of the Rules of Court (similar to section 17, Rule 39, the rule
involved in the instant case) "because a chattel mortgage is merely a
security for a loan and does not transfer title of the property
mortgaged to the chattel mortgagee".
As a corollary, the judgment creditor and the sheriff argue that, since
Northern Motors, Inc., the chattel mortgagee, was not a proper third-
party claimant, there was no necessity for an indemnity bond.
We hold, under the facts of this case, that Northern Motors, Inc., as
chattel mortgagee and unpaid vendor, should not be required to
vindicate in a separate action its claims for the seven mortgaged
taxicabs and for the proceeds of the execution sale of the other eight
mortgaged taxicabs.
Inasmuch as the condition of the chattel mortgages had already
been broken and Northern Motors, Inc. had in fact instituted an
action for replevin so that it could take possession of the mortgaged
taxicabs (Civil Case No. 20536, Rizal CFI), it has a superior,
preferential and paramount right to have possession of the
mortgaged taxicabs and to claim the proceeds of the execution sale
(See Bachrach Motor Co. vs. Summers, 42 Phil. 3;, Northern Motors,
Inc. vs. Herrera, L-32674, February 22, 1973, 49 SCRA 392).
Respondent sheriff wrongfully levied upon the mortgaged taxicabs
and erroneously took possession of them. He could have levied only
upon the right or equity of redemption pertaining to the Manila Yellow
Taxicab Co., Inc . as chattel mortgagor and judgment debtor,
because that was the only leviable or attachable property right of the
company in the mortgaged taxicabs (Manila Mercantile Co. vs.
Flores, 50 Phil. 759; Levy Hermanos, Inc. vs. Ramirez and Casimiro,
60 Phil. 978, 981). "After a chattel mortgage is executed, there
remains in the mortgagor a mere right of redemption" (Tizon vs.
Valdez and Morales, 48 Phil. 910, 916).
To levy upon the mortgagor's incorporeal right or equity of
redemption, it was not necessary for the sheriff to have taken
physical possession of the mortgaged taxicabs. It would have
sufficed if he furnished the chattel mortgagor, Manila Yellow Taxicab
Co., Inc., with a copy of the writ of execution and served upon it a
notice that its right or equity of redemption in the mortgaged taxicabs
was being levied upon pursuant to that writ (Sec. 15, 2nd par., Rule
39 and see. 7[e], Rule 57 of the Rules of Court). Levying upon the
property itself is distinguishable from levying on the judgment
debtor's interest in it (McCullough & Co. vs. Taylor, 25 Phil. 110, 115).
Justice Imperial, in a concurring opinion, noted that if the only
attachable interest of a chattel mortgagor in a mortgaged car was his
right of redemption and if the purchaser at the execution sale could
not acquire anything except such right of redemption, then the
purchaser was "not entitled to the actual possession and delivery of
the automobile without first paying" the mortgage debt (Levy
Hermanos, Inc. vs. Ramirez and Casimiro, 60 Phil. 978, 984, 985).
In this case what the sheriff could have sold at public auction was
merely the mortgagor's right or equity of redemption. The sheriff and
the judgment creditor are deemed to have constructive notice of the
chattel mortgages on the taxicabs (Ong Liong Tiak vs. Luneta Motor
Co., 66 Phil. 459). As a consequence of the registration of the
mortgages, Northern Motors, Inc. had the symbolical possession of
the taxicabs (Meyers vs. Thein, 15 Phil. 303).
If the judgment creditor, Tropical Commercial Co., Inc., or the
assignee, Ong, bought the mortgagor's equity of redemption at the
auction sale, then it would step into the shoes of the mortgagor,
Manila Yellow Taxicab Co., Inc. and be able to redeem the vehicles
from Northern Motors, Inc., the mortgagee, by paying the mortgage
debt. 1
Originally, the chattel mortgage was regarded as a conditional sale of
personal property (See. 3, Act No. 1508). As such, it was similar to a
pacto de retro sale of personality.
As clarified in Bachrach Motor Co. vs. Summers, 42 Phil. 3," there is
no real analogy between the chattel mortgage contract and a
conditional sale as understood in the civil law." The prevailing
equitable conception of the chattel mortgage is that it is merely a
security. To regard it as a conditional sale is to rattle" the bones of an
antiquated skeleton from which all semblance of animate life has
long since departed".
Article 2140 of the Civil Code, in defining a chattel mortgage as the
recording of personal property in the Chattel Mortgage Register as
security for the performance of an obligation, has adhered to the
equitable conception of that contract. At the same time, article 2140
has preserved the distinction between pledge and chattel mortgage
which was blurred by section 4 of the Chattel Mortgage Law when it
provided that in a chattel mortgage" the possession of the property is
delivered to and retained by the mortgagee" or, if no such
possession is delivered, the mortgage should be recorded in the
proper registry of deeds.
Historically, it is not proper that the contract of pledge (pignus), as
one of the four real contracts of the jus civile (the others being
mutuum, commodatum and depositum should be absorbed by the
chattel mortgage contract.
Under section 4 of the Chattel Mortgage Law, it was held that the
registration of the chattel mortgage was tantamount to the symbolical
delivery of the possession of the mortgaged chattel to the
mortgagee, a symbolical delivery which was equivalent to actual
delivery (Meyers vs. Thein, 15 Phil. 303, 306, per Arellano, C.J.)
Act No. 1508 provides:
SEC. 13. When the condition of a chattel mortgage is broken a
mortgagor or person holding a subsequent mortgage, or a
subsequent attaching creditor may redeem the same by paying or
delivering to the mortgagee the amount due on such mortgage and
the reasonable costs and expenses incurred by such breach of
condition before the sale thereof. An attaching creditor who so
redeems shall be subrogated to the rights of the mortgagee and
entitled to foreclose the mortgage in the same manner that the
mortgagee could foreclose it by the terms of this Act.
The equity of redemption of the mortgagor will pass to the purchaser
at an execution sale (Tizon vs. Valdez and Morales, 48 Phil. 910,
914).
Inasmuch as what remains to the mortgagor is only the equity of
redemption, it follows that the right of the judgment or attaching
creditor, who purchased the mortgaged chattel at an execution sale,
is subordinate to the lien of the mortgagee who has in his favor a
valid chattel mortgage (Cabral vs. Evangelista, L-26860, July 30,
1969, 28 SCRA 1000, 1006; Ong Liong Tiak vs. Luneta Motor Co.,
66 Phil. 459 462.
Justice Moreland, in his concurring opinion in the case of In re Du
Tec Chuan, 34 Phil. 488, observed that "no one can take the title
away from the mortgagee except the mortgagor and he only in the
manner prescribed by the mortgage itself and that the general
statement is therefore correct that after the execution of a chattel
mortgage and its registry as required by law, nobody can obtain an
interest in that property adverse to that of the mortgagee".
That the chattel mortgagee has the symbolical possession and that
he has the preferential right to have physical possession is inferable
from article 319 of the Revised Penal Code which penalizes any
person who knowingly removes the mortgaged chattel to any
province or city other than the one in which it was located at the time
of the execution of the mortgage, without the written consent of the
mortgagee or his executors, administrators or assigns. It penalizes
also any mortgagor who sells or pledges the mortgaged chattel
without the consent of the mortgagee written on the back of the
register of deeds of the province where such chattel is located.
(Article 319 was taken from sections 9 to 12 of the Chattel Mortgage.
2 A third person with actual or constructive notice who wrongfully
interferes with a mortgaged chattel may be liable for damages or for
a conversion. A seizure and sale of the mortgaged property under a
writ of attachment or execution in derogation of the mortgagee's
rights constitutes a conversion. (14 C.J.S. 822-824).
In the Cabral case the unsecured judgment creditor (of the chattel
mortgagor) who bought the mortgaged chattels at the execution sale
was held solidarily liable with the mortgagor to the chattel mortgagee
for the mortgage obligation. 2
Our ruling in this case is in consonance with the purpose of the
Chattel Mortgage Law to promote business and trade and to give
impetus to the country's economic development (Torres vs. Limjap,
56 Phil. 141, 145). In the business world the chattel mortgage has
greatly facilitated sales of goods and merchandise. Dealers of cars,
trucks, appliances and machinery, who resort to installment sales,
have relied on the chattel mortgage as an effective security. Sales of
merchandise would be sluggish and insubstantial if the Chattel
Mortgage Law could not protect dealers against the defaults and
delinquencies of their customers and if the mortgagee's lien could be
nullified by the maneuvers of an unsecured judgment creditor of the
chattel mortgagor. It is not right nor just that the lien of a secured
creditor should be rendered nugatory by a wrongful execution
engineered by an unsecured creditor.
Northern Motors, Inc. prayed in its motion that the two indemnity
bonds for P480,000 filed on December 18, 1974 by Filriters Guaranty
Assurance Corporation for Tropical Commercial Co., Inc. be
reinstated. The lower court cancelled ex parte said bonds in its order
of January 3, 1975 and reaffirmed the cancellation in its order of
January 17, 1975.
We hold that there was grave abuse of discretion in cancelling the
said bonds without notice to Northern Motors, Inc. and Filinvest
Credit Corporation. A chattel mortgagee, as a third-party claimant,
comes within the purview of the following provisions of Rule 39:
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 third-party claimant unless a claim is made by the
latter and unless an action for damages is brought by him against the
officer within one hundred twenty (120) days from the date of the
filing of the bond. But nothing herein contained shall prevent such
claimant or any third person from vindicating his claim to the property
by any proper action ....
The chattel mortgagee may file a third-party claim, even before there
is a breach of the mortgage because, as already noted, the
recording of the mortgage gives him the symbolical possession of
the mortgaged chattel which was construed as "equivalent to the
actual delivery of possession to the creditor" (Meyers vs. Thein,
supra on page 306), and because what a judgment creditor of the
chattel mortgagor can attach is only the equity or right of redemption
and, to effectuate the attachment levy it is not requisite that the
mortgaged chattel itself be seized by the sheriff. The Chattel
Mortgage Law, in relation to article 319 of the Revised Penal Code,
contemplates that the mortgagor should always have the physical
possession of the mortgaged chattel until there is a breach, in which
case the mortgagee become entitled to take possession of the
chattel so that the mortgage can be foreclosed.
However, inasmuch as the one hundred twenty-day period for filing
an action against the sheriff had already expired, and since Tropical
Commercial Co., Inc. and the surety have not been impleaded in this
case, the propriety and justice of ordering them to re-file the
indemnity bonds appear to be doubtful.
Northern Motors, Inc. is entitled to bring the appropriate action to
recover the damages which it might have suffered in consequence of
the wrongful execution.
WHEREFORE, the decision of March 21, 1975 is reconsidered and
set aside. Respondent Sheriff is directed to deliver to Northern
Motors, Inc. (a) the proceeds of the execution sale held on
December 18, 1974 for the eight taxicabs mortgaged to it less the
expenses of execution and (b) the seven taxicabs which were levied
upon by him and which are also mortgaged to the corporation.
Following the ruling the Cabral case, respondent Honesto Ong is
held solidarity liable with Manila Yellow Taxicab Co., Inc. for the
mortgage obligations secured by the eight mortgaged taxicabs which
were sold at the execution sale, less the net proceeds of the sale.
Costs against respondent Ong.
SO ORDERED.
SECOND DIVISION
G.R. No. L-58469 May 16, 1983
MAKATI LEASING and FINANCE CORPORATION, petitioner,
vs.
WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF
APPEALS, respondents.
Loreto C. Baduan for petitioner.
Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner.
Jose V. Mancella for respondent.
DE CASTRO, J.:
Petition for review on certiorari of the decision of the Court of
Appeals (now Intermediate Appellate Court) promulgated on August
27, 1981 in CA-G.R. No. SP-12731, setting aside certain Orders later
specified herein, of Judge Ricardo J. Francisco, as Presiding Judge
of the Court of First instance of Rizal Branch VI, issued in Civil Case
No. 36040, as wen as the resolution dated September 22, 1981 of
the said appellate court, denying petitioner's motion for
reconsideration.
It appears that in order to obtain financial accommodations from
herein petitioner Makati Leasing and Finance Corporation, the
private respondent Wearever Textile Mills, Inc., discounted and
assigned several receivables with the former under a Receivable
Purchase Agreement. To secure the collection of the receivables
assigned, private respondent executed a Chattel Mortgage over
certain raw materials inventory as well as a machinery described as
an Artos Aero Dryer Stentering Range.
Upon private respondent's default, petitioner filed a petition for
extrajudicial foreclosure of the properties mortgage to it. However,
the Deputy Sheriff assigned to implement the foreclosure failed to
gain entry into private respondent's premises and was not able to
effect the seizure of the aforedescribed machinery. Petitioner
thereafter filed a complaint for judicial foreclosure with the Court of
First Instance of Rizal, Branch VI, docketed as Civil Case No. 36040,
the case before the lower court.
Acting on petitioner's application for replevin, the lower court issued
a writ of seizure, the enforcement of which was however
subsequently restrained upon private respondent's filing of a motion
for reconsideration. After several incidents, the lower court finally
issued on February 11, 1981, an order lifting the restraining order for
the enforcement of the writ of seizure and an order to break open the
premises of private respondent to enforce said writ. The lower court
reaffirmed its stand upon private respondent's filing of a further
motion for reconsideration.
On July 13, 1981, the sheriff enforcing the seizure order, repaired to
the premises of private respondent and removed the main drive
motor of the subject machinery.
The Court of Appeals, in certiorari and prohibition proceedings
subsequently filed by herein private respondent, set aside the Orders
of the lower court and ordered the return of the drive motor seized by
the sheriff pursuant to said Orders, after ruling that the machinery in
suit cannot be the subject of replevin, much less of a chattel
mortgage, because it is a real property pursuant to Article 415 of the
new Civil Code, the same being attached to the ground by means of
bolts and the only way to remove it from respondent's plant would be
to drill out or destroy the concrete floor, the reason why all that the
sheriff could do to enfore the writ was to take the main drive motor of
said machinery. The appellate court rejected petitioner's argument
that private respondent is estopped from claiming that the machine is
real property by constituting a chattel mortgage thereon.
A motion for reconsideration of this decision of the Court of Appeals
having been denied, petitioner has brought the case to this Court for
review by writ of certiorari. It is contended by private respondent,
however, that the instant petition was rendered moot and academic
by petitioner's act of returning the subject motor drive of respondent's
machinery after the Court of Appeals' decision was promulgated.
The contention of private respondent is without merit. When
petitioner returned the subject motor drive, it made itself
unequivocably clear that said action was without prejudice to a
motion for reconsideration of the Court of Appeals decision, as
shown by the receipt duly signed by respondent's representative. 1
Considering that petitioner has reserved its right to question the
propriety of the Court of Appeals' decision, the contention of private
respondent that this petition has been mooted by such return may
not be sustained.
The next and the more crucial question to be resolved in this Petition
is whether the machinery in suit is real or personal property from the
point of view of the parties, with petitioner arguing that it is a
personality, while the respondent claiming the contrary, and was
sustained by the appellate court, which accordingly held that the
chattel mortgage constituted thereon is null and void, as contended
by said respondent.
A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41
SCRA 143 where this Court, speaking through Justice J.B.L. Reyes,
ruled:
Although there is no specific statement referring to the subject house
as personal property, yet by ceding, selling or transferring a property
by way of chattel mortgage defendants-appellants could only have
meant to convey the house as chattel, or at least, intended to treat
the same as such, so that they should not now be allowed to make
an inconsistent stand by claiming otherwise. Moreover, the subject
house stood on a rented lot to which defendants-appellants merely
had a temporary right as lessee, and although this can not in itself
alone determine the status of the property, it does so when combined
with other factors to sustain the interpretation that the parties,
particularly the mortgagors, intended to treat the house as
personality. Finally, unlike in the Iya cases, Lopez vs. Orosa, Jr. &
Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery &
Williamson, wherein third persons assailed the validity of the chattel
mortgage, it is the defendants-appellants themselves, as debtors-
mortgagors, who are attacking the validity of the chattel mortgage in
this case. The doctrine of estoppel therefore applies to the herein
defendants-appellants, having treated the subject house as
personality.
Examining the records of the instant case, We find no logical
justification to exclude the rule out, as the appellate court did, the
present case from the application of the abovequoted
pronouncement. If a house of strong materials, like what was
involved in the above Tumalad case, may be considered as personal
property for purposes of executing a chattel mortgage thereon as
long as the parties to the contract so agree and no innocent third
party will be prejudiced thereby, there is absolutely no reason why a
machinery, which is movable in its nature and becomes immobilized
only by destination or purpose, may not be likewise treated as such.
This is really because one who has so agreed is estopped from
denying the existence of the chattel mortgage.
In rejecting petitioner's assertion on the applicability of the Tumalad
doctrine, the Court of Appeals lays stress on the fact that the house
involved therein was built on a land that did not belong to the owner
of such house. But the law makes no distinction with respect to the From what has been said above, the error of the appellate court in
ownership of the land on which the house is built and We should not ruling that the questioned machinery is real, not personal property,
lay down distinctions not contemplated by law. becomes very apparent. Moreover, the case of Machinery and
Engineering Supplies, Inc. v. CA, 96 Phil. 70, heavily relied upon by
It must be pointed out that the characterization of the subject said court is not applicable to the case at bar, the nature of the
machinery as chattel by the private respondent is indicative of machinery and equipment involved therein as real properties never
intention and impresses upon the property the character determined having been disputed nor in issue, and they were not the subject of a
by the parties. As stated in Standard Oil Co. of New York v. Jaramillo, Chattel Mortgage. Undoubtedly, the Tumalad case bears more nearly
44 Phil. 630, it is undeniable that the parties to a contract may by perfect parity with the instant case to be the more controlling
agreement treat as personal property that which by nature would be jurisprudential authority.
real property, as long as no interest of third parties would be
prejudiced thereby. WHEREFORE, the questioned decision and resolution of the Court
of Appeals are hereby reversed and set aside, and the Orders of the
Private respondent contends that estoppel cannot apply against it lower court are hereby reinstated, with costs against the private
because it had never represented nor agreed that the machinery in respondent.
suit be considered as personal property but was merely required and
dictated on by herein petitioner to sign a printed form of chattel SO ORDERED.
mortgage which was in a blank form at the time of signing. This
contention lacks persuasiveness. As aptly pointed out by petitioner
and not denied by the respondent, the status of the subject
machinery as movable or immovable was never placed in issue
before the lower court and the Court of Appeals except in a
supplemental memorandum in support of the petition filed in the
appellate court. Moreover, even granting that the charge is true, such
fact alone does not render a contract void ab initio, but can only be a
ground for rendering said contract voidable, or annullable pursuant
to Article 1390 of the new Civil Code, by a proper action in court.
There is nothing on record to show that the mortgage has been
annulled. Neither is it disclosed that steps were taken to nullify the
same. On the other hand, as pointed out by petitioner and again not
refuted by respondent, the latter has indubitably benefited from said
contract. Equity dictates that one should not benefit at the expense
of another. Private respondent could not now therefore, be allowed to
impugn the efficacy of the chattel mortgage after it has benefited
therefrom,

EN BANC
G.R. Nos. L-10837-38 May 30, 1958
ASSOCIATED INSURANCE and SURETY COMPANY, INC., plaintiff,
vs.
ISABEL IYA, ADRIANO VALINO and LUCIA VALINO, defendants.
ISABEL IYA, plaintiff,
vs.
ADRIANO VALINO, LUCIA VALINO and ASSOCIATED INSURANCE
and SURETY COMPANY. INC., defendants.
Jovita L. de Dios for defendant Isabel Iya.
M. Perez Cardenas and Apolonio Abola for defendant Associated
Insurance and Surety Co., Inc.
FELIX, J.:
Adriano Valino and Lucia A. Valino, husband and wife, were the
owners and possessors of a house of strong materials constructed
on Lot No. 3, Block No. 80 of the Grace Park Subdivision in
Caloocan, Rizal, which they purchased on installment basis from the
Philippine Realty Corporation. On November 6, 1951, to enable her
to purchase on credit rice from the NARIC, Lucia A. Valino filed a
bond in the sum of P11,000.00 (AISCO Bond No. G-971) subscribed
by the Associated Insurance and Surety Co., Inc., and as counter-
guaranty therefor, the spouses Valino executed an alleged chattel
mortgage on the aforementioned house in favor of the surety
company, which encumbrance was duly registered with the Chattel
Mortgage Register of Rizal on December 6, 1951. It is admitted that
at the time said undertaking took place, the parcel of land on which
the house is erected was still registered in the name of the Philippine
Realty Corporation. Having completed payment on the purchase
price of the lot, the Valinos were able to secure on October 18, 1958,
a certificate of title in their name (T.C.T. No. 27884). Subsequently,
however, or on October 24, 1952, the Valinos, to secure payment of
an indebtedness in the amount of P12,000.00, executed a real
estate mortgage over the lot and the house in favor of Isabel Iya,
which was duly registered and annotated at the back of the
certificate of title.
On the other hand, as Lucia A. Valino, failed to satisfy her obligation
to the NARIC, the surety company was compelled to pay the same
pursuant to the undertaking of the bond. In turn, the surety company
demanded reimbursement from the spouses Valino, and as the latter
likewise failed to do so, the company foreclosed the chattel mortgage
over the house. As a result thereof, a public sale was conducted by
the Provincial Sheriff of Rizal on December 26, 1952, wherein the
property was awarded to the surety company for P8,000.00, the
highest bid received therefor. The surety company then caused the
said house to be declared in its name for tax purposes (Tax
Declaration No. 25128).
Sometime in July, 1953, the surety company learned of the existence
of the real estate mortgage over the lot covered by T.C.T. No. 26884
together with the improvements thereon; thus, said surety company
instituted Civil Case No. 2162 of the Court of First Instance of Manila
naming Adriano and Lucia Valino and Isabel Iya, the mortgagee, as
defendants. The complaint prayed for the exclusion of the residential
house from the real estate mortgage in favor of defendant Iya and
the declaration and recognition of plaintiff's right to ownership over
the same in virtue of the award given by the Provincial Sheriff of
Rizal during the public auction held on December 26, 1952. Plaintiff
likewise asked the Court to sentence the spouses Valino to pay said
surety moral and exemplary damages, attorney's fees and costs.
Defendant Isabel Iya filed her answer to the complaint alleging
among other things, that in virtue of the real estate mortgage
executed by her co-defendants, she acquired a real right over the lot
and the house constructed thereon; that the auction sale allegedly
conducted by the Provincial Sheriff of Rizal as a result of the
foreclosure of the chattel mortgage on the house was null and void
for non-compliance with the form required by law. She, therefore,
prayed for the dismissal of the complaint and anullment of the sale
made by the Provincial Sheriff. She also demanded the amount of
P5,000.00 from plaintiff as counterclaim, the sum of P5,000.00 from
her co-defendants as crossclaim, for attorney's fees and costs.
Defendants spouses in their answer admitted some of the averments
of the complaint and denied the others. They, however, prayed for
the dismissal of the action for lack of cause of action, it being alleged
that plaintiff was already the owner of the house in question, and as
said defendants admitted this fact, the claim of the former was
already satisfied.
On October 29, 1953, Isabel Iya filed another civil action against the
Valinos and the surety company (Civil Case No. 2504 of the Court of
First Instance of Manila) stating that pursuant to the contract of
mortgage executed by the spouses Valino on October 24, 1952, the
latter undertook to pay a loan of P12,000.00 with interest at 12% per
annum or P120.00 a month, which indebtedness was payable in 4
years, extendible for only one year; that to secure payment thereof,
said defendants mortgaged the house and lot covered by T.C.T. No.
27884 located at No. 67 Baltazar St., Grace Park Subdivision,
Caloocan, Rizal; that the Associated Insurance and Surety Co., Inc.,
was included as a party defendant because it claimed to have an
interest on the residential house also covered by said mortgage; that
it was stipulated in the aforesaid real estate mortgage that default in
the payment of the interest agreed upon would entitle the mortgagee
to foreclose the same even before the lapse of the 4-year period;
and as defendant spouses had allegedly failed to pay the interest for
more than 6 months, plaintiff prayed the Court to order said
defendants to pay the sum of P12,000.00 with interest thereon at
12% per annum from March 25, 1953, until fully paid; for an
additional sum equivalent to 20% of the total obligation as damages,
and for costs. As an alternative in case such demand may not be met
and satisfied plaintiff prayed for a decree of foreclosure of the land,
building and other improvements thereon to be sold at public auction
and the proceeds thereof applied to satisfy the demands of plaintiff;
that the Valinos, the surety company and any other person claiming
interest on the mortgaged properties be barred and foreclosed of all
rights, claims or equity of redemption in said properties; and for
deficiency judgment in case the proceeds of the sale of the
mortgaged property would be insufficient to satisfy the claim of
plaintiff.
Defendant surety company, in answer to this complaint insisted on its
right over the building, arguing that as the lot on which the house
was constructed did not belong to the spouses at the time the chattel
mortgage was executed, the house might be considered only as a
personal property and that the encumbrance thereof and the
subsequent foreclosure proceedings made pursuant to the
provisions of the Chattel Mortgage Law were proper and legal.
Defendant therefore prayed that said building be excluded from the
real estate mortgage and its right over the same be declared
superior to that of plaintiff, for damages, attorney's fees and costs.
Taking side with the surety company, defendant spouses admitted
the due execution of the mortgage upon the land but assailed the
allegation that the building was included thereon, it being contended
that it was already encumbered in favor of the surety company
before the real estate mortgage was executed, a fact made known to
plaintiff during the preparation of said contract and to which the latter
offered no objection. As a special defense, it was asserted that the
action was premature because the contract was for a period of 4
years, which had not yet elapsed.
The two cases were jointly heard upon agreement of the parties, who
submitted the same on a stipulation of facts, after which the Court
rendered judgment dated March 8, 1956, holding that the chattel
mortgage in favor of the Associated Insurance and Surety Co., Inc.,
was preferred and superior over the real estate mortgage
subsequently executed in favor of Isabel Iya. It was ruled that as the
Valinos were not yet the registered owner of the land on which the
building in question was constructed at the time the first
encumbrance was made, the building then was still a personality and
a chattel mortgage over the same was proper. However, as the
mortgagors were already the owner of the land at the time the
contract with Isabel Iya was entered into, the building was
transformed into a real property and the real estate mortgage
created thereon was likewise adjudged as proper. It is to be noted in
this connection that there is no evidence on record to sustain the
allegation of the spouses Valino that at the time they mortgaged their
house and lot to Isabel Iya, the latter was told or knew that part of the
mortgaged property, i.e., the house, had previously been mortgaged
to the surety company.
The residential building was, therefore, ordered excluded from the
foreclosure prayed for by Isabel Iya, although the latter could
exercise the right of a junior encumbrance. So the spouses Valino
were ordered to pay the amount demanded by said mortgagee or in
their default to have the parcel of land subject of the mortgage sold
at public auction for the satisfaction of Iya's claim.
There is no question as to appellant's right over the land covered by
the real estate mortgage; however, as the building constructed
thereon has been the subject of 2 mortgages; controversy arise as to
which of these encumbrances should receive preference over the
other. The decisive factor in resolving the issue presented by this
appeal is the determination of the nature of the structure litigated
upon, for where it be considered a personality, the foreclosure of the
chattel mortgage and the subsequent sale thereof at public auction,
made in accordance with the Chattel Mortgage Law would be valid
and the right acquired by the surety company therefrom would
certainly deserve prior recognition; otherwise, appellant's claim for
preference must be granted. The lower Court, deciding in favor of the
surety company, based its ruling on the premise that as the
mortgagors were not the owners of the land on which the building is
erected at the time the first encumbrance was made, said structure
partook of the nature of a personal property and could properly be
the subject of a chattel mortgage. We find reason to hold otherwise,
for as this Court, defining the nature or character of a building, has
said:
. . . while it is true that generally, real estate connotes the land and
the building constructed thereon, it is obvious that the inclusion of the
building, separate and distinct from the land, in the enumeration of
what may constitute real properties (Art. 415, new Civil Code) could
only mean one thing that a building is by itself an immovable
property . . . Moreover, and in view of the absence of any specific
provision to the contrary, a building is an immovable property
irrespective of whether or not said structure and the land on which it
is adhered to belong to the same owner. (Lopez vs. Orosa, G.R.
Nos. supra, p. 98).
A building certainly cannot be divested of its character of a realty by
the fact that the land on which it is constructed belongs to another.
To hold it the other way, the possibility is not remote that it would
result in confusion, for to cloak the building with an uncertain status
made dependent on the ownership of the land, would create a
situation where a permanent fixture changes its nature or character
as the ownership of the land changes hands. In the case at bar, as
personal properties could only be the subject of a chattel mortgage
(Section 1, Act 3952) and as obviously the structure in question is
not one, the execution of the chattel mortgage covering said building
is clearly invalid and a nullity. While it is true that said document was
correspondingly registered in the Chattel Mortgage Register of Rizal,
this act produced no effect whatsoever for where the interest
conveyed is in the nature of a real property, the registration of the
document in the registry of chattels is merely a futile act. Thus, the
registration of the chattel mortgage of a building of strong materials
produce no effect as far as the building is concerned (Leung Yee vs.
Strong Machinery Co., 37 Phil., 644). Nor can we give any
consideration to the contention of the surety that it has acquired
ownership over the property in question by reason of the sale
conducted by the Provincial Sheriff of Rizal, for as this Court has
aptly pronounced:
A mortgage creditor who purchases real properties at an extrajudicial
foreclosure sale thereof by virtue of a chattel mortgage constituted in
his favor, which mortgage has been declared null and void with
respect to said real properties, acquires no right thereto by virtue of
said sale (De la Riva vs. Ah Keo, 60 Phil., 899).
Wherefore the portion of the decision of the lower Court in these two
cases appealed from holding the rights of the surety company, over
the building superior to that of Isabel Iya and excluding the building
from the foreclosure prayed for by the latter is reversed and
appellant Isabel Iya's right to foreclose not only the land but also the
building erected thereon is hereby recognized, and the proceeds of
the sale thereof at public auction (if the land has not yet been sold),
shall be applied to the unsatisfied judgment in favor of Isabel Iya.
This decision however is without prejudice to any right that the
Associated Insurance and Surety Co., Inc., may have against the
spouses Adriano and Lucia Valino on account of the mortgage of
said building they executed in favor of said surety company. Without
pronouncement as to costs. It is so ordered.
EN BANC
G.R. No. L-56568 May 20, 1987
REPUBLIC OF THE PHILIPPINES, represented by the Bureau of
Customs and the Bureau of Internal Revenue, petitioner,
vs.
HONORABLE E.L. PERALTA, PRESIDING JUDGE OF THE COURT
OF FIRST INSTANCE OF MANILA, BRANCH XVII, QUALITY
TABACCO CORPORATION, FRANCISCO, FEDERACION OBRERO
DE LA INDUSTRIA TABAQUERA Y OTROS TRABAJADORES DE
FILIPINAS (FOITAF) USTC EMPLOYEES ASSOCIATION
WORKERS UNION-PTGWO, respondents.
Oscar A. Pascua for assignee F. Candelaria.
Teofilo C. Villarico for respondent Federation.
Pedro A. Lopez for respondent USTC.
FELICIANO, J.:
The Republic of the Philippines seeks the review on certiorari of the
Order dated 17 November 1980 of the Court of First Instance of
Manila in its Civil Case No. 108395 entitled "In the Matter of
Voluntary Insolvency of Quality Tobacco Corporation, Quality
Tobacco Corporation, Petitioner," and of the Order dated 19 January
1981 of the same court denying the motion for reconsideration of the
earlier Order filed by the Bureau of Internal Revenue and the Bureau
of Customs for the Republic.
In the voluntary insolvency proceedings commenced in May 1977 by
private respondent Quality Tobacco Corporation (the "Insolvent"), the
following claims of creditors were filed:
(i) P2,806,729.92, by the USTC Association of Employees and
workers Union-PTGWO USTC as separation pay for their members.
This amount plus an additional sum of P280,672.99 as attorney's
fees had been awarded by the National Labor Relations Commission
in NLRC Case No. RB-IV-9775-77. 1
(ii) P53,805.05 by the Federacion de la Industria Tabaquera y
Otros Trabajadores de Filipinas ("FOITAF), as separation pay for
their members, an amount similarly awarded by the NLRC in the
same NLRC Case.
(iii) P1,085,188.22 by the Bureau of Internal Revenue for tobacco
inspection fees covering the period 1 October 1967 to 28 February
1973;
(iv) P276,161.00 by the Bureau of Customs for customs duties
and taxes payable on various importations by the Insolvent. These
obligations appear to be secured by surety bonds. 2 Some of these
imported items are apparently still in customs custody so far as the
record before this Court goes.
In its questioned Order of 17 November 1980, the trial court held that
the above-enumerated claims of USTC and FOITAF (hereafter
collectively referred to as the "Unions") for separation pay of their
respective members embodied in final awards of the National Labor
Relations Commission were to be preferred over the claims of the
Bureau of Customs and the Bureau of Internal Revenue. The trial
court, in so ruling, relied primarily upon Article 110 of the Labor Code
which reads thus:
Article 110. Worker preference in case of bankruptcy In the event
of bankruptcy or liquidation of an employer's business, his workers
shall enjoy first preference as regards wages due them for services
rendered during the period prior to the bankruptcy or liquidation, any
provision of law to the contrary notwithstanding. Union paid wages
shall be paid in full before other creditors may establish any claim to
a share in the assets of the employer.
The Solicitor General, in seeking the reversal of the questioned
Orders, argues that Article 110 of the Labor Code is not applicable as
it speaks of "wages," a term which he asserts does not include the
separation pay claimed by the Unions. "Separation pay," the Solicitor
General contends,
is given to a laborer for a separation from employment computed on
the basis of the number of years the laborer was employed by the
employer; it is a form of penalty or damage against the employer in
favor of the employee for the latter's dismissal or separation from
service. 3
Article 97 (f) of the Labor Code defines "wages" in the following
terms:
Wage' paid to any employee shall mean the remuneration or
earnings, however designated, capable of being expressed in terms
of money, whether fixed or ascertained on a time, task, piece, or
commission basis, or other method of calculating the same, which is
payable by an employer to an employee under a written or unwritten
contract of employment for work done or to be done, or for services
rendered or to be rendered, and includes the fair and reasonable
value, as determined by the Secretary of Labor, of board, lodging, or
other facilities customarily furnished by the employer to the
employee. 'Fair and reasonable value' shall not include any profit to
the employer or to any person affiliated with the employer.(emphasis
supplied)
We are unable to subscribe to the view urged by the Solicitor
General. We note, in this connection, that in Philippine Commercial
and Industrial Bank (PCIB) us. National Mines and Allied Workers
Union, 4 the Solicitor General took a different view and there urged
that the term "wages" under Article 110 of the Labor Code may be
regarded as embracing within its scope severance pay or termination
or separation pay. In PCIB, this Court agreed with the position
advanced by the Solicitor General. 5 We see no reason for
overturning this particular position. We continue to believe that, for
the specific purposes of Article 110 and in the context of insolvency
termination or separation pay is reasonably regarded as forming part
of the remuneration or other money benefits accruing to employees
or workers by reason of their having previously rendered services to
their employer; as such, they fall within the scope of "remuneration
or earnings for services rendered or to be rendered ." Liability
for separation pay might indeed have the effect of a penalty, so far
as the employer is concerned. So far as concerns the employees,
however, separation pay is additional remuneration to which they
become entitled because, having previously rendered services, they
are separated from the employer's service. The relationship between
separation pay and services rendered is underscored by the fact that
separation pay is measured by the amount (i.e., length) of the
services rendered. This construction is sustained both by the specific
terms of Article 110 and by the major purposes and basic policy
embodied in the Labor Code. 6 It is also the construction that is
suggested by Article 4 of the Labor Code which directs that doubts
assuming that any substantial rather than merely frivolous doubts
remain-in the interpretation of the provisions of the labor Code and
its implementing rules and regulations shall be "resolved in favor of
labor."
The resolution of the issue of priority among the several claims filed
in the insolvency proceedings instituted by the Insolvent cannot,
however, rest on a reading of Article 110 of the labor Code alone.
Article 110 of the Labor Code, in determining the reach of its terms,
cannot be viewed in isolation. Rather, Article 110 must be read in
relation to the provisions of the Civil Code concerning the
classification, concurrence and preference of credits, which
provisions find particular application in insolvency proceedings where
the claims of all creditors, preferred or non-preferred, may be
adjudicated in a binding manner. 7 It is thus important to begin by
outlining the scheme constituted by the provisions of the Civil Code
on this subject.
Those provisions may be seen to classify credits against a particular
insolvent into three general categories, namely:
(a) special preferred credits listed in Articles 2241 and 2242,
(b) ordinary preferred credits listed in Article 2244; and
(c) common credits under Article 2245.
Turning first to special preferred credits under Articles 2241 and
2242, it should be noted at once that these credits constitute liens or
encumbrances on the specific movable or immovable property to
which they relate. Article 2243 makes clear that these credits "shall
be considered as mortgages or pledges of real or personal property,
or liens within the purview of legal provisions governing insolvency."
It should be emphasized in this connection that "duties, taxes and
fees due [on specific movable property of the insolvent] to the State
or any subdivision thereof" (Article 2241 [1]) and "taxes due upon the
[insolvent's] land or building (2242 [1])"stand first in preference in
respect of the particular movable or immovable property to which the
tax liens have attached. Article 2243 is quite explicit: "[T]axes
mentioned in number 1, Article 2241 and number 1, Article 2242
shall first be satisfied. " The claims listed in numbers 2 to 13 in Article
2241 and in numbers 2 to 10 in Articles 2242, all come after taxes in
order of precedence; such claims enjoy their privileged character as
liens and may be paid only to the extent that taxes have been paid
from the proceeds of the specific property involved (or from any other
sources) and only in respect of the remaining balance of such
proceeds. What is more, these other (non-tax) credits, although
constituting liens attaching to particular property, are not preferred
one over another inter se. Provided tax liens shall have been
satisfied, non-tax liens or special preferred credits which subsist in
respect of specific movable or immovable property are to be treated
on an equal basis and to be satisfied concurrently and
proportionately. 8 Put succintly, Articles 2241 and 2242 jointly with
Articles 2246 to 2249 establish a two-tier order of preference. The
first tier includes only taxes, duties and fees due on specific movable
or immovable property. All other special preferred credits stand on
the same second tier to be satisfied, pari passu and pro rata, out of
any residual value of the specific property to which such other credits
relate.
Credits which are specially preferred because they constitute liens
(tax or non-tax) in turn, take precedence over ordinary preferred
credits so far as concerns the property to which the liens have
attached. The specially preferred credits must be discharged first out
of the proceeds of the property to which they relate, before ordinary
preferred creditors may lay claim to any part of such proceeds. 9
If the value of the specific property involved is greater than the sum
total of the tax liens and other specially preferred credits, the residual
value will form part of the "free property" of the insolvent i.e.,
property not impressed with liens by operation of Articles 2241 and
2242. If, on the other hand, the value of the specific movable or
immovable is less than the aggregate of the tax liens and other
specially preferred credits, the unsatisfied balance of the tax liens
and other such credits are to the treated as ordinary credits under
Article 2244 and to be paid in the order of preference there set up.
10
In contrast with Articles 2241 and 2242, Article 2244 creates no liens
on determinate property which follow such property. What Article
2244 creates are simply rights in favor of certain creditors to have
the cash and other assets of the insolvent applied in a certain
sequence or order of priority. 11
Only in respect of the insolvent's "free property" is an order of priority
established by Article 2244. In this sequence, certain taxes and
assessments also figure but these do not have the same kind of
overriding preference that Articles 2241 No. 1 and 2242 No. I create
for taxes which constituted liens on the taxpayer's property. Under
Article 2244,
(a) taxes and assessments due to the national government,
excluding those which result in tax liens under Articles 2241 No. 1
and 2242 No. 1 but including the balance thereof not satisfied out of
the movable or immovable property to which such liens attached, are
ninth in priority;
(b) taxes and assessments due any province, excluding those
impressed as tax liens under Articles 2241 No. 1 and 2242 No. 1, but
including the balance thereof not satisfied out of the movable or
immovable property to which such liens attached, are tenth in
priority; and
(c) taxes and assessments due any city or municipality, excluding
those impressed as tax liens under Articles 2241 No. I and 2242 No.
2 but including the balance thereof not satisfied out of the movable
or immovable property to which such liens attached, are eleventh in
priority.
It is within the framework of the foregoing rules of the Civil Code that
the question of the relative priority of the claims of the Bureau of
Customs and the Bureau of Internal Revenue, on the one hand, and
of the claims of the Unions for separation pay of their members, on
the other hand, is to be resolved. A related vital issue is what impact
Article 110 of the labor Code has had on those provisions of the Civil
Code.
A. Claim of the Bureau of Customs for Unpaid Customs Duties
and Taxes-
Under Section 1204 of the Tariff and Customs Code, 12 the liability
of an importer
for duties, taxes and fees and other charges attaching on importation
constitute a personal debt due from the importer to the government
which can be discharged only by payment in full of all duties, taxes,
fees and other charges legally accruing It also constitutes a lien upon
the articles imported which may be enforced while such articles are
in the custody or subject to the control of the government. (emphasis
supplied)
Clearly, the claim of the Bureau of Customs for unpaid customs
duties and taxes enjoys the status of a specially preferred credit
under Article 2241, No. 1, of the Civil Code. only in respect of the
articles importation of which by the Insolvent resulted in the
assessment of the unpaid taxes and duties, and which are still in the
custody or subject to the control of the Bureau of Customs. The
goods imported on one occasion are not subject to a lien for customs
duties and taxes assessed upon other importations though also
effected by the Insolvent. Customs duties and taxes which remain
unsatisfied after levy upon the imported articles on which such duties
and taxes are due, would have to be paid out of the Insolvent's "free
property" in accordance with the order of preference embodied in
Article 2244 of the Civil Code. Such unsatisfied customs duties and
taxes would fall within Article 2244, No. 9, of the Civil Code and
hence would be ninth in priority.
B. Claims of the Bureau of Internal Revenue for Tabacco
Inspection Fees
Under Section 315 of the National Internal Revenue Code ("old Tax
Code"), 13 later reenacted in Identical terms as Section 301 of the
Tax Code of 1977, 14 an unpaid "internal revenue tax," together with
related interest, penalties and costs, constitutes a lien in favor of the
Government from the time an assessment therefor is made and until
paid, "upon all property and rights to property belonging to the
taxpayer."
Tobacco inspection fees are specifically mentioned as one of the
miscellaneous taxes imposed under the National Internal Revenue
Code, specifically Title VIII, Chapter IX of the old Tax Code and little
VIII, Chapter VII of the Tax Code of 1977. 15 Tobacco inspection
fees are collected both for purposes of regulation and control and for
purposes of revenue generation: half of the said fees accrues to the
Tobacco Inspection Fund created by Section 12 of Act No. 2613, as
amended by Act No. 3179, while the other half accrues to the
Cultural Center of the Philippines. Tobacco inspection fees, in other
words, are imposed both as a regulatory measure and as a revenue-
raising measure. In Commissioner of Internal Revenue us. Guerrero,
et al 16 this Court held, through Mr. Chief Justice Concepcion, that
the term "tax" is used in Section 315 of the old Tax Code:
not in the limited sense [of burdens imposed upon persons and/or
properties, by way of contributions to the support of the Government,
in consideration of general benefits derived from its operation], but,
in a broad sense, encompassing all government revenues collectible
by the Commissioner of Internal Revenue under said Code, whether
involving taxes, in the strict technical sense thereof, or not. x x x As
used in Title IX of said Code, the term 'tax' includes 'any national
internal revenue tax, fee or charge imposed by the Code. 17
It follows that the claim of the Bureau of Internal Revenue for unpaid
tobacco inspection fees constitutes a claim for unpaid internal
revenue taxes 18 which gives rise to a tax lien upon all the properties
and assets, movable and immovable, of the Insolvent as taxpayer.
Clearly, under Articles 2241 No. 1, 2242 No. 1, and 2246-2249 of the
Civil Code, this tax claim must be given preference over any other
claim of any other creditor, in respect of any and all properties of the
Insolvent. 19
C. Claims of the Unions for Separation Pay of Their Members
Article 110 of the Labor Code does not purport to create a lien in
favor of workers or employees for unpaid wages either upon all of
the properties or upon any particular property owned by their
employer. Claims for unpaid wages do not therefore fall at all within
the category of specially preferred claims established under Articles
2241 and 2242 of the Civil Code, except to the extent that such
claims for unpaid wages are already covered by Article 2241,
number 6. "claims for laborers' wages, on the goods manufactured or
the work done;" or by Article 2242, number 3: "claims of laborers and
other workers engaged in the construction, reconstruction or repair of
buildings, canals and other works, upon said buildings, canals or
other works." To the extent that claims for unpaid wages fall outside
the scope of Article 2241, number 6 and 2242, number 3, they would
come within the ambit of the category of ordinary preferred credits
under Article 2244.
Applying Article 2241, number 6 to the instant case, the claims of the
Unions for separation pay of their members constitute liens attaching
to the processed leaf tobacco, cigars and cigarettes and other
products produced or manufactured by the Insolvent, but not to other
assets owned by the Insolvent. And even in respect of such tobacco
and tobacco products produced by the Insolvent, the claims of the
Unions may be given effect only after the Bureau of Internal
Revenue's claim for unpaid tobacco inspection fees shall have been
satisfied out of the products so manufactured by the Insolvent.
Article 2242, number 3, also creates a lien or encumbrance upon a
building or other real property of the Insolvent in favor of workmen
who constructed or repaired such building or other real property.
Article 2242, number 3, does not however appear relevant in the
instant case, since the members of the Unions to whom separation
pay is due rendered services to the Insolvent not (so far as the
record of this case would show) in the construction or repair of
buildings or other real property, but rather, in the regular course of
the manufacturing operations of the Insolvent. The Unions' claims do
not therefore constitute a lien or encumbrance upon any immovable
property owned by the Insolvent, but rather, as already indicated,
upon the Insolvent's existing inventory (if any of processed tobacco
and tobacco products.
We come to the question of what impact Article 110 of the Labor
Code has had upon the complete scheme of classification,
concurrence and preference of credits in insolvency set out in the
Civil Code. We believe and so hold that Article 110 of the Labor
Code did not sweep away the overriding preference accorded under
the scheme of the Civil Code to tax claims of the government or any
subdivision thereof which constitute a lien upon properties of the
Insolvent. It is frequently said that taxes are the very lifeblood of
government. The effective collection of taxes is a task of highest
importance for the sovereign. It is critical indeed for its own survival.
It follows that language of a much higher degree of specificity than
that exhibited in Article 110 of the Labor Code is necessary to set
aside the intent and purpose of the legislator that shines through the
precisely crafted provisions of the Civil Code. It cannot be assumed
simpliciter that the legislative authority, by using in Article 110 the
words "first preference" and "any provision of law to the contrary
notwithstanding" intended to disrupt the elaborate and symmetrical
structure set up in the Civil Code. Neither can it be assumed casually
that Article 110 intended to subsume the sovereign itself within the
term "other creditors" in stating that "unpaid wages shall be paid in
full before other creditors may establish any claim to a share in the
assets of employer." Insistent considerations of public policy prevent
us from giving to "other creditors" a linguistically unlimited scope that
would embrace the universe of creditors save only unpaid
employees.
We, however, do not believe that Article 110 has had no impact at all
upon the provisions of the Civil Code. Bearing in mind the overriding
precedence given to taxes, duties and fees by the Civil Code and the
fact that the Labor Code does not impress any lien on the property of
an employer, the use of the phrase "first preference" in Article 110
indicates that what Article 110 intended to modify is the order of
preference found in Article 2244, which order relates, as we have
seen, to property of the Insolvent that is not burdened with the liens
or encumbrances created or recognized by Articles 2241 and 2242.
We have noted that Article 2244, number 2, establishes second
priority for claims for wages for services rendered by employees or
laborers of the Insolvent "for one year preceding the commencement
of the proceedings in insolvency." Article 110 of the Labor Code
establishes "first preference" for services rendered "during the period
prior to the bankruptcy or liquidation, " a period not limited to the year
immediately prior to the bankruptcy or liquidation. Thus, very
substantial effect may be given to the provisions of Article 110
without grievously distorting the framework established in the Civil
Code by holding, as we so hold, that Article 110 of the Labor Code
has modified Article 2244 of the Civil Code in two respects: (a) firstly,
by removing the one year limitation found in Article 2244, number 2;
and (b) secondly, by moving up claims for unpaid wages of laborers
or workers of the Insolvent from second priority to first priority in the
order of preference established I by Article 2244.
Accordingly, and by way of recapitulating the application of Civil
Code and Labor Code provisions to the facts herein, the trial court
should inventory the properties of the Insolvent so as to determine
specifically: (a) whether the assets of the Insolvent before the trial
court includes stocks of processed or manufactured tobacco
products; and (b) whether the Bureau of Customs still has in its
custody or control articles imported by the Insolvent and subject to
the lien of the government for unpaid customs duties and taxes.
In respect of (a), if the Insolvent has inventories of processed or
manufactured tobacco products, such inventories must be subjected
firstly to the claim of the Bureau of Internal Revenue for unpaid
tobacco inspection fees. The remaining value of such inventories
after satisfaction of such fees (or should such inspection fees be
satisfied out of other properties of the Insolvent) will be subject to a
lien in favor of the Unions by virtue of Article 2241, number 6. In
case, upon the other hand, the Insolvent no longer has any inventory
of processed or manufactured product, then the claim of the Unions
for separation pay would have to be satisfied out of the "free
property" of the Insolvent under Article 2244 of the Civil Code. as
modified by Article 110 of the Labor Code.
Turning to (b), should the Bureau of Customs no longer have any
importations by the Insolvent still within customs custody or control,
or should the importations still held by the Bureau of Customs be or
have become insufficient in value for the purpose, customs duties
and taxes remaining unpaid would have only ninth priority by virtue
of Article 2244, number 9. In respect therefore of the Insolvent's "free
property, " the claims of the Unions will enjoy first priority under
Article 2244 as modified and will be paid ahead of the claims of the
Bureau of Customs for any customs duties and taxes still remaining
unsatisfied.
It is understood that the claims of the Unions referred to above do
not include the 10% claim for attorney's fees. Attorney's fees incurred
by the Unions do not stand on the same footing as the Unions'
claims for separation pay of their members.
WHEREFORE, the petition for review is granted and the Orders
dated 17 November 1980 and 19 January 1981 of the trial court are
modified accordingly. This case is hereby remanded to the trial court
for further proceedings in insolvency compatible with the rulings set
forth above. No pronouncement as to costs.
SO ORDERED.
Teehankee, C.J., Yap, Fernan, Narvasa, Melencio-Herrera,
Gutierrez, Jr., Paras, Gancayco, Padilla, Bidin, Sarmiento and
Cortes, JJ., concur,
SECOND DIVISION
G.R. No. 86932 June 27, 1990
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and DOROTHY S.
ANCHETA, MA. MAGDALENA Y. ARMARILLE, CONSTANTE A.
ANCHETA, CONSTANTE B. BANAYOS, EVELYN BARRIENTOS,
JOSE BENAVIDEZ, LEONARDO BUENAAGUA, BENJAMIN
BAROT, ERNESTO S. CANTILLER, EDUARDO CANDA,
ARMANDO CANDA, AIDA DE LUNA, PACIFICO M. DE JESUS,
ALFREDO ESTRERA, AURELIO A. FARINAS, FRANCISCO
GREGORIO, DOMELINA GONZALES, JUANA JALANDONI,
MANUEL MALUBAY, FELICIANO OCAMPO, MABEL PADO,
GEMINIANO PLETA, ERNESTO S. SALAMAT, JULIAN TRAQUENA,
JUSFIEL SILVERIO, JAMES CRISTALES, FRANCISCO BAMBIO,
JOSE T. MARCELO, JR., SUSAN M. OLIVAR, ERNESTO JULIO,
CONSTANTE ANCHETA, JR., ENRIQUE NABUA and JAVIER P.
MATARO, respondents.
The Legal Counsel for petitioner.
CA. Ancheta & C.B. Banayos for private respondents.
REGALADO, J.:
The present petition for certiorari seeks the reversal of the decision
of the National Labor Relations Commission (NLRC) in, NLRC-NCR
Case No. 00-07-02500-87, dated January 16, 1986, 1 which
dismissed the appeal of the Development Bank of the Philippines
(DBP) from the decision of the labor arbiter ordering it to pay the
unpaid wages, 13th month pay, incentive pay and separation pay of
herein private respondents.
Philippine Smelters Corporation (PSC), a corporation registered
under Philippine law, obtained a loan in 1983 from the Development
Bank of the Philippines, a government-owned financial institution
created and operated in accordance with Executive Order No. 81, to
finance its iron smelting and steel manufacturing business. To secure
said loan, PSC mortgaged to DBP real properties with all the
buildings and improvements thereon and chattels, with its President,
Jose T. Marcelo, Jr., as co-obligor.
By virtue of the said loan agreement, DBP became the majority
stockholder of PSC, with stockholdings in the amount of
P31,000,000.00 of the total P60,226,000.00 subscribed and paid up
capital stock. Subsequently, it took over the management of PSC.
When PSC failed to pay its obligation with DBP, which amounted to
P75,752,445.83 as of March 31, 1986, DBP foreclosed and acquired
the mortgaged real estate and chattels of PSC in the auction sales
held on February 25, 1987 and March 4, 1987.
On February 10, 1987, forty (40) petitioners filed a Petition for
Involuntary Insolvency in the Regional Trial Court, Branch 61 at
Makati, Metropolitan Manila, docketed therein as Special Proceeding
No. M-1359, 2 against PSC and DBP, impleading as co-respondents
therein Olecram Mining Corporation, Jose Panganiban Ice Plant and
Cold Storage, Inc. and PISO Bank, with said petitioners representing
themselves as unpaid employees of said private respondents, except
PISO Bank.
On February 13, 1987, herein private respondents filed a complaint
with the Department of Labor against PSC for nonpayment of
salaries, 13th month pay, incentive leave pay and separation pay. On
February 20, 1987, the complaint was amended to include DBP as
party respondent. The case was thereafter indorsed to the Arbitration
Branch of the National Labor Relations Commission (NLRC). DBP
filed its position paper on September 7, 1987, invoking the absence
of employer-employee relationship between private respondents and
DBP and submitting that when DBP foreclosed the assets of PSC, it
did so as a foreclosing creditor.
On January 30, 1988, the labor arbiter rendered a decision, the
dispositive portion of which directed that "DBP as foreclosing creditor
is hereby ordered to pay all the unpaid wages and benefits of the
workers which remain unpaid due to PSC's foreclosure." 3
On appeal by DBP, the NLRC sustained the ruling of the labor
arbiter, holding DBP liable for unpaid wages of private respondents
"not as a majority stockholder of respondent PSC, but as the
foreclosing creditor who possesses the assets of said PSC by virtue
of the auction sale it held in 1987." In addition, the NLRC held that
the labor arbiter is correct in assuming jurisdiction because "the
worker's preference to the amount secured by DBP by virtue of said
foreclosure sales of PSC properties arose out of or are connected or
interwoven with the labor dispute brought forth by appellees against
PSC and DBP. 4 Hence, the present petition by DBP.
DBP contends that the labor arbiter and the NLRC committed a
grave abuse of discretion (1) in assuming jurisdiction over DBP; (2)
in applying the provisions of Article 110 of the Labor Code, as
amended; and (3) in not enforcing and applying Section 14 of
Executive Order No. 81.
We find merit in the petition.
It is to be noted that in their comment, private respondents tried to
prove the existence of employer-employee relationship based on the
fact that DBP is the majority stockholder of PSC and that the majority
of the members of the board of directors of PSC are from DBP. 5 We
do not believe that these circumstances are sufficient indicia of the
existence of an employer-employee relationship as would confer
jurisdiction over the case on the labor arbiter, especially in the light of
the express declaration of said labor arbiter and the NLRC that DBP
is being held liable as a foreclosing creditor. At any rate, this
jurisdictional defect was cured when DBP appealed the labor
arbiter's decision to the NLRC and thereby submitted to its
jurisdiction.
The pivotal issue for resolution is whether DBP, as foreclosing
creditor, could be held liable for the unpaid wages, 13th month pay,
incentive leave pay and separation pay of the employees of PSC.
We rule in the negative.
During the dates material to the foregoing proceedings, Article 110 of
the Labor Code read:
Art. 110. Worker preference in case of bankruptcy. In the
event of bankruptcy or liquidation of an employer's business, his
workers shall enjoy first preference as regards wages due them for
services rendered during the period prior to the bankruptcy or
liquidation, any provision of law to the contrary notwithstanding.
Unpaid wages shall be paid in full before other creditors may
establish any claim to a share in the assets of the employer.
In conjunction therewith, Section 10, Rule VIII, Book III of the
Implementing Rules and Regulations of the Labor Code provided:
Sec. 10. Payment of wages in mm of bankruptcy.-Unpaid wages
earned by the employees before the declaration of bankruptcy or
judicial liquidation of the employer's business shall be given first
preference and shall be paid in full before other creditors may
establish any claim to a share in the assets of the employer.
Interpreting the above provisions, this Court, in Development Bank of
the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., 6
explicated as follows:
It is quite clear from the provisions that a declaration of bankruptcy or
a judicial liquidation must be present before the worker's preference
may be enforced. ... .
xxx xxx xxx
Moreover, the reason behind the necessity for a judicial proceeding
or a proceeding in rem before the concurrence and preference of
credits may be applied was explained by this Court in the case of
Philippine Savings Bank v. Lantin (124 SCRA 476 [1983]). We said:
The proceedings in the court below do not partake of the nature of
the insolvency proceedings or settlement of a decedent's estate. The
action filed by Ramos was only to collect the unpaid cost of the
construction of the duplex apartment. It is far from being a general
liquidation of the estate of the Tabligan spouses.
Insolvency proceedings and settlement of a decedent's estate are
both proceedings in rem which are binding against the whole world.
All persons having interest in the subject matter involved, whether
they were notified or not, are equally bound. Consequently, a
liquidation of similar import or 'other equivalent general liquidation
must also necessarily be a proceeding in rem so that all interested
persons whether known to the parties or not may be bound by such
proceeding.
In the case at bar, although the lower court found that 'there were no
known creditors other than the plaintiff and the defendant herein,'
this can not be conclusive. It will not bar other creditors in the event
they show up and present their claim against the petitioner bank,
claiming that they also have preferred liens against the property
involved. Consequently, Transfer Certificate of Title No. 101864
issued in favor of the bank which is supposed to be indefeasible
would remain constantly unstable and questionable. Such could not
have been the intention of Article 2243 of the Civil Code although it
considers claims and credits under Article 2242 as statutory fines.
Neither does the De Barreto case ...
The claims of all creditors whether preferred or non- preferred, the
Identification of the preferred ones and the totality of the employer's
asset should be brought into the picture. There can then be an
authoritative, fair, and binding adjudication instead of the piece meal
settlement which would result from the questioned decision in this
case.
Republic Act No. 6715, which took effect on March 21, 1989,
amended Article 110 of the Labor Code to read as follows:
Art. 110. Worker preference in case of bankruptcy. In the
event of bankruptcy or liquidation of an employer's business, his
workers shall enjoy first preference as regards their unpaid wages
and other monetary claims, any provision of law to the contrary
notwithstanding. Such unpaid wages and monetary claims shall be
paid in full before the claims of the Government and other creditors
may be paid.
As a consequence, Section 1 0, Rule VIII, Book III of the
Implementing Rules and Regulations of the Labor Code was likewise
amended, to wit:
Sec. 10. Payment of wages and other monetary claims in case
of bankruptcy. In case of bankruptcy or liquidation of the
employer's business, the unpaid wages and other monetary claims
of the employees shall be given first preference and shall be paid in
full before the claims of government and other creditors may be paid.
Despite said amendments, however, the same interpretation of
Article 110 as applied in the aforesaid case of Development Bank of
the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., supra,
was adopted by this Court in the recent case of Development Bank
of the Philippines vs. National Labor Relations Commission, et. al., 7
For facility of reference, especially the rationalization for the
conclusions reached therein, we reproduce the salient portions of the
decision in this later case.
Notably, the terms "declaration" of bankruptcy or "judicial" liquidation
have been eliminated. Does this means then that liquidation
proceedings have been done away with?
We opine m the negative, upon the following considerations:
1. Because of its impact on the entire system of credit, Article
110 of the Labor Code cannot be viewed in isolation but must be
read in relation to the Civil Code scheme on classification and
preference of credits.
Article 110 of the Labor Code, in determining the reach of its terms,
cannot be viewed in isolation. Rather, Article 110 must be read in
relation to the provisions of the Civil Code concerning the
classification, concurrence and preference of credits which
provisions find particular application in insolvency proceedings where
the claims of all creditors, preferred or non-preferred, may be
adjudicated in a binding manner ... (Republic vs. Peralta (G.R. No. L-
56568, May 20, 1987, 150 SCRA 37).
2. In the same way that the Civil Code provisions on
classification of credits and the Insolvency Law have been brought
into harmony, so also must the kindred provisions of the Labor Law
be made to harmonize with those laws.
3. In the event of insolvency, a principal objective should be to
effect an equitable distribution of the insolvent's property among his
creditors. To accomplish this there must first be some proceeding
where notice to all of the insolvent's creditors may be given and
where the claims of preferred creditors may be bindingly adjudicated
(De Barretto vs. Villanueva, No. L-14938, December 29, 1962, 6
SCRA 928). The rationale therefor has been expressed in the recent
case of DBP vs. Secretary of Labor (G.R. No. 79351, 28 November
1989), which we quote:
A preference of credit bestows upon the preferred creditor an
advantage of having his credit satisfied first ahead of other claims
which may be established against the debtor. Logically, it becomes
material only when the properties and assets of the debtors are
insufficient to pay his debts in full; for if the debtor is amply able to
pay his various creditors, in full, how can the necessity exist to
determine which of his creditors shall be paid first or whether they
shall be paid out of the proceeds of the sale of the debtor's specific
property? Indubitably, the preferential right of credit attains
significance only after the properties of the debtor have been
inventoried and liquidated, and the claims held by his various
creditors have been established (Kuenzle & Streiff [Ltd.] vs.
Villanueva, 41 Phil. 611 [1916]; Barretto vs. Villanueva, G.R. No.
14038, 29 December 1962, 6 SCRA 928; Philippine Savings Bank
vs. Lantin, G.R. 33929, 2 September 1983,124 SCRA 476).
4. A distinction should be made between a preference of credit
and a lien. A preference applies only to claims which do not attach to
specific properties. A hen creates a charge on a particular property.
The right of first preference as regards unpaid wages recognize by
Article 110 does not constitute a hen on the property of the insolvent
debtor in favor of workers. It is but a preference of credit in their
favor, a preference in application. It is a met-hod adopted to
determine and specify the order in which credits should be paid in
the final distribution of the proceeds of the insolvent's assets- It is a
right to a first preference in the discharge of the funds of the
judgment debtor. in the words of Republic vs. Peralta, supra:
Article 110 of the Labor Code does not purport to create a lien in
favor of workers or employees for unpaid wages either upon all of
the properties or upon any particular property owned by their
employer. Claims for unpaid wages do not therefore fall at all within
the category of specially preferred claims established under Articles
2241 and 2242 of the Civil Code, except to the extent that such
claims for unpaid wages are already covered by Article 2241,
number 6: 'claims for laborers' wages, on the goods manufactured or
the work done; or by Article 2242, number 3: 'claims of laborers and
other workers engaged in the construction, reconstruction or repair of
buildings, canals and other works, upon said buildings, canals or
other works.' To the extent that claims for unpaid wages fall outside
the scope of Article 2241, number 6 and Article 2242, number 3, they
would come within the ambit of the category of ordinary preferred
credits under Article 2244.'
5. The DBP anchors its claim on a mortgage credit. A mortgage
directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of the
obligation for whose security it was constituted (Article 2176, Civil
Code). It creates a real right which is enforceable against the whole
world. It is a lien on an Identified immovable property, which a
preference is not. A recorded mortgage credit is a special preferred
credit under Article 2242 (5) of the Civil Code on classification of
credits. The preference given by Article 110, when not falling within
Article 2241 (6) and Article 2242 (3) of the Civil Code and not
attached to any specific property, is an ordinary preferred credit
although its impact is to move it from second priority to first priority in
the order of preference established by Article 2244 of the Civil Code
(Republic vs. Peralta, supra).
In fact, under the Insolvency Law (Section 29) a creditor holding a
mortgage or hen of any kind as security is not permitted to vote in
the election of the assignee in insolvency proceedings unless the
value of his security is first fixed or he surrenders all such property to
the receiver of the insolvent's estate.
classification, concurrence and preference of credits in the Civil
Code, the Insolvency Law, and the Labor Code is preserved in
harmony.
On the foregoing considerations and it appearing that an involuntary
insolvency proceeding has been instituted against PSC, private
respondents should properly assert their respective claims in said
proceeding. .

6. Even if Article 110 and its Implementing Rule, as amended, WHEREFORE, the petition is GRANTED. The decision of public
should be interpreted to mean 'absolute preference,' the same respondent is hereby ANNULLED and SET ASIDE.
should be given only prospective effect in line with the cardinal rule SO ORDERED.
that laws shall have no retroactive effect, unless the contrary is
provided (Article 4, Civil Code). Thereby, any infringement on the
constitutional guarantee on non-impairment of obligation of contracts
(Section 10, Article III, 1987 Constitution) is also avoided. In point of
fact, DBP's mortgage credit antedated by several years the
amendatory law, RA No. 6715. To give Article 110 retroactive effect
would be to wipe out the mortgage in DBPs favor and expose it to a
risk which it sought to protect itself against by requiring a collateral in
the form of real property.

In fine, the right to preference given to workers under Article 110 of

the Labor Code cannot exist in any effective way prior to the time of
its presentation in distribution proceedings. It will find application
when, in proceedings such as insolvency, such unpaid wages shall
be paid in full before the 'claims of the Government and other
creditors' may be paid. But, for an orderly settlement of a debtor's
assets, all creditors must be convened, their claims ascertained and
inventoried, and thereafter the preference determined in the course
of judicial proceedings which have for their object the subjection of
the property of the debtor to the payment of his debts or other lawful
obligations. Thereby, an orderly determination of preference of
creditors' claims is assured (Philippine Savings Bank vs. Lantin, No.
L-33929, September 2, 1983, 124 SCRA 476); the adjudication
made will be binding on all parties-in-interest, since those
proceedings are proceedings in rem; and the legal scheme of