1. Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 125585               June 8, 2005

HEIRS OF EDUARDO MANLAPAT, represented by GLORIA MANLAPAT-BANAAG and LEON M. BANAAG, JR., Petitioners, vs.HON. COURT OF APPEALS, RURAL BANK OF SAN PASCUAL, INC., and JOSE B. SALAZAR, CONSUELO CRUZ and ROSALINA CRUZ-BAUTISTA, and the REGISTER OF DEEDS of Meycauayan, Bulacan,Respondents.

D E C I S I O N

Tinga, J.:

Before this Court is a Rule 45 petition assailing the D E C I S I O N1 dated 29 September 1994 of the Court of Appeals that reversed the D E C I S I O N2 dated 30 April 1991 of the Regional Trial Court (RTC) of Bulacan, Branch 6, Malolos. The trial court declared Transfer Certificates of Title (TCTs) No. T-9326-P(M) and No. T-9327-P(M) as void ab initio and ordered the restoration of Original Certificate of Title (OCT) No. P-153(M) in the name of Eduardo Manlapat (Eduardo), petitioners’ predecessor-in-interest.

The controversy involves Lot No. 2204, a parcel of land with an area of 1,058 square meters, located at Panghulo, Obando, Bulacan. The property had been originally in the possession of Jose Alvarez, Eduardo’s grandfather, until his demise in 1916. It remained unregistered until 8 October 1976 when OCT No. P-153(M) was issued in the name of Eduardo pursuant to a free patent issued in Eduardo’s name3 that was entered in the Registry of Deeds of Meycauayan, Bulacan.4 The subject lot is adjacent to a fishpond owned by one

Ricardo Cruz (Ricardo), predecessor-in-interest of respondents Consuelo Cruz and Rosalina Cruz-Bautista (Cruzes).5

On 19 December 1954, before the subject lot was titled, Eduardo sold a portion thereof with an area of 553 square meters to Ricardo. The sale is evidenced by a deed of sale entitled "Kasulatan ng Bilihang Tuluyan ng Lupang Walang Titulo (Kasulatan)"6 which was signed by Eduardo himself as vendor and his wife Engracia Aniceto with a certain Santiago Enriquez signing as witness. The deed was notarized by Notary Public Manolo Cruz.7 On 4 April 1963, the Kasulatan was registered with the Register of Deeds of Bulacan.8

On 18 March 1981, another Deed of Sale9 conveying another portion of the subject lot consisting of 50 square meters as right of way was executed by Eduardo in favor of Ricardo in order to reach the portion covered by the first sale executed in 1954 and to have access to his fishpond from the provincial road.10 The deed was signed by Eduardo himself and his wife Engracia Aniceto, together with Eduardo Manlapat, Jr. and Patricio Manlapat. The same was also duly notarized on 18 July 1981 by Notary Public Arsenio Guevarra.11

In December 1981, Leon Banaag, Jr. (Banaag), as attorney-in-fact of his father-in-law Eduardo, executed a mortgage with the Rural Bank of San Pascual, Obando Branch (RBSP), for P100,000.00 with the subject lot as collateral. Banaag deposited the owner’s duplicate certificate of OCT No. P-153(M) with the bank.

On 31 August 1986, Ricardo died without learning of the prior issuance of OCT No. P-153(M) in the name of Eduardo.12 His heirs, the Cruzes, were not immediately aware of the consummated sale between Eduardo and Ricardo.

Eduardo himself died on 4 April 1987. He was survived by his heirs, Engracia Aniceto, his spouse; and children, Patricio, Bonifacio, Eduardo, Corazon, Anselmo, Teresita and Gloria, all surnamed Manlapat.13 Neither did the heirs of Eduardo (petitioners) inform the Cruzes of the prior sale in favor of their predecessor-in-interest, Ricardo. Yet subsequently, the Cruzes came to learn about the sale and the issuance of the OCT in the name of Eduardo.

Upon learning of their right to the subject lot, the Cruzes immediately tried to confront petitioners on the mortgage and obtain the surrender of the OCT. The Cruzes, however, were thwarted in their bid to see the heirs. On the advice of the Bureau of Lands, NCR Office, they brought the matter to the barangay captain of BarangayPanghulo, Obando, Bulacan. During the hearing, petitioners were informed that the Cruzes had a legal right to the property covered by OCT and needed the OCT for the purpose of securing a separate title to cover the interest of Ricardo. Petitioners, however, were unwilling to surrender the OCT.14

Having failed to physically obtain the title from petitioners, in July 1989, the Cruzes instead went to RBSP which had custody of the owner’s duplicate certificate of the OCT, earlier surrendered as a consequence of the mortgage. Transacting with RBSP’s manager, Jose Salazar (Salazar), the Cruzes sought to borrow the owner’s duplicate certificate for the purpose of photocopying the same and thereafter showing a copy thereof to the Register of Deeds. Salazar allowed the Cruzes to bring the owner’s duplicate certificate outside the bank premises when the latter showed the Kasulatan.15 The Cruzes returned the owner’s duplicate certificate on the same day after having copied the same. They then brought the copy of the OCT to Register of Deeds Jose Flores (Flores) of Meycauayan and showed the same to him to secure his legal opinion as to how the Cruzes could legally protect their interest in the property and register the same.16 Flores suggested the preparation of a subdivision plan to be able to segregate the area purchased by Ricardo from Eduardo and have the same covered by a separate title.17

Thereafter, the Cruzes solicited the opinion of Ricardo Arandilla (Arandilla), Land Registration Officer, Director III, Legal Affairs Department, Land Registration Authority at Quezon City, who agreed with the advice given by Flores.18 Relying on the suggestions of Flores and Arandilla, the Cruzes hired two geodetic engineers to prepare the corresponding subdivision plan. The subdivision plan was presented to the Land Management Bureau, Region III, and there it was approved by a certain Mr. Pambid of said office on 21 July 1989.

After securing the approval of the subdivision plan, the Cruzes went back to RBSP and again asked for the owner’s duplicate certificate from Salazar. The Cruzes informed him that the presentation of the owner’s duplicate certificate was necessary, per advise of the Register of Deeds, for the cancellation of the OCT and the issuance in lieu thereof of two separate titles in the names of Ricardo and Eduardo in accordance with the approved subdivision plan.19 Before giving the owner’s duplicate certificate, Salazar required the Cruzes to see Atty. Renato

Santiago (Atty. Santiago), legal counsel of RBSP, to secure from the latter a clearance to borrow the title. Atty. Santiago would give the clearance on the condition that only Cruzes put up a substitute collateral, which they did.20 As a result, the Cruzes got hold again of the owner’s duplicate certificate.

After the Cruzes presented the owner’s duplicate certificate, along with the deeds of sale and the subdivision plan, the Register of Deeds cancelled the OCT and issued in lieu thereof TCT No. T-9326-P(M) covering 603 square meters of Lot No. 2204 in the name of Ricardo and TCT No. T-9327-P(M) covering the remaining 455 square meters in the name of Eduardo.21

On 9 August 1989, the Cruzes went back to the bank and surrendered to Salazar TCT No. 9327-P(M) in the name of Eduardo and retrieved the title they had earlier given as substitute collateral. After securing the new separate titles, the Cruzes furnished petitioners with a copy of TCT No. 9327-P(M) through the barangay captain and paid the real property tax for 1989.22

The Cruzes also sent a formal letter to Guillermo Reyes, Jr., Director, Supervision Sector, Department III of the Central Bank of the Philippines, inquiring whether they committed any violation of existing bank laws under the circumstances. A certain Zosimo Topacio, Jr. of the Supervision Sector sent a reply letter advising the Cruzes, since the matter is between them and the bank, to get in touch with the bank for the final settlement of the case.23

In October of 1989, Banaag went to RBSP, intending to tender full payment of the mortgage obligation. It was only then that he learned of the dealings of the Cruzes with the bank which eventually led to the subdivision of the subject lot and the issuance of two separate titles thereon. In exchange for the full payment of the loan, RBSP tried to persuade petitioners to accept TCT No. T-9327-P(M) in the name of Eduardo.24

As a result, three (3) cases were lodged, later consolidated, with the trial court, all involving the issuance of the TCTs, to wit:

(1) Civil Case No. 650-M-89, for reconveyance with damages filed by the heirs of Eduardo Manlapat against Consuelo Cruz, Rosalina Cruz-Bautista, Rural Bank of San Pascual, Jose Salazar and Jose Flores, in his capacity as Deputy Registrar, Meycauayan Branch of the Registry of Deeds of Bulacan;

(2) Civil Case No. 141-M-90 for damages filed by Jose Salazar against Consuelo Cruz, et. [sic] al.; and

(3) Civil Case No. 644-M-89, for declaration of nullity of title with damages filed by Rural Bank of San Pascual, Inc. against the spouses Ricardo Cruz and Consuelo Cruz, et al.25

After trial of the consolidated cases, the RTC of Malolos rendered a decision in favor of the heirs of Eduardo, the dispositive portion of which reads:

WHEREFORE, premised from the foregoing, judgment is hereby rendered:

1.–Declaring Transfer Certificates of Title Nos. T-9326-P(M) and T-9327-P(M) as void ab initio and ordering the Register of Deeds, Meycauayan Branch to cancel said titles and to restore Original Certificate of Title No. P-153(M) in the name of plaintiffs’ predecessor-in-interest Eduardo Manlapat;

2.-Ordering the defendants Rural Bank of San Pascual, Jose Salazar, Consuelo Cruz and Rosalina Cruz-Bautista, to pay the plaintiffs Heirs of Eduardo Manlapat, jointly and severally, the following:

a)P200,000.00 as moral damages;

b)P50,000.00 as exemplary damages;

c)P20,000.00 as attorney’s fees; and

d)the costs of the suit.

3.–Dismissing the counterclaims.

SO ORDERED."26

The trial court found that petitioners were entitled to the reliefs of reconveyance and damages. On this matter, it ruled that petitioners were bona fide mortgagors of an unclouded title bearing no annotation of any lien and/or encumbrance. This fact, according to the trial court, was confirmed by the bank when it accepted the mortgage unconditionally on 25 November 1981. It found that petitioners were complacent and unperturbed, believing that the title to their property, while serving as security for a loan, was safely vaulted in the impermeable confines of RBSP. To their surprise and prejudice, said title was subdivided into two portions, leaving them a portion of 455 square meters from the original total area of 1,058 square meters, all because of the fraudulent and negligent acts of respondents and RBSP. The trial court ratiocinated that even assuming that a portion of the subject lot was sold by Eduardo to Ricardo, petitioners were still not privy to the transaction between the bank and the Cruzes which eventually led to the subdivision of the OCT into TCTs No. T-9326-P(M) and No. T-9327-P(M), clearly to the damage and prejudice of petitioners.27

Concerning the claims for damages, the trial court found the same to be bereft of merit. It ruled that although the act of the Cruzes could be deemed fraudulent, still it would not constitute intrinsic fraud. Salazar, nonetheless, was clearly guilty of negligence in letting the Cruzes borrow the owner’s duplicate certificate of the OCT. Neither the bank nor its manager had business entrusting to strangers titles mortgaged to it by other persons for whatever reason. It was a clear violation of the mortgage and banking laws, the trial court concluded.

The trial court also ruled that although Salazar was personally responsible for allowing the title to be borrowed, the bank could not escape liability for it was guilty of contributory negligence. The evidence showed that RBSP’s legal counsel was sought for advice regarding respondents’ request. This could only mean that RBSP through its lawyer if not through its manager had known in advance of the Cruzes’ intention and still it did nothing to prevent the eventuality. Salazar was not even summarily dismissed by the bank if he was indeed the sole person to blame. Hence, the bank’s claim for damages must necessarily fail.28

The trial court granted the prayer for the annulment of the TCTs as a necessary consequence of its declaration that reconveyance was in order. As to Flores, his work being ministerial as Deputy Register of the Bulacan Registry of Deeds, the trial court absolved him of any liability with a stern warning that he should deal with his future transactions more carefully and in the strictest sense as a responsible government official.29

Aggrieved by the decision of the trial court, RBSP, Salazar and the Cruzes appealed to the Court of Appeals. The appellate court, however, reversed the decision of the RTC. The decretal text of the decision reads:

THE FOREGOING CONSIDERED, the appealed decision is hereby reversed and set aside, with costs against the appellees.

SO ORDERED.30

The appellate court ruled that petitioners were not bona fide mortgagors since as early as 1954 or before the 1981 mortgage, Eduardo already sold to Ricardo a portion of the subject lot with an area of 553 square meters. This fact, the Court of Appeals noted, is even supported by a document of sale signed by Eduardo Jr. and Engracia Aniceto, the surviving spouse of Eduardo, and registered with the Register of Deeds of Bulacan. The appellate court also found that on 18 March 1981, for the second time, Eduardo sold to Ricardo a separate area containing 50 square meters, as a road right-of-way.31 Clearly, the OCT was issued only after the first sale. It also noted that the title was given to the Cruzes by RBSP voluntarily, with knowledge even of the bank’s counsel.32Hence, the imposition of damages cannot be justified, the Cruzes themselves being the owners of the property. Certainly, Eduardo misled the bank into accepting the entire area as a collateral since the 603-square meter portion did not anymore belong to him. The appellate court, however, concluded that there was no conspiracy between the bank and Salazar.33

Hence, this petition for review on certiorari.

Petitioners ascribe errors to the appellate court by asking the following questions, to wit: (a) can a mortgagor be compelled to receive from the mortgagee a smaller portion of the originally encumbered title partitioned during the subsistence of the mortgage, without the knowledge of, or authority derived from, the registered owner; (b) can the mortgagee question the veracity of the registered title of the mortgagor, as noted in the owner’s duplicate certificate, and thus, deliver the certificate to such third persons, invoking an adverse, prior, and unregistered claim against the registered title of the mortgagor; (c) can an adverse prior claim against a registered title be noted, registered and entered without a competent court order; and (d) can belief of ownership justify the taking of property without due process of law?34

The kernel of the controversy boils down to the issue of whether the cancellation of the OCT in the name of the petitioners’ predecessor-in-interest and its splitting into two separate titles, one for the petitioners and the other for the Cruzes, may be accorded legal recognition given the peculiar factual backdrop of the case. We rule in the affirmative.

Private respondents (Cruzes) ownthe portion titled in their names

Consonant with law and justice, the ultimate denouement of the property dispute lies in the determination of the respective bases of the warring claims. Here, as in other legal disputes, what is written generally deserves credence.

A careful perusal of the evidence on record reveals that the Cruzes have sufficiently proven their claim of ownership over the portion of Lot No. 2204 with an area of 553 square meters. The duly notarized instrument of conveyance was executed in 1954 to which no less than Eduardo was a signatory. The execution of the deed of sale was rendered beyond doubt by Eduardo’s admission in his Sinumpaang Salaysay dated 24 April 1963.35These documents make the affirmance of the right of the Cruzes ineluctable. The apparent irregularity, however, in the obtention of the owner’s duplicate certificate from the bank, later to be presented to the Register of Deeds to secure the issuance of two new TCTs in place of the OCT, is another matter.

Petitioners argue that the 1954 deed of sale was not annotated on the OCT which was issued in 1976 in favor of Eduardo; thus, the Cruzes’ claim of ownership based on the sale would not hold water. The Court is not persuaded.

Registration is not a requirement for validity of the contract as between the parties, for the effect of registration serves chiefly to bind third persons.36 The principal purpose of registration is merely to notify other persons not parties to a contract that a transaction involving the property had been entered into. Where the party has knowledge of a prior existing interest which is unregistered at the time he acquired a right to the same land, his knowledge of that prior unregistered interest has the effect of registration as to him.37

Further, the heirs of Eduardo cannot be considered third persons for purposes of applying the rule. The conveyance shall not be valid against any person unless registered, except (1) the grantor, (2) his heirs and devisees, and (3) third persons having actual notice or knowledge thereof.38 Not only are petitioners the heirs of Eduardo, some of them were actually parties to the Kasulatan executed in favor of Ricardo. Thus, the annotation of the adverse claim of the Cruzes on the OCT is no longer required to bind the heirs of Eduardo, petitioners herein.

Petitioners had no right to constitutemortgage over disputed portion

The requirements of a valid mortgage are clearly laid down in Article 2085 of the New Civil Code, viz:

ART. 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (emphasis supplied)

For a person to validly constitute a valid mortgage on real estate, he must be the absolute owner thereof as required by Article 2085 of the New Civil Code.39 The mortgagor must be the owner, otherwise the mortgage is void.40 In a contract of mortgage, the mortgagor remains to be the owner of the property although the property is subjected to a lien.41 A mortgage is regarded as nothing more than a mere lien, encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives him no right or claim to the possession of the property.42 In this kind of contract, the property mortgaged is merely delivered to the mortgagee to secure the fulfillment of the principal obligation.43 Such delivery does not empower the mortgagee to convey any portion thereof in favor of another person as the right to dispose is an attribute of ownership.44 The right to dispose includes the right to donate, to sell, to pledge or mortgage. Thus, the mortgagee, not being the owner of the property, cannot dispose of the whole or part thereof nor cause the impairment of the security in any manner without violating the foregoing rule.45 The mortgagee only owns the mortgage credit, not the property itself.46

Petitioners submit as an issue whether a mortgagor may be compelled to receive from the mortgagee a smaller portion of the lot covered by the originally encumbered title, which lot was partitioned during the subsistence of the mortgage without the knowledge or authority of the mortgagor as registered owner. This formulation is disingenuous, baselessly assuming, as it does, as an admitted fact that the mortgagor is the owner of the mortgaged property in its entirety. Indeed, it has not become a salient issue in this case since the mortgagor was not the owner of the entire mortgaged property in the first place.

Issuance of OCT No. P-153(M), improper

It is a glaring fact that OCT No. P-153(M) covering the property mortgaged was in the name of Eduardo, without any annotation of any prior disposition or encumbrance. However, the property was sufficiently shown to be not entirely owned by Eduardo as evidenced by the Kasulatan. Readily apparent upon perusal of the records is that the OCT was issued in 1976, long after the Kasulatan was executed way back in 1954. Thus, a portion of the property registered in Eduardo’s name arising from the grant of free patent did not actually belong to him. The utilization of the Torrens system to perpetrate fraud cannot be accorded judicial sanction.

Time and again, this Court has ruled that the principle of indefeasibility of a Torrens title does not apply where fraud attended the issuance of the title, as was conclusively established in this case. The Torrens title does not furnish a shied for fraud.47 Registration does not vest title. It is not a mode of acquiring ownership but is merely evidence of such title over a particular property. It does not give the holder any better right than what he actually has, especially if the registration was done in bad faith. The effect is that it is as if no registration was made at all.48 In fact, this Court has ruled that a decree of registration cut off or extinguished a right acquired by a person when such right refers to a lien or encumbrance on the land¾not to the right of ownership thereof¾which was not annotated on the certificate of title issued thereon.49

Issuance of TCT Nos. T-9326-P(M)and T-9327-P(M), Valid

The validity of the issuance of two TCTs, one for the portion sold to the predecessor-in-interest of the Cruzes and the other for the portion retained by petitioners, is readily apparent from Section 53 of the Presidential Decree (P.D.) No. 1529 or the Property Registration Decree. It provides:

SEC 53. Presentation of owner’s duplicate upon entry of new certificate. – No voluntary instrument shall be registered by the Register of Deeds, unless the owner’s duplicate certificate is presented with such instrument, except in cases expressly provided for in this Decree or upon order of the court, for cause shown.

The production of the owner’s duplicate certificate, whenever any voluntary instrument is presented for registration, shall be conclusive authority from the registered owner to the Register of Deeds to enter a new certificate or to make a memorandum of registration in accordance with such instrument, and the new certificate or memorandum shall be binding upon the registered owner and upon all persons claiming under him, in favor of every purchaser for value and in good faith.

In all cases of registration procured by fraud, the owner may pursue all his legal and equitable remedies against the parties to such fraud without prejudice, however, to the rights of any innocent holder of the decree of registration on the original petition or application, any subsequent registration procured by the presentation of a forged duplicate certificate of title, or a forged deed or instrument, shall be null and void. (emphasis supplied)

Petitioners argue that the issuance of the TCTs violated the third paragraph of Section 53 of P.D. No. 1529. The argument is baseless. It must be noted that the provision speaks of forged duplicate certificate of title and forged deed or instrument. Neither instance obtains in this case. What the Cruzes presented before the Register of Deeds was the very genuine owner’s duplicate certificate earlier deposited by Banaag, Eduardo’s attorney-in-fact, with RBSP. Likewise, the instruments of conveyance are authentic, not forged. Section 53 has never been clearer on the point that as long as the owner’s duplicate certificate is presented to the Register of Deeds together with the instrument of conveyance, such presentation serves as conclusive authority to the Register of Deeds to issue a transfer certificate or make a memorandum of registration in accordance with the instrument.

The records of the case show that despite the efforts made by the Cruzes in persuading the heirs of Eduardo to allow them to secure a separate TCT on the claimed portion, their ownership being amply evidenced by theKasulatan and Sinumpaang Salaysay where Eduardo himself acknowledged the sales in favor of Ricardo, the heirs adamantly rejected the notion of separate titling. This prompted the Cruzes to approach the bank manager of RBSP for the purpose of protecting their property right. They succeeded in persuading the latter to lend the owner’s duplicate certificate. Despite the apparent irregularity in allowing the Cruzes to get hold of the owner’s duplicate certificate, the bank officers consented to the Cruzes’ plan to register the deeds of sale and secure two new separate titles, without notifying the heirs of Eduardo about it.

Further, the law on the matter, specifically P.D. No. 1529, has no explicit requirement as to the manner of acquiring the owner’s duplicate for purposes of issuing a TCT. This led the Register of Deeds of Meycauayan as well as the Central Bank officer, in rendering an opinion on the legal feasibility of the process resorted to by the Cruzes. Section 53 of P.D. No. 1529 simply requires the production of the

owner’s duplicate certificate, whenever any voluntary instrument is presented for registration, and the same shall be conclusive authority from the registered owner to the Register of Deeds to enter a new certificate or to make a memorandum of registration in accordance with such instrument, and the new certificate or memorandum shall be binding upon the registered owner and upon all persons claiming under him, in favor of every purchaser for value and in good faith.

Quite interesting, however, is the contention of the heirs of Eduardo that the surreptitious lending of the owner’s duplicate certificate constitutes fraud within the ambit of the third paragraph of Section 53 which could nullify the eventual issuance of the TCTs. Yet we cannot subscribe to their position.

Impelled by the inaction of the heirs of Eduardo as to their claim, the Cruzes went to the bank where the property was mortgaged. Through its manager and legal officer, they were assured of recovery of the claimed parcel of land since they are the successors-in-interest of the real owner thereof. Relying on the bank officers’ opinion as to the legality of the means sought to be employed by them and the suggestion of the Central Bank officer that the matter could be best settled between them and the bank, the Cruzes pursued the titling of the claimed portion in the name of Ricardo. The Register of Deeds eventually issued the disputed TCTs.

The Cruzes resorted to such means to protect their interest in the property that rightfully belongs to them only because of the bank officers’ acquiescence thereto. The Cruzes could not have secured a separate TCT in the name of Ricardo without the bank’s approval. Banks, their business being impressed with public interest, are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands.50 The highest degree of diligence is expected, and high standards of integrity and performance are even required of it.51

Indeed, petitioners contend that the mortgagee cannot question the veracity of the registered title of the mortgagor as noted in the owner’s duplicate certificate, and, thus, he cannot deliver the certificate to such third persons invoking an adverse, prior, and unregistered claim against the registered title of the mortgagor. The strength of this argument is diluted by the peculiar factual milieu of the case.

A mortgagee can rely on what appears on the certificate of title presented by the mortgagor and an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title. This rule is strictly applied to banking institutions. A mortgagee-bank must exercise due diligence before entering into said contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who the real owners thereof are.52

Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, as their business is one affected with public interest. Banks keep in trust money belonging to their depositors, which they should guard against loss by not committing any act of negligence that amounts to lack of good faith. Absent good faith, banks would be denied the protective mantle of the land registration statute, Act 496, which extends only to purchasers for value and good faith, as well as to mortgagees of the same character and description.53 Thus, this Court clarified that the rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.54

Bank Liable for Nominal Damages

Of deep concern to this Court, however, is the fact that the bank lent the owner’s duplicate of the OCT to the Cruzes when the latter presented the instruments of conveyance as basis of their claim of ownership over a portion of land covered by the title. Simple rationalization would dictate that a mortgagee-bank has no right to deliver to any stranger any property entrusted to it other than to those contractually and legally entitled to its possession. Although we cannot dismiss the bank’s acknowledgment of the Cruzes’ claim as legitimized by instruments of conveyance in their possession, we nonetheless cannot sanction how the bank was inveigled to do the bidding of virtual strangers. Undoubtedly, the bank’s cooperative stance facilitated the issuance of the TCTs. To make matters worse, the bank did not even notify the heirs of Eduardo. The conduct of the bank is as dangerous as it is unthinkably negligent. However, the aspect does not impair the right of the Cruzes to be recognized as legitimate owners of their portion of the property.

Undoubtedly, in the absence of the bank’s participation, the Register of Deeds could not have issued the disputed TCTs. We cannot find fault on the part of the Register of Deeds in issuing the TCTs as his authority to issue the same is clearly sanctioned by law. It is thus ministerial on the part of the Register of Deeds to issue TCT if the deed of conveyance and the original owner’s duplicate are presented to him as there appears on theface of the instruments no badge of irregularity or nullity.55 If there is someone to blame for the shortcut resorted to by the Cruzes, it would be the bank itself whose manager and legal officer helped the Cruzes to facilitate the issuance of the TCTs.1avvphi1

The bank should not have allowed complete strangers to take possession of the owner’s duplicate certificate even if the purpose is merely for photocopying for a danger of losing the same is more than imminent. They should be aware of the conclusive presumption in

Section 53. Such act constitutes manifest negligence on the part of the bank which would necessarily hold it liable for damages under Article 1170 and other relevant provisions of the Civil Code.56

In the absence of evidence, the damages that may be awarded may be in the form of nominal damages. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.57 This award rests on the mortgagor’s right to rely on the bank’s observance of the highest diligence in the conduct of its business. The act of RBSP of entrusting to respondents the owner’s duplicate certificate entrusted to it by the mortgagor without even notifying the mortgagor and absent any prior investigation on the veracity of respondents’ claim and

character is a patent failure to foresee the risk created by the act in view of the provisions of Section 53 of P.D. No. 1529. This act runs afoul of every bank’s mandate to observe the highest degree of diligence in dealing with its clients. Moreover, a mortgagor has also the right to be afforded due process before deprivation or diminution of his property is effected as the OCT was still in the name of Eduardo. Notice and hearing are indispensable elements of this right which the bank miserably ignored.

Under the circumstances, the Court believes the award of P50,000.00 as nominal damages is appropriate.

Five-Year Prohibition against alienationor encumbrance under the Public Land Act

One vital point. Apparently glossed over by the courts below and the parties is an aspect which is essential, spread as it is all over the record and intertwined with the crux of the controversy, relating as it does to the validity of the dispositions of the subject property and the mortgage thereon. Eduardo was issued a title in 1976 on the basis of his free patent application. Such application implies the recognition of the public dominion character of the land and, hence, the five (5)-year prohibition imposed by the Public Land Act against alienation or encumbrance of the land covered by a free patent or homestead58 should have been considered.

The deed of sale covering the fifty (50)-square meter right of way executed by Eduardo on 18 March 1981 is obviously covered by the proscription, the free patent having been issued on 8 October 1976. However, petitioners may recover the portion sold since the prohibition was imposed in favor of the free patent holder. InPhilippine National Bank v. De los Reyes,59 this Court ruled squarely on the point, thus:

While the law bars recovery in a case where the object of the contract is contrary to law and one or both parties acted in bad faith, we cannot here apply the doctrine of in pari delicto which admits of an exception, namely, that when the contract is merely prohibited by law, not illegal per se, and the prohibition is designed for the protection of the party seeking to recover, he is entitled to the relief prayed for whenever public policy is enhanced thereby. Under the Public Land Act, the prohibition to alienate is predicated on the fundamental policy of the State to preserve and keep in the family of the homesteader that portion of public land which the State has gratuitously given to him, and recovery is allowed even where the land acquired under the Public Land Act was sold and not merely encumbered, within the prohibited period.60

The sale of the 553 square meter portion is a different story. It was executed in 1954, twenty-two (22) years before the issuance of the patent in 1976. Apparently, Eduardo disposed of the portion even before he thought of applying for a free patent. Where the sale or transfer took place before the filing of the free patent application, whether by the vendor or the vendee, the prohibition should not be applied. In such situation, neither the prohibition nor the rationale therefor which is to keep in the family of the patentee that portion of the public land which the government has gratuitously given him, by shielding him from the temptation to dispose of his landholding, could be relevant. Precisely, he had disposed of his rights to the lot even before the government could give the title to him.

The mortgage executed in favor of RBSP is also beyond the pale of the prohibition, as it was forged in December 1981 a few months past the period of prohibition.

WHEREFORE, the Decision of the Court of Appeals is AFFIRMED, subject to the modifications herein. Respondent Rural Bank of San Pascual is hereby ORDERED to PAY petitioners Fifty Thousand Pesos (P50,000.00) by way of nominal damages. Respondents Consuelo Cruz and Rosalina Cruz-Bautista are hereby DIVESTED of title to, and respondent Register of Deeds of Meycauayan, Bulacan is accordingly ORDERED to segregate, the portion of fifty (50) square meters of the subject Lot No. 2204, as depicted in the approved plan covering the lot, marked as Exhibit "A", and to issue a new title covering the said portion in the name of the petitioners at the expense of the petitioners. No costs.

SO ORDERED.

2. Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

 

G.R. No. 133876 December 29, 1999

BANK OF AMERICA, NT and SA, petitioner, vs.AMERICAN REALTY CORPORATION and COURT OF APPEALS, respondents.

 

BUENA, J.:

Does a mortgage-creditor waive its remedy to foreclose the real estate mortgage constituted over a third party mortgagor's property situated in the Philippines by filing an action for the collection of the principal loan before foreign courts?

Sought to be reversed in the instant petition for review on certiorari under Rule 45 of the Rules of Court are the decision 1 of public respondent Court of Appeals in CA G.R. CV No. 51094, promulgated on 30 September 1997 and its resolution, 2 dated 22 May 1998, denying petitioner's motion for reconsideration.

Petitioner Bank of America NT & SA (BANTSA) is an international banking and financing institution duly licensed to do business in the Philippines, organized and existing under and by virtue of the laws of the State of California, United States of America while private respondent American Realty Corporation (ARC) is a domestic corporation.

Bank of America International Limited (BAIL), on the other hand, is a limited liability company organized and existing under the laws of England.

As borne by the records, BANTSA and BAIL on several occasions granted three major multi-million United States (US) Dollar loans to the following corporate borrowers: (1) Liberian Transport Navigation, S.A.; (2) El Challenger S.A. and (3) Eshley Compania Naviera S.A. (hereinafter collectively referred to as "borrowers"), all of which are existing under and by virtue of the laws of the Republic of Panama and are foreign affiliates of privaterespondent. 3

Due to the default in the payment of the loan amortizations, BANTSA and the corporate borrowers signed and entered into restructuring agreements. As additional security for the restructured loans, private respondent ARC as third party mortgagor executed two real estate mortgages, 4 dated 17 February 1983 and 20 July 1984, over its parcels of land including improvements thereon, located at Barrio

Sto. Cristo, San Jose Del Monte, Bulacan, and which are covered by Transfer Certificate of Title Nos. T-78759, T-78760, T-78761, T-78762 and T-78763.

Eventually, the corporate borrowers defaulted in the payment of the restructured loans prompting petitioner BANTSA to file civil actions 5 before foreign courts for the collection of the principal loan, to wit:

a) In England, in its High Court of Justice, Queen's Bench Division, Commercial Court (1992-Folio No 2098) against Liberian Transport Navigation S.A., Eshley Compania Naviera S.A., El Challenger S.A., Espriona Shipping Company S.A., Eddie Navigation Corp., S.A., Eduardo Katipunan Litonjua and Aurelio Katipunan Litonjua on June 17, 1992.

b) In England, in its High Court of Justice, Queen's Bench Division, Commercial Court (1992-Folio No. 2245) against El Challenger S.A., Espriona Shipping Company S.A., Eduardo Katipuan Litonjua & Aurelio Katipunan Litonjua on July 2, 1992;

c) In Hongkong, in the Supreme Court of Hongkong High Court (Action No. 4039 of 1992) against Eshley Compania Naviera S.A., El Challenger S.A., Espriona Shipping Company S.A. Pacific Navigators Corporation, Eddie Navigation Corporation S.A., Litonjua Chartering (Edyship) Co., Inc., Aurelio Katipunan Litonjua, Jr. and Eduardo Katipunan Litonjua on November 19, 1992; and

d) In Hongkong, in the Supreme Court of Hongkong High Court (Action No. 4040 of 1992) against Eshley Compania Naviera S.A., El Challenger S.A., Espriona Shipping Company, S.A., Pacific Navigators Corporation, Eddie Navigation Corporation S.A., Litonjua Chartering (Edyship) Co., Jr. and Eduardo Katipunan Litonjua on November 21, 1992.

In the civil suits instituted before the foreign courts, private respondent ARC, being a third party mortgagor, was private not impleaded as party-defendant.

On 16 December 1992, petitioner BANTSA filed before the Office of the Provincial Sheriff of Bulacan, Philippines an application for extrajudicial foreclosure 6 of real estate mortgage.

On 22 January 1993, after due publication and notice, the mortgaged real properties were sold at public auction in an extrajudicial foreclosure sale, with Integrated Credit

and Corporation Services Co (ICCS) as the highest bidder for the sum of Twenty four Million Pesos (P24,000.000.00). 7

On 12 February 1993, private respondent filed before the Pasig Regional Trial Court, Branch 159, an action for damages 8 against the petitioner, for the latter's act of foreclosing extrajudicially the real estate mortgages despite the pendency of civil suits before foreign courts for the collection of the principal loan.

In its answer 9 petitioner alleged that the rule prohibiting the mortgagee from foreclosing the mortgage after an ordinary suit for collection has been filed, is not applicable in the present case, claiming that:

a) The plaintiff, being a mere third party mortgagor and not a party to the principal restructuring agreements, was never made a party defendant in the civil cases filed in Hongkong and England;

b) There is actually no civil suit for sum of money filed in the Philippines since the civil actions were filed in Hongkong and England. As such, any decisions (sic) which may be rendered in the abovementioned courts are not (sic) enforceable in the Philippines unless a separate action to enforce the foreign judgments is first filed in the Philippines, pursuant to Rule 39, Section 50 of the Revised Rules of Court.

c) Under English Law, which is the governing law under the principal agreements, the mortgagee does not lose its security interest by filing civil actions for sums of money.

On 14 December 1993, private respondent filed a motion forsuspension 10 of the redemption period on the ground that "it cannot exercise said right of redemption without at the same time waiving or contradicting its contentions in the case that the foreclosure of the mortgage on its properties is legally improper and therefore invalid."

In an order 11 dated 28 January 1994, the trial court granted the private respondent's motion for suspension after which a copy of said order was duly received by the Register of Deeds of Meycauayan, Bulacan.

On 07 February 1994, ICCS, the purchaser of the mortgaged properties at the foreclosure sale, consolidated its ownership over the real properties, resulting to the issuance of Transfer Certificate of Title Nos. T-18627, T-186272, T-186273, T-16471 and T-16472 in its name.

On 18 March 1994, after the consolidation of ownership in its favor, ICCS sold the real properties to Stateland Investment Corporation for the amount of Thirty Nine Million Pesos (P39,000,000.00). 12 Accordingly, Transfer Certificate of Title Nos. T-187781(m), T-187782(m), T-187783(m), T-16653P(m) and T-16652P(m) were issued in the latter's name.

After trial, the lower court rendered a decision 13 in favor of private respondent ARC dated 12 May 1993, the decretal portion of which reads:

WHEREFORE, judgment is hereby rendered declaring that the filing in foreign courts by the defendant of collection suits against the principal debtors operated as a waiver of the security of the mortgages. Consequently, the plaintiff's rights as owner and possessor of the properties then covered by Transfer Certificates of Title Nos. T-78759, T-78762, T-78763, T-78760 and T-78761, all of the Register of Deeds of Meycauayan, Bulacan, Philippines, were violated when the defendant caused the extrajudicial foreclosure of the mortgages constituted thereon.

Accordingly, the defendant is hereby ordered to pay the plaintiff the following sums, all with legal interest thereon from the date of the filing of the complaint up to the date of actual payment:

1) Actual or compensatory damages in the amount of Ninety Nine Million Pesos (P99,000,000.00);

2) Exemplary damages in the amount of Five Million Pesos (P5,000,000.00); and

3) Costs of suit.

SO ORDERED.

On appeal, the Court of Appeals affirmed the assailed decision of the lower court prompting petitioner to file a motion for reconsideration which the appellate court denied.

Hence, the instant petition for review 14 on certiorari where herein petitioner BANTSA ascribes to the Court of Appeals the following assignment of errors:

1. The Honorable Court of Appeals disregarded the doctrines laid down by this Hon. Supreme Court in the cases of Caltex Philippines, Inc. vs. Intermediate Appellate Courtdocketed as G.R. No. 74730 promulgated on August 25, 1989 and Philippine Commercial International Bank vs. IAC, 196 SCRA 29 (1991 case), although said cases were duly cited, extensively discussed and specifically mentioned, as one of the issues in the assignment of errors found on page 5 of the decision dated September 30, 1997.

2. The Hon. Court of Appeals acted with grave abuse of discretion when it awarded the private respondent actual and exemplary damages totalling P171,600,000.00, as of July 12, 1998 although such huge amount was not asked nor prayed for in private respondent's complaint, is contrary to law and is totally unsupported by evidence (sic).

In fine, this Court is called upon to resolve two main issues:

1. Whether or not the petitioner's act of filing a collection suit against the principal debtors for the recovery of the loan before foreign courts constituted a waiver of the remedy of foreclosure.

2. Whether or not the award by the lower court of actual and exemplary damages in favor of private respondent ARC, as third-party mortgagor, is proper.

The petition is bereft of merit.

First, as to the issue of availability of remedies, petitioner submits that a waiver of the remedy of foreclosure requires the concurrence of two requisites: an ordinary civil action for collection should be filed and subsequently a final judgment be correspondingly rendered therein.

According to petitioner, the mere filing of a personal action to collect the principal loan does not suffice; a final judgment must be secured and obtained in the personal action so that waiver of the remedy of foreclosure may be appreciated. To put it differently, absent any of the two requisites, the mortgagee-creditor is deemed not to have waived the remedy of foreclosure.

We do not agree.

Certainly, this Court finds petitioner's arguments untenable and upholds the jurisprudence laid down in Bachrach15 and similar cases adjudicated thereafter, thus:

In the absence of express statutory provisions, a mortgage creditor may institute against the mortgage debtor either a personal action or debt or a real action to foreclose the mortgage. In other words, he may he may pursue either of the two remedies, but not both. By such election, his cause of action can by no means be impaired, for each of the two remedies is complete in itself. Thus, an election to bring a personal action will leave open to him all the properties of the debtor for attachment and execution, even including the mortgaged property itself. And, if he waives such personal action and pursues his remedy against the mortgaged property, an unsatisfied judgment thereon would still give him the right to sue for a deficiency judgment, in which case, all the properties of the defendant, other than the mortgaged property, are again open to him for the satisfaction of the deficiency. In either case, his remedy is complete, his cause of action undiminished, and any advantages attendant to the pursuit of one or the other remedy are purely accidental and are all under his right of election. On the other hand, a rule that would authorize the plaintiff to bring a personal action against the debtor and simultaneously or successively another action against the mortgaged property, would result not only in multiplicity of suits so offensive to justice (Soriano vs. Enriques, 24 Phil. 584) and obnoxious to law and equity (Osorio vs. San Agustin, 25 Phil., 404), but also in subjecting the defendant to the vexation of being sued

in the place of his residence or of the residence of the plaintiff, and then again in the place where the property lies.

In Danao vs. Court of Appeals, 16 this Court, reiterating jurisprudence enunciated in Manila Trading and Supply Co vs. Co Kim 17 and Movido vs.RFC, 18 invariably held:

. . . The rule is now settled that a mortgage creditor may elect to waive his security and bring, instead, an ordinary action to recover the indebtedness with the right to execute a judgment thereon on all the properties of the debtor, including the subject matter of the mortgage . . . , subject to the qualification that if he fails in the remedy by him elected, he cannot pursue further the remedy he has waived. (Emphasis Ours)

Anent real properties in particular, the Court has laid down the rule that a mortgage creditor may institute against the mortgage debtor either a personal action for debt or a real action to foreclose the mortgage. 19

In our jurisdiction, the remedies available to the mortgage creditor are deemed alternative and not cumulative. Notably, an election of one remedy operates as a waiver of the other. For this purpose, a remedy is deemed chosen upon the filing of the suit for collection or upon the filing of the complaint in an action for foreclosure of mortgage, pursuant to the provision of Rule 68 of the of the 1997 Rules of Civil Procedure. As to extrajudicial foreclosure, such remedy is deemed elected by the mortgage creditor upon filing of the petition not with any court of justice but with the Office of the Sheriff of the province where the sale is to be made, in accordance with the provisions of Act No. 3135, as amended by Act No. 4118.

In the case at bench, private respondent ARC constituted real estate mortgages over its properties as security for the debt of the principal debtors. By doing so, private respondent subjected itself to the liabilities of a third party mortgagor. Under the law, third persons who are not parties to a loan may secure the latter by pledging or mortgaging their own property. 20

Notwithstanding, 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. The signatory to the principal contract—loan—remains to be primarily bound. It is only upon default of the latter that the creditor may have recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the recovery of the amount of the loan. 21

In the instant case, petitioner's contention that the requisites of filing the action for collection and rendition of final judgment therein should concur, is untenable.

Thus, in Cerna vs. Court of Appeals, 22 we agreed with the petitioner in said case, that the filing of a collection suit barred the foreclosure of the mortgage:

A mortgagee 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 when he seeks to recover in the said collection suit.

. . . When the mortgagee elects to file a suit for collection, not foreclosure, thereby abandoning the chattel mortgage as basis for relief, he clearly manifests his lack of desire and interest to go after the mortgaged property as security for the promissory note . . . .

Contrary to petitioner's arguments, we therefore reiterate the rule, for clarity and emphasis, that the mere act of filing of an ordinary action for collection operates as a waiver of the mortgage-creditor's remedy to foreclose the mortgage. By the mere filing of the ordinary action for collection against the principal debtors, the petitioner in the present case is deemed to have elected a remedy, as a result of which a waiver of the other necessarily must arise. Corollarily, no final judgment in the collection suit is required for the rule on waiver to apply.

Hence, in Caltex Philippines, Inc. vs. Intermediate-Appellate Court, 23 a case relied upon by petitioner, supposedly to buttress its contention, this Court had occasion to rule that the mere act of filing a collection suit for the recovery of a debt secured by a mortgage constitutes waiver of the other remedy of foreclosure.

In the case at bar, petitioner BANTSA only has one cause of action which is non-payment of the debt. Nevertheless, alternative remedies are available for its enjoyment and exercise. Petitioner then may opt to exercise only one of two remedies so as not to violate the rule against splitting a cause of action.

As elucidated by this Court in the landmark case of Bachrach Motor Co., Inc, vs. Icarangal. 24

For non-payment of a note secured by mortgage, the creditor has a single cause of action against the debtor. This single cause of action consists in the recovery of the credit with execution of the security. In other words, the creditor in his action may make two demands, the payment of the debt and the foreclosure of his mortgage. But both demands arise from the same cause, the non-payment of the debt, and for that reason, they constitute a single cause of action. Though the debt and the mortgage constitute separate agreements, the latter is subsidiary to the former, and both refer to one and the same obligation. Consequently, there exists only one cause of action for a single breach of that obligation. Plaintiff, then, by applying the rules above stated, cannot split up his single cause of action by filing a complaint for payment of the debt, and thereafter another complaint for foreclosure of the mortgage. If he does so, the filing of the first complaint will bar the subsequent complaint. By allowing the creditor to file two separate complaints simultaneously or successively, one to recover his credit and another to foreclose his mortgage, we will, in effect, be authorizing him plural redress for a single breach of contract at so much cost to the courts and with so much vexation and oppression to the debtor.

Petitioner further faults the Court of Appeals for allegedly disregarding the doctrine enunciated in Caltex wherein this High Court relaxed the application of the general rules to wit:

In the present case, however, we shall not follow this rule to the letter but declare that it is the collection suit which was waived and/or abandoned. This ruling is more in harmony with the principles underlying our judicial system. It is of no moment that the collection suit was filed ahead, what is determinative is the fact that the foreclosure proceedings ended even before the decision in the collection suit was rendered. . . .

Notably, though, petitioner took the Caltex ruling out of context. We must stress that the Caltex case was never intended to overrule the well-entrenched doctrine enunciated Bachrach, which to our mind still finds applicability in cases of this sort. To reiterate, Bachrach is still good law.

We then quote the decision 25 of the trial court, in the present case, thus:

The aforequoted ruling in Caltex is the exception rather than the rule, dictated by the peculiar circumstances obtaining therein. In the said case, the Supreme Court chastised Caltex for making ". . . a mockery of our judicial system when it initially filed a collection suit then, during the pendency thereof, foreclosed extrajudicially the mortgaged property which secured the indebtedness, and still pursued the collection suit to the end." Thus, to prevent a mockery of our judicial system", the collection suit had to be nullified because the foreclosure proceedings have already been pursued to their end and can no longer be undone.

xxx xxx xxx

In the case at bar, it has not been shown whether the defendant pursued to the end or are still pursuing the collection suits filed in foreign courts. There is no occasion, therefore, for this court to apply the exception laid down by the Supreme Court in Caltex by nullifying the collection suits. Quite obviously, too, the aforesaid collection suits are beyond the reach of this Court. Thus the only way the court may prevent the spector of a creditor having "plural redress for a single breach of contract" is by holding, as the Court hereby holds, that the defendant has waived the right to foreclose the mortgages constituted by the plaintiff on its properties originally covered by Transfer Certificates of Title Nos. T-78759, T-78762, T-78760 and T-78761. (RTC Decision pp., 10-11)

In this light, the actuations of Caltex are deserving of severe criticism, to say the least. 26

Moreover, petitioner attempts to mislead this Court by citing the case of PCIB vs. IAC. 27 Again, petitioner tried to fit a square peg in a round hole. It must be stressed that far from overturning the doctrine laid down in Bachrach, this Court in PCIB buttressed its firm stand on this issue by declaring:

While the law allows a mortgage creditor to either institute a personal action for the debt or a real action to foreclosure the mortgage, he cannot pursue both remedies simultaneously or successively as was done by PCIB in this case.

xxx xxx xxx

Thus, when the PCIB filed Civil Case No. 29392 to enforce payment of the 1.3 million promissory note secured by real estate mortgages and subsequently filed a petition for extrajudicial foreclosure, it violates the rule against splitting a cause of action.

Accordingly, applying the foregoing rules, we hold that petitioner, by the expediency of filing four civil suits before foreign courts, necessarily abandoned the remedy to foreclose the real estate mortgages constituted over the properties of third-party mortgagor and herein private respondent ARC. Moreover, by filing the four civil actions and by eventually foreclosing extrajudicially the mortgages, petitioner in effect transgressed the rules against splitting a cause of action well-enshrined in jurisprudence and our statute books.

In Bachrach, this Court resolved to deny the creditor the remedy of foreclosure after the collection suit was filed, considering that the creditor should not be afforded "plural redress for a single breach of contract." For cause of action should not be confused with the remedy created for its enforcement. 28

Notably, it is not the nature of the redress which is crucial but the efficacy of the remedy chosen in addressing the creditor's cause. Hence, a suit brought before a foreign court having competence and jurisdiction to entertain the action is deemed, for this purpose, to be within the contemplation of the remedy available to the mortgagee-creditor. This pronouncement would best serve the interest of justice and fair play and further discourage the noxious practice of splitting up a lone cause of action.

Incidentally, BANTSA alleges that under English Law, which according to petitioner is the governing law with regard to the principal agreements, the mortgagee does not lose its security interest by simply filing civil actions for sums of money. 29

We rule in the negative.

This argument shows desperation on the part of petitioner to rivet its crumbling cause. In the case at bench, Philippine law shall apply notwithstanding the evidence presented by petitioner to prove the English law on the matter.

In a long line of decisions, this Court adopted the well-imbedded principle in our jurisdiction that there is no judicial notice of any foreign law. A foreign law must be properly pleaded and proved as a fact. 30 Thus, if the foreign law involved is not properly pleaded and proved, our courts will presume that the foreign law is the same as our local or domestic or internallaw. 31 This is what we refer to as the doctrine of processual presumption.

In the instant case, assuming arguendo that the English Law on the matter were properly pleaded and proved in accordance with Section 24, Rule 132 of the Rules of Court and the jurisprudence laid down in Yao Kee, et al. vs.Sy-Gonzales, 32 said foreign law would still not find applicability.

Thus, when the foreign law, judgment or contract is contrary to a sound and established public policy of the forum, the said foreign law, judgment or order shall not be applied. 33

Additionally, prohibitive laws concerning persons, their acts or property, and those which have for their object public order, public policy and good customs shall not be rendered ineffective by laws or judgments promulgated, or by determinations or conventions agreed upon in a foreign country. 34

The public policy sought to be protected in the instant case is the principle imbedded in our jurisdiction proscribing the splitting up of a single cause of action.

Section 4, Rule 2 of the 1997 Rules of Civil Procedure is pertinent —

If two or more suits are instituted on the basis of the same cause of action, the filing of one or a judgment upon the merits in any one is available as a ground for the dismissal of the others.

Moreover, foreign law should not be applied when its application would work undeniable injustice to the citizens or residents of the forum. To give justice is the most important function of law; hence, a law, or judgment or contract that is obviously unjust negates the fundamental principles of Conflict of Laws. 35

Clearly then, English Law is not applicable.

As to the second pivotal issue, we hold that the private respondent is entitled to the award of actual or compensatory damages inasmuch as the act of petitioner BANTSA in extrajudicially foreclosing the real estate mortgages constituted a clear violation of the rights of herein private respondent ARC, as third-party mortgagor.

Actual or compensatory damages are those recoverable because of pecuniary loss in business, trade, property, profession, job or occupation and the same must be proved, otherwise if the proof is flimsy and non-substantial, no damages will be given. 36 Indeed, the question of the value of property is always a difficult one to settle as valuation of real property is an imprecise process since real estate has no inherent value readily ascertainable by an appraiser or by the court. 37 The opinions of men vary so much concerning the real value of property that the best the courts can do is hear all of the witnesses which the respective parties desire to present, and then, by carefully weighing that testimony, arrive at a conclusion which is just and equitable. 38

In the instant case, petitioner assails the Court of Appeals for relying heavily on the valuation made by Philippine Appraisal Company. In effect, BANTSA questions the act of the appellate court in giving due weight to the appraisal report composed of twenty three pages, signed by Mr. Lauro Marquez and submitted as evidence by private respondent. The appraisal report, as the records would readily show, was corroborated by the testimony of Mr. Reynaldo Flores, witness for private respondent.

On this matter, the trial court observed:

The record herein reveals that plaintiff-appellee formally offered as evidence the appraisal report dated March 29, 1993 (Exhibit J, Records, p. 409), consisting of twenty three (23) pages which set out in detail the valuation of the property to determine its fair market value (TSN, April 22, 1994, p. 4), in the amount of P99,986,592.00 (TSN, ibid., p. 5), together with the corroborative

testimony of one Mr. Reynaldo F. Flores, an appraiser and director of Philippine Appraisal Company, Inc. (TSN, ibid., p. 3). The latter's testimony was subjected to extensive cross-examination by counsel for defendant-appellant (TSN, April 22, 1994, pp. 6-22). 39

In the matter of credibility of witnesses, the Court reiterates the familiar and well-entrenched rule that the factual findings of the trial court should be respected. 40 The time-tested jurisprudence is that the findings and conclusions of the trial court on the credibility of witnesses enjoy a badge of respect for the reason that trial courts have the advantage of observing the demeanor of witnesses as they testify. 41

This Court will not alter the findings of the trial court on the credibility of witnesses, principally because they are in a better position to assess the same than the appellate court. 42 Besides, trial courts are in a better position to examine real evidence as well as observe the demeanor of witnesses. 43

Similarly, the appreciation of evidence and the assessment of the credibility of witnesses rest primarily with the trial court. 44 In the case at bar, we see no reason that would justify this Court to disturb the factual findings of the trial court, as affirmed by the Court of Appeals, with regard to the award of actual damages.

In arriving at the amount of actual damages, the trial court justified the award by presenting the following ratiocination in its assailed decision 45, to wit:

Indeed, the Court has its own mind in the matter of valuation. The size of the subject real properties are (sic) set forth in their individuals titles, and the Court itself has seen the character and nature of said properties during the ocular inspection it conducted. Based principally on the foregoing, the Court makes the following observations:

1. The properties consist of about 39 hectares in Bo. Sto. Cristo, San Jose del Monte, Bulacan, which is (sic) not distant from Metro Manila — the biggest urban center in the Philippines — and are easily accessible through well-paved roads;

2. The properties are suitable for development into a subdivision for low cost housing, as admitted by defendant's own appraiser (TSN, May 30, 1994, p. 31);

3. The pigpens which used to exist in the property have already been demolished. Houses of strong materials are found in the vicinity of the property (Exhs. 2, 2-1 to 2-7), and the vicinity is a growing community. It has even been shown that the house of the Barangay Chairman is located adjacent to the property in question (Exh. 27), and the only remaining piggery (named Cherry Farm) in the vicinity is about 2 kilometers away from the western boundary of the property in question (TSN, November 19, p. 3);

4. It will not be hard to find interested buyers of the property, as indubitably shown by the fact that on March 18, 1994, ICCS (the buyer during the foreclosure sale) sold the consolidated real

estate properties to Stateland Investment Corporation, in whose favor new titles were issued, i.e., TCT Nos. T-187781(m); T-187782(m), T-187783(m); T-16653P(m) and T-166521(m) by the Register of Deeds of Meycauayan (sic), Bulacan;

5. The fact that ICCS was able to sell the subject properties to Stateland Investment Corporation for Thirty Nine Million (P39,000,000.00) Pesos, which is more than triple defendant's appraisal (Exh. 2) clearly shows that the Court cannot rely on defendant's aforesaid estimate (Decision, Records, p. 603).

It is a fundamental legal aphorism that the conclusions of the trial judge on the credibility of witnesses command great respect and consideration especially when the conclusions are supported by the evidence on record. 46Applying the foregoing principle, we therefore hold that the trial court committed no palpable error in giving credence to the testimony of Reynaldo Flores, who according to the records, is a licensed real estate broker, appraiser and director of Philippine Appraisal Company, Inc. since 1990. 47 As the records show, Flores had been with the company for 26 years at the time of his testimony.

Of equal importance is the fact that the trial court did not confine itself to the appraisal report dated 29 March 1993, and the testimony given by Mr. Reynaldo Flores, in determining the fair market value of the real property. Above all these, the record would likewise show that the trial judge in order to appraise himself of the characteristics and condition of the property, conducted an ocular inspection where the opposing parties appeared and were duly represented.

Based on these considerations and the evidence submitted, we affirm the ruling of the trial court as regards the valuation of the property —

. . . a valuation of Ninety Nine Million Pesos (P99,000,000.00) for the 39-hectare properties (sic) translates to just about Two Hundred Fifty Four Pesos (P254.00) per square meter. This appears to be, as the court so holds, a better approximation of the fair market value of the subject properties. This is the amount which should be restituted by the defendant to the plaintiff by way of actual or compensatory damages . . . . 48

Further, petitioner ascribes error to the lower court awarding an amount allegedly not asked nor prayed for in private respondent's complaint.

Notwithstanding the fact that the award of actual and compensatory damages by the lower court exceeded that prayed for in the complaint, the same is nonetheless valid, subject to certain qualifications.

On this issue, Rule 10, Section 5 of the Rules of Court is pertinent:

Sec. 5. Amendment to conform to or authorize presentation of evidence. — When issues not raised by the pleadings are tried with the express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be

made upon motion of any party at any time, even after judgement; but failure to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall do so with liberality if the presentation of the merits of the action and the ends of substantial justice will be subserved thereby. The court may grant a continuance to enable the amendment to be made.

The jurisprudence enunciated in Talisay-Silay Milling Co., Inc. vs. Asociacion de Agricultures de Talisay-Silay, Inc.49 citing Northern Cement Corporation vs. Intermediate Appellate Court 50 is enlightening:

There have been instances where the Court has held that even without the necessary amendment, the amount proved at the trial may be validly awarded, as in Tuazon v. Bolanos (95 Phil. 106), where we said that if the facts shown entitled plaintiff to relief other than that asked for, no amendment to the complaint was necessary, especially where defendant had himself raised the point on which recovery was based. The appellate court could treat the pleading as amended to conform to the evidence although the pleadings were actually not amended. Amendment is also unnecessary when only clerical error or non substantial matters are involved, as we held in Bank of the Philippine Islands vs. Laguna (48 Phil. 5). In Co Tiamco vs. Diaz (75 Phil. 672), we stressed that the rule on amendment need not be applied rigidly, particularly where no surprise or prejudice is caused the objecting party. And in the recent case of National Power Corporation vs. Court of Appeals (113 SCRA 556), we held that where there is a variance in the defendant's pleadings and the evidence adduced by it at the trial, the Court may treat the pleading as amended to conform with the evidence.

It is the view of the Court that pursuant to the above-mentioned rule and in light of the decisions cited, the trial court should not be precluded from awarding an amount higher than that claimed in the pleading notwithstanding the absence of the required amendment. But it is upon the condition that the evidence of such higher amount has been presented properly, with full opportunity on the part of the opposing parties to support their respective contentions and to refute each other's evidence.

The failure of a party to amend a pleading to conform to the evidence adduced during trial does not preclude an adjudication by the court on the basis of such evidence which may embody new issues not raised in the pleadings, or serve as a basis for a higher award of damages. Although the pleading may not have been amended to conform to the evidence submitted during trial, judgment may nonetheless be rendered, not simply on the basis of the issues alleged but also the basis of issues discussed and the assertions of fact proved in the course of trial. The court may treat the pleading as if it had been amended to conform to the evidence, although it had not been actually so amended. Former Chief Justice Moran put the matter in this way:

When evidence is presented by one party, with the expressed or implied consent of the adverseparty, as to issues not alleged in the pleadings, judgment may be rendered validly as regards those issues, which shall be considered as if they have been raised in the pleadings. There is implied consent to the evidence thus presented when the adverse party fails to object thereto.

Clearly, a court may rule and render judgment on the basis of the evidence before it even though the relevant pleading had not been previously amended, so long as no surprise or prejudice is thereby caused to the adverse party. Put a little differently, so long as the basis requirements of fair play had been met, as where litigants were given full opportunity to support their respective contentions and to object to or refute each other's evidence, the court may validly treat the pleadings as if they had been amended to conform to the evidence and proceed to adjudicate on the basis of all the evidence before it.

In the instant case, inasmuch as the petitioner was afforded the opportunity to refute and object to the evidence, both documentary and testimonial, formally offered by private respondent, the rudiments of fair play are deemed satisfied. In fact, the testimony of Reynaldo Flores was put under scrutiny during the course of the cross-examination. Under these circumstances, the court acted within the bounds of its jurisdiction and committed no reversible error in awarding actual damages the amount of which is higher than that prayed for. Verily, the lower court's actuations are sanctioned by the Rules and supported by jurisprudence.

Similarly, we affirm the grant of exemplary damages although the amount of Five Million Pesos (P5,000,000.00) awarded, being excessive, is subject to reduction. Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages. 51 Considering its purpose, it must be fair and reasonable in every case and should not be awarded to unjustly enrich a prevailing party. 52 In our view, an award of P50,000.00 as exemplary damages in the present case qualifies the test of reasonableness.

WHEREFORE, premises considered, the instant petition is DENIED for lack of merit. The decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION of the amount awarded as exemplary damages. According, petitioner is hereby ordered to pay private respondent the sum of P99,000,000.00 as actual or compensatory damages; P50,000.00 as exemplary damage and the costs of suit.

SO ORDERED.

3. Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 158997             October 6, 2008

FORT BONIFACIO DEVELOPMENT CORPORATION petitioner, vs.YLLAS LENDING CORPORATION and JOSE S. LAURAYA, in his official capacity as President, respondents.

D E C I S I O N

CARPIO, J.:

The Case

This is a petition for review on certiorari1 of the Orders issued on 7 March 20032 and 3 July 20033 by Branch 59 of the Regional Trial Court of Makati City (trial court) in Civil Case No. 01-1452. The trial court's orders dismissed Fort Bonifacio Development Corporation's (FBDC) third party claim and denied FBDC's Motion to Intervene and Admit Complaint in Intervention.

The Facts

On 24 April 1998, FBDC executed a lease contract in favor of Tirreno, Inc. (Tirreno) over a unit at the Entertainment Center - Phase 1 of the Bonifacio Global City in Taguig, Metro Manila. The parties had the lease contract notarized on the day of its execution. Tirreno used the leased premises for Savoia Ristorante and La Strega Bar.

Two provisions in the lease contract are pertinent to the present case: Section 20, which is about the consequences in case of default of the lessee, and Section 22, which is about the lien on the properties of the lease. The pertinent portion of Section 20 reads:

Section 20. Default of the Lessee

20.1 The LESSEE shall be deemed to be in default within the meaning of this Contract in case:

(i) The LESSEE fails to fully pay on time any rental, utility and service charge or other financial obligation of the LESSEE under this Contract;

x x x

20.2 Without prejudice to any of the rights of the LESSOR under this Contract, in case of default of the LESSEE, the lessor shall have the right to:

(i) Terminate this Contract immediately upon written notice to the LESSEE, without need of any judicial action or declaration;

x x x

Section 22, on the other hand, reads:

Section 22. Lien on the Properties of the Lessee

Upon the termination of this Contract or the expiration of the Lease Period without the rentals, charges and/or damages, if any, being fully paid or settled, the LESSOR shall have the right to retain possession of the properties of the LESSEE used or situated in the Leased Premises and the LESSEE hereby authorizes the LESSOR to offset the prevailing value thereof as appraised by the LESSOR against any unpaid rentals, charges and/or damages. If the LESSOR does not want to use said properties, it may instead sell the same to third parties and apply the proceeds thereof against any unpaid rentals, charges and/or damages.

Tirreno began to default in its lease payments in 1999. By July 2000, Tirreno was already in arrears byP5,027,337.91. FBDC and Tirreno entered into a settlement agreement on 8 August 2000. Despite the execution of the settlement agreement, FBDC found need to send Tirreno a written notice of termination dated 19 September 2000 due to Tirreno's alleged failure to settle its outstanding obligations. On 29 September 2000, FBDC entered and occupied the leased premises. FBDC also appropriated the equipment and properties left by Tirreno pursuant to Section 22 of their Contract of Lease as partial payment for Tirreno's outstanding obligations. Tirreno filed an action for forcible entry against FBDC before the Municipal Trial Court of Taguig. Tirreno also filed a complaint for specific performance with a prayer for the issuance of a temporary restraining order and/or a writ of preliminary injunction against FBDC before the Regional Trial Court (RTC) of Pasig City. The RTC of Pasig City dismissed Tirreno's complaint for forum-shopping.

On 4 March 2002, Yllas Lending Corporation and Jose S. Lauraya, in his official capacity as President, (respondents) caused the sheriff of Branch 59 of the trial court to serve an alias writ of seizure against FBDC. On the same day, FBDC served on the sheriff an affidavit of title and third party claim. FBDC found out that on 27 September 2001, respondents filed a complaint for Foreclosure of Chattel Mortgage with Replevin, docketed as Civil Case No. 01-1452, against Tirreno, Eloisa Poblete Todaro (Eloisa), and Antonio D. Todaro (Antonio), in their personal and individual capacities, and in Eloisa's official capacity as President. In their complaint, respondents alleged that they lent a total of P1.5 million to Tirreno, Eloisa, and Antonio. On 9 November 2000, Tirreno, Eloisa and Antonio executed a Deed of Chattel Mortgage in favor of respondents as security for the loan. The following properties are covered by the Chattel Mortgage:

a. Furniture, Fixtures and Equipment of Savoia Ristorante and La Strega Bar, a restaurant owned and managed by [Tirreno], inclusive of the

leasehold right of [Tirreno] over its rented building where [the] same is presently located.

b. Goodwill over the aforesaid restaurant, including its business name, business sign, logo, and any and all interest therein.

c. Eighteen (18) items of paintings made by Florentine Master, Gino Tili, which are fixtures in the above-named restaurant.

The details and descriptions of the above items are specified in Annex "A" which is hereto attached and forms as an integral part of this Chattel Mortgage instrument.4

In the Deed of Chattel Mortgage, Tirreno, Eloisa, and Antonio made the following warranties to respondents:

1. WARRANTIES: The MORTGAGOR hereby declares and warrants that:

a. The MORTGAGOR is the absolute owner of the above named properties subject of this mortgage, free from all liens and encumbrances.

b. There exist no transaction or documents affecting the same previously presented for, and/or pending transaction.5

Despite FBDC's service upon him of an affidavit of title and third party claim, the sheriff proceeded with the seizure of certain items from FBDC's premises. The sheriff's partial return indicated the seizure of the following items from FBDC:

A. FIXTURES

(2) - Smaller Murano Chandeliers

(1) - Main Murano Chandelier

B. EQUIPMENT

(13) - Uni-Air Split Type 2HP Air Cond.

(2) - Uni-Air Split Type 1HP Air Cond.

(3) - Uni-Air Window Type 2HP Air Cond.

(56) - Chairs

(1) - Table

(2) - boxes - Kitchen equipments [sic]6

The sheriff delivered the seized properties to respondents. FBDC questioned the propriety of the seizure and delivery of the properties to respondents without an indemnity bond before the trial court. FBDC argued that when respondents and Tirreno entered into the chattel mortgage agreement on 9 November 2000, Tirreno no longer owned the mortgaged properties as FBDC already enforced its lien on 29 September 2000.

In ruling on FBDC's motion for leave to intervene and to admit complaint in intervention, the trial court stated the facts as follows:

Before this Court are two pending incidents, to wit: 1) [FBDC's] Third-Party Claim over the properties of [Tirreno] which were seized and delivered by the sheriff of this Court to [respondents]; and 2) FBDC's Motion to Intervene and to Admit Complaint in Intervention.

Third party claimant, FBDC, anchors its claim over the subject properties on Sections 20.2(i) and 22 of the Contract of Lease executed by [FBDC] with Tirreno. Pursuant to said Contract of Lease, FBDC took possession of the leased premises and proceeded to sell to third parties the properties found therein and appropriated the proceeds thereof to pay the unpaid lease rentals of [Tirreno].

FBDC, likewise filed a Motion to Admit its Complaint-in-Intervention.

In Opposition to the third-party claim and the motion to intervene, [respondents] posit that the basis of [FBDC's] third party claim being anchored on the aforesaid Contract [of] Lease is baseless. [Respondents] contend that the stipulation of the contract of lease partakes of a pledge which is void under Article 2088 of the Civil Code for being pactum commissorium.

x x x

By reason of the failure of [Tirreno] to pay its lease rental and fees due in the amount of P5,027,337.91, after having notified [Tirreno] of the termination of the lease, x x x FBDC took possession of [Tirreno.'s] properties found in the premises and sold those which were not of use to it. Meanwhile, [respondents], as mortgagee of said properties, filed an action for foreclosure of the chattel mortgage with replevin and caused the seizure of the same properties which [FBDC] took and appropriated in payment of [Tirreno's] unpaid lease rentals.7

The Ruling of the Trial Court

In its order dated 7 March 2003, the trial court stated that the present case raises the questions of who has a better right over the properties of Tirreno and whether FBDC has a right to intervene in respondents' complaint for foreclosure of chattel mortgage.

In deciding against FBDC, the trial court declared that Section 22 of the lease contract between FBDC and Tirreno is void under Article 2088 of the Civil Code.8 The trial court stated that Section 22 of the lease contract pledges the properties found in the leased premises as security for the payment of the unpaid rentals. Moreover,

Section 22 provides for the automatic appropriation of the properties owned by Tirreno in the event of its default in the payment of monthly rentals to FBDC. Since Section 22 is void, it cannot vest title of ownership over the seized properties. Therefore, FBDC cannot assert that its right is superior to respondents, who are the mortgagees of the disputed properties.

The trial court quoted from Bayer Phils. v. Agana9 to justify its ruling that FBDC should have filed a separate complaint against respondents instead of filing a motion to intervene. The trial court quoted from Bayer as follows:

In other words, construing Section 17 of Rule 39 of the Revised Rules of Court (now Section 16 of the 1997 Rules on Civil Procedure), the rights of third-party claimants over certain properties levied upon by the sheriff to satisfy the judgment may not be taken up in the case where such claims are presented but in a separate and independent action instituted by the claimants.10

The dispositive portion of the trial court's decision reads:

WHEREFORE, premises considered, [FBDC's] Third Party Claim is hereby DISMISSED. Likewise, the Motion to Intervene and Admit Complaint in Intervention is DENIED.11

FBDC filed a motion for reconsideration on 9 May 2003. The trial court denied FBDC's motion for reconsideration in an order dated 3 July 2003. FBDC filed the present petition before this Court to review pure questions of law.

The Issues

FBDC alleges that the trial court erred in the following:

1. Dismissing FBDC's third party claim upon the trial court's erroneous interpretation that FBDC has no right of ownership over the subject properties because Section 22 of the contract of lease is void for being a pledge and a pactum commissorium;

2. Denying FBDC intervention on the ground that its proper remedy as third party claimant over the subject properties is to file a separate action; and

3. Depriving FBDC of its properties without due process of law when the trial court erroneously dismissed FBDC's third party claim, denied FBDC's intervention, and did not require the posting of an indemnity bond for FBDC's protection.12

The Ruling of the Court

The petition has merit.

Taking of Lessee's Properties without Judicial Intervention

We reproduce Section 22 of the Lease Contract below for easy reference:

Section 22. Lien on the Properties of the Lessee

Upon the termination of this Contract or the expiration of the Lease Period without the rentals, charges and/or damages, if any, being fully paid or settled, the LESSOR shall have the right to retain possession of the properties of the LESSEE used or situated in the Leased Premises and the LESSEE hereby authorizes the LESSOR to offset the prevailing value thereof as appraised by the LESSOR against any unpaid rentals, charges and/or damages. If the LESSOR does not want to use said properties, it may instead sell the same to third parties and apply the proceeds thereof against any unpaid rentals, charges and/or damages.

Respondents, as well as the trial court, contend that Section 22 constitutes a pactum commissorium, a void stipulation in a pledge contract. FBDC, on the other hand, states that Section 22 is merely a dacion en pago.

Articles 2085 and 2093 of the Civil Code enumerate the requisites essential to a contract of pledge: (1) the pledge is constituted to secure the fulfillment of a principal obligation; (2) the pledgor is the absolute owner of the thing pledged; (3) the persons constituting the pledge have the free disposal of their property or have legal authorization for the purpose; and (4) the thing pledged is placed in the possession of the creditor, or of a third person by common agreement. Article 2088 of the Civil Code prohibits the creditor from appropriating or disposing the things pledged, and any contrary stipulation is void.

On the other hand, Article 1245 of the Civil Code defines dacion en pago, or dation in payment, as the alienation of property to the creditor in satisfaction of a debt in money. Dacion en pago is governed by the law on sales.Philippine National Bank v. Pineda13 held that dation in payment requires delivery and transmission of ownership of a thing owned by the debtor to the creditor as an accepted equivalent of the performance of the obligation. There is no dation in payment when there is no transfer of ownership in the creditor's favor, as when the possession of the thing is merely given to the creditor by way of security.

Section 22, as worded, gives FBDC a means to collect payment from Tirreno in case of termination of the lease contract or the expiration of the lease period and there are unpaid rentals, charges, or damages. The existence of a contract of pledge, however, does not arise just because FBDC has means of collecting past due rent from Tirreno other than direct payment. The trial court concluded that Section 22 constitutes a pledge because of the presence of the first three requisites of a pledge: Tirreno's properties in the leased premises secure Tirreno's lease payments; Tirreno is the absolute owner of the said properties; and the persons representing Tirreno have legal authority to constitute the pledge. However, the fourth requisite, that the thing pledged is placed in the possession of the creditor, is absent. There is non-compliance with the fourth requisite even if Tirreno's personal properties are found in FBDC's real property. Tirreno's personal properties are in FBDC's real property because of the Contract of Lease, which gives Tirreno possession of the personal properties. Since Section 22 is not a contract of pledge, there is no pactum commissorium.

FBDC admits that it took Tirreno's properties from the leased premises without judicial intervention after terminating the Contract of Lease in accordance with

Section 20.2. FBDC further justifies its action by stating that Section 22 is a forfeiture clause in the Contract of Lease and that Section 22 gives FBDC a remedy against Tirreno's failure to comply with its obligations. FBDC claims that Section 22 authorizes FBDC to take whatever properties that Tirreno left to pay off Tirreno's obligations.

We agree with FBDC.

A lease contract may be terminated without judicial intervention. Consing v. Jamandre upheld the validity of a contractually-stipulated termination clause:

This stipulation is in the nature of a resolutory condition, for upon the exercise by the [lessor] of his right to take possession of the leased property, the contract is deemed terminated. This kind of contractual stipulation is not illegal, there being nothing in the law proscribing such kind of agreement.

x x x

Judicial permission to cancel the agreement was not, therefore necessary because of the express stipulation in the contract of [lease] that the [lessor], in case of failure of the [lessee] to comply with the terms and conditions thereof, can take-over the possession of the leased premises, thereby cancelling the contract of sub-lease. Resort to judicial action is necessary only in the absence of a special provision granting the power of cancellation.14

A lease contract may contain a forfeiture clause. Country Bankers Insurance Corp. v. Court of Appeals upheld the validity of a forfeiture clause as follows:

A provision which calls for the forfeiture of the remaining deposit still in the possession of the lessor, without prejudice to any other obligation still owing, in the event of the termination or cancellation of the agreement by reason of the lessee's violation of any of the terms and conditions of the agreement is a penal clause that may be validly entered into. A penal clause is an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof by imposing on the debtor a special prestation (generally consisting in the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled.15

In Country Bankers, we allowed the forfeiture of the lessee's advance deposit of lease payment. Such a deposit may also be construed as a guarantee of payment, and thus answerable for any unpaid rent or charges still outstanding at any termination of the lease.

In the same manner, we allow FBDC's forfeiture of Tirreno's properties in the leased premises. By agreement between FBDC and Tirreno, the properties are answerable for any unpaid rent or charges at any termination of the lease. Such agreement is not contrary to law, morals, good customs, or public policy. Forfeiture of the properties is the only security that FBDC may apply in case of Tirreno's default in its obligations.

Intervention versus Separate Action

Respondents posit that the right to intervene, although permissible, is not an absolute right. Respondents agree with the trial court's ruling that FBDC's proper remedy is not intervention but the filing of a separate action. Moreover, respondents allege that FBDC was accorded by the trial court of the opportunity to defend its claim of ownership in court through pleadings and hearings set for the purpose. FBDC, on the other hand, insists that a third party claimant may vindicate his rights over properties taken in an action for replevin by intervening in the replevin action itself.

We agree with FBDC.

Both the trial court and respondents relied on our ruling in Bayer Phils. v. Agana16 to justify their opposition to FBDC's intervention and to insist on FBDC's filing of a separate action. In Bayer, we declared that the rights of third party claimants over certain properties levied upon by the sheriff to satisfy the judgment may not be taken up in the case where such claims are presented, but in a separate and independent action instituted by the claimants. However, both respondents and the trial court overlooked the circumstances behind the ruling in Bayer, which makes the Bayer ruling inapplicable to the present case. The third party in Bayer filed his claim during execution; in the present case, FBDC filed for intervention during the trial.

The timing of the filing of the third party claim is important because the timing determines the remedies that a third party is allowed to file. A third party claimant under Section 16 of Rule 39 (Execution, Satisfaction and Effect of Judgments)17 of the 1997 Rules of Civil Procedure may vindicate his claim to the property in a separate action, because intervention is no longer allowed as judgment has already been rendered. A third party claimant under Section 14 of Rule 57 (Preliminary Attachment)18 of the 1997 Rules of Civil Procedure, on the other hand, may vindicate his claim to the property by intervention because he has a legal interest in the matter in litigation.19

We allow FBDC's intervention in the present case because FBDC satisfied the requirements of Section 1, Rule 19 (Intervention) of the 1997 Rules of Civil Procedure, which reads as follows:

Section 1. Who may intervene. - A person who has a legal interest in the matter in litigation, or in the success of either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or of an officer thereof may, with leave of court, be allowed to intervene in the action. The court shall consider whether or not the intervention will unduly delay or prejudice the adjudication of the rights of the original parties, and whether or not the intervenor's rights may be fully protected in a separate proceeding.

Although intervention is not mandatory, nothing in the Rules proscribes intervention. The trial court's objection against FBDC's intervention has been set aside by our ruling that Section 22 of the lease contract is not pactum commissorium.

Indeed, contrary to respondents' contentions, we ruled in BA Finance Corporation v. Court of Appeals that where the mortgagee's right to the possession of the specific

property is evident, the action need only be maintained against the possessor of the property. However, where the mortgagee's right to possession is put to great doubt, as when a contending party might contest the legal bases for mortgagee's cause of action or an adverse and independent claim of ownership or right of possession is raised by the contending party, it could become essential to have other persons involved and accordingly impleaded for a complete determination and resolution of the controversy. Thus:

A chattel mortgagee, unlike a pledgee, need not be in, nor entitled to, the possession of the property, unless and until the mortgagor defaults and the mortgagee thereupon seeks to foreclose thereon. Since the mortgagee's right of possession is conditioned upon the actual default which itself may be controverted, the inclusion of other parties, like the debtor or the mortgagor himself, may be required in order to allow a full and conclusive determination of the case. When the mortgagee seeks a replevin in order to effect the eventual foreclosure of the mortgage, it is not only the existence of, but also the mortgagor's default on, the chattel mortgage that, among other things, can properly uphold the right to replevy the property. The burden to establish a valid justification for that action lies with the plaintiff [-mortgagee]. An adverse possessor, who is not the mortgagor, cannot just be deprived of his possession, let alone be bound by the terms of the chattel mortgage contract, simply because the mortgagee brings up an action for replevin.20 (Emphasis added)

FBDC exercised its lien to Tirreno's properties even before respondents and Tirreno executed their Deed of Chattel Mortgage. FBDC is adversely affected by the disposition of the properties seized by the sheriff. Moreover, FBDC's intervention in the present case will result in a complete adjudication of the issues brought about by Tirreno's creation of multiple liens on the same properties and subsequent default in its obligations.

Sheriff's Indemnity Bond

FBDC laments the failure of the trial court to require respondents to file an indemnity bond for FBDC's protection. The trial court, on the other hand, did not mention the indemnity bond in its Orders dated 7 March 2003 and 3 July 2003.

Pursuant to Section 14 of Rule 57, the sheriff is not obligated to turn over to respondents the properties subject of this case in view of respondents' failure to file a bond. The bond in Section 14 of Rule 57 (proceedings where property is claimed by third person) is different from the bond in Section 3 of the same rule (affidavit and bond). Under Section 14 of Rule 57, the purpose of the bond is to indemnify the sheriff against any claim by the intervenor to the property seized or for damages arising from such seizure, which the sheriff was making and for which the sheriff was directly responsible to the third party. Section 3, Rule 57, on the other hand, refers to the attachment bond to assure the return of defendant's personal property or the payment of damages to the defendant if the plaintiff's action to recover possession of the same property fails, in order to protect the plaintiff's right of possession of said property, or prevent the defendant from destroying the same during the pendency of the suit.

Because of the absence of the indemnity bond in the present case, FBDC may also hold the sheriff for damages for the taking or keeping of the properties seized from FBDC.

WHEREFORE, we GRANT the petition. We SET ASIDE the Orders dated 7 March 2003 and 3 July 2003 of Branch 59 of the Regional Trial Court of Makati City in Civil Case No. 01-1452 dismissing Fort Bonifacio Development Corporation's Third Party Claim and denying Fort Bonifacio Development Corporation's Motion to Intervene and Admit Complaint in Intervention. We REINSTATE Fort Bonifacio Development Corporation's Third Party Claim andGRANT its Motion to Intervene and Admit Complaint in Intervention. Fort Bonifacio Development Corporation may hold the Sheriff liable for the seizure and delivery of the properties subject of this case because of the lack of an indemnity bond.

SO ORDERED.

4. Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 172592               July 9, 2008

SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-ONG, Petitioners, vs.ROBAN LENDING CORPORATION, Respondent.

AUSTRIA-MARTINEZ,*

D E C I S I O N

CARPIO MORALES, J.:

On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong obtained several loans from Roban Lending Corporation (respondent) in the total amount ofP4,000,000.00. These loans were secured by a real estate mortgage on petitioners’ parcels of land located in Binauganan, Tarlac City and covered by TCT No. 297840.1

On February 12, 2001, petitioners and respondent executed an Amendment to Amended Real Estate Mortgage2consolidating their loans inclusive of charges thereon which totaled P5,916,117.50. On even date, the parties executed a Dacion in Payment Agreement3 wherein petitioners assigned the properties covered by TCT No. 297840 to respondent in settlement of their total obligation, and a Memorandum of Agreement4 reading:

That the FIRST PARTY [Roban Lending Corporation] and the SECOND PARTY [the petitioners] agreed to consolidate and restructure all aforementioned loans, which have been all past due and delinquent since April 19, 2000, and outstanding obligations totaling P5,916,117.50. The SECOND PARTY hereby sign [sic] another promissory note in the amount of P5,916,117.50 (a copy of which is hereto attached and forms xxx an integral part of this document), with a promise to pay the FIRST PARTY in full within one year from the date of the consolidation and restructuring, otherwise the SECOND PARTY agree to have their "DACION IN PAYMENT" agreement, which they have executed and signed today in favor of the FIRST PARTY be enforced[.]5

In April 2002 (the day is illegible), petitioners filed a Complaint,6 docketed as Civil Case No. 9322, before the Regional Trial Court (RTC) of Tarlac City, for declaration of mortgage contract as abandoned, annulment of deeds, illegal exaction, unjust enrichment, accounting, and damages, alleging that the Memorandum of Agreement and the Dacion in Payment executed are void for being pactum commissorium.7

Petitioners alleged that the loans extended to them from July 14, 1999 to March 20, 2000 were founded on several uniform promissory notes, which provided for 3.5% monthly interest rates, 5% penalty per month on the total amount due and

demandable, and a further sum of 25% attorney’s fees thereon,8 and in addition, respondent exacted certain sums denominated as "EVAT/AR."9 Petitioners decried these additional charges as "illegal, iniquitous, unconscionable, and revolting to the conscience as they hardly allow any borrower any chance of survival in case of default."10

Petitioners further alleged that they had previously made payments on their loan accounts, but because of the illegal exactions thereon, the total balance appears not to have moved at all, hence, accounting was in order.11

Petitioners thus prayed for judgment:

a) Declaring the Real Estate Mortgage Contract and its amendments x x x as null and void and without legal force and effect for having been renounced, abandoned, and given up;

b) Declaring the "Memorandum of Agreement" xxx and "Dacion in Payment" x x x as null and void for beingpactum commissorium;

c) Declaring the interests, penalties, Evat [sic] and attorney’s fees assessed and loaded into the loan accounts of the plaintiffs with defendant as unjust, iniquitous, unconscionable and illegal and therefore, stricken out or set aside;

d) Ordering an accounting on plaintiffs’ loan accounts to determine the true and correct balances on their obligation against legal charges only; and

e) Ordering defendant to [pay] to the plaintiffs: --

e.1 Moral damages in an amount not less than P100,000.00 and exemplary damages of P50,000.00;

e.2 Attorney’s fees in the amount of P50,000.00 plus P1,000.00 appearance fee per hearing; and

e.3 The cost of suit.12

as well as other just and equitable reliefs.

In its Answer with Counterclaim,13 respondent maintained the legality of its transactions with petitioners, alleging that:

x x x x

If the voluntary execution of the Memorandum of Agreement and Dacion in Payment Agreement novated the Real Estate Mortgage then the allegation of Pactum Commissorium has no more legal leg to stand on;

The Dacion in Payment Agreement is lawful and valid as it is recognized x x x under Art. 1245 of the Civil Code as a special form of payment whereby the debtor-Plaintiffs alienates their property to the creditor-Defendant in satisfaction of their monetary obligation;

The accumulated interest and other charges which were computed for more than two (2) years would stand reasonable and valid taking into consideration [that] the principal loan is P4,000,000 and if indeed it became beyond the Plaintiffs’ capacity to pay then the fault is attributed to them and not the Defendant[.]14

After pre-trial, the initial hearing of the case, originally set on December 11, 2002, was reset several times due to, among other things, the parties’ efforts to settle the case amicably.151avvphi1

During the scheduled initial hearing of May 7, 2003, the RTC issued the following order:

Considering that the plaintiff Wilfredo Ong is not around on the ground that he is in Manila and he is attending to a very sick relative, without objection on the part of the defendant’s counsel, the initial hearing of this case is reset to June 18, 2003 at 10:00 o’clock in the morning.

Just in case [plaintiff’s counsel] Atty. Concepcion cannot present his witness in the person of Mr. Wilfredo Ong in the next scheduled hearing, the counsel manifested that he will submit the case for summary judgment. 16 (Underscoring supplied)

It appears that the June 18, 2003 setting was eventually rescheduled to February 11, 2004 at which both counsels were present17 and the RTC issued the following order:

The counsel[s] agreed to reset this case on April 14, 2004, at 10:00 o’clock in the morning. However, the counsels are directed to be ready with their memorand[a] together with all the exhibits or evidence needed to support their respective positions which should be the basis for the judgment on the pleadings   if the parties fail to settle the case in the next scheduled setting.

x x x x18 (Underscoring supplied)

At the scheduled April 14, 2004 hearing, both counsels appeared but only the counsel of respondent filed a memorandum.19

By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, finding on the basis of the pleadings that there was no pactum commissorium, dismissed the complaint.20

On appeal,21 the Court of Appeals22 noted that

x x x [W]hile the trial court in its decision stated that it was rendering judgment on the pleadings, x x x what it actually rendered was a summary judgment. A judgment on the pleadings is proper when the answer fails to tender an issue, or otherwise admits the material allegations of the adverse party’s pleading. However, a judgment on the pleadings would not have been proper in this case as the answer tendered an issue, i.e. the validity of the MOA and DPA. On the other hand, a

summary judgment may be rendered by the court if the pleadings, supporting affidavits, and other documents show that, except as to the amount of damages, there is no genuine issue as to any material fact.23

Nevertheless, finding the error in nomenclature "to be mere semantics with no bearing on the merits of the case",24 the Court of Appeals upheld the RTC decision that there was no pactum commissorium.25

Their Motion for Reconsideration26 having been denied,27 petitioners filed the instant Petition for Review on Certiorari,28 faulting the Court of Appeals for having committed a clear and reversible error

I. . . . WHEN IT FAILED AND REFUSED TO APPLY PROCEDURAL REQUISITES WHICH WOULD WARRANT THE SETTING ASIDE OF THE SUMMARY JUDGMENT IN VIOLATION OF APPELLANTS’ RIGHT TO DUE PROCESS;

II. . . . WHEN IT FAILED TO CONSIDER THAT TRIAL IN THIS CASE IS NECESSARY BECAUSE THE FACTS ARE VERY MUCH IN DISPUTE;

III. . . . WHEN IT FAILED AND REFUSED TO HOLD THAT THE MEMORANDUM OF AGREEMENT (MOA) AND THE DACION EN PAGO AGREEMENT (DPA) WERE DESIGNED TO CIRCUMVENT THE LAW AGAINSTPACTUM COMMISSORIUM; and

IV. . . . WHEN IT FAILED TO CONSIDER THAT THE MEMORANDUM OF AGREEMENT (MOA) AND THE DACION EN PAGO (DPA) ARE NULL AND VOID FOR BEING CONTRARY TO LAW AND PUBLIC POLICY.29

The petition is meritorious.

Both parties admit the execution and contents of the Memorandum of Agreement and Dacion in Payment. They differ, however, on whether both contracts constitute pactum commissorium or dacion en pago.

This Court finds that the Memorandum of Agreement and Dacion in Payment constitute pactum commissorium, which is prohibited under Article 2088 of the Civil Code which provides:

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void."

The elements of pactum commissorium, which enables the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings,30 are: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.31

In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no provisions for foreclosure proceedings nor redemption. Under the Memorandum of Agreement, the failure by the petitioners to pay their debt within the one-year period gives respondent the right to enforce the Dacion in Payment

transferring to it ownership of the properties covered by TCT No. 297840. Respondent, in effect, automatically acquires ownership of the properties upon petitioners’ failure to pay their debt within the stipulated period.

Respondent argues that the law recognizes dacion en pago as a special form of payment whereby the debtor alienates property to the creditor in satisfaction of a monetary obligation.32 This does not persuade. In a truedacion en pago, the assignment of the property extinguishes the monetary debt.33 In the case at bar, the alienation of the properties was by way of security, and not by way of satisfying the debt.34 The Dacion in Payment did not extinguish petitioners’ obligation to respondent. On the contrary, under the Memorandum of Agreement executed on the same day as the Dacion in Payment, petitioners had to execute a promissory note forP5,916,117.50 which they were to pay within one year.35

Respondent cites Solid Homes, Inc. v. Court of Appeals36 where this Court upheld a Memorandum of Agreement/Dacion en Pago.37 That case did not involve the issue of pactum commissorium.38

That the questioned contracts were freely and voluntarily executed by petitioners and respondent is of no moment,pactum commissorium being void for being prohibited by law.39

Respecting the charges on the loans, courts may reduce interest rates, penalty charges, and attorney’s fees if they are iniquitous or unconscionable.40

This Court, based on existing jurisprudence,41 finds the monthly interest rate of 3.5%, or 42% per annum unconscionable and thus reduces it to 12% per annum. This Court finds too the penalty fee at the monthly rate of 5% (60% per annum) of the total amount due and demandable – principal plus interest, with interest not paid when due added to and becoming part of the principal and likewise bearing interest at the same rate, compounded monthly42 – unconscionable and reduces it to a yearly rate of 12% of the amount due, to be computed from the time of demand.43 This Court finds the attorney’s fees of 25% of the principal, interests and interests thereon, and the penalty fees unconscionable, and thus reduces the attorney’s fees to 25% of the principal amount only.44

The prayer for accounting in petitioners’ complaint requires presentation of evidence, they claiming to have made partial payments on their loans, vis a vis respondent’s denial thereof.45 A remand of the case is thus in order.

Prescinding from the above disquisition, the trial court and the Court of Appeals erred in holding that a summary judgment is proper. A summary judgment is permitted only if there is no genuine issue as to any material fact and a moving party is entitled to a judgment as a matter of law.46 A summary judgment is proper if, while the pleadings on their face appear to raise issues, the affidavits, depositions, and admissions presented by the moving party show that such issues are not genuine.47 A genuine issue, as opposed to a fictitious or contrived one, is an issue of fact that requires the presentation of evidence.48 As mentioned above, petitioners’ prayer for accounting requires the presentation of evidence on the issue of partial payment.

But neither is a judgment on the pleadings proper. A judgment on the pleadings may be rendered only when an answer fails to tender an issue or otherwise admits the material allegations of the adverse party’s pleadings.49 In the case at bar,

respondent’s Answer with Counterclaim disputed petitioners’ claims that the Memorandum of Agreement and Dation in Payment are illegal and that the extra charges on the loans are unconscionable.50Respondent disputed too petitioners’ allegation of bad faith.51

WHEREFORE, the challenged Court of Appeals Decision is REVERSED and SET ASIDE. The Memorandum of Agreement and the Dacion in Payment executed by petitioner- spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent Roban Lending Corporation on February 12, 2001 are declared NULL AND VOID for beingpactum commissorium.

In line with the foregoing findings, the following terms of the loan contracts between the parties are MODIFIED as follows:

1. The monthly interest rate of 3.5%, or 42% per annum, is reduced to 12% per annum;

2. The monthly penalty fee of 5% of the total amount due and demandable is reduced to 12% per annum, to be computed from the time of demand; and

3. The attorney’s fees are reduced to 25% of the principal amount only.

Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of receiving evidence on petitioners’ prayer for accounting.

SO ORDERED.

5. Republic of the PhilippinesSUPREME COURT

Baguio City

SECOND DIVISION

G.R. No. 127682               April 24, 1998

KOMATSU INDUSTRIES (PHILS.) INC., petitioner, vs.COURT OF APPEALS, PHILIPPINE NATIONAL BANK, SANTIAGO LAND DEVELOPMENT CORPORATION and MAXIMO CONTRERAS, respondents.

R E S O L U T I O N

 

REGALADO, J.:

Before the Court is a pleading filed on March 4, 1998 in behalf of petitioner and denominated as a Motion for Leave to file Incorporated Second Motion for Reconsideration of the Resolution of September 10, 1997. This resolution does not in the least depart from or enervate the specific prohibition against second motions for reconsideration 1 which are applicable thereto. Considering however, the increasing practice by defeated parties of conjuring scenarios which they blame for their debacle instead of admitting the lack of merit in their cases, the Court is constrained to once again express its displeasure against such unethical disregard of the canons for responsible advocacy, with the warning that this insidious pattern of professional misconduct shall not hereafter be allowed to pass with impunity.

Indeed, petitioner has gone to the extent of attributing supposed errors and irregularities in the disposition of this case to both the Court of Appeals and this Court, with particular allusions amounting to misconduct on the part of counsel for respondent private corporation and with specific imputations against retired Justice Teodoro Padilla in connection therewith. These will hereafter be discussed in light of the records of this Court and the vigorous disclaimer of counsel for said private respondent.

Petitioner's unbridled remonstrations are directed at the fact that its petition for review on certiorari of the adverse decision of respondent Court of Appeals2 was denied by this Court for failure to sufficiently show that respondent court had committed any reversible error in its questioned judgment. 3 This was arrived at after due consideration by the Second Division of this Court of the merits of the challenged decision and the extended resolution of respondent court denying petitioner's motion for reconsideration thereof, the arguments of petitioner in his present petition for review on certiorari, the joint comment of respondents, the reply of petitioner, and the joint rejoinder of respondents, as well as the respective annexes of said pleadings. Indeed, the parties had all the opportunity to expound on and dissect the issues in this case, and in some instances even the non-issues, through the liberal admission by this Court of such pleadings.

Petitioner then filed a 24-page motion for reconsideration, and this Court required respondents to comment thereon, after which petitioner's reply filed without leave was nonetheless admitted, and to which, on leave sought and granted, respondents filed a joint rejoinder. All these pleadings, just like those mentioned in the preceding paragraph, were so extensive, to the point of even incorporating new and modified issues, as to cover all possible aspects of the case to subserve the partisan views of the parties. Since no additional and substantial arguments were adduced to warrant the reconsideration sought, the Court resolved to deny the motion on January 26, 1998. 4

It defies explanation, therefore, why petitioner would still insist that the parties should further have been allowed to file memoranda, an obvious ploy to justify a resolution giving due course to its petition, while simultaneously insinuating that its pleadings were not read. Indeed, petitioner would even dictate how this Court should have acted on its petition, with the improbable theory that because the case had progressed to the rejoinder stage, the petition must be given due course and a decision be rendered thereafter in its favor. This it tries to buttress by the palpably erroneous submission that since respondent court reversed the decision of the court a quo, this Court is duty bound to determine the facts involved. Firstly, this is a deliberate misstatement of our jurisprudence which merely holds that, in such a case, this Court may at its option review the factual findings of the Court of Appeals instead of being bound thereby. Secondly, and worse for petitioner, there is no conflict in the factual findings of the two lower courts as the Court of Appeals actually adopted the findings of fact of the trial court.

In its second motion for reconsideration, petitioner now tries a different tack by lecturing this Court on its theory that the "minute resolutions" it assails are supposedly in violation of Section 14, Article VIII of the present Constitution. In characteristic fashion, it insinuates that such procedure adopted by this Court is a culpable constitutional violation and can be subject of impeachment proceedings. Petitioner is, of course, free to believe and act as it pleases just as this Court may likewise be minded to take the appropriate sanctions, for which purpose it would do well for all and sundry to now imbibe the consistent doctrines laid down by this Court.

As early as Novino, et al. vs. Court of Appeals, et al, 5 it has been stressed that these "resolutions" are not "decisions" within the above constitutional requirements; they merely hold that the petition for review should not be entertained and even ordinary lawyers have all this time so understood it; and the petition to review the decision of the Court of Appeals is not a matter of right but of sound judicial discretion, hence there is no need to fully explain the Court's denial since, for one thing, the facts and the law are already mentioned in the Court of Appeals' decision.

This was reiterated in Que vs. People, et al., 6 and further clarified in Munal vs. Commission on Audit, et al. 7 that the constitutional mandate is applicable only in cases "submitted for decision," i.e., given due course and after the filing of briefs or memoranda and/or other pleadings, but not where the petition is refused due course, with the resolution therefor stating the legal basis thereof. Thus, when the Court, after deliberating on a petition and subsequent pleadings, decides to deny due course to the petition and states that the questions raised are factual or there is no reversible error in the respondent court's decision, there is sufficient compliance with the constitutional requirement. 8

For, as expounded more in detail in Borromeo vs. Court of Appeals, et al.: 9

The Court reminds all lower courts, lawyers, and litigants that it disposes of the bulk of its cases by minute resolutions and decrees them as final and executory, as where a case is patently without merit, where the issues raised are factual in nature, where the decision appealed from is supported by substantial evidence and is in accord with the facts of the case and the applicable laws, where it is clear from the records that the petition is filed merely to forestall the early execution of judgment and for non-compliance with the rules. The resolution denying due course or dismissing the petition always gives the legal basis. As emphasized in In Re: Wenceslao Laureta (148 SCRA 382, 417 [1987]), "[T]he Court is not "duty bound" to render signed Decisions all the time. It has ample discretion to formulate Decisions and/or Minute Resolutions, provided a legal basis is given, depending on its evaluation of a case" (Emphasis supplied). This is the only way whereby it can act on all cases filed before it and, accordingly discharge its constitutional functions. . . .

x x x           x x x          x x x

In G.R. No. 76355, Macario Tayamura, et al. v. Intermediate Appellate Court, et al. (May 21, 1987), the Court clarified the constitutional requirement that a decision must express clearly and distinctly the facts and law on which it is based as referring only to decisions. Resolutions disposing of petitions fall under the constitutional provision which states that, "No petition for review . . . shall be refused due course . . . without stating the legal basis therefor" (Section 14, Article VIII, Constitution). When the Court, after deliberating on a petition and any subsequent pleadings, manifestations, comments, or motions decides to deny due course to the petition and states that the questions raised are factual or no reversible error in the respondent court's decision is shown or for some other legal basis stated in the resolution, there is sufficient compliance with the constitutional requirement.

The course of action adopted by the Court in disposing of this case through its two resolutions, after a thorough review of the issues and arguments of the parties in the plethora of pleadings they have filed, is not only in accord with but is justified by this firm and realistic doctrinal rule:

. . . The Supreme Court is not compelled to adopt a definite and stringent rule on how its judgment shall be framed. It has long been settled that this Court has discretion to decide whether a "minute resolution" should be used in lieu of a full-blown decision in any particular case and that a minute Resolution of dismissal of a Petition for Review on Certiorari constitutes an adjudication on the merits of the controversy or subject matter of the Petition. It has been stressed by the Court that the grant of due course to a Petition for Review is "not a matter of right, but of sound judicial discretion; and so there is no need to fully explain the Court's denial. For one thing, the facts and law are already mentioned in the Court of Appeals' opinion." A minute Resolution denying a Petition for Review of a Decision of the Court of Appeals can only mean that the Supreme Court agrees with or adopts the findings and conclusions of the Court of Appeals, in other words that the decision sought to be reviewed and set aside is correct. 10

That this Court was fully justified in handing down its minute resolutions because it "agrees with or adopts the findings and conclusions of the Court of Appeals" since "the decision sought to be reviewed and set aside is correct," is best demonstrated

and appreciated by reproducing the salient pronouncements of respondent court on the real issues actually involved in this case. The material holdings in its decision 11 of June 28, 1996 are as follows:

The facts of the case as found by the trial court are as follows:

Sometime in 1975, NIDC granted KIPI a direct loan of Eight Million Pesos (P8,000,000.00) and a Two Million (P2,000,000.00) guarantee to secure PNB. (Exh. "M" of petitioner and Exh. "22" of respondent PNB and intervenor SLDC, T.S.N. October 14, 1992 pp. 19-28). As security thereof, a Deed of Real Estate Mortgage dated April 24, 1975 was executed by Petitioner KIPI in favor of NIDC, covering, among others, a parcel of land with all its improvements embraced in and covered by TCT No. 469737 of the Registry of Deeds of the Province of Rizal (now Makati, Metro Manila). At the instance of Respondent PNB and with the conformity of its subsidiary, NIDC, in order to secure the obligation of Petitioner KIPI under Respondent PNB's deferred letter of credit for US$1,564,826.00 in favor of Toyota Tsusho Kaisha Ltd., Japan, Petitioner KIPI executed an Amendment of Mortgage Deed dated June 21, 1978 covering the same parcel of land and its improvements under TCT No. 469737 on a pari passu basis in favor of Respondent PNB and NIDC. (Exhibit "H", "H-1" to "H-9"). Upon full payment of Petitioner KIPI's account with NIDC and the P2.0 M Credit Line with Respondent PNB, NIDC executed a Deed of Release and Cancellation of Mortgage 12 dated January 7, 1981 releasing the mortgage on TCT No. 469737 (Exhibit "1" to "1-4" of Petitioner and Exhibits "7" to "7-D" of Respondent PNB and Intervenor SLDC). In this Deed of Release and Cancellation of Mortgage, it is provided among the whereas that "Whereas, the credit accommodations had been fully paid by the Borrower to the Philippine National Bank (PNB) and NIDC". (Exh. "1-5"). By virtue of this full payment and the execution of the Deed of Release and Cancellation of Mortgage, NIDC returned the owner's copy of the TCT No. 469737 of the petitioner and accordingly the Deed of Release and Cancellation of Mortgage was registered with the Registry of Deed on January 28, 1981. (Exhibits "E" to "E-5") (sic) that there were some accounts chargeable to Petitioner KIPI on deferred letters of credit opened and established in 1974 and 1975 settled by Respondent PNB with the foreign suppliers in 1978 and 1979 but came to the knowledge of Respondent PNB only in 1981 and 1982 (Exhibits "21-1" to "21-L". T.S.N. May 20, 1992 pp. 16-30).

In a letter to Petitioner KIPI dated March 31, 1992, Respondent PNB requested for the return of the owner's copy of TCT No. 469737 (Exh. "22"). On July 7, 1982 in a letter addressed to Mr. Ricardo C. Silverio, then President of Petitioner KIPI, Respondent PNB reiterated for the return of the aforesaid TCT No. 469737 (Exh. "22-A") and the said title was returned to Respondent PNB.

On May 7, 1982, Respondent PNB filed a "Petition for Correction of Entry and Adverse Claim" with the office of the Registry of Deeds of Makati, Metro Manila and was able to have the same annotated at the back of TCT No. 469737 (Exh. "9" joint exhibit of Respondent PNB and Intervenor SLDC).

On November 2, 1983, Respondent PNB filed with the Ex-Officio Sheriff of Makati, Metro Manila a Petition of Sale under ACT 1508, as amended by P.D. 385 to extra-judicially foreclose various properties belonging to

Petitioner by virtue of a Chattel Mortgage with Power of Attorney dated June 21, 1978 (Exhibits "J" to "J-4").

On November 25, 1983, Petitioner KIPI received an undated Notice of Sheriff's Sale to the effect that the land covered by TCT No. 469737 would be foreclosed extra-judicially on December 19, 1983 at 9:00 a.m. (Exhs. "K" to "K-2")."

x x x           x x x          x x x

Simplifying and summing up all the assigned errors of both appellants Philippine National Bank and Santiago Land Development Corporation, there are actually three main issues to be resolved in this appeal, to wit: (1) Whether the "Deed of Release" dated January 7, 1981 executed by the National Investment and Development Corporation in favor of appellee Komatsu Industries (Phil.) Inc. [Exhibit "I", p. 76 Record — Vol. I; Exhibit "7", p. 1494 Record — Vol. IV], had the effect of releasing the real estate mortgage in favor of appellant Philippine National Bank as embodied in the "Amendment of Mortgage Deed" dated June 21, 1978 [Exhibit "H", p. 64 Record — Vol. I; Exhibit "6", p. 1482 Record — Vol. IV]; (2) Whether the foreclosure of appellee's property conducted on May 17, 1984 is valid; (3) Whether there is legal and/or factual basis for the awards of damages in favor of the appellee.

Anent the first issue, We rule that the "Deed of Release" dated January 7, 1981 executed solely by the National Investment and Development Corporation in favor of the appellee Komatsu Industries (Phil.) Inc., did not operate to release the real estate mortgage executed in favor of appellant Philippine National Bank as embodied in the "Amendment of Mortgage Deed" dated June 21, 1978. Said "Deed of Release" is not binding upon the appellant Philippine National Bank which was not a signatory to it and has not ratified the same.

It is axiomatic under Our law on obligations and contracts that contracts take effect only between the parties, their assigns and heirs (Art. 1311, New Civil Code). The characteristic of "relativity of contracts" renders it binding only upon the parties and their successors. [Civil Code of the Philippines, Annotated, Paras, Vol. IV 1994 ed., pp. 550-552]. A contract cannot be binding upon and cannot be enforced against one who is not a party to it [Civil Code of the Philippines, Tolentino, Vol. IV 1995 ed., p. 428 citing Lopez vs. Enriquez, 16 Phil. 336, Ibañez vs. Rodriguez, 47 Phil. 554, etc.] even if he is aware of such contract and has acted with knowledge thereof [Civil Code of the Philippines, Tolentino, Vol. IV 1995, p. 428 citing Manila Port Service et al. vs. Court of Appeals, et al. 20 SCRA 1214]. The rights of a party cannot be prejudiced by the act, declaration, or omission of another, and proceedings against one cannot affect another, except as expressly provided by law or the Rules of Court [Civil Code of the Philippines, Tolentino, Vol. IV 1995 ed., p. 428 / Rule 123 sec. 10 Rules of Court].

We accordingly find no legal basis for the court's ruling that the "Deed of Release" dated January 7, 1981, had the effect of releasing the mortgage in favor of appellant bank despite the fact that it was executed solely by the National Investment and Development Corporation without any conformity or authority whatsoever of its joint mortgagee, the appellant Philippine

National Bank. It is not disputed that PNB is a corporation with a separate and distinct personality from that of NIDC. The court a quo erred in holding that PNB recognized the release of the mortgage as shown by its Exhibit "22" wherein Vice President Ramirez stated in his memo to the Litigation and Collection Division of the PNB that upon discovery of the aforecited release of the mortgage, "we immediately wrote NIDC informing them that KIPI effected the release of PNB's mortgage using NIDC's Deed of Release". The same memo stated that PNB requested KIPI to return the title for the reannotation of PNB's mortgage "which was erroneously cancelled" (p. 1712, Record). Accordingly, the same exhibit indubitably showed that PNB promptly objected to the erroneous cancellation of the mortgage in its favor. Moreover, as above pointed out, an agreement cannot bind one who is not a party even if he had knowledge of the agreement and had acted on the basis thereof.

Moreover, a reading of the Amendment of Mortgage Deeds executed by Komatsu, PNB and NIDC, will show that it covered not only the credit accommodations obtained by Komatsu with NIDC as described in the first whereas clause, but also another obligation arising from the establishment of a deferred letter of credit for US$1,564,826.00, and other credit accommodations. We quote from the said Amendment:

NOW THEREFORE, for and in consideration of the foregoing premises, the Deed of Mortgage in favor of NIDC referred to in the first "Whereas" clause hereof shall be as it is hereby amended in the sense that the mortgage shall be in favor of PNB and NIDC, their successors and assigns on a pari-passu basis to secure the respective obligations of the MORTGAGOR to PNB and NIDC as follows:

NIDC : a) Direct loan of P8,000,000.00.

: b) Guarantee in the amount of P2,000,000.00 issued in favor of PNB to secure the Credit Line of MORTGAGOR with PNB

PNB : US $1,564,826.00 or equivalent in Philippine Currency by way of deferred Letter of Credit issued by PNB in favor of Toyoda Tsusho Kaisha Ltd., Japan, thru Republic National Bank of New York, N.Y.

plus interest and charges as well as all other obligations, whether direct or indirect, primary or secondary, as appearing in the respective Books of Account of NIDC and PNB and other reasonable expenses and charges arising thereunder, whether such obligations have been contracted before, during or after date hereof. Subject to condition No. 4 hereinbelow, in case the MORTGAGOR execute subsequent promissory note or notes either as

renewal of the former note, an extension thereof, as new loan, or is given any kind of accommodations such as overdraft, letters of credit, acceptance and bills of exchange, release of import shipments, on trust receipts etc., this mortgage shall also stand as security for the payment of said promissory notes or notes and/or accommodations without necessity of executing new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing on the date hereof. However, if the MORTGAGOR shall pay to the MORTGAGEES, their successors or assigns the obligations secured by this mortgage, together with interest, costs and other expenses on or before the date they are due and shall keep and perform all the covenants and agreements herein contained for the MORTGAGOR then this mortgage shall be null and void, otherwise, it shall remain in full force and effect. (pp. 65-66, Record).

It is clear that the reference to the credit accommodations consisting of P8,000,000.00 direct loan and P2,000,000.00 guarantee mentioned in the third "whereas" clause of the Deed of Release "as having been fully paid by the borrower" was to these two obligations obtained from NIDC, and not to the other obligation described in the Amended Mortgage as pertaining to PNB directly, arising from the issuance of the deferred letter of credit in the amount of US $1,564,826.00, the express inclusion of which obligation in the Amended Mortgage cannot be ignored. It is equally clear that NIDC was in no position to state that Komatsu's direct obligation to PNB has been fully paid. And on the basic proposition above-stated that the deed of release executed by NIDC cannot bind its joint mortgagee, which is an entirely different entity, We find that the courta quo erroneously invoked the 3rd whereas clause stating that "the credit accommodations had been fully paid by the Borrower to the Philippine National Bank (PNB) and NIDC".

We are thus unable to accept the trial court's reasoning that the release executed by NIDC will "necessarily include" the mortgage to PNB. The hypothesis that NIDC being a wholly owned subsidiary of its joint mortgagee could not have executed the Deed of Release and Cancellation of Mortgage without the knowledge and consent of respondent PNB, "its mother company", has no support in law and jurisprudence. Neither does the evidence of record show that any confirmation or ratification of the release of mortgage was made by the PNB. Nothing short of an actual payment of the debt or an express release will operate to discharge a mortgage (55 Am. Jur. 394).

Defendants-appellants also question the trial court's ruling that even granting that PNB's claim is correct that insofar as it is concerned, the mortgage was not released it being a separate entity and the mortgage being on a pari-passu basis, the extrajudicial foreclosure should be to the extent only of its proportionate credit.

We do not agree that the extrajudicial foreclosure of the mortgage on the whole Pasong Tamo property is null and void. A mortgage is indivisible in nature, so that payment of a part of the secured debt does not extinguish the entire mortgage (See Paras, Civil Code Anno., 1995 ed., Vol. V, p. 1044; Art. 2089, Civil Code). There is also no language in the mortgage

instrument to indicate otherwise, i.e. that the mortgage of the Pasong Tamo property is divisible, so that in case of the payment of the obligation to one mortgagee the mortgage would subsist only to the extent of the remaining lien of the other mortgagee. The mortgage instrument contemplated not only obligations existing on the date thereof, but also future obligations or accommodations appearing in the respective Books of Account of NIDC and PNB, thus rendering it unlikely and impractical for the parties to have intended a division of the mortgaged property in accordance with the proportionate credits of the two joint mortgagors.

The case of Central Bank of the Philippines vs. Court of Appeals (139 SCRA 46) cited by the court a quo is not in point. It refers to a mortgage of one parcel of land in favor of one mortgagee, where there was a failure of consideration, i.e. the entire amount of the loan was not released to the mortgagor and the mortgage was thus held to be enforceable only to the extent of the amount of the loan that was released. The factual situation in this case is obviously different. The mortgage here is not being enforced for more than the actual sum due.

With respect to the court's pronouncement that the "Petition for Correction of Entry or Adverse Claim" cannot be made as basis of any foreclosure proceeding, suffice it to point out that the records bear out defendants-appellants' claim that the PNB filed a verified petition for extrajudicial foreclosure under Act No. 3135 pursuant to the provisions of the Amendment of Mortgage Deed (Records, pp. 1482 to 1493). The Petition for Sale under Act No. 3135, as amended, dated October 8, 1983, was made the basis for the issuance of the Notice of Sheriff's sale (Exhs. "9" to "9-d", "9-e" to "9-bbb", "9-ccc — Komatsu; Exhs. "10", "14" to "14-b", "15", "17" — PNB,/SLDC). The plaintiff-appellee has not controverted the veracity of these documents either in the court below or in its Appellee's brief. Accordingly, We rule that since the mortgage in favor of PNB is still subsisting, the sheriff's sale on the basis of the petition for extrajudicial foreclosure is valid.

Finally, consistently with Our above ruling relative to the validity of the foreclosure proceedings and the non-binding effect of the Deed of Release executed by the National Investment and Development Corporation in so far as the mortgage in favor of the appellant Philippine National Bank is concerned, We rule that the appellee Komatsu Industries (Phil.) Inc. is not entitled to any award of damages pursuant to the principle ofdamnum absque injuria, i.e. there might have been a loss (on the part of the appellee-mortgagor) arising from the foreclosure but said loss does not create a ground of legal redress. A loss or damage which does not constitute the violation of a legal right or amount to a legal wrong is damnum absque injuria [Huyong Hian vs. Court of Appeals, 59 SCRA 114, 134; Gilchrist vs. Cuddy, 29 Phil. 548]. (Emphasis supplied)

Consequently, respondent court reversed and set aside the judgment of the trial court in Civil Case No. 5957 and declared legal and valid the First Notice of Sheriff's Sale dated November 12, 1983, the Second Notice of Sheriff's Sale dated April 6, 1984, the Extrajudicial Foreclosure Proceedings held and conducted thereunder, the Certificate of Sale dated May 17, 1984 and the registration thereof, the Final Deed of Sale, its registration and the Transfer Certificate of Title issued to respondent Philippine National Bank as the highest and lone bidder, the Deed of Sale in favor of and the Transfer Certificate of Title issued to the intervenor Santiago Land Development Corporation.

Petitioner's subsequent motion for reconsideration was denied by respondent court in its resolution 13 of January 14, 1997, from which we quote the following pertinent excerpts:

The motion for reconsideration has no merit.

We reiterate our ruling that the "Deed of Release" executed solely by National Investment and Development Corporation did not operate to release the real estate mortgage executed in favor of appellant Philippine National Bank as embodied in the "Amendment of Mortgage Deed". This issue was fully discussed in our decision and We find no substantial argument in the motion for reconsideration, the petitioner-appellee's memorandum or at the hearing, that would warrant a reversal of our previous findings.

It is evident that the "Deed of Release" pertains only to the mortgage executed in favor of the National Investment and Development Corporation whose credit has been fully paid. Insofar as the mortgage executed in favor of PNB is concerned, the same subsists as the credit in the amount of $1,564,826.00 remained unpaid. Contrary to appellee's submission, the "Deed of Release" executed by the National Investment and Development Corporation is not an exercise in futility for said document actually released the indebtedness due to the National Investment and Development Corporation consisting of an P8,000,000.00 direct loan and P2,000,000.00 guarantee loan.

Petitioner-appellee submits that in the light of Article 2089 of the Civil Code, the "Amendment of Mortgage Deed" is null and void, and there was no valid mortgage in favor of PNB. Hence when the "Deed of Release" cancelled the only valid mortgage in favor of National Investment Development Corporation, there was no more mortgage left to be foreclosed by Philippine National Bank.

We do not agree.

At the outset, We note that the legality and validity of the "Amendment of Mortgage Deed" was never put in issue before the trial court nor was it raised in the appeal proper. "If well recognized jurisprudence precludes raising an issue only for the first time on appeal proper, with more reason should such issue be disallowed or disregarded when initially raised only in a motion for reconsideration of the decision of the appellate court" [Manila Bay Club Corporation vs. Court of Appeals, 249 SCRA 303].

At any rate, We are not inclined to uphold appellee's contention that the "Amendment of Mortgage Deed" (which is the basis of the mortgage in favor of the PNB) is null and void on the argument that Article 2089 of the Civil Code "prohibits a situation where two or more creditors, with separate and distinct credits secured a mortgage over a single property".

There is nothing in Article 2089 of the Civil Code that prohibits the mortgagor from mortgaging the same property for a separate and distinct debt in favor of another creditor. In this jurisdiction, the mortgagor is allowed to obtain subsequent loans by means of subsequent and successive mortgages on the same property. We further agree with

appellant that "if an owner-mortgagor can enter into second and further mortgages, there is no law that prohibits the mortgagor and the mortgagee from agreeing that the mortgages would be pari-passu." What is proscribed by Article 2089 is for a debtor who has mortgaged his property to secure a debt, to demand that the mortgage be released in proportion to the amount of the debt he has paid. Under said article, the mortgagor has to pay the debt in full before he can ask for the release of the mortgage. This is compatible with the principle that a mortgage is indivisible.

Our ruling that the extrajudicial foreclosure of the mortgage on the whole Pasong Tamo property is valid since the mortgage is indivisible in nature is not inconsistent with our statement that "the Deed of Released executed solely by National Investment and Development Corporation did not operate to release the real estate mortgage executed in favor of appellant Philippine National Bank". The fact that the Deed of Release executed by the National Investment and Development Corporation did not operate to release the real estate mortgage in favor of appellant Philippine National Bank, does not render the mortgage divisible. Indeed, foreclosure of the property in its entirety by Philippine National Bank is necessary because of the indivisible nature of a mortgage. The fact that there are two obligations secured by the same mortgaged property does not render the mortgage divisible. "The indivisibility of the mortgage or pledge does not affect the divisibility of the principal obligation. When the same thing is pledged or mortgaged to several creditors, the indivisibility of the pledge or mortgage entitled each and every creditor to the same action against the thing which is liable in its entirety for the individual share of each creditor." [Civil Code of the Philippines, by Tolentino, Vol. V, pp. 538-539, 1992 Ed.].

The rest of the arguments of the appellee in its motion for reconsideration are mere rehash of what have been raised in its brief and were already fully considered and discussed in our decision. (Emphases ours)

In the same manner, we readily found that, despite the lengthy and repetitious submissions of petitioner in its pleadings filed with this Court as earlier enumerated, all the arguments therein are also mere rehashed versions of what it posited before respondent court. We have patiently given petitioner's postulates the corresponding thorough and objective review but, on the real and proper issues so completely and competently discussed and resolved by respondent court, petitioner's obvious convolutions of the same arguments are evidently unavailing. It must be noted that its recourse to respondent court was by appeal on writ of error, hence the preceding quotationin extenso of said court's decision readily shows how the real issues were correctly particularized and summarized to meet petitioner's assignment of errors, and then ably adjudicated on both evidential and legal grounds.

Petitioner has come to this Court this time on appeal by certiorari and it must be aware of the elementary rule that, as emphasized in the decisions previously cited, a review thereunder is not a matter of right but of sound judicial discretion, and will be granted only when there are special and important reasons therefor. 14 Here, there is no novel question of substance nor has respondent court decided the case contrary to law or our applicable decisions. On the contrary, it acted with commendable fealty to the same, and that is the other reason why we extensively reproduced the pertinent discussions in its challenged decision.

All these notwithstanding, petitioner still comes up with another supposed issue, this time faulting respondent court for allegedly not resolving the question of whether or

not petitioner is entitled to redeem its foreclosed property from respondent Philippine National Bank in the event the foreclosure thereof is held to be valid. We agree with respondents' observation that this matter is not proper at this stage of the case since it was never raised in the complaint or admitted as an issue at the pre-trial, but was raised only in petitioner's memorandum before the trial court. 15 Also, respondents point out that the period of redemption had long lapsed since the sheriff's certificate of sale was registered on May 17, 1984 and, citing applicable authorities, the one-year redemption period is not suspended by an action for nullification of the auction sale.

What is more telling against petitioner's new proposition, however, is the documented fact that as early as April 17, 1985, it executed a Deed of Assignment of Right of Redemption over the property in question in favor of Atty. Norberto J. Quisumbing. 16 In fact, the exercise of such right of redemption by the assignee is involved in Civil Case No. 105 of the Regional Trial Court of Makati, and the side issue of the right of respondent Santiago Land Development Corporation to intervene therein was decided by this Court in G.R. No. 106194. On both substantive and procedural considerations, therefore, petitioner's presentation of that so-called issue in the present appellate stage is an undue imposition on the time of this Court.

We have stated, at the outset, that petitioner's second motion for reconsideration could have been correctly rejected outright. But, as further noted, petitioner has distressingly adopted the lamentable technique contrived by losing litigants of resorting to ascriptions of supposed irregularities in the courts of justice as the cause for their defeat. Here, petitioner speaks of pressure having been employed by respondents against the trial court. It then proceeds to insinuate anomalous haste on the part of respondent court in reversing the trial court, pointing to the supposed short period of time it took the former to come out with its decision. It never even bothered to mention that the issues are actually very simple, that the evidence is basically documentary, and that the questions raised are easily answered by applying settled doctrines of this Court.

On top of that, it now veers towards this Court, spinning the yarn that retired Justice Teodoro Padilla first approached the ponente to whom its petition had been raffled, and asked for a disposition in favor of respondents as a "birthday and parting gift"; that said ponente declined and unloaded the case such that it was again raffled to a good friend of Justice Padilla. The records, however, show that this case was directly raffled to the Second Division on January 28, 1997 and there was no prior ponente to whom it was assigned who then supposedly unloaded it; and under the internal rules of this Court, when a case is unloaded, there is no need for holding a second raffle.

Petitioner could have rendered a signal service to the judiciary if it had only verified and proved the facts it purveyed but which are now belied even just by the internal rules of this Court, of which petitioner appears to be ignorant hence the valor of his denunciation. The members of the Second Division of this Court vehemently deny and denounce the animadversion on their allegedly having been approached by Justice Padilla regarding this case. The Padilla Law Office, counsel for respondent private corporation, has submitted its response to the imputations against it, thus calling for petitioner to prove its charges. The same burden is also imposed upon petitioner for the aspersions it has cast upon respondent Court of Appeals. We, therefore, leave it to the aforesaid law firm, Justice Teodoro Padilla and the Court of Appeals, on the one hand, and to herein petitioner, on the other, to decide for themselves whether to further pursue this incident in the proper proceedings.

On such contingency, this Court will content itself for the nonce with a stern admonition that petitioner refrain from conduct tending to create mistrust in our judicial system through innuendos on which no evidence is offered or indicated to be proffered. Responsible litigants need not be told that only pleadings formulated with intellectual honesty on facts duly ascertained can subserve the ends of justice and dignify the cause of the pleader.

WHEREFORE, petitioner's second motion for reconsideration is hereby DENIED for lack of merit and EXPUNGED as an unauthorized pleading. This resolution is immediately final and executory, and no further pleadings or motions will be entertained.

SO ORDERED.

6. Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 171569               August 1, 2011

UNION BANK OF THE PHILIPPINES, vs.ALAIN* JUNIAT, WINWOOD APPAREL, INC., WINGYAN APPAREL, INC., NONWOVEN FABRIC PHILIPPINES,Respondents.

D E C I S I O N

DEL CASTILLO, J.:

To have a binding effect on third parties, a contract of pledge must appear in a public instrument.1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the June 23, 2005 Decision3and the February 9, 2006 Resolution4 of the Court of Appeals (CA) in CA-G.R. CV No. 66392.

Factual Antecedents

Petitioner Union Bank of the Philippines (Union Bank) is a universal

banking corporation organized and existing under Philippine laws.5

Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc. (Wingyan) are domestic corporations engaged in the business of apparel manufacturing.6 Both respondent corporations are owned and operated by respondent Alain Juniat (Juniat), a French national based in Hongkong.7 Respondent Nonwoven Fabric Philippines, Inc. (Nonwoven) is a Philippine corporation engaged in the manufacture and sale of various types of nonwoven fabrics.8

On September 3, 1992, petitioner filed with the Regional Trial Court (RTC) of Makati, Branch 57, a Complaint9 with prayer for the issuance of ex-parte writs of preliminary attachment and replevin against Juniat, Winwood, Wingyan, and the person in possession of the mortgaged motorized sewing machines and equipment.10 Petitioner alleged that Juniat, acting for and in behalf of Winwood and Wingyan, executed a promissory note11 dated April 11, 1992 and a Chattel Mortgage12 dated March 27, 1992 over several motorized sewing machines and other allied equipment to secure their obligation arising from export bills transactions to petitioner in the amount ofP1,131,134.35;13 that as additional security for the obligation, Juniat executed a Continuing Surety Agreement14dated April 11, 1992 in favor of petitioner;15 that the loan remains unpaid;16 and that the mortgaged motorized sewing machines are insufficient to answer for the obligation.17

On September 10, 1992, the RTC issued writs of preliminary attachment and replevin in favor of petitioner.18 The writs were served by the Sheriff upon Nonwoven as it was in possession of the motorized sewing machines and equipment.19 Although Nonwoven was not impleaded in the complaint filed by petitioner, the RTC likewise served summons upon Nonwoven since it was in possession of the motorized sewing machines and equipment.20

On September 28, 1992, Nonwoven filed an Answer,21 contending that the unnotarized Chattel Mortgage executed in favor of petitioner has no binding effect on Nonwoven and that it has a better title over the motorized sewing machines and equipment because these were assigned to it by Juniat pursuant to their Agreement22 dated May 9, 1992.23 Juniat, Winwood, and Wingyan, on the other hand, were declared in default for failure to file an answer within the reglementary period.24

On November 23, 1992, petitioner filed a Motion to Sell Chattels Seized by Replevin,25 praying that the motorized sewing machines and equipment be sold to avoid depreciation and deterioration.26 However, on May 18, 1993, before the RTC could act on the motion, petitioner sold the attached properties for the amount ofP1,350,000.00.27

Nonwowen moved to cite the officers of petitioner in contempt for selling the attached properties, but the RTC denied the same on the ground that Union Bank acted in good faith.28

Ruling of the Regional Trial Court

On May 20, 1999, the RTC of Makati, Branch 145,29 rendered a Decision30 in favor of petitioner. The RTC ruled that both the Chattel Mortgage dated March 27, 1992 in favor of petitioner and the Agreement dated May 9, 1992 in favor of Nonwoven have no obligatory effect on third persons because these documents were not notarized.31However, since the Chattel Mortgage in favor of petitioner was executed earlier, petitioner has a better right over the motorized sewing machines and equipment under the doctrine of "first in time, stronger in right" (prius tempore, potior jure).32 Thus, the RTC disposed of the case in this wise:

WHEREFORE, above premises considered, judgment is hereby rendered as follows:

1.] Declaring the [petitioner] UNION BANK OF THE PHILIPPINES, as having the better right to the goods and/or machineries subject of the Writs of Preliminary Attachment and Replevin issued by this Court on September 10, 1992.

2.] Declaring the [petitioner] as entitled to the proceeds of the sale of the subject machineries in the amount of P1,350,000.00;

3.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan Apparel, Inc. to be jointly and severally liable to the [petitioner], for the deficiency between the proceeds of the sale of the machineries subject of this suit [P1,350,000.00] and original claim of the plaintiff [P1,919,907.03], in the amount ofP569,907.03, with legal interest at the rate of 12% per annum from date of this judgment until fully paid; and

4.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan Apparel, Inc. to be jointly and severally liable to the [petitioner] for the amount of P50,000.00 as reasonable attorneys fees; and

5.] Cost of this suit against the [respondents].

SO ORDERED.33

Nonwoven moved for reconsideration34 but the RTC denied the same in its

Order35 dated July 14, 1999.

Ruling of the Court of Appeals

On appeal, the CA reversed the ruling of the RTC. The CA ruled that the contract of pledge entered into between Juniat and Nonwoven is valid and binding, and that the motorized sewing machines and equipment were ceded to Nonwoven by Juniat by virtue of a dacion en pago.36 Thus, the CA declared Nonwoven entitled to the proceeds of the sale of the attached properties.37 The fallo reads:

WHEREFORE, premises considered, the assailed decision is hereby REVERSED and SET ASIDE. [Petitioner] Union Bank of the Philippines is hereby DIRECTED to pay Nonwoven Fabric Philippines, Inc. P1,350,000.00, the amount it holds in escrow, realized from the May 18, 1993 sale of the machineries to avoid deterioration during pendency of suit. No pronouncement as to costs.

SO ORDERED.38

Petitioner sought reconsideration39 which was denied by the CA in a Resolution40 dated February 9, 2006.

Issues

Hence, the present recourse where petitioner interposes the following issues:

1. Whether x x x the Court of Appeals committed serious reversible error in setting aside the Decision of the trial court holding that Union Bank of the Philippines had a better right over the machineries seized/levied upon in the proceedings before the trial court and/or the proceeds of the sale thereof;

2. Whether x x x the Court of Appeals seriously erred in holding that [Nonwoven] has a valid claim over the subject sewing machines.41

Petitioner’s Arguments

Echoing the reasoning of the RTC, petitioner insists that it has a better title to the proceeds of the sale.42Although the Chattel Mortgage executed in its favor was not notarized, petitioner insists that it is nevertheless valid, and thus, has preference over a subsequent unnotarized agreement.43 Petitioner further claims that except for

the said agreement, no other evidence was presented by Nonwoven to show that the motorized sewing machines and equipment were indeed transferred to them by Juniat/Winwood/Wingyan.44

Respondent Nonwoven’s Arguments

Nonwoven, on the other hand, claims ownership over the proceeds of the sale under Article 154445 of the Civil Code on double sale, which it claims can be applied by analogy in the instant case.46 Nonwoven contends that since its prior possession over the motorized sewing machines and equipment was in good faith, it has a better title over the proceeds of the sale.47 Nonwoven likewise maintains that petitioner has no right over the proceeds of the sale because the Chattel Mortgage executed in its favor was unnotarized, unregistered, and without an affidavit of good faith.48

Our Ruling

The petition has merit.

Nonwoven lays claim to the attached motorized sewing machines and equipment pursuant to the Agreement it entered into with Juniat, to wit:

Hong Kong, 9th May, 1992

With reference to talks held this morning at the Holiday Inn Golden Mile Coffee Shop, among the following parties:

a. Redflower Garments Inc. – Mrs. Maglipon

b. Nonwoven Fabrics Phils. Inc. – Mr. J. Tan

c. Winwood Apparel Inc./Wing Yan Apparel, Inc. – Mr. A. Juniat, Mrs. S. Juniat

IT WAS AGREED THAT:

a. Settlement of the accounts between Nonwoven Fabrics Phils. Inc. and Winwood Apparel Inc./Wing Yan Apparel, Inc. should be effected as agreed through partial payment by L/C with the balance to be settled at a later date for which Winwood Apparel, Inc. agrees to consign 94 sewing machines, 3 snap machines and 2 boilers, presently in the care of Redflower Garments Inc., to the care of Nonwoven Fabrics Phils., Inc. as guarantee. Meanwhile, Nonwoven will resume delivery to Winwood/Win Yang as usual.

x x x x49 (Emphasis supplied.)

It insists that since the attached properties were assigned or ceded to it by Juniat, it has a better right over the proceeds of the sale of the attached properties than petitioner, whose claim is based on an unnotarized Chattel Mortgage.

We do not agree.

Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of Wingyan and Winwood, in favor of petitioner does not bind Nonwoven.50 However, it must be pointed out that petitioner’s primary cause of action is for a sum of money with prayer for the issuance of ex-parte writs of attachment and replevin against Juniat, Winwood, Wingyan, and the person in possession of the motorized sewing machines and equipment.51 Thus, the fact that the Chattel Mortgage executed in favor of petitioner was not notarized does not affect petitioner’s cause of action. Petitioner only needed to show that the loan of Juniat, Wingyan and Winwood remains unpaid and that it is entitled to the issuance of the writs prayed for. Considering that writs of attachment and replevin were issued by the RTC,52 Nonwoven had to prove that it has a better right of possession or ownership over the attached properties.1avvphil This it failed to do.

A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing machines, snap machines and boilers were pledged to Nonwoven by Juniat to guarantee his obligation. However, under Article 2096 of the Civil Code, "[a] pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument." Hence, just like the chattel mortgage executed in favor of petitioner, the pledge executed by Juniat in favor of Nonwoven cannot bind petitioner.

Neither can we sustain the finding of the CA that: "The machineries were ceded to THIRD PARTY NONWOVEN by way of dacion en pago, a contract later entered into by WINWOOD/WINGYAN and THIRD PARTY NONWOVEN."53As aptly pointed out by petitioner, no evidence was presented by Nonwoven to show that the attached properties were subsequently sold to it by way of a dacion en pago. Also, there is nothing in the Agreement dated May 9, 1992 to indicate that the motorized sewing machines, snap machines and boilers were ceded to Nonwoven as payment for the Wingyan’s and Winwood’s obligation. It bears stressing that there can be no transfer of ownership if the delivery of the property to the creditor is by way of security.54 In fact, in case of doubt as to whether a transaction is one of pledge or dacion en pago, the presumption is that it is a pledge as this involves a lesser transmission of rights and interests.55

In view of the foregoing, we are constrained to reverse the ruling of the CA. Nonwoven is not entitled to the proceeds of the sale of the attached properties because it failed to show that it has a better title over the same.

WHEREFORE, the petition is hereby GRANTED. The assailed June 23, 2005 Decision and the February 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 66392 are hereby REVERSED and SET ASIDE. The May 20, 1999 Decision of the Regional Trial Court of Makati, Branch 145, is hereby REINSTATED and AFFIRMED.

SO ORDERED.

7. Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

 

G.R. No. 103576 August 22, 1996

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners, vs.HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY,respondents.

 

VITUG, J.:p

Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred? This question is the core issue in the instant petition for review oncertiorari.

Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of private respondent Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to this effect —

(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full obligation or obligations above-stated according to the terms thereof, then this mortgage shall be null and void. . . .

In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as an extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security for the payment of the said promissory note or notes and/or accommodations without the necessity of executing a new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing on the date thereof. This mortgage shall also stand as security for said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during or after the constitution of this mortgage. 1

In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained from respondent bank additional financial accommodations totalling P2,700,000.00. 2 These borrowings were on due date also fully paid.

On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints, the loan was not settled at maturity. 3 Respondent bank thereupon applied for an extra judicial foreclosure of the chattel mortgage, herein before cited, with the Sheriff of Caloocan City, prompting petitioner corporation to forthwith file an action for injunction, with damages and a prayer for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C-12081). Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage.

Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991, affirmed, "in all respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January 1992.

The instant petition interposed by petitioner corporation was initially dinied on 04 March 1992 by this Court for having been insufficient in form and substance. Private respondent filed a motion to dismiss the petition while petitioner corporation filed a compliance and an opposition to private respondent's motion to dismiss. The Court denied petitioner's first motion for reconsideration but granted a second motion for reconsideration, thereby reinstating the petition and requiring private respondent to comment thereon. 5

Except in criminal cases where the penalty of reclusion perpetua or death is imposed 6 which the Court so reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right but of sound judicial discretion. The circulars of the Court prescribing technical and other procedural requirements are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and needlessly consume the time of the Court. These technical and procedural rules, however, are intended to help secure, not suppress, substantial justice. A deviation from the rigid enforcement of the rules may thus be allowed to attain the prime objective for, after all, the dispensation of justice is the core reason for the existence of courts. In this instance, once again, the Court is constrained to relax the rules in order to give way to and uphold the paramount and overriding interest of justice.

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the obligation by the principal debt or is secured by the personalcommitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property — in pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit — upon the essential condition that if the obligation becomes due and the debtor defaults, then the property encumbered can be

alienated for the payment of the obligation, 7 but that should the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory character 8 of the agreement. As the law so puts it, once the obligation is complied with, then the contract of security becomes, ipso facto, null and void. 9

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, 10 a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. 11 Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed.

A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the parties (not against third persons acting in good faith 12), the fact, however, that the statute has provided that the parties to the contract must execute an oath that —

. . . (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud. 13

makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al., 14 the Court said —

. . . A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage. 15

The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00 loan, 16 there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter.

We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial court for a specific finding on the amount of damages it has sustained "as a result of the unlawful action taken by respondent bank against it." 17 This prayer is not reflected in its complaint which has merely asked for the amount of P3,000,000.00 by way of moral damages. 18 In LBC Express, Inc. vs. Court of Appeals, 19 we have said:

Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life — all of which cannot be suffered by respondent bank as an artificial person. 20

While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so named as a party in representation of petitioner corporation.

Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead turned out to be, however, a source of disappointment for this Court to read in petitioner's reply to private respondent's comment on the petition his so-called "One Final Word;" viz:

In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals should be required to justify its decision which completely disregarded the basic laws on obligations and contracts, as well as the clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable Court; that in the event that its explanation is wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring justices. This is one positive step in ridding our courts of law of incompetent and dishonest magistrates especially members of a superior court of appellate jurisdiction. 21 (Emphasis supplied.)

The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero vs.Villamor; 22 thus:

(L)awyers . . . should bear in mind their basic duty "to observe and maintain the respect due to the courts of justice and judicial officers and . . . (to) insist on similar conduct by others." This respectful attitude towards the court is to be observed, "not for the sake of the temporary incumbent of the judicial office, but for the maintenance of its supreme importance." And it is through a scrupulous preference for respectful language that a lawyer best demonstrates his observance of the respect due to the courts and judicial officers . . . 23

The virtues of humility and of respect and concern for others must still live on even in an age of materialism.

WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without prejudice to the appropriate legal recourse by private respondent as may still be warranted as an unsecured creditor. No costs.

Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the courts.

SO ORDERED.

8. Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 132287             January 24, 2006

SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL ESPELETA, Petitioners, vs.DRA. ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL assisted by her husband ANTOLIN JARIOL, SR., LEONORA NOLASCO assisted by her husband FELICIANO NOLASCO, DOLORES SOBERANO assisted by her husband JOSE SOBERANO, JR., JULIA R. GENEROSO, TERESITA R. NATIVIDAD and GENOVEVA R. SORONIO assisted by her husband ALFONSO SORONIO, Respondents.

D E C I S I O N

TINGA, J.:

The assailed decision of the Court of Appeals took off on the premise that pledged shares of stock auctioned off in a notarial sale could still be redeemed by their owners. This notion is wrong, and we thus reverse.

The facts, as culled from the record, follow.

Respondents were the owners, in their respective personal capacities, of shares of stock in a corporation known as the Quirino-Leonor-Rodriguez Realty Inc.1 Sometime during the years 1979 to 1980, respondents secured by way of pledge of some of their shares of stock to petitioners Bonifacio and Faustina Paray ("Parays") the payment of certain loan obligations. The shares pledged are listed below:

Miguel Rodriguez Jariol ….1,000 shares covered by Stock Certifi-

cates No. 011, 060, 061 & 062;

Abdulia C. Rodriguez …. 300 shares covered by Stock Certificates

No. 023 & 093;

Leonora R. Nolasco ….. 407 shares covered by Stock Certificates

No. 091 & 092;

Genoveva Soronio…. 699 shares covered by Stock Certificates

No. 025, 059 & 099;

Dolores R. Soberano…. 699 shares covered by Stock Certificates

No. 021, 053, 022 & 097;

Julia Generoso ….. 1,100 shares covered by Stock Certificates

No. 085, 051, 086 & 084;

Teresita Natividad….. 440 shares covered by Stock Certificates

Nos. 054 & 0552

When the Parays attempted to foreclose the pledges on account of respondents’ failure to pay their loans, respondents filed complaints with the Regional Trial Court (RTC) of Cebu City. The actions, which were consolidated and tried before RTC Branch 14, Cebu City, sought the declaration of nullity of the pledge agreements, among others. However the RTC, in its decision3 dated 14 October 1988, dismissed the complaint and gave "due course to the foreclosure and sale at public auction of the various pledges subject of these two cases."4 This decision attained finality after it was affirmed by the Court of Appeals and the Supreme Court. The Entry of Judgment was issued on 14 August 1991.

Respondents then received Notices of Sale which indicated that the pledged shares were to be sold at public auction on 4 November 1991. However, before the scheduled date of auction, all of respondents caused the consignation with the RTC Clerk of Court of various amounts. It was claimed that respondents had attempted to tender these payments to the Parays, but had been rebuffed. The deposited amounts were as follows:

Abdulia C. Rodriguez.. P 120,066.66 .. 14 Oct. 1991

Leonora R. Nolasco …. 277,381.82 .. 14 Oct. 1991

Genoveva R. Soronio … 425,353.50 .. 14 Oct. 1991

38,385.44 .. 14 Oct. 1991

Julia R. Generoso …….. 638,385.00 .. 25 Oct. 1991

Teresita R. Natividad …. 264,375.00 .. 11 Nov. 1991

Dolores R. Soberano ….. 12,031.61.. 25 Oct. 1991

520,216.39 ..11 Nov. 1991

Miguela Jariol …. 490,000.00.. 18 Oct. 1991

88,000.00 ..18 Oct. 19915

Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal Espeleta successfully bidding the amount of P6,200,000.00 for all of the pledged shares. None of respondents participated or appeared at the auction of 4 November 1991.

Respondents instead filed on 13 November 1991 a complaint seeking the declaration of nullity of the concluded public auction. The complaint, docketed as Civil Case No. CEB-10926, was assigned to Branch 16 of the Cebu City RTC. Respondents argued that their tender of payment and subsequent consignations served to extinguish their loan obligations and discharged the pledge contracts. Petitioners countered that the auction sale was conducted pursuant to the final and executory judgment in Civil Cases Nos. R-20120 and 20131, and that the tender of payment and consignations were made long after their obligations had fallen due.

The Cebu City RTC dismissed the complaint, expressing agreement with the position of the Parays.6 It held, among others that respondents had failed to tender or consign payments within a reasonable period after default and that the proper remedy of respondents was to have participated in the auction sale.7 The Court of Appeals Eighth Division however reversed the RTC on appeal, ruling that the consignations extinguished the loan obligations and the subject pledge contracts; and the auction sale of 4 November 1991 as null and void.8 Most crucially, the appellate court chose to uphold the sufficiency of the consignations owing to an imputed policy of the law that favored redemption and mandated a liberal construction to redemption laws. The attempts at payment by respondents were characterized as made in the exercise of the right of redemption.

The Court of Appeals likewise found fault with the auction sale, holding that there was a need to individually sell the various shares of stock as they had belonged to different pledgors. Thus, it was observed that the minutes of the auction sale should have specified in detail the bids submitted for each of the shares of the pledgors for the purpose of knowing the price to be paid by the different pledgors upon redemption of the auctioned sales of stock.

Petitioners now argue before this Court that they were authorized to refuse as they did the tender of payment since they were undertaking the auction sale pursuant to the final and executory decision in Civil Cases Nos. R-20120 and 20131, which did not authorize the payment of the principal obligation by respondents. They point out that the amounts consigned could not extinguish the principal loan obligations of respondents since they were not sufficient to cover the interests due on the debt. They likewise argue that the essential procedural requisites for the auction sale had been satisfied.

We rule in favor of petitioners.

The fundamental premise from which the appellate court proceeded was that the consignations made by respondents should be construed in light of the rules of redemption, as if respondents were exercising such right. In that perspective, the Court of Appeals made three crucial conclusions favorable to respondents: that their act of consigning the payments with the RTC should be deemed done in the exercise of their right of redemption; that the buyer at public auction does not ipso

facto become the owner of the pledged shares pending the lapse of the one-year redemptive period; and that the collective sale of the shares of stock belonging to several individual owners without specification of the apportionment in the applications of payment deprives the individual owners of the opportunity to know of the price they would have to pay for the purpose of exercising the right of redemption.

The appellate court’s dwelling on the right of redemption is utterly off-tangent. The right of redemption involves payments made by debtors after the foreclosure of their properties, and not those made or attempted to be made, as in this case, before the foreclosure sale. The proper focus of the Court of Appeals should have been whether the consignations made by respondents sufficiently acquitted them of their principal obligations. A pledge contract is an accessory contract, and is necessarily discharged if the principal obligation is extinguished.

Nonetheless, the Court is now confronted with this rather new fangled theory, as propounded by the Court of Appeals, involving the right of redemption over pledged properties. We have no hesitation in pronouncing such theory as discreditable.

Preliminarily, it must be clarified that the subject sale of pledged shares was an extrajudicial sale, specifically a notarial sale, as distinguished from a judicial sale as typified by an execution sale. Under the Civil Code, the foreclosure of a pledge occurs extrajudicially, without intervention by the courts. All the creditor needs to do, if the credit has not been satisfied in due time, is to proceed before a Notary Public to the sale of the thing pledged.9

In this case, petitioners attempted as early as 1980 to proceed extrajudicially with the sale of the pledged shares by public auction. However, extrajudicial sale was stayed with the filing of Civil Cases No. R-20120 and 20131, which sought to annul the pledge contracts. The final and executory judgment in those cases affirmed the pledge contracts and disposed them in the following fashion:

WHEREFORE, premises considered, judgment is hereby rendered dismissing the complaints at bar, and –

(1) Declaring the various pledges covered in Civil Cases Nos. R-20120 and R-20131 valid and effective; and

(2) Giving due course to the foreclosure and sale at public auction of the various pledges subject of these two cases.

Costs against the plaintiffs.

SO ORDERED.10

The phrase "giving due course to the foreclosure and sale at public auction of the various pledges subject of these two cases" may give rise to the impression that such sale is judicial in character. While the decision did authorize the sale by public auction, such declaration could not detract from the fact that the sale so authorized is actually extrajudicial in character. Note that the final judgment in said cases expressly did not direct the sale by public auction of the pledged shares, but instead upheld the right of the Parays to conduct such sale at their own volition.

Indeed, as affirmed by the Civil Code,11 the decision to proceed with the sale by public auction remains in the sole discretion of the Parays, who could very well choose not to hold the sale without violating the final judgments in the aforementioned civil cases. If the sale were truly in compliance with a final judgment or order, the Parays would have no choice but to stage the sale for then the order directing the sale arises from judicial compulsion. But nothing in the dispositive portion directed the sale at public auction as a mandatory recourse, and properly so since the sale of pledged property in public auction is, by virtue of the Civil Code, extrajudicial in character.

The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to execution sales, more precisely execution sales of real property.

The Court of Appeals expressly asserted the notion that pledged property, necessarily personal in character, may be redeemed by the creditor after being sold at public auction. Yet, as a fundamental matter, does the right of redemption exist over personal property? No law or jurisprudence establishes or affirms such right. Indeed, no such right exists.

The right to redeem property sold as security for the satisfaction of an unpaid obligation does not exist preternaturally. Neither is it predicated on proprietary right, which, after the sale of property on execution, leaves the judgment debtor and vests in the purchaser. Instead, it is a bare statutory privilege to be exercised only by the persons named in the statute.12

The right of redemption over mortgaged real property sold extrajudicially is established by Act No. 3135, as amended. The said law does not extend the same benefit to personal property. In fact, there is no law in our statute books which vests the right of redemption over personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to bestow a right of redemption over personal property, since that law governs the extrajudicial sale of mortgaged personal property, but the statute is definitely silent on the point. And Section 39 of the 1997 Rules of Civil Procedure, extensively relied upon by the Court of Appeals, starkly utters that the right of redemption applies to real properties, not personal properties, sold on execution.

Tellingly, this Court, as early as 1927, rejected the proposition that personal property may be covered by the right of redemption. In Sibal 1.º v. Valdez,13 the Court ruled that sugar cane crops are personal property, and thus, not subject to the right of redemption.14 No countervailing statute has been enacted since then that would accord the right of redemption over personal property, hence the Court can affirm this decades-old ruling as effective to date.

Since the pledged shares in this case are not subject to redemption, the Court of Appeals had no business invoking and applying the inexistent right of redemption. We cannot thus agree that the consigned payments should be treated with liberality, or somehow construed as having been made in the exercise of the right of redemption. We also must reject the appellate court’s declaration that the buyer of at the public auction is not "ipso facto" rendered the owner of the auctioned shares, since the debtor enjoys the one-year redemptive period to redeem the property. Obviously, since there is no right to redeem personal property, the rights of ownership vested unto the purchaser at the foreclosure sale are not entangled in any suspensive condition that is implicit in a redemptive period.

The Court of Appeals also found fault with the apparent sale in bulk of the pledged shares, notwithstanding the fact that these shares were owned by several people, on the premise the pledgors would be denied the opportunity to know exactly how much they would need to shoulder to exercise the right to redemption. This concern is obviously rendered a non-issue by the fact that there can be no right to redemption in the first place. Rule 39 of the Rules of Court does provide for instances when properties foreclosed at the same time must be sold separately, such as in the case of lot sales for real property under Section 19. However, these instances again pertain to execution sales and not extrajudicial sales. No provision in the Rules of Court or in any law requires that pledged properties sold at auction be sold separately.

On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who is given the right to choose which of the items should be sold if two or more things are pledged.15 No similar option is given to pledgors under the Civil Code. Moreover, there is nothing in the Civil Code provisions governing the extrajudicial sale of pledged properties that prohibits the pledgee of several different pledge contracts from auctioning all of the pledged properties on a single occasion, or from the buyer at the auction sale in purchasing all the pledged properties with a single purchase price. The relative insignificance of ascertaining the definite apportionments of the sale price to the individual shares lies in the fact that once a pledged item is sold at auction, neither the pledgee nor the pledgor can recover whatever deficiency or excess there may be between the purchase price and the amount of the principal obligation.16

A different ruling though would obtain if at the auction, a bidder expressed the desire to bid on a determinate number or portion of the pledged shares. In such a case, there may lie the need to ascertain with particularity which of the shares are covered by the bid price, since not all of the shares may be sold at the auction and correspondingly not all of the pledge contracts extinguished. The same situation also would lie if one or some of the owners of the pledged shares participated in the auction, bidding only on their respective pledged shares. However, in this case, none of the pledgors participated in the auction, and the sole bidder cast his bid for all of the shares. There obviously is no longer any practical reason to apportion the bid price to the respective shares, since no matter how slight or significant the value of the purchase price for the individual share is, the sale is completed, with the pledgor and the pledgee not entitled to recover the excess or the deficiency, as the case may be. To invalidate the subject auction solely on this point serves no cause other than to celebrate formality for formality’s sake.

Clearly, the theory adopted by the Court of Appeals is in shambles, and cannot be resurrected. The question though yet remains whether the consignations made by respondents extinguished their respective pledge contracts in favor of the Parays so as to enjoin the latter from auctioning the pledged shares.

There is no doubt that if the principal obligation is satisfied, the pledges should be terminated as well. Article 2098 of the Civil Code provides that the right of the creditor to retain possession of the pledged item exists only until the debt is paid. Article 2105 of the Civil Code further clarifies that the debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest. At the same time, the right of the pledgee to foreclose the pledge is also established under the Civil Code. When the credit has not been satisfied in due time, the creditor may proceed with the sale by public auction under the procedure provided under Article 2112 of the Code.

Respondents argue that their various consignations made prior to the auction sale discharged them from the loan and the pledge agreements. They are mistaken.

Petitioners point out that while the amounts consigned by respondents could answer for their respective principal loan obligations, they were not sufficient to cover the interests due on these loans, which were pegged at the rate of 5% per month or 60% per annum. Before this Court, respondents, save for Dolores Soberano, do not contest this interest rate as alleged by petitioners. Soberano, on the other hand, challenges this interest rate as "usurious."17

The particular pledge contracts did not form part of the records elevated to this Court. However, the 5% monthly interest rate was noted in the statement of facts in the 14 October 1988 RTC Decision which had since become final. Moreover, the said decision pronounced that even assuming that the interest rates of the various loans were 5% per month, "it is doubtful whether the interests so charged were exorbitantly or excessively usurious. This is because for sometime now, usury has become ‘legally inexistent.’"18 The finality of this 1988 Decision is a settled fact, and thus the time to challenge the validity of the 5% monthly interest rate had long passed. With that in mind, there is no reason for the Court to disagree with petitioners that in order that the consignation could have the effect of extinguishing the pledge contracts, such amounts should cover not just the principal loans, but also the 5% monthly interests thereon.

It bears noting that the Court of Appeals also ruled that respondents had satisfied the requirements under Section 18, Rule 39, which provides that the judgment obligor may prevent the sale by paying the amount required by the execution and the costs that have been incurred therein.19 However, the provision applies only to execution sales, and not extra-judicial sales, as evidenced by the use of the phrases "sale of property on execution" and "judgment obligor." The reference is inapropos, and even if it were applicable, the failure of the payment to cover the interests due renders it insufficient to stay the sale.

The effect of the finality of the judgments in Civil Cases Nos. R-20120 and R-20131 should also not be discounted. Petitioners’ right to proceed with the auction sale was affirmed not only by law, but also by a final court judgment. Any subsequent court ruling that would enjoin the petitioners from exercising such right would have the effect of superseding a final and executory judgment.

Finally, we cannot help but observe that respondents may have saved themselves much trouble if they simply participated in the auction sale, as they are permitted to bid themselves on their pledged properties.20 Moreover, they would have had a better right had they

matched the terms of the highest bidder.21 Under the circumstances, with the high interest payments that accrued after several years, respondents were even placed in a favorable position by the pledge agreements, since the creditor would be unable to recover any deficiency from the debtors should the sale price be insufficient to cover the principal amounts with interests. Certainly, had respondents participated in the auction, there would have been a chance for them to recover the shares at a price lower than the amount that was actually due from them to the Parays. That respondents failed to avail of this beneficial resort wholly accorded them by law is their loss. Now, all respondents can recover is the amounts they had consigned.

WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Appeals is SET ASIDE and the decision of the Cebu City RTC, Branch 16, dated 18 November 1992 is REINSTATED. Costs against respondents.

SO ORDERED.

9. Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 170202               July 14, 2008

OPTIMUM MOTOR CENTER CORPORATION, Petitioner, vs.ANNIE TAN, doing business under the name & style "AJ & T Trading," Respondent.

D E C I S I O N

TINGA, J.:

This Petition for Review1 seeks to reverse the Decision2 and Resolution3 of the Court of Appeals in CA-G.R. CV No. 63985. The decision affirmed with modification the judgment4 of the Regional Trial Court (RTC) of Manila, Branch 19 in Civil Case No. 94-71847.

The case originated from a Complaint5 for recovery of possession filed by Annie Tan (respondent) against Optimum Motor Center Corporation (Optimum) and Cesar Peña (Peña) with the RTC of Manila. Respondent is doing business under the name and style, "AJ & T Trading" which is engaged in transportation of cargoes.6 AJ & T Trading is the registered owner7 of an Isuzu cargo truck with Plate No. NWM 418, the subject of this complaint. Optimum is a domestic corporation which owned and operated an auto repair shop located at 120 Del Monte Avenue, Quezon City.8

Respondent’s version of the facts is as follows.

On 14 January 1994, she brought the subject truck to Optimum for body repair and painting. Peña introduced himself as the owner and manager of Optimum. Respondent verbally contracted with Peña for the repair of the damaged portions of the truck, repainting and upholstery replacement. It was then agreed that the work would take thirty (30) days to complete and would thus be finished on 15 February 1994.9 Leopoldo Daza, a security guard assigned to Optimum, received the truck and prepared a checklist10 of the items found therein. On 20 January 1994, an estimate11 detailing the description and price rates for the repair was sent to respondent. To bring down the repair costs, the parties agreed that respondent would supply the necessari materials such as windshield glasses for the front and back of the truck, rubber strip and quartered glass panel.12

On 15 February 1994, respondent went to Optimum but was told to come back in March as the repair was not yet finished.13 On several occasions, respondent tried to claim her truck from Optimum14 to no avail. On 4 March 1994, she again went to Optimum’s repair shop and was surprised to see that the trade name "AJ & T Trading" painted in the middle and side doors of the truck had been scraped off. She also noticed that the 100-meter skyline rope, oil stick gauge and right side mirror were missing.15 On 22 April 1994, she found her truck abandoned and unrepaired at

Optimum’s compound. On 16 May 1994, she discovered that Optimum had already vacated its shop in Del Monte and that her truck was nowhere to be found.16 Later, she learned that Optimum had transferred to a new location but her still unrepaired truck was found in Valenzuela City.

This prompted respondent to file the instant complaint with the trial court on 5 October 1994.17 She prayed for the recovery of possession of the truck or, in the alternative, the payment of the value thereof. She also sought the award of attorney’s fees, moral damages and costs of suit.18 At the trial of the case, two witnesses, Maximo Merigildo19 and Bel Eduardo Nitafan,20 testified on the dilapidated condition of the truck when they saw it on separate occasions.

On 20 October 1994, the trial court issued an order directing the seizure of the vehicle upon respondent’s filing of a bond in the amount of P1,200,000.00.21 Respondent posted the required bond.22 Optimum posted a counterbond to lift said order.23

Optimum controverted the allegations of respondent. In its own account of the facts, it denied guaranteeing that the repair work would be completed within 30 days from 15 January 1994. It claimed that the repairs were completed only on 8 May 1994 due to delay in

respondent’s delivery of the parts.24 It presented as its witnesses the employees who had undertaken the tinsmithing25 painting26 and electrical works27 on the truck.

Optimum also explained that by virtue of a writ of execution28 issued against it by the Metropolitan Trial Court of Quezon City, it was forced to vacate its repair shop and to transfer all its equipment, tools and all the vehicles in its possession and custody, including respondent’s truck, to the IIC Compound in Sitio Malinis, Bagbaguin, Valenzuela City. It claimed that it tried to get in touch with respondent to ask her to claim the truck but she was not available.

Optimum claimed its right to retain possession of the truck, by virtue of Article 1731 of the Civil Code, until the cost of repairs is paid. By way of counterclaim, it asked for the payment of P79,370.00 as the unpaid cost of repairs and P25,000.00 as attorney’s fees.29

On 31 May 1999, the trial court rendered a decision in favor of respondent, thus:

WHEREFORE, premises considered, judgment is hereby rendered ordering defendants Optimum Motor Center Corporation and/or any person acting for and in its behalf, to surrender in good running condition the Isuzu Cargo Truck, subject matter of this complaint and if this is not feasible, to jointly and severally pay the sum ofP600,000.00 with legal interest from the date (October 5, 1994) the complaint was filed, until fully satisfied, moral damages of P50,000.00 and litigation expenses of P30,000.00 plus 25% of the amount awarded from defendants as and for attorney’s fees. The counterclaim of defendants is hereby DISMISSED for lack of merit.

SO ORDERED.30

Of the two opposing contentions, the trial court accepted the version of respondent that the repairs on her truck had not been accomplished. It observed:

x x x Plaintiff claimed that even after the thirty (30) day period for the completion of the repair on the truck, the same remained unrepaired. This was supported by the testimonies of the Court’s personnel, namely: Maximo Merigildo of the RTC, Branch 31, Quezon City, who served on April 25, 1994 the Writ of Execution in the Ejectment case against defendants and implemented the same on May 14, 1994. He observed that the three (3) tires were not installed and there were no left side mirror and door. Eduardo Bel Nitafan, Process Server, declared in open court that the Isuzu Cargo Truck was now parked at the I.I.C. Compound in Valenzuela, Metro Manila. The truck was surrounded with piles of lumber, about eight (8) feet in height. Missing were the two (2) batteries, one spare tire, front side glass, skyline rope and the light on top of the cowl. The electrical wirings were not in order. The interior portion appeared to be newly-painted but the outer portion looked rusty. He could not categorically tell if the truck was in good running condition, because the batteries and ignition key were missing. The testimonies of these witnesses were not rebutted by the defendants. They are independent witnesses whose testimonies deserve full faith and credit being neutral parties to the case. Even defendant Cesar Peña admitted that the repair was not completed after thirty (30) days from receipt of the Cargo Truck.31

Furthermore, the trial court held Optimum liable for damages for its failure to execute its part of the contract on time, pursuant to Article 1170 of the Civil Code.32

Optimum filed a Notice of Appeal,33 whereas respondent moved for reconsideration on the ground that the trial court failed to award actual damages and that Oriental Assurance Corporation, the bonding company of Optimum, should have been adjudged liable for damages payable by the latter.34 On 5 August 1999, the trial court issued an order denying the motion for reconsideration on the ground that it has already lost jurisdiction over the case.35Thus, respondent filed her Notice of Appeal36 on 25 August 1999.

On 28 June 2005, the Court of Appeals promulgated its Decision affirming with modification the ruling of the RTC, to wit:

WHEREFORE, the appealed Decision is hereby AFFIRMED with the following MODIFICATIONS:

1. Appellant Optimum is ordered to return the cargo truck or to reimburse its value in the amount ofP600,000.00 plus legal interest from the time of the commencement of the action until fully satisfied;

2. Temperate or moderate damages in the amount of Thirty Thousand Pesos (P30,000.00) is awarded;

3. Twenty percent (20%) of the total award is hereby given to appellee/appellant Tan for both attorney’s fees and litigation expenses; and

4. The award of moral damages is deleted.

SO ORDERED.37

The Court of Appeals adhered to the trial court’s findings that the repairs on the truck had not been completed and that Optimum is liable for damages. It likewise ordered the return of the truck to respondent. It noted:

The trial court, in giving credence to the claim of appellee/appellant Tan that the repair of the cargo truck was not in accordance with her agreement with appellant Optimum, found the testimonies of a court personnel and a process server to be deserving of full faith and credit, being neutral parties. These witnesses categorically declared in favor of appellee/appellant Tan that the cargo truck was not yet repaired as of April 25, 1994 and May 14, 1994, respectively. Thus, even if We admit appellant Optimum’s defense that the repair was delayed by the late delivery on May 7, 1994 of the quarter glass panel and the rubber strips, the fact remains that even after the said delivery on May 7, 1994, no such repair was yet done. The trial court found the defense of late delivery to be even toppled by a rebuttal witness for appellee/appellant Tan who testified that the said glass need not even be repaired or that it was not necessary for the complete repair of the cargo truck since they were not damaged at the time he had inspected the cargo truck prior to its delivery for repair to appellant Optimum.

Necessarily then, appellant Optimum was already liable to appellee/appellant Tan for damages from the time the latter demanded delivery of the cargo truck and the latter could not as yet deliver the same despite the lapse of the agreed period. The trial court rightly concluded that appellant Optimum was already remiss in the performance of its part of the contract for repair from the time of such demand. Hence, its liability accrues by virtue of Article 1170 of the Civil Code that states: Those who in the performance of their obligation are guilty of fraud, negligence or delay and those who in any manner contravene the tenor thereof are liable for damages. Thus, appellant Optimum may be compelled to deliver the cargo truck to appellee/appellant Tan despite that the agreed repair was not totally made or to reimburse the value thereof in the claimed amount of Six Hundred Thousand Pesos (P600,000.00), plus the legal interest of six percent (6%) thereof from the filing of the complaint for recovery.38

Both parties moved for reconsideration. For her part, respondent reiterated that her claim for compensatory damages is supported by statement of accounts showing the earnings of the truck before it was brought to Optimum for repair. She likewise expressed disinterest in the return of the truck as it was no longer in good condition. Instead, she sought merely the reimbursement of its value at P600,000.00 with interest. Both motions were denied in a Resolution dated 17 October 2005. The appellate court however made the following clarifications:

Nonetheless, this Court wishes to clarify that the order for the return of the cargo truck must be qualified by the phrase "if feasible" AND that the payment of legal interest applies in both circumstances, i.e., whether there would be the return of such truck OR there would be mere reimbursement of its value pegged at Six Hundred Thousand Pesos (P600,000.00), with the same amount being the basis of the computation of legal interest.39

Unfazed by the unfavorable judgment, Optimum now comes to this Court via a petition for review.

In refusing to abide by the appellate court’s ruling, Optimum reiterates its claim for mechanic’s lien to justify its retention of the truck. It advances the view that by virtue of the repairs it has actually performed on respondent’s truck, it has the right under Article 1731 of the Civil Code40 to enforce the mechanic’s lien. It maintains

that the lien applies and can be availed of whether or not the repair work was completely executed. Accordingly, it prays for the payment of the cost of repairs amounting to P69,145.00 in exchange for the return of the subject truck, as well as for the award of temperate damages in the sum of P30,000.00 and attorney’s fees.41

Respondent counters that Optimum cannot avail of the mechanic’s lien because it was found by the lower courts that the repairs on the truck had not been accomplished.

Respondent prevails.

The concept of a mechanic’s lien is articulated in Article 1731 of the Civil Code, which provides:

ARTICLE 1731. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid.

The mechanic’s lien is akin to a contractor’s or warehouseman’s lien in that by way of pledge, the repairman has the right to retain possession of the movable until he is paid. However, the right of retention is conditioned upon the execution of work upon the movable. The creation of a mechanic's lien does not depend upon the owner's nonpayment. Rather, the contractor "creates" his or her own lien by performing the work or furnishing the materials.42

In Bachrach Motor Co. v. Mendoza,43 the Court had the occasion to rule that a person who has made repairs upon an automobile at the request of the owner is entitled to retain it until he has been paid the price of the work executed.44

Optimum’s invocation of the mechanic’s lien is apparently based on the repairs it executed on the truck.1awphil However, the lower courts had already come up with a categorical finding based on testimonies of independent witnesses that the repairs had not been accomplished in accordance with the agreement of the parties. We have to sustain these factual findings, for basic is the tenet that the trial court's findings of facts as affirmed by the Court of Appeals are binding on this Court, unless the lower courts overlooked, misconstrued or misinterpreted facts and circumstances of substance which, if considered, would change the outcome of the case.45

As a result of the failure to accomplish the repairs on the truck, the right to retain the truck in accordance with Article 1731 did not arise. Optimum’s continuous possession or detention of the truck turned to be that of a deforciant and so respondent has every right to recover possession of it.

From another perspective, Optimum is obliged to take care of the truck with the proper diligence of a good father to a family while the same is in its possession.46 Records show that the subject truck had already deteriorated while in the possession of Optimum. Taking into consideration the last known condition of the truck in tandem with the fact that the court proceedings have spanned almost a decade, it can be readily inferred that the truck has become wholly useless. Since restitution is no longer feasible, Optimum is bound to pay the value of the truck.

The value of the truck should be based on the fair market value that the property would command at the time it was entrusted to Optimum. Such recoverable value is

fair and reasonable considering that the value of a motor vehicle depreciates. This value may be recovered without prejudice to such other damages a claimant is entitled to under applicable laws.47

In this case, however, respondent did not appeal the appellate court’s denial of compensatory damages. Hence, the issue has obtained finality and this Court need not pass upon the same.

Nevertheless, temperate damages have been properly imposed by the appellate court. Under Article 2224 of the Civil Code, temperate damages may be recovered when the court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved with certainty.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated 28 June 2005 is AFFIRMED.

SO ORDERED.

10. Republic of the PhilippinesSUPREME COURT

SECOND DIVISION

G.R. No. 150197 July 28, 2005

PRUDENTIAL BANK, Petitioner, vs.DON A. ALVIAR and GEORGIA B. ALVIAR, Respondents.

D E C I S I O N

Tinga, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner Prudential Bank seeks the reversal of the Decision1 of the Court of Appeals dated 27 September 2001 in CA-G.R. CV No. 59543 affirming the Decision of the Regional Trial Court (RTC) of Pasig City, Branch 160, in favor of respondents.

Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a parcel of land in San Juan, Metro Manila, covered by Transfer Certificate of Title (TCT) No. 438157 of the Register of Deeds of Rizal. On 10 July 1975, they executed a deed of real estate mortgage in favor of petitioner Prudential Bank to secure the payment of a loan worth P250,000.00.2 This mortgage was annotated at the back of TCT No. 438157. On 4 August 1975, respondents executed the corresponding promissory note, PN BD#75/C-252, covering the said loan, which provides that the loan matured on 4 August 1976 at an interest rate of 12% per annum with a 2% service charge, and that the note is secured by a real estate mortgage as aforementioned.3 Significantly, the real estate mortgage contained the following clause:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .4

On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345 for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured by a "hold-out" on the mortgagor’s foreign currency savings account with

the bank under Account No. 129, and that the mortgagor’s passbook is to be surrendered to the bank until the amount secured by the "hold-out" is settled.5

On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the husband and wife were President and Chairman of the Board and Vice President,6 respectively, PN BD#76/C-430 coveringP545,000.000. As provided in the note, the loan is secured by "Clean-Phase out TOD CA 3923," which means that the temporary overdraft incurred by Donalco Trading, Inc. with petitioner is to be converted into an ordinary loan in compliance with a Central Bank circular directing the discontinuance of overdrafts.7

On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a straight loan ofP545,000.00, the proceeds of which shall be used to liquidate the outstanding loan of P545,000.00 TOD. The letter likewise mentioned that the securities for the loan were the deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on various heavy and transportation equipment.8

On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the obligations of G.B. Alviar Realty and Development, Inc. and for the release of the real estate mortgage for the P450,000.00 loan covering the two (2) lots located at Vam Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. The payment was acknowledged by petitioner who accordingly released the mortgage over the two properties.9

On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the property covered by TCT No. 438157. Per petitioner’s computation, respondents had the total obligation of P1,608,256.68, covering the three (3) promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN BD#76/C-345 for P382,680.83, and PN BD#76/C-340 for P545,000.00, plus assessed past due interests and penalty charges. The public auction sale of the mortgaged property was set on 15 January 1980.10

Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary injunction with the RTC of Pasig,11 claiming that they have paid their principal loan secured by the mortgaged property, and thus the mortgage should not be foreclosed. For its part, petitioner averred that the payment of P2,000,000.00 made on 6 March 1979 was not a payment made by respondents, but by G.B. Alviar Realty and Development Inc., which has a separate loan with the bank secured by a separate mortgage.12

On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to proceed with the extra-judicial foreclosure.13 Respondents sought reconsideration of the decision.14 On 24 August 1994, the trial court issued an Order setting aside its earlier decision and awarded attorney’s fees to respondents.15 It found that only the P250,000.00 loan is secured by the mortgage on the land covered by TCT No. 438157. On the other hand, the P382,680.83 loan is secured by the foreign currency deposit account of Don A. Alviar, while the P545,000.00 obligation was an unsecured loan, being a mere conversion of the temporary overdraft of Donalco Trading, Inc. in compliance with a Central Bank circular. According to the trial court, the "blanket mortgage clause" relied upon by petitioner applies only to future loans obtained by

the mortgagors, and not by parties other than the said mortgagors, such as Donalco Trading, Inc., for which respondents merely signed as officers thereof.

On appeal to the Court of Appeals, petitioner made the following assignment of errors:

I. The trial court erred in holding that the real estate mortgage covers only the promissory note BD#75/C-252 for the sum of P250,000.00.

II. The trial court erred in holding that the promissory note BD#76/C-345 for P2,640,000.00 (P382,680.83 outstanding principal balance) is not covered by the real estate mortgage by expressed agreement.

III. The trial court erred in holding that Promissory Note BD#76/C-430 for P545,000.00 is not covered by the real estate mortgage.

IV. The trial court erred in holding that the real estate mortgage is a contract of adhesion.

V. The trial court erred in holding defendant-appellant liable to pay plaintiffs-appellees attorney’s fees forP20,000.00.16

The Court of Appeals affirmed the Order of the trial court but deleted the award of attorney’s fees.17 It ruled that while a continuing loan or credit accommodation based on only one security or mortgage is a common practice in financial and commercial institutions, such agreement must be clear and unequivocal. In the instant case, the parties executed different promissory notes agreeing to a particular security for each loan. Thus, the appellate court ruled that the extrajudicial foreclosure sale of the property for the three loans is improper.18

The Court of Appeals, however, found that respondents have not yet paid the P250,000.00 covered by PN BD#75/C-252 since the payment of P2,000,000.00 adverted to by respondents was issued for the obligations of G.B. Alviar Realty and Development, Inc.19

Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors raised in the Court of Appeals as grounds herein.

Petitioner maintains that the "blanket mortgage clause" or the "dragnet clause" in the real estate mortgage expressly covers not only the P250,000.00 under PN BD#75/C-252, but also the two other promissory notes included in the application for extrajudicial foreclosure of real estate mortgage.20 Thus, it claims that it acted within the terms of the mortgage contract when it filed its petition for extrajudicial foreclosure of real estate mortgage. Petitioner relies on the cases of Lim Julian v. Lutero,21 Tad-Y v. Philippine National Bank,22 Quimson v. Philippine National Bank,23 C & C Commercial v. Philippine National Bank,24 Mojica v. Court of Appeals,25 and China Banking Corporation v. Court of Appeals,26 all of which upheld the validity of mortgage contracts securing future advancements.

Anent the Court of Appeals’ conclusion that the parties did not intend to include PN BD#76/C-345 in the real estate mortgage because the same was specifically secured by a foreign currency deposit account, petitioner states that there is no law

or rule which prohibits an obligation from being covered by more than one security.27Besides, respondents even continued to withdraw from the same foreign currency account even while the promissory note was still outstanding, strengthening the belief that it was the real estate mortgage that principally secured all of respondents’ promissory notes.28 As for PN BD#76/C-345, which the Court of Appeals found to be exclusively secured by the Clean-Phase out TOD 3923, petitioner posits that such security is not exclusive, as the "dragnet clause" of the real estate mortgage covers all the obligations of the respondents.29

Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency of stating that the promissory notes were executed by them not in their personal capacity but as corporate officers. It claims that PN BD#76/C-430 was in fact for home construction and personal consumption of respondents. Thus, it states that there is a need to pierce the veil of corporate fiction.30

Finally, petitioner alleges that the mortgage contract was executed by respondents with knowledge and understanding of the "dragnet clause," being highly educated individuals, seasoned businesspersons, and political personalities.31 There was no oppressive use of superior bargaining power in the execution of the promissory notes and the real estate mortgage.32

For their part, respondents claim that the "dragnet clause" cannot be applied to the subsequent loans extended to Don Alviar and Donalco Trading, Inc. since these loans are covered by separate promissory notes that expressly provide for a different form of security.33 They reiterate the holding of the trial court that the "blanket mortgage clause" would apply only to loans obtained jointly by respondents, and not to loans obtained by other parties.34Respondents also place a premium on the finding of the lower courts that the real estate mortgage clause is a contract of adhesion and must be strictly construed against petitioner bank.35

The instant case thus poses the following issues pertaining to: (i) the validity of the "blanket mortgage clause" or the "dragnet clause"; (ii) the coverage of the "blanket mortgage clause"; and consequently, (iii) the propriety of seeking foreclosure of the mortgaged property for the non-payment of the three loans.

At this point, it is important to note that one of the loans sought to be included in the "blanket mortgage clause" was obtained by respondents for Donalco Trading, Inc. Indeed, PN BD#76/C-430 was executed by respondents on behalf of Donalco Trading, Inc. and not in their personal capacity. Petitioner asks the Court to pierce the veil of corporate fiction and hold respondents liable even for obligations they incurred for the corporation. The mortgage contract states that the mortgage covers "as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary." Well-settled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders. Officers of a corporation are not personally liable for their acts as such officers unless it is shown that they have exceeded their authority.36 However, the legal fiction that a corporation has a personality separate and distinct from stockholders and members may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.37 PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the respondents, is not within the contemplation of the "blanket mortgage clause." Moreover, petitioner is unable to show that respondents are hiding behind the corporate structure to evade payment of their obligations. Save for the notation in

the promissory note that the loan was for house construction and personal consumption, there is no proof showing that the loan was indeed for respondents’ personal consumption. Besides, petitioner agreed to the terms of the promissory note. If respondents were indeed the real parties to the loan, petitioner, a big, well-established institution of long standing that it is, should have insisted that the note be made in the name of respondents themselves, and not to Donalco Trading Inc., and that they sign the note in their personal capacity and not as officers of the corporation.

Now on the main issues.

A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are "carefully scrutinized and strictly construed."38 Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction.39 A "dragnet clause" operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera.40 Indeed, it has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts,41 and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.42

The "blanket mortgage clause" in the instant case states:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .43 (Emphasis supplied.)

Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real estate mortgage to secure not only the P250,000.00 loan from the petitioner, but also future credit facilities and advancements that may be obtained by the respondents. The terms of the above provision being clear and unambiguous, there is neither need nor excuse to construe it otherwise.

The cases cited by petitioner, while affirming the validity of "dragnet clauses" or "blanket mortgage clauses," are of a different factual milieu from the instant case.

There, the subsequent loans were not covered by any security other than that for the mortgage deeds which uniformly contained the "dragnet clause."

In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on his foreign currency savings account, while PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was secured by "Clean-Phase out TOD CA 3923" and eventually by a deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various heavy and transportation equipment. The matter of PN BD#76/C-430 has already been discussed. Thus, the critical issue is whether the "blanket mortgage" clause applies even to subsequent advancements for which other securities were intended, or particularly, to PN BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this question. One school advocates that a "dragnet clause" so worded as to be broad enough to cover all other debts in addition to the one specifically secured will be construed to cover a different debt, although such other debt is secured by another mortgage.44The contrary thinking maintains that a mortgage with such a clause will not secure a note that expresses on its face that it is otherwise secured as to its entirety, at least to anything other than a deficiency after exhausting the security specified therein,45 such deficiency being an indebtedness within the meaning of the mortgage, in the absence of a special contract excluding it from the arrangement.46

The latter school represents the better position. The parties having conformed to the "blanket mortgage clause" or "dragnet clause," it is reasonable to conclude that they also agreed to an implied understanding that subsequent loans need not be secured by other securities, as the subsequent loans will be secured by the first mortgage. In other words, the sufficiency of the first security is a corollary component of the "dragnet clause." But of course, there is no prohibition, as in the mortgage contract in issue, against contractually requiring other securities for the subsequent loans. Thus, when the mortgagor takes another loan for which another security was given it could not be inferred that such loan was made in reliance solely on the original security with the "dragnet clause," but rather, on the new security given. This is the "reliance on the security test."

Hence, based on the "reliance on the security test," the California court in the cited case made an inquiry whether the second loan was made in reliance on the original security containing a "dragnet clause." Accordingly, finding a different security was taken for the second loan no intent that the parties relied on the security of the first loan could be inferred, so it was held. The rationale involved, the court said, was that the "dragnet clause" in the first security instrument constituted a continuing offer by the borrower to secure further loans under the security of the first security instrument, and that when the lender accepted a different security he did not accept the offer.47

In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the mortgagor to the bank to provide the security of the mortgage for advances of and when they were made. Thus, it was concluded that the "offer" was not accepted by the bank when a subsequent advance was made because (1) the second note was secured by a chattel mortgage on certain vehicles, and the clause therein stated that the note was secured by such chattel mortgage; (2) there was no reference in the second note or chattel mortgage indicating a connection between the real estate mortgage and the advance; (3) the mortgagor signed the real estate

mortgage by her name alone, whereas the second note and chattel mortgage were signed by the mortgagor doing business under an assumed name; and (4) there was no allegation by the bank, and apparently no proof, that it relied on the security of the real estate mortgage in making the advance.48

Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a contrary intention, a mortgage containing a "dragnet clause" will not be extended to cover future advances unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor.49

It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of non-payment of all the three promissory notes. While the existence and validity of the "dragnet clause" cannot be denied, there is a need to respect the existence of the other security given for PN BD#76/C-345. The foreclosure of the mortgaged property should only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the security for the second promissory note. As held in one case, where deeds absolute in form were executed to secure any and all kinds of indebtedness that might subsequently become due, a balance due on a note, after exhausting the special security given for the payment of such note, was in the absence of a special agreement to the contrary, within the protection of the mortgage, notwithstanding the giving of the special security.50 This is recognition that while the "dragnet clause" subsists, the security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be resorted to.

One other crucial point. The mortgage contract, as well as the promissory notes subject of this case, is a contract of adhesion, to which respondents’ only participation was the affixing of their signatures or "adhesion" thereto.51 A contract of adhesion is one in which a party imposes a ready-made form of contract which the other party may accept or reject, but which the latter cannot modify.52

The real estate mortgage in issue appears in a standard form, drafted and prepared solely by petitioner, and which, according to jurisprudence must be strictly construed against the party responsible for its preparation.53 If the parties intended that the "blanket mortgage clause" shall cover subsequent advancement secured by separate securities, then the same should have been indicated in the mortgage contract. Consequently, any ambiguity is to be taken contra proferentum, that is, construed against the party who caused the ambiguity which could have avoided it by the exercise of a little more care.54 To be more emphatic, any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it,55 which is the petitioner in this case.

Even the promissory notes in issue were made on standard forms prepared by petitioner, and as such are likewise contracts of adhesion. Being of such nature, the same should be interpreted strictly against petitioner and with even more reason since having been accomplished by respondents in the presence of petitioner’s personnel and approved by its manager, they could not have been unaware of the import and extent of such contracts.

Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that respondents have not yet paid the P250,000.00, and gave no credence to their claim that they paid the said amount when they paid petitioner P2,000,000.00. Thus, the mortgaged property could still be properly subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and as mentioned earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/C-

345, has been exhausted, subject of course to defenses which are available to respondents.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 59543 is AFFIRMED.

Costs against petitioner.

SO ORDERED.

11. Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 137792               August 12, 2003

SPOUSES RICARDO ROSALES and ERLINDA SIBUG, Petitioners, vs.SPOUSES ALFONSO and LOURDES SUBA, THE CITY SHERIFF OF MANILA, Respondents.

D E C I S I O N

SANDOVAL-GUTIERREZ, J.:

Challenged in the instant petition for review on certiorari are the Resolutions1 dated November 25, 1998 and February 26, 1999 of the Court of Appeals dismissing the petition for certiorari in CA G.R. SP No. 49634, "Spouses Ricardo Rosales and Erlinda Sibug vs. Alfonso and Lourdes Suba."

On June 13, 1997, the Regional Trial Court, Branch 13, Manila rendered a Decision2 in Civil Cases Nos. 94-72303 and 94-72379, the dispositive portion of which reads:

"WHEREFORE, judgment is rendered:

(1) Declaring the Deed of Sale of Exhibit D, G and I, affecting the property in question, as an equitable mortgage;

(2) Declaring the parties Erlinda Sibug and Ricardo Rosales, within 90 days from finality of this Decision, to deposit with the Clerk of Court, for payment to the parties Felicisimo Macaspac and Elena Jiao, the sum ofP65,000.00, with interest at nine (9) percent per annum from September 30, 1982 until payment is made, plus the sum of P219.76 as reimbursement for real estate taxes;

(3) Directing the parties Felicisimo Macaspac and Elena Jiao, upon the deposit on their behalf of the amounts specified in the foregoing paragraph, to execute a deed of reconveyance of the property in question to Erlinda Sibug, married to Ricardo Rosales, and the Register of Deeds of Manila shall cancel Transfer Certificate of Title No. 150540 in the name of the Macaspacs (Exh. E) and issue new title in the name of Sibug;

(4) For non-compliance by Sibug and Rosales of the directive in paragraph (2) of this dispositive portion, let the property be sold in accordance with the Rules of Court for the release of the mortgage debt and the issuance of title to the purchaser.

"SO ORDERED."3

The decision became final and executory. Spouses Ricardo and Erlinda Rosales, judgment debtors and herein petitioners, failed to comply with paragraph 2 quoted above, i.e., to deposit with the Clerk of Court, within 90 days from finality of the Decision, P65,000.00, etc., to be paid to Felicisimo Macaspac and Elena Jiao. This prompted Macaspac, as judgment creditor, to file with the trial court a motion for execution.

Petitioners opposed the motion for being premature, asserting that the decision has not yet attained finality. On March 5, 1998, they filed a manifestation and motion informing the court of their difficulty in paying Macaspac as there is no correct computation of the judgment debt.

On February 23, 1998, Macaspac filed a supplemental motion for execution stating that the amount due him isP243,864.08.

Petitioners failed to pay the amount. On March 25, 1998, the trial court issued a writ of execution ordering the sale of the property subject of litigation for the satisfaction of the judgment.

On May 15, 1998, an auction sale of the property was held wherein petitioners participated. However, the property was sold for P285,000.00 to spouses Alfonso and Lourdes Suba, herein respondents, being the highest bidders. On July 15, 1998, the trial court issued an order confirming the sale of the property and directing the sheriff to issue a final deed of sale in their favor.

On July 28, 1998, Macaspac filed a motion praying for the release to him of the amount of P176,176.06 from the proceeds of the auction sale, prompting petitioners to file a motion praying that an independent certified public accountant be appointed to settle the exact amount due to movant Macaspac.

Meanwhile, on August 3, 1998, the Register of Deeds of Manila issued a new Transfer Certificate of Title over the subject property in the names of respondents.

On August 18, 1998, respondents filed with the trial court a motion for a writ of possession, contending that the confirmation of the sale "effectively cut off petitioners’ equity of redemption." Petitioners on the other hand, filed a motion for reconsideration of the order dated July 15, 1998 confirming the sale of the property to respondents.

On October 19, 1998, the trial court, acting upon both motions, issued an order (1) granting respondents’ prayer for a writ of possession and (2) denying petitioners’ motion for reconsideration. The trial court ruled that petitioners have no right to redeem the property since the case is for judicial foreclosure of mortgage under Rule 68 of the 1997 Rules of Civil Procedure, as amended. Hence, respondents, as purchasers of the property, are entitled to its possession as a matter of right.

Forthwith, petitioners filed with the Court of Appeals a petition for certiorari, docketed as CA-G.R. SP No. 49634, alleging that the trial court committed grave abuse of discretion amounting to lack or excess of jurisdiction in issuing a writ of

possession to respondents and in denying their motion for reconsideration of the order dated July 15, 1998 confirming the sale of the property to said respondents.

On November 25, 1998, the CA dismissed outright the petition for lack of merit, holding that there is no right of redemption in case of judicial foreclosure of mortgage. Petitioners’ motion for reconsideration was also denied.

Hence this petition.

In the main, petitioners fault the Appellate Court in applying the rules on judicial foreclosure of mortgage. They contend that their loan with Macaspac is unsecured, hence, its payment entails an execution of judgment for money under Section 9 in relation to Section 25, Rule 39 of the 1997 Rules of Civil Procedure, as amended,4allowing the judgment debtor one (1) year from the date of registration of the certificate of sale within which to redeem the foreclosed property.

Respondents, upon the other hand, insist that petitioners are actually questioning the decision of the trial court dated June 13, 1997 which has long become final and executory; and that the latter have no right to redeem a mortgaged property which has been judicially foreclosed.

Petitioners’ contention lacks merit. The decision of the trial court, which is final and executory, declared the transaction between petitioners and Macaspac an equitable mortgage. In Matanguihan vs. Court of Appeals,5 this Court defined an equitable mortgage as "one which although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law." An equitable mortgage is not different from a real estate mortgage, and the lien created thereby ought not to be defeated by requiring compliance with the formalities necessary to the validity of a voluntary real estate mortgage.6 Since the parties’ transaction is an equitable mortgage and that the trial court ordered its foreclosure, execution of judgment is governed by Sections 2 and 3, Rule 68 of the 1997 Rules of Civil Procedure, as amended, quoted as follows:

SEC. 2. Judgment on foreclosure for payment or sale. – If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less that ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment.

SEC. 3. Sale of mortgaged property, effect. – When the defendant, after being directed to do so as provided in the next preceding section, fails to pay the amount of the judgment within the period specified therein, the court, upon motion, shall order the property to be sold in the manner and under the provisions of Rule 39 and other regulations governing sales of real estate under execution. Such sale shall not effect the rights of persons holding prior encumbrances upon the property or a part thereof, and when confirmed by an order of the court, also upon motion, it shall operate to divest the rights in the

property of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.

x x x."

In Huerta Alba Resort, Inc. vs. Court of Appeals,7 we held that the right of redemption is not recognized in a judicial foreclosure, thus:

"The right of redemption in relation to a mortgage–understood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure sale–exists only in the case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine National bank or a bank or a banking institution.

"Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year from the registration of the sheriff’s certificate of foreclosure sale.

"Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a judicial foreclosure sale, ‘when confirmed by an order of the court, x x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.’ Such rights exceptionally ‘allowed by law’ (i.e., even after the confirmation by an order of the court) are those granted by the charter of the Philippine National Bank (Act Nos. 2747 and 2938), and the General Banking Act (R.A.337). These laws confer on the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem the property sold on foreclosure–after confirmation by the court of the foreclosure sale–which right may be exercised within a period of one (1) year, counted from the date of registration of the certificate of sale in the Registry of Property.

"But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a bank or banking institution. In such a case, the foreclosure sale, ‘when confirmed by an order of the court, x x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser.’ There then exists only what is known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes final, in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation.

x x x

"This is the mortgagor’s equity (not right) of redemption which, as above stated, may be exercised by him even beyond the 90-day period ‘from the date of service of the order,’ and even after the foreclosure sale itself, provided it be before the order of confirmation of the sale. After such order of confirmation, no redemption can be effected any longer." (Italics supplied)

Clearly, as a general rule, there is no right of redemption in a judicial foreclosure of mortgage. The only exemption is when the mortgagee is the Philippine National Bank or a bank or a banking institution. Since the mortgagee in this case is not one of those mentioned, no right of redemption exists in favor of petitioners. They merely have an equity of redemption, which, to reiterate, is simply their right, as mortgagor, to extinguish the mortgage and retain ownership of the property by paying the secured debt prior to the confirmation of the foreclosure sale. However, instead of exercising this equity of redemption, petitioners chose to delay the proceedings by filing several manifestations with the trial court. Thus, they only have themselves to blame for the consequent loss of their property.

WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated November 25, 1998 and February 26, 1999 in CA G.R. SP No. 49634 are AFFIRMED.

SO ORDERED.

12. Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 173976               February 27, 2009

METROPOLITAN BANK AND TRUST COMPANY, INC., Petitioner, vs.EUGENIO PEÑAFIEL, for himself and as Attorney-in-Fact of ERLINDA PEÑAFIEL, Respondents.

D E C I S I O N

NACHURA, J.:

This is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) dated July 29, 2005 and Resolution dated July 31, 2006. The assailed decision nullified the extrajudicial foreclosure sale of respondents’ properties because the notice of sale was published in a newspaper not of general circulation in the place where the properties were located.

Respondent Erlinda Peñafiel and the late Romeo Peñafiel are the registered owners of two parcels of land covered by Transfer Certificate of Title (TCT) No. (350937) 6195 and TCT No. 0085, both issued by the Register of Deeds of Mandaluyong City. On August 1, 1991, the Peñafiel spouses mortgaged their properties in favor of petitioner Metropolitan Bank and Trust Company, Inc. The mortgage deed was amended on various dates as the amount of the loan covered by said deed was increased.

The spouses defaulted in the payment of their loan obligation. On July 14, 1999, petitioner instituted an extrajudicial foreclosure proceeding under Act No. 3135 through Diego A. Alleña, Jr., a notary public. Respondent Erlinda Peñafiel received the Notice of Sale, stating that the public auction was to be held on September 7, 1999 at ten o’clock in the morning, at the main entrance of the City Hall of Mandaluyong City. The Notice of Sale was published in Maharlika Pilipinas on August 5, 12 and 19, 1999, as attested to by its publisher in his Affidavit of Publication.2 Copies of the said notice were also posted in three conspicuous places in Mandaluyong City.3

At the auction sale, petitioner emerged as the sole and highest bidder. The subject lots were sold to petitioner forP6,144,000.00. A certificate of sale4 was subsequently issued in its favor.

On August 8, 2000, respondent Erlinda Peñafiel, through her attorney-in-fact, Eugenio Peñafiel, filed a Complaint5praying that the extrajudicial foreclosure of the properties be declared null and void. They likewise sought (a) to enjoin petitioner and the Register of Deeds from consolidating ownership, (b) to enjoin petitioner from taking possession of the properties, and (c) to be paid attorney’s fees.

On June 30, 2003, the Regional Trial Court (RTC) rendered judgment in favor of petitioner:

ACCORDINGLY, judgment is hereby rendered as follows:

1. The extrajudicial foreclosure of real estate mortgage instituted by defendants Metrobank and Notary Public Diego A. Alleña, Jr. over the two parcels of land covered by TCT Nos. (350937) 6195 and TCT No. 0085 is hereby declared VALID; and

2. The counterclaim of herein defendants are hereby DISMISSED for insufficiency of evidence.

SO ORDERED.6

Respondents appealed to the CA, raising, among others, the issue of whether petitioner complied with the publication requirement for an extrajudicial foreclosure sale under Act No. 3135.

On this issue, the CA agreed with respondents. The CA noted that the law requires that publication be made in a newspaper of general circulation in the municipality or city where the property is situated. Based on the testimony of the publisher of Maharlika Pilipinas, it concluded that petitioner did not comply with this requirement, since the newspaper was not circulated in Mandaluyong City where the subject properties were located. Thus, in its Decision dated July 29, 2005, the CA reversed the RTC Decision, thus:

WHEREFORE, the appealed decision is REVERSED and SET ASIDE. A new one is hereby entered declaring the extrajudicial foreclosure sale of the properties covered by TCT Nos. (350937) 6195 and 0085 NULL and VOID.

SO ORDERED.7

Petitioner filed a motion for reconsideration8 of the decision which the CA denied on July 31, 2006.

Petitioner now brings before us this petition for review on certiorari, raising the following issues:

I. WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED WHEN IT RULED TO APPLY THE PROVISIONS ON THE PUBLICATION OF JUDICIAL NOTICES UNDER SECTION 1 OF P.D. NO. 1079 TO THE EXTRAJUDICIAL FORECLOSURE OF THE MORTGAGE BY NOTARY PUBLIC OVER THE PROPERTIES COVERED BY TCT NO. (350927) 6195 AND TCT NO. 0085.

II. WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED WHEN IT RULED THAT "MAHARLIKA PILIPINAS" IS NOT A NEWSPAPER OF GENERAL CIRCULATION IN MANDALUYONG CITY.

III. WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED WHEN IT REVERSED AND SET ASIDE THE DECISION DATED JUNE 30, 2003 ISSUED BY THE REGIONAL TRIAL COURT OF MANDALUYONG CITY, BRANCH 208 AND DECLARED THE EXTRAJUDICIAL FORECLOSURE SALE OF THE PROPERTIES COVERED BY TCT NO. (350937) 6195 AND TCT NO. 0085 NULL AND VOID.9

This controversy boils down to one simple issue: whether or not petitioner complied with the publication requirement under Section 3, Act No. 3135, which provides:

SECTION 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.10

We hold in the negative.

Petitioner insists that Maharlika Pilipinas is a newspaper of general circulation since it is published for the dissemination of local news and general information, it has a bona fide subscription list of paying subscribers, and it is published at regular intervals. It asserts that the publisher’s Affidavit of Publication attesting that Maharlika Pilipinas is a newspaper of general circulation is sufficient evidence of such fact.11 Further, the absence of subscribers in Mandaluyong City does not necessarily mean that Maharlika Pilipinas is not circulated therein; on the contrary, as testified to by its publisher, the said newspaper is in fact offered to persons other than its subscribers. Petitioner stresses that the publisher’s statement that Maharlika Pilipinas is also circulated in Rizal and Cavite was in response to the question as to where else the newspaper was circulated; hence, such testimony does not conclusively show that it is not circulated in Mandaluyong City.12

Petitioner entreats the Court to consider the fact that, in an Order13 dated April 27, 1998, the Executive Judge of the RTC of Mandaluyong City approved the application for accreditation of Maharlika Pilipinas as one of the newspapers authorized to participate in the raffle of judicial notices/orders effective March 2, 1998. Nonetheless, petitioner admits that this was raised for the first time only in its Motion for Reconsideration with the CA.14

The accreditation of Maharlika Pilipinas by the Presiding Judge of the RTC is not decisive of whether it is a newspaper of general circulation in Mandaluyong City. This Court is not bound to adopt the Presiding Judge’s determination, in connection with the said accreditation, that Maharlika Pilipinas is a newspaper of general circulation. The court before which a case is pending is bound to make a resolution of the issues based on the evidence on record.1avvphi1

To prove that Maharlika Pilipinas was not a newspaper of general circulation in Mandaluyong City, respondents presented the following documents: (a) Certification15 dated December 7, 2001 of Catherine de Leon Arce, Chief of the Business Permit and Licensing Office of Mandaluyong City, attesting that Maharlika Pilipinas did not have a business permit in Mandaluyong City; and (b) List of Subscribers16 of Maharlika Pilipinas showing that there were no subscribers from Mandaluyong City.

In addition, respondents also presented Mr. Raymundo Alvarez, publisher of Maharlika Pilipinas, as a witness. During direct examination, Mr. Alvarez testified as follows:

Atty. Mendoza: And where is your principal place of business? Where you actually publish.

Witness: At No. 80-A St. Mary Avenue, Provident Village, Marikina City.

Atty. Mendoza: Do you have any other place where you actually publish Maharlika Pilipinas?

Witness: At No. 37 Ermin Garcia Street, Cubao, Quezon City.

Atty. Mendoza: And you have a mayor’s permit to operate?

Witness: Yes.

Atty. Mendoza: From what city?

Witness: Originally, it was from Quezon City, but we did not change anymore our permit.

Atty. Mendoza: And for the year 1996, what city issued you a permit?

Witness: Quezon City.

Atty. Mendoza: What about this current year?

Witness: Still from Quezon City.

Atty. Mendoza: So, you have no mayor’s permit from Marikina City?

Witness: None, it’s only our residence there.

Atty. Mendoza: What about for Mandaluyong City?

Witness: We have no office in Mandaluyong City.

Atty. Mendoza: Now, you said that you print and publish Maharlika Pilipinas in Marikina and Quezon City?

Witness: Yes.

Atty. Mendoza: Where else do you circulate your newspaper?

Witness: In Rizal and in Cavite.

Atty. Mendoza: In the subpoena[,] you were ordered to bring the list of subscribers.

Witness: Yes.

x x x x

Atty. Mendoza: How do these subscribers listed here in this document became (sic) regular subscribers?

Witness: They are friends of our friends and I offered them to become subscribers.

Atty. Mendoza: Other than this list of subscribers, you have no other subscribers?

Witness: No more.

Atty. Mendoza: Do you offer your newspaper to other persons other than the subscribers listed here?

Witness: Yes, but we do not just offer it to anybody.17 (Emphasis supplied.)

It bears emphasis that, for the purpose of extrajudicial foreclosure of mortgage, the party alleging non-compliance with the requisite publication has the burden of proving the same.18 Petitioner correctly points out that neither the publisher’s statement that Maharlika Pilipinas is being circulated in Rizal and Cavite, nor his admission that there are no subscribers in Mandaluyong City proves that said newspaper is not circulated in Mandaluyong City.

Nonetheless, the publisher’s testimony that they "do not just offer [Maharlika Pilipinas] to anybody" implies that the newspaper is not available to the public in general. This statement, taken in conjunction with the fact that there are no subscribers in Mandaluyong City, convinces us that Maharlika Pilipinas is, in fact, not a newspaper of general circulation in Mandaluyong City.

The object of a notice of sale is to inform the public of the nature and condition of the property to be sold, and of the time, place and terms of the sale. Notices are given for the purpose of securing bidders and to prevent a sacrifice of the property.19 The goal of the notice requirement is to achieve a "reasonably wide publicity" of the auction sale. This is why publication in a newspaper of general circulation is required. The Court has previously taken judicial notice of the "far-reaching effects" of publishing the notice of sale in a newspaper of general circulation.20

True, to be a newspaper of general circulation, it is enough that it is published for the dissemination of local news and general information, that it has a bona fide subscription list of paying subscribers, and that it is published at regular intervals.21 Over and above all these, the newspaper must be available to the public in general, and not just to a select few chosen by the publisher. Otherwise, the precise objective of publishing the notice of sale in the newspaper will not be realized.

In fact, to ensure a wide readership of the newspaper, jurisprudence suggests that the newspaper must also be appealing to the public in general. The Court has, therefore, held in several cases that the newspaper must not be devoted solely to the interests, or published for the entertainment, of a particular class, profession, trade, calling, race, or religious denomination. The newspaper need not have the largest circulation so long as it is of general circulation.22

Thus, the Court doubts that the publication of the notice of sale in Maharlika Pilipinas effectively caused widespread publicity of the foreclosure sale.

Noticeably, in the Affidavit of Publication, Mr. Alvarez attested that he was the "Publisher of Maharlika Pilipinas, a newspaper of general circulation, published every Thursday." Nowhere is it stated in the affidavit that Maharlika Pilipinas is in circulation in Mandaluyong City. To recall, Sec. 3 of Act No. 3135 does not only require that the newspaper must be of general circulation; it also requires that the newspaper be circulated in the municipality or city where the property is located. Indeed, in the cases23 wherein the Court held that the affidavit of the publisher was sufficient proof of the required publication, the affidavit of the publisher therein distinctly stated that the newspaper was generally circulated in the place where the property was located.

Finally, petitioner argues that the CA, in effect, applied P.D. No. 107924 when it cited Fortune Motors (Phils.) Inc. v. Metropolitan Bank and Trust Company,25 which involved an extrajudicial foreclosure sale by a sheriff. Petitioner avers that the general reference to "judicial notices" in P.D. No. 1079, particularly Section 226 thereof, clearly shows that the law applies only to extrajudicial foreclosure proceedings conducted by a sheriff, and not by a notary public.27 P.D. No. 1079 allegedly applies only to notices and announcements that arise from court litigation.28

The Court does not agree with petitioner that the CA applied P.D. 1079 to the present case. The appellate court cited Fortune Motors merely to emphasize that what is important is that the newspaper is actually in general circulation in the place where the properties to be foreclosed are located.

In any case, petitioner’s concern that the CA may have applied P.D. 1079 to the present case is trifling. While P.D. No. 1079 requires the newspaper to be "published, edited and circulated in the same city and/or province where the requirement of general circulation applies," the Court, in Fortune Motors, did not make a literal interpretation of the provision. Hence, it brushed aside the argument that New Record, the newspaper where the notice of sale was published, was not a newspaper of general circulation in Makati since it was not published and edited therein, thus:

The application given by the trial court to the provisions of P.D. No. 1079 is, to our mind, too narrow and restricted and could not have been the intention of the said law. Were the interpretation of the trial court (sic) to be followed, even the leading dailies in the country like the "Manila Bulletin," the "Philippine Daily Inquirer," or "The Philippine Star" which all enjoy a wide circulation throughout the country, cannot publish legal notices that would be honored outside the place of their publication. But this is not the interpretation given by the courts. For what is important is that a paper should be in general circulation in the place where the properties to be foreclosed are located in order that publication may serve the purpose for which it was intended.29

Therefore, as it stands, there is no distinction as to the publication requirement in extrajudicial foreclosure sales conducted by a sheriff or a notary public. The key element in both cases is still general circulation of the newspaper in the place where the property is located.

WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated July 29, 2005 and Resolution dated July 31, 2006 in CA-G.R. CV No. 79862 are AFFIRMED.

SO ORDERED.

13. Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

 

G.R. No. 98334 May 8, 1992

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

Gines N. Abellana for petitioners.

Dionisio U. Flores for private respondents.

 

REGALADO, J.:

The core issue in this case is whether or not a mortgagor, whose property has been extrajudicially foreclosed and sold at the corresponding foreclosure sale, may validly execute a mortgage contract over the same property in favor of a third party during the period of redemption.

The present appeal by certiorari assails the decision 1 of respondent Court of Appeals in CA-G.R. CV No. 12678 where it answered the question posed by the foregoing issue in the negative and modified the decision 2 of the then Court of First Instance of Cebu in Civil Case No. R-18616 wherein the validity of said subsequent mortgage was assumed and the case was otherwise disposed of on other grounds.

The facts which gave rise to the institution of the aforesaid civil case in the trial court, as found by respondent Court of Appeals, are as follows:

On October 10, 1974 plaintiff spouses, alarmed of losing their right of redemption over lot 4731 of the Cebu City Cadastre and embraced under TCT No. 14272 from Mr. Juan Gandioncho, purchaser of the aforesaid lot at the foreclosure sale of the previous mortgage in favor of Cebu City Development Bank, went to Teotimo Abellana, president of defendant Association, to obtain a loan of P30,000.00. Prior thereto or on October 3, 1974, their son Teofredo Dolino filed a similar loan application for Twenty-Five Thousand (P25,000.00) Pesos with lot No. 4731 offered as security for the Thirty Thousand (P30,000.00) Pesos loan from defendant association. Subsequently, they executed a promissory note in

favor of defendant association. Both documents indicated that the principal obligation is for Thirty Thousand (P30,000.00) Pesos payable in one year with interest at twelve (12%) percent per annum.

When the loan became due and demandable without plaintiff paying the same, defendant association caused the extrajudicial foreclosure of the mortgage on March 16, 1976. After the posting and publication requirements were complied with, the land was sold at public auction on April 19, 1976 to defendant association being the highest bidder. The certificate of sale was issued on April 20, 1976 and registered on May 10, 1976 with the Register of Deeds of Cebu.

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

xxx xxx xxx

On October 18, 1979, private respondents filed the aforestated Civil Case No. R-18616 in the court a quo for the annulment of the sale at public auction conducted on April 19, 1976, as well as the corresponding certificate of sale issued pursuant thereto.

In their complaint, private respondents, as plaintiffs therein, assailed the validity of the extrajudicial foreclosure sale of their property, claiming that the same was held in violation of Act No. 3135, as amended, and prayed, inter alia, for the cancellation of Transfer Certificate of Title No. 68041 issued in favor of therein defendant City Savings and Loan Association, Inc., now known as City Savings Bank and one of the petitioners herein.

In its answer, the defendant association therein denied the material allegations of the complaint and averred, among others, that the present private respondent spouses may still avail of their right of redemption over the land in question.

On January 12, 1983, after trial on the merits, the court below rendered judgment upholding the validity of the loan and the real estate mortgage, but annulling the extrajudicial foreclosure sale inasmuch as the same failed to comply with the notice requirements in Act No. 3135, as amended, under the following dispositive part:

WHEREFORE, the foregoing premises considered and upon the view taken by the Court of this case, judgment is hereby rendered, as follows:

1. Declaring ineffective the extrajudicial foreclosure of the mortgage over Lot No. 4731 of the Cadastral Survey of Cebu;

2. Ordering the cancellation of Transfer Certificate of Title No. 68041 of the Registry of Deeds of the City of Cebu in the name of defendant Cebu City Savings and Loan Association, Inc. the

corresponding issuance of a new transfer certificate to contain all the annotations made in TCT No. 14272 of the plaintiffs Pascuala Sabellano, married to Andres Dolino;

3. Ordering the plaintiffs aforenamed to pay the defendant Cebu City Savings and Loan Association, Inc. the unpaid balance of the loan, plus interest; and reimbursing said defendant the value of any necessary and useful expenditures on the property after deducting any income derived by said defendant from the property.

For this purpose, defendant Association is given 15 days from receipt hereof within which to submit its statement of the amount due it from the plaintiffs Dolino, with notice to them. The payment to be made by the plaintiffs shall be within ninety (90) days from their receipt of the order approving the amount due the defendant Cebu City Savings and Loan Association, Inc.

No award of damages or costs to either party.

SO ORDERED. 4

Not satisfied therewith, herein private respondents interposed a partial appeal to respondent court with respect to the second and third paragraphs of the aforequoted decretal portion, contending that the lower court erred in (1) declaring that the mortgage executed by the therein plaintiff spouses Dolino is valid; (2) permitting therein Cebu City Savings and Loan Association, Inc. to collect interest after the same foreclosure proceedings and auction sale which are null and void from the beginning; (3) not ordering the forfeiture of the capital or balance of the loan with usurious interest; and (4) not sentencing therein defendant to pay damages and attorney's fees to plaintiffs. 5

On September 28, 1990, respondent Court of Appeals promulgated its decision modifying the decision of the lower court, with this adjudication:

WHEREFORE, PREMISES CONSIDERED, the decision appealed from is hereby MODIFIED declaring as void and ineffective the real estate mortgage executed by plaintiffs in favor of defendant association. With this modification, the decision is AFFIRMED in other respects. 6

Herein petitioners then filed a motion for reconsideration which was denied by respondent court in its resolution dated March 5, 1991, hence the present petition which, in synthesis, postulates that respondent court erred in declaring the real estate mortgage void, and also impugns the judgment of the trial court declaring ineffective the extrajudicial foreclosure of said mortgage and ordering the cancellation of Transfer Certificate of Title No. 68041 issued in favor of the predecessor of petitioner bank. 7

The first submission assailing the judgment of respondent Court of Appeals is meritorious.

Said respondent court declared the real estate mortgage in question null and void for the reason that the mortgagor spouses, at the time when the said mortgage was executed, were no longer the owners of the lot, having supposedly lost the same when the lot was sold to a purchaser in the foreclosure sale under the prior mortgage. This holding cannot be sustained.

Preliminarily, the issue of ownership of the mortgaged property was never alleged in the complaint nor was the same raised during the trial, hence that issue should not have been taken cognizance of by the Court of Appeals. An issue which was neither averred in the complaint nor ventilated during the trial in the court below cannot be raised for the first time on appeal as it would be offensive to the basic rule of fair play, justice and due process. 8

Nonetheless, since respondent Court took cognizance thereof and, in fact, anchored its modificatory judgment on its ratiocination of that issue, we are inclined to liberalize the rule so that we can in turn pass upon the correctness of its conclusion. We may consider such procedure as analogous to the rule that an unassigned error closely related to an error properly assigned, or upon which the determination of the question properly assigned is dependent, may be considered by an appellate court. 9 We adopt this approach since, after all, both lower courts agreed upon the invalidity of the extrajudicial foreclosure but differed only on the matter of the validity of the real estate mortgage upon which the extrajudicial foreclosure was based.

In arriving at its conclusion, respondent court placed full reliance on what obviously is an obiter dictum laid down in the course of the disquisition in Dizon vs. Gaborro, et al. which we shall analyze. 10 For, as explicitly stated therein by the Court, "(t)he basic issue to be resolved in this case is whether the 'Deed of Sale with Assumption of Mortgage' and the 'Option to Purchase Real Estate,' two instruments executed by and between petitioner Jose P. Dizon and Alfredo G. Gaborro (defendant below) on the same day, October 6, 1959, constitute in truth and in fact an absolute sale of the three parcels of land therein described or merely an equitable mortgage or conveyance thereof by way of security for reimbursement or repayment by petitioner Jose P. Dizon of any and all sums which may have been paid to the Development Bank of the Philippines and the Philippine National Bank by Alfredo G. Gaborro . . . ." Said documents were executed by the parties and the payments were made by Gaborro for the debt of Dizon to said banks after the Development Bank of the Philippines had foreclosed the mortgage executed by Dizon and during the period of redemption after the foreclosure sale of the mortgaged property to said creditor bank.

The trial court held that the true agreement between the parties therein was that Gaborro would assume and pay the indebtedness of Dizon to the banks and, in consideration thereof, Gaborro was given the possession and enjoyment of the properties in question until Dizon shall have reimbursed him for the amount paid to the creditor banks. Accordingly, the trial court ordered the reformation of the documents to the extent indicated and such particular relief was affirmed by the Court of Appeals. This Court held that the agreement between the parties is one of those innominate contracts under Article 1307 of the Civil Code whereby the parties agreed "to give and to do" certain rights and obligations, but partaking of the nature of antichresis.

Hence, on appeal to this Court, the judgment of the Court of Appeals in that case was affirmed but with the following pronouncements:

The two instruments sought to be reformed in this case appear to stipulate rights and obligations between the parties thereto pertaining to and involving parcels of land that had already been foreclosed and sold extrajudicially, and purchased by the mortgage creditor, a third party. It becomes, therefore, necessary, to determine the legality of said rights and obligations arising from the foreclosure and sale proceedings not only between the two contracting parties to the instruments executed between them but also in so far as the agreement affects the rights of the third party, the purchaser Bank.

xxx xxx xxx

Under the Revised Rules of Court, Rule 39, Section 33, the judgment debtor remains in possession of the property foreclosed and sold, during the period of redemption. If the judgment debtor is in possession of the property sold, he is entitled to retain it, and receive the fruits, the purchaser not being entitled to such possession. (Riosa vs. Verzosa, 26 Phil. 86; Velasco vs. Rosenberg's, Inc., 32 Phil. 72; Pabico vs. Pauco, 43 Phil. 572; Power vs. PNB, 54 Phil. 54; Gorospe vs. Gochangco, L-12735, Oct. 30, 1959).

xxx xxx xxx

Upon foreclosure and sale, the purchaser is entitled to a certificate of sale executed by the sheriff. (Section 27, Revised Rules of Court). After the termination of the period of redemption and no redemption having been made, the purchaser is entitled to a deed of conveyance and to the possession of the properties. (Section 35, Revised Rules of Court). The weight of authority is to the effect that the purchaser of land sold at public auction under a writ of execution has only an inchoate right to the property, subject to be defeated and terminated within the period of 12 months from the date of sale, by a redemption on the part of the owner. Therefore, the judgment debtor in possession of the property is entitled to remain therein during the period for redemption. (Riosa vs. Verzosa, 26 Phil. 86, 89; Gonzales vs. Calimbas, 51 Phil. 355).

In the case before Us, after the extrajudicial foreclosure and sale of his properties, petitioner Dizon retained the right to redeem the lands, the possession, use and enjoyment of the same during the period of redemption. And these are the only rights that Dizon could legally transfer, cede and conveyunto respondent Gaborro under the instrument captioned Deed of Sale with Assumption of Mortgage (Exh. A-Stipulation), likewise the same rights that said respondent could acquire in consideration of the latter's promise to pay and assume the loan of petitioner Dizon with DBP and PNB.

Such an instrument cannot be legally considered a real and unconditional sale of the parcels of land, firstly, because there was absolutely no money consideration therefor, as admittedly stipulated, the sum of P131,831.91 mentioned in the document as the consideration "receipt of which was acknowledged" was not actually paid; and, secondly, because the properties had already

been previously sold by the sheriff at the foreclosure sale, thereby divesting the petitioner of his full right as owner thereof to dispose and sell the lands. (Emphasis ours.)

It was apparently the second reason stated by the Court in said case which was relied upon by respondent court in the present case on which to premise its conclusion. Yet, as demonstrated by the relevant excerpts above quoted, not only was that obiter therein unnecessary since evidently no sale was concluded, but even inaccurate, if not inconsistent, when considered in the context of the discussion in its entirety. If, as admitted, the purchaser at the foreclosure sale merely acquired an inchoate right to the property which could ripen into ownership only upon the lapse of the redemption period without his credit having been discharged, it is illogical to hold that during that same period of twelve months the mortgagor was "divested" of his ownership, since the absurd result would be that the land will consequently be without an owner although it remains registered in the name of the mortgagor.

That is why the discussion in said case carefully and felicitously states that what is divested from the mortgagor is only his "full right as owner thereof to dispose (of) and sell the lands," in effect, merely clarifying that the mortgagor does not have the unconditional power to absolutely sell the land since the same is encumbered by a lien of a third person which, if unsatisfied, could result in a consolidation of ownership in the lienholder but only after the lapse of the period of redemption. Even on that score, it may plausibly be argued that what is delimited is not the mortgagor's jus dispodendi, as an attribute of ownership, but merely the rights conferred by such act of disposal which may correspondingly be restricted.

At any rate, even the foregoing considerations and arguments would have no application in the case at bar and need not here be resolved since what is presently involved is a mortgage, not a sale, to petitioner bank. Such mortgage does not involve a transfer, cession or conveyance of the property but only constitutes a lien thereon. There is no obstacle to the legal creation of such a lien even after the auction sale of the property but during the redemption period, since no distinction is made between a mortgage constituted over the property before or after the auction sale thereof.

Thus, a redemptioner is defined as a creditor having a lien by attachment, judgment or mortgage on the property sold, or on some part thereof, subsequent to the judgment under which the property was sold. 11 Of course, while in extrajudicial foreclosure the sale contemplated is not under a judgment but the proceeding pursuant to which the mortgaged property was sold, a subsequent mortgage could nevertheless be legally constituted thereafter with the subsequent mortgagee becoming and acquiring the rights of a redemptioner, aside from his right against the mortgagor.

In either case, what bears attention is that since the mortgagor remains as the absolute owner of the property during the redemption period and has the free disposal of his property, there would be compliance with the requisites of Article 2085 of the Civil Code for the constitution of another mortgage on the property. To hold otherwise would create the inequitable situation wherein the mortgagor would be deprived of the opportunity, which may be his last recourse, to raise funds wherewith to timely redeem his property through another mortgage thereon.

Coming back to the present controversy, it is undisputed that the real estate mortgage in favor of petitioner bank was executed by respondent spouses during the period of redemption. We reiterate that during said period it cannot be said that

the mortgagor is no longer the owner of the foreclosed property since the rule up to now is that the right of a purchaser at a foreclosure sale is merely inchoate until after the period of redemption has expired without the right being exercised. 12 The title to land sold under mortgage foreclosure remains in the mortgagor or his grantee until the expiration of the redemption period and conveyance by the master's deed. 13To repeat, the rule has always been that it is only upon the expiration of the redemption period, without the judgment debtor having made use of his right of redemption, that the ownership of the land sold becomes consolidated in the purchaser. 14

Parenthetically, therefore, what actually is effected where redemption is seasonably exercised by the judgment or mortgage debtor is not the recovery of ownership of his land, which ownership he never lost, but the elimination from his title thereto of the lien created by the levy on attachment or judgment or the registration of a mortgage thereon. The American rule is similarly to the effect that the redemption of property sold under a foreclosure sale defeats the inchoate right of the purchaser and restores the property to the same condition as if no sale had been attempted. Further, it does not give to the mortgagor a new title, but merely restores to him the title freed of the encumbrance of the lien foreclosed. 15

We cannot rule on the plaint of petitioners that the trial court erred in declaring ineffective the extrajudicial foreclosure and the sale of the property to petitioner bank. The court below spelled out at length in its decision the facts which it considered as violative of the provisions of Act No. 3135, as amended, by reason of which it nullified the extrajudicial foreclosure proceeding and its effects. Such findings and ruling of the trial court are already final and binding on petitioners and can no longer be modified, petitioners having failed to appeal therefrom.

An appellee who has not himself appealed cannot obtain from the appellate court any affirmative relief other than the ones granted in the decision of the court below. 16 He cannot impugn the correctness of a judgment not appealed from by him. He cannot assign such errors as are designed to have the judgment modified. All that said appellee can do is to make a counter-assignment of errors or to argue on issues raised at the trial only for the purpose of sustaining the judgment in his favor, even on grounds not included in the decision of the court a quonor raised in the appellant's assignment of errors or arguments. 17

WHEREFORE, the decision of respondent Court of Appeals, insofar as it modifies the judgment of the trial court, is REVERSED and SET ASIDE. The judgment of said trial court in Civil Case No. R-18616, dated January 12, 1983, is hereby REINSTATED.

SO ORDERED.

14. Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 171868               July 27, 2011

SPOUSES FRANCISCO D. YAP and WHELMA S. YAP, Petitioners, vs.SPOUSES ZOSIMO DY, SR. and NATIVIDAD CHIU DY, SPOUSES MARCELINO MAXINO and REMEDIOS L. MAXINO, PROVINCIAL SHERIFF OF NEGROS ORIENTAL and DUMAGUETE RURAL BANK, INC.,Respondents.

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

G.R. No. 171991

DUMAGUETE RURAL BANK, INC. (DRBI) herein represented by Mr. William D.S. Dichoso, Petitioners, vs.SPOUSES ZOSIMO DY, SR. and NATIVIDAD CHIU DY, SPOUSES MARCELINO MAXINO and REMEDIOS MAXINO, and SPOUSES FRANCISCO D. YAP and WHELMA S. YAP, Respondents.

D E C I S I O N

VILLARAMA, JR., J.:

May persons to whom several mortgaged lands were transferred without the knowledge and consent of the creditor redeem only several parcels if all the lands were sold together for a single price at the foreclosure sale? This is the principal issue presented to us for resolution in these two petitions for review on certiorari assailing the May 17, 2005 Decision1 and March 15, 2006 Resolution2 of the Court of Appeals (CA) in CA-G.R. C.V. No. 57205.

The antecedents are as follows:

The spouses Tomas Tirambulo and Salvacion Estorco (Tirambulos) are the registered owners of several parcels of land located in Ayungon, Negros Oriental, registered under Transfer Certificate of Title (TCT) Nos. T-14794, T-14777, T-14780, T-14781, T-14783 and T-20301 of the Registry of Deeds of Negros Oriental, and more particularly designated as follows:

(1) TCT No. T-14777

Lot 1 of Plan Pcs-11728

61,371 sq.m.

(2) TCT No. T-20301

Lot 3 of Plan Psu-124376

17,373 sq.m.

(3) TCT No. T-14780

Lot 4 of Plan Pcs-11728

27,875 sq.m.

(4) TCT No. T-14794

Lot 5 of Plan Psu-124376

2,900 sq.m.

(5) TCT No. T-14781

Lot 6 of Plan Pcs-11728

16,087 sq.m.

(6) TCT No. T-14783

Lot 8 of Plan Pcs-11728

39,888 sq.m

The Tirambulos likewise own a parcel of land denominated as Lot 846, covered by Tax Declaration No. 08109.

On December 3, 1976, the Tirambulos executed a Real Estate Mortgage3 over Lots 1, 4, 5, 6 and 8 in favor of the Rural Bank of Dumaguete, Inc., predecessor of Dumaguete Rural Bank, Inc. (DRBI), to secure a P105,000 loan extended by the latter to them. Later, the Tirambulos obtained a second loan for P28,000 and also executed a Real Estate Mortgage4 over Lots 3 and 846 in favor of the same bank on August 3, 1978.

Subsequently, on October 27, 1979, the Tirambulos sold all seven mortgaged lots to the spouses Zosimo Dy, Sr. and Natividad Chiu (the Dys) and the spouses Marcelino C. Maxino and Remedios Lasola (the Maxinos) without the consent and knowledge of DRBI. This sale, which was embodied in a Deed of Absolute Sale,5 was followed by a default on the part of the Tirambulos to pay their loans to DRBI. Thus, DRBI extrajudicially foreclosed the December 3, 1976 mortgage and had Lots 1, 4, 5, 6 and 8 sold at public auction on March 31, 1982.

At the auction sale, DRBI was proclaimed the highest bidder and bought said lots for P216,040.93. The Sheriff’s Certificate of Sale6 stated that the "sale is subject to the rights of redemption of the mortgagor (s) or any other persons authorized by law so to do, within a period of one (1) year from registration hereof."7 The certificate of sale, however, was not registered until almost a year later, or on June 24, 1983.

On July 6, 1983, or twelve (12) days after the sale was registered, DRBI sold Lots 1, 3 and 6 to the spouses Francisco D. Yap and Whelma D. Yap (the Yaps) under a Deed of Sale with Agreement to Mortgage.8 It is important to note, however, that Lot 3 was not among the five properties foreclosed and bought by DRBI at public auction.

On August 8, 1983, or well within the redemption period, the Yaps filed a Motion for Writ of Possession9 alleging that they have acquired all the rights and interests of DRBI over the foreclosed properties and are entitled to immediate possession of the same because the one-year redemption period has lapsed without any redemption being made. Said motion, however, was ordered withdrawn on August 22, 198310 upon motion of the Yaps, who gave no reason therefor.11 Three days later, or on August 25, 1983, the Yaps again filed a Motion for Writ of Possession.12 This time the motion was granted, and a Writ of Possession13 over Lots 1, 3 and 6 was issued in favor of the Yaps on September 5, 1983. They were placed in possession of Lots 1, 3 and 6 seven days later.

On May 22, 1984, roughly a month before the one-year redemption period was set to expire, the Dys and the Maxinos attempted to redeem Lots 1, 3 and 6. They tendered the amount of P40,000.00 to DRBI and the Yaps,14but both refused, contending that the redemption should be for the full amount of the winning bid of P216,040.93 plus interest for all the foreclosed properties.

Thus, on May 28, 1984, the Dys and the Maxinos went to the Office of the Sheriff of Negros Oriental and paidP50,625.29 (P40,000.00 for the principal plus P10,625.29 for interests and Sheriff’s Commission) to effect the redemption.15 Noticing that Lot 3 was not included in the foreclosure proceedings, Benjamin V. Diputado, Clerk of Court and Provincial Sheriff, issued a Certificate of Redemption16 in favor of the Dys and the Maxinos only for Lots 1 and 6, and stated in said certificate that Lot 3 is not included in the foreclosure proceedings. By letter17 of even date, Atty. Diputado also duly notified the Yaps of the redemption of Lots 1 and 6 by the Dys and the Maxinos, as well as the non-inclusion of Lot 3 among the foreclosed properties. He advised the Yaps to personally claim the redemption money or send a representative to do so.

In a letter to the Provincial Sheriff on May 31, 1984, the Yaps refused to take delivery of the redemption price arguing that one of the characteristics of a mortgage is its indivisibility and that one cannot redeem only some of the lots foreclosed because all the parcels were sold for a single price at the auction sale.18

On June 1, 1984, the Provincial Sheriff wrote the Dys and the Maxinos informing them of the Yaps’ refusal to take delivery of the redemption money and that in view of said development, the tender of the redemption money was being considered as a consignation.19

On June 15, 1984, the Dys and the Maxinos filed Civil Case No. 8426 with the Regional Trial Court of Negros Oriental for accounting, injunction, declaration of nullity (with regard to Lot 3) of the Deed of Sale with Agreement to Mortgage, and damages against the Yaps and DRBI. In their complaint,20 they prayed

a) That the Deed of Sale With Agreement to Mortgage … be declared null and void ab initio;

b) That defendant Yap[s’] possession of Lot No. 3, TCT No. T20301 based as it was on a void sale, be declared illegal from the very beginning;

c) That defendants be ordered to render to plaintiffs a fair accounting of the harvests and income which defendants made from said Lot No. 3 and, in addition, be ordered to pay to plaintiffs damages for wrongfully depriving plaintiffs of the use and enjoyment of said property;

d) That the redemption which plaintiffs made of Lot No. 1, TCT No. 14777, and Lot No. 6, TCT No. 14781, through the Provincial Sheriff of Negros Oriental, be declared valid and binding on the defendants, thereby releasing and freeing said parcels of land from whatever liens or claims that said defendants might have on them;

e) That defendants be likewise ordered to render to plaintiffs full and fair accounting of all the harvests, fruits, and income that they or either of them might have derived from said two parcels of land starting from the

time defendant Yap first took possession thereof and harvested the coconuts in September, 1983;

f) That, after the accounting herein prayed for, defendants be required to deliver to plaintiffs the net proceeds of the income from the three parcels of land subject of this case, together with interest at the legal rate;

g) That for his acts of misrepresentation and deceit in obtaining a writ of possession over the three parcels of land subject of this case, and for the highly irregular and anomalous procedures and maneuvers employed by defendant Yap in securing said writ, as well as for harvesting the coconuts even after knowing that plaintiffs had already fully redeemed the properties in question and, with respect to Lot No. 3, after knowing that the same was not in fact included in the foreclosure and, therefore, could not have been validly sold by the bank to him, said defendant Yap be condemned to pay plaintiffs moral damages in the amount of P200,000.00, plus punitive and exemplary damages in the amount of P100,000.00;

h) That for falsifying the Sheriff’s Certificate of Sale and selling unlawfully Lot No. 3, TCT No. T-20301, to its co-defendant Yap, defendant DRBI be condemned to pay to plaintiffs actual damages in the amount ofP50,000.00; moral damages in the amount of P200,000.00; and punitive and exemplary damages in the amount of P100,000.00;

i) That defendants be condemned to pay solidarily to plaintiffs attorney’s fees in the amount of P50,000.00; other legitimate expenses of litigation in the amount of P30,000.00; and the costs of suit;

j) That pending hearing of this case, a writ of preliminary injunction be issued enjoining and restraining the defendants, particularly defendant Yap, from disturbing and interfering the plaintiffs’ possession and other rights of ownership over the land in question;

k) That pending hearing of the petition for preliminary injunction, a temporary restraining order be issued against the defendants, particularly against defendant Yap, to serve the same purpose for which the writ of preliminary injunction is herein prayed for; and

l) That, after hearing of the main case, said preliminary injunction be made permanent.

Furthermore, plaintiffs pray for all other reliefs which may be just and equitable in the premises.21

Thereafter, on June 19, 1984, the Dys and the Maxinos consigned to the trial court an additional sum ofP83,850.50 plus sheriff’s commission fee of P419.25 representing the remaining balance of the purchase price that the Yaps still owed DRBI by virtue of the sale to them by the DRBI of Lots 1, 3 and 6.22

Meanwhile, by letter23 dated June 27, 1984, the Yaps told DRBI that no redemption has been made by the Tirambulos or their successors-in-interest and requested DRBI to consolidate its title over the foreclosed properties by requesting the Provincial

Sheriff to execute the final deed of sale in favor of the bank so that the latter can transfer the titles of the two foreclosed properties to them.

On the same date, the Yaps also wrote the Maxinos informing the latter that during the last harvest of the lots bought from DRBI, they excluded from the harvest Lot 3 to show their good faith. Also, they told the Maxinos that they were formally turning over the possession of Lot 3 to the Maxinos, without prejudice to the final determination of the legal implications concerning Lot 3. As to Lots 1 and 6, however, the Yaps stated that they intended to consolidate ownership over them since there has been no redemption as contemplated by law. Included in the letter was a liquidation of the copra proceeds harvested from September 7, 1983 to April 30, 1984 for Lots 1, 3 and 6.24

Later, on July 5, 1984, the Yaps filed Civil Case No. 8439 for consolidation of ownership, annulment of certificate of redemption, and damages against the Dys, the Maxinos, the Provincial Sheriff of Negros Oriental and DRBI. In their complaint,25 the Yaps prayed

1. That [they] be declared the exclusive owners of Lot No. 1 covered by TCT No. T-14777 and Lot No. 6 covered by TCT No. T-14781 for failure on the part of defendants Zosimo Dy, Sr., and Marcelino Maxino to redeem the properties in question within one (1) year from the auction sale.

2. That defendants be [declared] solidarily liable to pay moral damages in the amount of ONE HUNDRED THOUSAND PESOS (P100,000.00), THIRTY[-]FIVE THOUSAND PESOS (P35,000.00) as attorney’s fees and FIFTEEN THOUSAND PESOS (P15,000.00) as exemplary damages;

3. That the Provincial Sheriff be required to execute the final Deed of Sale in favor of the bank and the bank be in turn required to transfer the property to the plaintiffs in accordance with the Deed of Sale with Mortgage.

4. That the court grant such other relief as may be deemed just and equitable under the premises.26

Civil Case Nos. 8426 and 8439 were tried jointly.

On October 24, 1985, the Yaps, by counsel, filed a motion to withdraw from the provincial sheriff the redemption money amounting to P50,373.42.27 Said motion was granted on October 28, 1985 after a Special Power of Attorney executed by Francisco Yap in favor of his brother Valiente Yap authorizing the latter to receive theP50,373.42 redemption money was presented in court.28

On February 12, 1997, the trial court rendered decision29 in favor of the Yaps. The fallo reads:

WHEREFORE, judgment is hereby rendered as follows:

1. Dismissing the complaint of Dy and Maxino spouses in Civil Case No. 8426 as well as the bank and the Yap spouses counterclaim for lack of factual and legal basis;

2. In Civil Case No. 8439:

a) Declaring the Yap spouses, plaintiffs therein, the exclusive owners of Lot No. 1 covered by TCT No. T-14777 and Lot No. 6 covered by TCT No. T-14781 for failure on the part of the Dy and Maxino spouses, defendants therein, to redeem the properties in question within one (1) year from the auction sale.

b) Directing the Provincial Sheriff of Negros Oriental to execute the Final Deed of Sale in favor of the bank and the latter to transfer the subject properties to the Yap spouses in accordance with the Deed of Sale With Mortgage….

SO ORDERED.30

On March 7, 1997, the trial court amended the above dispositive portion upon motion of DRBI, as follows:

Wherefore, judgment is hereby rendered as follows:

1. The Certificate of Redemption issued by the Provincial Sheriff (Exh. "M") is hereby declared null and void;

2. The Provincial Sheriff of Negros Oriental is hereby ordered to execute a Final Deed of Sale of the foreclosed properties in favor of the defendant Dumaguete Rural Bank, Inc., subject to the rights of the Yap spouses acquired in accordance with the Deed of Sale with Mortgage…;

3. The Deed of Sale dated [October] 27, 1979, made by Tirambulo and Estorco in favor of the Dys and Maxinos covering all the seven (7) parcels of land in question, is hereby declared null and void;

4. In Civil Case No. 8439, declaring the Yap Spouses, the exclusive owners of Lot No. 1, covered by TCT No. T-14777, and Lot No. 6, covered by TCT No. T-14781, for failure on the part of the Dy and Maxino Spouses, to redeem said properties within one (1) year from the date of the registration of the auction sale;

5. All other claims and counterclaims are hereby dismissed for lack of merit.

SO ORDERED.31

The trial court held that the Dys and the Maxinos failed to formally offer their evidence; hence, the court could not consider the same. It also upheld the Deed of Sale with Agreement to Mortgage between the Yaps and DRBI, ruling that its genuineness and due execution has been admitted by the Dys and the Maxinos and that it is not contrary to law, morals, good customs, public policy or public order. Thus, ownership of Lots 1, 3 and 6 was transferred to the Yaps.

The trial court further held that the Dys and the Maxinos failed to exercise their rights of redemption properly and timely. They merely deposited the amount of P50,625.29 with the Sheriff, whereas the amount due on the mortgage deed is P216,040.93.

Aggrieved by the above ruling, the Dys and the Maxinos elevated the case to the CA. They argued that the trial court erred in:

1) ... failing to consider plaintiffs’ evidence [testimonial, including the testimony of the Provincial Sheriff of Negros Oriental (Attorney Benjamin V. Diputado) and plaintiff Attorney Marcelino C. Maxino] and documentary [Exhibits A through TT (admitted under Order of 3 March 1995)];

2) …failing to declare void or annul the purported contract of sale by Dumaguete Rural Bank, Inc. to Francisco D. Yap and Whelma S. Yap of Lots 1, 3, and 6, during the redemption period [the purported seller (bank) not being the owner thereof, and Lot 3 not being included in the foreclosure/auction sale and could not have been acquired by the Bank thereat];

3) …not holding that the parcels of land had been properly and validly redeemed in good faith, defendant Yap, the Provincial Sheriff, the Clerk of Court, and Mr. Mario Dy, having accepted redemption/consignation (or, in not fixing the redemption price and allowing redemption);

4) …not holding that by withdrawing the redemption money consigned/deposited by plaintiffs to the Court, and turning over possession of the parcels of land to plaintiffs, defendants Yap accepted, ratified, and confirmed redemption by plaintiffs of the parcels of land acquired at foreclosure/auction sale by the Bank and purportedly sold by it to and purchased by Yap;

5) …not finding and holding that all the parcels of land covered by the foreclosed mortgage held by Dumaguete Rural Bank had been acquired by and are in the possession of plaintiffs as owners and that defendants bank and Yap had disposed of and/or lost their rights and interests and/or any cause of action and their claims had been extinguished and mooted or otherwise settled, waived and/or merged in plaintiffs-appellants;

6) …not holding that defendants Yap have no cause of action to quiet title as they had no title or possession of the parcels of land in question and in declaring defendants Yap spouses the exclusive owners of Lot No. 1 covered by TCT No. T-14777 and Lot No. 6 covered by TCT No. T-14781 and in directing the Provincial Sheriff to execute the final deed of sale in favor of the bank and the latter to transfer the subject properties to the Yap spouses in accordance with the Deed of Sale with Mortgage which included Lot No. 3 which was not foreclosed by the Sheriff and was not included in the certificate of sale issued by him and despite their acceptance, ratification, and confirmation of the redemption as well as acknowledgment of possession of the parcels of land by plaintiffs;

7) …issuing an amended decision after perfection of plaintiff’s appeal and without waiting for their comment (declaring the Certificate of Redemption issued by the Provincial Sheriff (Exh. "M") null and void; ordering the

Provincial Sheriff of Negros Oriental to execute a Final Deed of Sale of the foreclosed properties in favor of the defendant Dumaguete Rural Bank, Inc., subject to the rights of the Yap spouses acquired in accordance with the Deed of Sale with Mortgage (Exh. "B"-Maxino and Dy; Exh. "1" –Yap); declaring null and void the Deed of Sale dated Oct[ober] 27, 1979, made by Tirambulo and Estorco in favor of the Dys and Maxinos covering all the seven (7) parcels of land in question; in Civil Case No. 8439, declaring the Yap spouses, the exclusive owners of Lot No. 1, covered by TCT No. T-14777, and Lot No. 6, covered by TCT No. T-14781, for failure on the part of the Dy and Maxino spouses, to redeem said properties within (1) year from the date of registration of the auction sale) after plaintiffs had perfected appeal of the 12 February 1997 decision, without hearing or awaiting plaintiffs’ comment, and in the face of the records showing that the issues were never raised, much less litigated, insofar as Tirambulo, as well in the face of the foregoing circumstances, especially dismissal of defendants’ claims and counterclaims and acquisition of ownership and possession of the parcels of land by plaintiffs as well as disposition and/or loss of defendants rights and interests and cause of action in respect thereof and/or settlement, waiver, and/or extinguishment of their claims, and merger in plaintiffs-appellants, and without stating clearly the facts and the law upon which it is based[; and]

8) …not finding, holding and ruling that defendants acted in bad faith and in an abusive and oppressive manner, if not contrary to law; and in not awarding plaintiffs damages.32

On May 17, 2005, the CA rendered a decision reversing the March 7, 1997 amended decision of the trial court. The dispositive portion of the assailed CA decision reads:

IN LIGHT OF THE FOREGOING, this appeal is GRANTED. The decision as well as the amended decision of the Regional Trial Court is REVERSED AND SET ASIDE. In lieu thereof[,] judgment is hereby rendered as follows:

1. Declaring the sale made by Dumaguete Rural Bank Inc. to Sps. Francisco and Whelma Yap with respect to Lot No. 3 under TCT No. T-20301 as null and void;

2. Declaring the redemption made by Spouses Dy and Spouses Maxino with regards to Lot No. 6 under TCT No. T-14781 and Lot No. 1 under TCT No. [T-]14777 as valid;

3. Ordering defendants, Sps. Yap, to deliver the possession and ownership thereof to Sps. Dy and Sps. Maxino; to give a fair accounting of the proceeds of these three parcels of land and to tender and deliver the corresponding amount of income from October 24, 1985 until the finality of this judgment[; and]

4. Condemning the defendant bank to pay damages to Spouses Dy and Spouses Maxino the amount ofP20,000.00 as moral damages and P200,000.00 as exemplary damages and attorney’s fees in the amount of P50,000.00.

All other claims are dismissed.

Costs against the appellees.

SO ORDERED.33

The CA held that the trial court erred in ruling that it could not consider the evidence for the Dys and the Maxinos allegedly because they failed to formally offer the same. The CA noted that although the testimonies of Attys. Marcelino C. Maxino and Benjamin V. Diputado were not formally offered, the procedural lapse was cured when the opposing counsel cross-examined said witnesses. Also, while the original TSNs of the witnesses for the plaintiffs in Civil Case No. 8426 were burned, the latter’s counsel who had copies thereof, furnished the Yaps copies for their scrutiny and comment. The CA further noted that the trial court also admitted all the documentary exhibits of the Dys and the Maxinos on March 3, 1995. Unfortunately, however, the trial court simply failed to locate the pertinent documents in the voluminous records of the cases.

On the merits, the CA ruled that the Dys and the Maxinos had proven their cause of action sufficiently. The CA noted that their claim that Lot 3 was not among the properties foreclosed was duly corroborated by Atty. Diputado, the Provincial Sheriff who conducted the foreclosure sale. The Yaps also failed to rebut their contention regarding the former’s acceptance of the redemption money and their delivery of the possession of the three parcels of land to the Dys and the Maxinos. The CA also noted that not only did the Yaps deliver possession of Lot 3 to the Dys and the Maxinos, they also filed a Motion to Withdraw the Redemption Money from the Provincial Sheriff and withdrew the redemption money.

As to the question whether the redemption was valid or not, the CA found no need to discuss the issue. It found that the bank was in bad faith and therefore cannot insist on the protection of the law regarding the need for compliance with all the requirements for a valid redemption while estoppel and unjust enrichment operate against the Yaps who had already withdrawn the redemption money.

Upon motion for reconsideration of the Yaps, however, the CA amended its decision on March 15, 2006 as follows:

IN LIGHT OF THE FOREGOING, this appeal is GRANTED. The decision as well as the amended decision of the Regional Trial Court is REVERSED AND SET ASIDE. In lieu thereof[,] judgment is hereby rendered as follows:

1.Declaring the sale made by Dumaguete Rural Bank Inc. to Sps. Francisco and Whelma Yap with respect to Lot No. 3 under TCT No. T-20301 null and void;

2.Declaring the redemption made by Spouses Dy and Spouses Maxino with regards to Lot No. 6 under TCT No. T-14781 and Lot No. 1 under TCT No. [T-]14777 as valid;

3. Condemning the defendant bank to pay damages to Spouses Dy and Spouses Maxino the amount ofP20,000.00 as moral damages and P200,000.00 as exemplary damages and attorney’s fees in the amount of P50,000.00.

All other claims are dismissed.

Costs against the appellees.

SO ORDERED.34

Hence, the consolidated petitions assailing the appellate court’s decision.

The Yaps argue in the main that there is no valid redemption of the properties extrajudicially foreclosed. They contend that the P40,000.00 cannot be considered a valid tender of redemption since the amount of the auction sale is P216,040.93. They also argue that a valid tender of payment for redemption can only be made to DRBI since at that time, their rights were subordinate to the final consolidation of ownership by the bank.

DRBI, aside from insisting that all seven mortgaged properties (which thus includes Lot 3) were validly foreclosed, argues, for its part, that the appellate court erred in sustaining the redemption made by the Dys and Maxinos. It anchors its argument on the fact that the sale of the Tirambulos to the Dys and Maxinos was without the bank’s consent. The Dys and Maxinos therefore could not have assumed the character of debtors because a novation of the contract of mortgage between the Tirambulos and DRBI did not take place as such a novation is proscribed by Article 1293 of the Civil Code. And there being no valid redemption within the contemplation of law and DRBI being the highest bidder during the auction sale, DRBI has become the absolute owner of the properties mortgaged when the redemption period expired.

DRBI further argues that it was unfair and unjust for them to be held liable for damages for supposedly wrongfully foreclosing on Lot 3, depriving the Dys and the Maxinos of the use of the land, and registering the Certificate of Sale which included Lot 3 when it should have excluded the same. DRBI argues that as a juridical person, it only authorized and consented, through its Board of Directors, to lawful processes. The unlawful acts of the Sheriff, who is considered as an agent of the bank in the foreclosure proceedings, cannot bind DRBI. Moreover, DRBI cannot be liable for damages on the basis of an affidavit that was submitted only before the CA as the bank had no chance to cross-examine the affiant and determine the veracity and propriety of the statements narrated in said affidavit.

Thus, the issues to be resolved in the instant case are essentially as follows: (1) Is Lot 3 among the foreclosed properties? (2) To whom should the payment of redemption money be made? (3) Did the Dys and Maxinos validly redeem Lots 1 and 6? and (4) Is DRBI liable for damages?

As to the first issue, we find that the CA correctly ruled that the Dys and Maxinos were able to prove their claim that Lot 3 was not among the properties foreclosed and that it was merely inserted by the bank in the Sheriff’s Certificate of Sale. As Atty. Diputado, the Provincial Sheriff, testified, the application for foreclosure was only for five parcels of land, namely, Lots 1, 4, 5, 6 and 8. Accordingly, only said five parcels of land were included in the publication and sold at the foreclosure sale. When he was shown a copy of the Sheriff’s Certificate of Sale consisting of three pages, he testified that it was altered because Lot 3 and Lot 846 were included beyond the "xxx" that marked the end of the enumeration of the lots foreclosed.35 Also, a perusal of DRBI’s application for foreclosure of real estate mortgage36 shows that it explicitly refers to only one deed of mortgage to settle the Tirambulos’ indebtedness amounting to P216,040.93. This is consistent with the Notice of Extrajudicial Sale of Mortgaged Property, published in the Dumaguete Star

Informer on February 18, 25 and March 4, 1982,37announcing the sale of Lots 1, 4, 5, 6 and 8 for the satisfaction of the indebtedness amounting to P216,040.93. It is also consistent with the fact that Lots 1, 4, 5, 6 and 8 are covered by only one real estate mortgage, the Real Estate Mortgage38 dated December 3, 1976. Indeed, that the foreclosure sale refers only to Lots 1, 4, 5, 6 and 8 is clear from the fact that Lots 1, 4, 5, 6 and 8 and Lot 3 are covered by two separate real estate mortgages. DRBI failed to refute these pieces of evidence against it.

As to the second issue regarding the question as to whom payment of the redemption money should be made, Section 31,39 Rule 39 of the Rules of Court then applicable provides:

SEC. 31. Effect of redemption by judgment debtor, and a certificate to be delivered and recorded thereupon. To whom payments on redemption made.—If the judgment debtor redeem, he must make the same payments as are required to effect a redemption by a redemptioner, whereupon the effect of the sale is terminated and he is restored to his estate, and the person to whom the payment is made must execute and deliver to him a certificate of redemption acknowledged or approved before a notary public or other officer authorized to take acknowledgments of conveyances of real property. Such certificate must be filed and recorded in the office of the registrar of deeds of the province in which the property is situated, and the registrar of deeds must note the record thereof on the margin of the record of the certificate of sale. The payments mentioned in this and the last preceding sections may be made to the purchaser or redemptioner, or for him to the officer who made the sale. (Emphasis supplied.)

Here, the Dys and the Maxinos complied with the above-quoted provision. Well within the redemption period, they initially attempted to pay the redemption money not only to the purchaser, DRBI, but also to the Yaps. Both DRBI and the Yaps however refused, insisting that the Dys and Maxinos should pay the whole purchase price at which all the foreclosed properties were sold during the foreclosure sale. Because of said refusal, the Dys and Maxinos correctly availed of the alternative remedy by going to the sheriff who made the sale. As held in Natino v. Intermediate Appellate Court,40 the tender of the redemption money may be made to the purchaser of the land or to the sheriff. If made to the sheriff, it is his duty to accept the tender and execute the certificate of redemption.

But were the Dys and Maxinos entitled to redeem Lots 1 and 6 in the first place? We rule in the affirmative.

The Dys and the Maxinos have legal personality to redeem the subject properties.

Contrary to petitioners’ contention, the Dys and Maxinos have legal personality to redeem the subject properties despite the fact that the sale to the Dys and Maxinos was without DRBI’s consent. In Litonjua v. L & R Corporation,41 this Court declared valid the sale by the mortgagor of mortgaged property to a third person notwithstanding the lack of written consent by the mortgagee, and likewise recognized the third person’s right to redeem the foreclosed property, to wit:

Coming now to the issue of whether the redemption offered by PWHAS on account of the spouses Litonjua is valid, we rule in the affirmative. The sale by the spouses Litonjua of the mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped into the shoes of the spouses Litonjua on account of such sale and was in effect,

their successor-in-interest. As such, it had the right to redeem the property foreclosed by L & R Corporation. Again,Tambunting, supra, clarifies that –

"x x x. The acquisition by the Hernandezes of the Escuetas’ rights over the property carried with it the assumption of the obligations burdening the property, as recorded in the Registry of Property, i.e., the mortgage debts in favor of the RFC (DBP) and the Tambuntings. The Hernandezes, by stepping into the Escuetas’ shoes as assignees, had the obligation to pay the mortgage debts, otherwise, these debts would and could be enforced against the property subject of the assignment. Stated otherwise, the Hernandezes, by the assignment, obtained the right to remove the burdens on the property subject thereof by paying the obligations thereby secured; that is to say, they had the right of redemption as regards the first mortgage, to be exercised within the time and in the manner prescribed by law and the mortgage deed; and as regards the second mortgage, sought to be judicially foreclosed but yet unforeclosed, they had the so-called equity of redemption."

The right of PWHAS to redeem the subject properties finds support in Section 6 of Act 3135 itself which gives not only the mortgagor-debtor the right to redeem, but also his successors-in-interest. As vendee of the subject properties, PWHAS qualifies as such a successor-in-interest of the spouses Litonjua.42

Likewise, we rule that the Dys and the Maxinos validly redeemed Lots 1 and 6.

The requisites of a valid redemption are present

The requisites for a valid redemption are: (1) the redemption must be made within twelve (12) months from the time of the registration of the sale in the Office of the Register of Deeds; (2) payment of the purchase price of the property involved, plus 1% interest per month thereon in addition, up to the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after the purchase, also with 1% interest on such last named amount; and (3) written notice of the redemption must be served on the officer who made the sale and a duplicate filed with the Register of Deeds of the province.43

There is no issue as to the first and third requisites. It is undisputed that the Dys and the Maxinos made the redemption within the 12-month period from the registration of the sale. The Dys and Maxinos effected the redemption on May 24, 1984, when they deposited P50,373.42 with the Provincial Sheriff, and on June 19, 1984, when they deposited an additional P83,850.50. Both dates were well within the one-year redemption period reckoned from the June 24, 1983 date of registration of the foreclosure sale. Likewise, the Provincial Sheriff who made the sale was properly notified of the redemption since the Dys and Maxinos deposited with him the redemption money after both DRBI and the Yaps refused to accept it.

The second requisite, the proper redemption price, is the main subject of contention of the opposing parties.

The Yaps argue that P40,000.00 cannot be a valid tender of redemption since the amount of the auction sale wasP216,040.93. They further contend that the mortgage is indivisible so in order for the tender to be valid and effectual, it must be for the entire auction price plus legal interest.

We cannot subscribe to the Yaps’ argument on the indivisibility of the mortgage. As held in the case of Philippine National Bank v. De los Reyes,44 the doctrine of indivisibility of mortgage does not apply once the mortgage is extinguished by a complete foreclosure thereof as in the instant case. The Court held:

The parties were accordingly embroiled in a hermeneutic disparity on their aforesaid contending positions. Yet, the rule on the indivisibility of mortgage finds no application to the case at bar. The particular provision of the Civil Code referred to provides:

Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor.

Therefore, the debtor’s heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor’s heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of these guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied.

From the foregoing, it is apparent that what the law proscribes is the foreclosure of only a portion of the property or a number of the several properties mortgaged corresponding to the unpaid portion of the debt where before foreclosure proceedings partial payment was made by the debtor on his total outstanding loan or obligation. This also means that the debtor cannot ask for the release of any portion of the mortgaged property or of one or some of the several lots mortgaged unless and until the loan thus, secured has been fully paid, notwithstanding the fact that there has been a partial fulfillment of the obligation. Hence, it is provided that the debtor who has paid a part of the debt cannot ask for the proportionate extinguishment of the mortgage as long as the debt is not completely satisfied.

That the situation obtaining in the case at bar is not within the purview of the aforesaid rule on indivisibility is obvious since the aggregate number of the lots which comprise the collaterals for the mortgage had already been foreclosed and sold at public auction. There is no partial payment nor partial extinguishment of the obligation to speak of. The aforesaid doctrine, which is actually intended for the protection of the mortgagee, specifically refers to the release of the mortgage which secures the satisfaction of the indebtedness and naturally presupposes that the mortgage is existing. Once the mortgage is extinguished by a complete foreclosure thereof, said doctrine of indivisibility ceases to apply since, with the full payment of the debt, there is nothing more to secure.45 (Emphasis supplied.)

Nothing in the law prohibits the piecemeal redemption of properties sold at one foreclosure proceeding. In fact, in several early cases decided by this Court, the

right of the mortgagor or redemptioner to redeem one or some of the foreclosed properties was recognized.

In the 1962 case of Castillo v. Nagtalon,46 ten parcels of land were sold at public auction. Nagtalon, who owned three of the ten parcels of land sold, wanted to redeem her properties. Though the amount she tendered was found as insufficient to effectively release her properties, the Court held that the tender of payment was made timely and in good faith and thus, in the interest of justice, Nagtalon was given the opportunity to complete the redemption purchase of three of the ten parcels of land foreclosed.

Also, in the later case of Dulay v. Carriaga,47 wherein Dulay redeemed eight of the seventeen parcels of land sold at public auction, the trial court declared the piecemeal redemption of Dulay as void. Said order, however, was annulled and set aside by the Court on certiorari and the Court upheld the redemption of the eight parcels of land sold at public auction.

Clearly, the Dys and Maxinos can effect the redemption of even only two of the five properties foreclosed. And since they can effect a partial redemption, they are not required to pay the P216,040.93 considering that it is the purchase price for all the five properties foreclosed.

So what amount should the Dys and Maxinos pay in order for their redemption of the two properties be deemed valid considering that when the five properties were auctioned, they were not separately valued?

Contrary to the Yaps’ contention, the amount paid by the Dys and Maxinos within the redemption period for the redemption of just two parcels of land was not only P40,000.00 but totaled to P 134,223.92  (P50,373.42 paid on May 28, 1984 plus P83,850.50 paid on June 19, 1984). That is more than 60% of the purchase price for the five foreclosed properties, to think the Dys and Maxinos were only redeeming two properties. We find that it can be considered a sufficient amount if we were to base the proper purchase price on the proportion of the size of Lots 1 and 6 with the total size of the five foreclosed properties, which had the following respective sizes:

Lot 1 61,371 square metersLot 6 16,087 square metersLot 5 2,900 square metersLot 4 27,875 square metersLot 8 39,888 square metersTOTAL 148,121 square meters

The two subject properties to be redeemed, Lots 1 and 6, have a total area of 77,458 square meters or roughly 52% of the total area of the foreclosed properties. Even with this rough approximation, we rule that there is no reason to invalidate the redemption of the Dys and Maxinos since they tendered 60% of the total purchase price for properties constituting only 52% of the total area. However, there is a need to remand the case for computation of the pro-rata value of Lots 1 and 6 based on their true values at that time of redemption for the purposes of determining if there is any deficiency or overpayment on the part of the Dys and Maxinos.

As to the award of damages in favor of the Dys and Maxinos, we agree with the appellate court for granting the same.

The CA correctly observed that the act of DRBI in falsifying the Sheriff’s Certificate of Sale to include Lots 3 and 846, even if said additional lots were not among the properties foreclosed, was the proximate cause of the pecuniary loss suffered by the Dys and Maxinos in the form of lost income from Lot 3.

Likewise, the CA also correctly awarded moral damages. Paragraph 10, Article 2219 of the Civil Code provides that moral damages may be recovered in case of acts and actions referred to in Article 21 of the same Code. Article 21 reads:

ART. 21 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.

As previously discussed, DRBI’s act of maliciously including two additional properties in the Sheriff’s Certificate of Sale even if they were not included in the foreclosed properties caused the Dys and Maxinos pecuniary loss. Hence, DRBI is liable to pay moral damages.

The award of exemplary damages is similarly proper. Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages.48 We cannot agree more with the following ratio of the appellate court in granting the same:

Additionally, what is alarming to the sensibilities of the Court is the deception employed by the bank in adding other properties in the certificate of sale under public auction without them being included in the public auction conducted. It cannot be overemphasized that being a lending institution, prudence dictates that it should employ good faith and due diligence with the properties entrusted to it. It was the bank which submitted the properties ought to be foreclosed to the sheriff. It only submitted five (5) properties for foreclosure. Yet, it caused the registration of the Certificate of Sale under public auction which listed more properties than what was foreclosed. On this aspect, exemplary damages in the amount of P200,000.00 are in order.49

There being an award of exemplary damages, the award of attorney’s fees is likewise proper as provided in paragraph 1, Article 2208 of the Civil Code.

WHEREFORE, the petitions for review on certiorari are DENIED for lack of merit. The Decision dated May 17, 2005 and Resolution dated March 15, 2006 of the Court of Appeals in CA-G.R. C.V. No. 57205 are hereby AFFIRMED with the MODIFICATION that the case is REMANDED to the Regional Trial Court of Negros Oriental, Branch 44, Dumaguete City, for the computation of the pro-rata value of properties covered by TCT No. T-14777 (Lot 1) and TCT No. T-14781 (Lot 6) of the Registry of Deeds of Negros Oriental at the time of redemption to determine if there is a deficiency to be settled by or overpayment to be refunded to respondent Spouses Zosimo Dy, Sr. and Natividad Chiu and Spouses Marcelino C. Maxino and Remedios Lasola with regard to the redemption money they paid.

With costs against the petitioners.

SO ORDERED.

15. Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 178242               January 20, 2009

HEIRS OF NORBERTO J. QUISUMBING, Petitioners, vs.PHILIPPINE NATIONAL BANK and SANTIAGO LAND DEVELOPMENT CORPORATION, Respondents.

D E C I S I O N

CARPIO MORALES, J.:

From the Court of Appeals Decision1 of February 14, 2007 denying petitioners’ appeal from the Decision2 of the Regional Trial Court, Branch 62, Makati City in Civil Case No. 10513, they come to this Court on petition for review on certiorari.

Culled from the eight-volume records of the case are the following facts:

In 1984, spouses Ricardo C. Silverio and Beatriz Sison-Silverio (spouses Silverio) and Ricardo C. Silverio as Chairman of the Board of the following companies, namely Delta Motors Corporation (Delta Motors), Komatsu Industries (Komatsu), R.C. Silverio Management Corporation (RCSMC), through Deeds of Assignment3 dated April 11 and 12, 1985, assigned to Atty. Norberto J. Quisumbing (Quisumbing) their rights of redemption with respect to various real properties which herein respondent Philippine National Bank (PNB) had foreclosed and acquired as the highest bidder. The properties included lots in Quezon City, Manila, Pampanga and Bulacan in the name of Ricardo C. Silverio, married to Beatriz Sison; a lot in Tagaytay in the name of Ricardo C. Silverio; lots in Nueva Ecija in the name of RCSMC; lots in Baguio and Benguet in the name of Delta Motors; a lot in Zambales in the name of RCSMC; and a lot in Rizal (actually Pasong Tamo, Makati) including improvements in the name of Komatsu (hereafter referred to as Pasong Tamo property).

By letter4 dated April 8, 1985, Quisumbing made a formal tender of redemption to PNB for the abovementioned properties, with the request that he be informed within 10 days of the total amount of the redemption prices so "he would know how much to pay." Quisumbing furnished the sheriffs who conducted the sales, as well as the registers of deeds in the various localities where the properties are situated, with a copy of said tender letter.

Acting on Quisumbing’s tender of redemption, the PNB, by letter of April 15, 1985, requested copies of the Deeds of Assignment so that it may "have a basis to reply to" his request.5 Quisumbing furnished PNB with copies of the Deeds, requesting a reply to his tender letter and requested for the computation of the total amount of redemption price for which he gave PNB until April 30, 1985 to do so. Before PNB could reply, however, or on April 23, 1985, Quisumbing executed an Affidavit of Redemption,6 furnishing PNB, the sheriffs and the registers of deeds a copy thereof.

Before the one-year redemption period expired, PNB, by letter dated May 3, 1985,7 denied Quisumbing’s offer of redemption on the ground that the Deeds of Assignment were invalid for not having been registered and for being against Art. 1491 (5) of the Civil Code; that the tender was not proper because it was not accompanied by actual money payment; and that the amount Quisumbing offered was way below that required under Sec. 25 of P.D. No. 694.

Quisumbing thus filed a Complaint8 before the Regional Trial Court (RTC) of Makati9 against PNB to compel it to allow him to exercise his right of redemption over the foreclosed properties and to inform him of the total amount of redemption price. At the same time, he caused the annotation of a notice of lis pendens on the certificates of title of the properties.

In its Answer,10 PNB contended that Quisumbing had no cause of action as his tender offer was "pro-forma," as the same was unaccompanied by cash payment; that the offer was not in accordance with Section 25 of P.D. No. 694, as amended; that the assignment of rights made in Quisumbing’s favor was ineffectual because the same was not registered and annotated on the certificates of title of the properties; that the Deeds of Assignment executed by RSCMC, Komatsu and Delta Motors were defectively acknowledged as public instruments; and that the assignments were barred by Article 1491 (5) of the Civil Code.11 During the pendency of the case, Quisumbing died, hence, he was substituted by his heirs-herein petitioners on September 14, 1990.

On December 8, 1989, with the approval by Branch 149 of the Makati RTC, the herein other respondent Santiago Land Development Corporation (SLDC) intervened, it having purchased pendente lite from PNB the Pasong Tamo property, and adopted in its Answer-in-Intervention PNB’s defenses as set forth in its Answer, and raised additional defenses.

Petitioners thus filed before the appellate court a Petition for Certiorari, docketed as CA-G.R. SP No. 25826, questioning, inter alia, the trial court’s grant of SLDC’s move to intervene, arguing that SLDC should have joined as an additional defendant for it to be bound by all prior proceedings.

By Decision dated July 6, 1992, the appellate court granted the petition of petitioners and nullified the trial court’s Order granting SLDC’s intervention. SLDC appealed to this Court via certiorari, docketed as G.R. No. 106194.

By Decision12 of January 28, 1997, the Court dismissed SLDC’s petition and affirmed the appellate court’s decision, ruling that SLDC is a transferee pendente lite and, as such, could no longer intervene as the law already considers it joined or substituted in the pending action, hence, bound by all prior proceedings and barred from presenting a new or different claim.

SLDC thereupon filed a Motion for Partial Substitution in Civil Case No. 10513, which was granted on April 14, 1998.

By Decision13 of October 24, 2000, the trial court dismissed petitioner’s Amended Complaint as against PNB, as well as that against SLDC, ruling that Quisumbing did not make a valid tender of redemption as it was not accompanied by cash payment; that Sec. 25 of P.D. No. 694 is not unconstitutional and was applicable not only to

direct debtors/mortgagors but constructively also to accommodation mortgagors following Nepomuceno v. RFC.14Aggrieved, petitioners appealed to the Court of Appeals.

By the assailed Decision of February 14, 2007, the appellate court affirmed the trial court’s decision, holding that there was no valid offer to redeem the properties owing to Quisumbing’s failure to validly tender payment; and that even if his filing of the complaint was considered as judicial redemption, it was still ineffectual due to non-tender of the redemption price. On account of such ruling, the appellate court no longer ruled on the issue of the constitutionality of Sec. 25 of P.D. 694 and on the validity of the Deeds of Assignment. Petitioners’ motion for reconsideration having been denied by Resolution dated June 5, 2007, this present petition was filed.

Petitioners insist that Quisumbing made a valid tender of redemption because he did not have to tender the redemption prices due to, so they claim, PNB’s outright refusal to accept or allow any redemption, and that he perfected a ‘judicial redemption’ following Tioseco v. CA.15 They assail the ruling of the trial court that spouses Silverio were accommodation mortgagors or direct debtors/mortgagors and that Sec. 25 of P.D. No. 694 applies to accommodation mortgagors, as well as the trial and appellate court’s ruling that Sec. 25 is not unconstitutional despite its being violative, so petitioners contend, of the due process and equal protection clauses of the Constitution.

Petitioners maintain that Sec. 25 applies only to debtors-mortgagors, hence, the case at bar should have been governed by the general law on redemption ─ Sec. 6 of Republic Act No. 3135 vis a vis Rule 39, Sec. 30. In support of their position, they draw attention to the fact that all the certificates of sale state that the proceedings/sale were pursuant to an "extra-judicial foreclosure of real estate mortgage under RA 3135 as amended," without any mention whatsoever of P.D. No. 694. Petitioners thus conclude that Sec. 25 of P.D. No. 694 should be struck down for being void for vagueness; and that it is arbitrary and unreasonable because it grants a preferred position to PNB which may abuse to unjustly enrich itself at the expense of mortgagors, hence, violative of the right to due process.

At all events, they argue that assuming that Sec. 25 applies to accommodation mortgagors such as the spouses Silverio still, the redemption price would be based on the value of the properties foreclosed, not on the obligations of the debtor, as what PNB insists on doing.

In its Comment,16 PNB, averring that what petitioners are raising are questions of fact, maintains that the Deeds of Assignment are void for being against public policy because at the time they were executed, Quisumbing was already the lawyer not only of the spouses Silverio but also of Komatsu and the other companies, the properties of which were being foreclosed.

In its separate Comment,17 SLDC argues that the present petition, insofar as the Pasong Tamo property is concerned, is barred by res judicata, the Court in Komatsu Industries (Phils.) Inc. v. Philippine National Bank and Santiago Land Development Corporation and Maximo Contreras, (Komatsu case)18 having declared PNB’s extrajudicial foreclosure of the said property and eventual sale to SLDC valid. It adds that, since in G.R. No. 106194 or the "Intervention Case," it was held that a purchaser pendente lite ─ SLDC is bound by the outcome of the case instituted by the transferor ─ PNB, then Quisumbing, as transferee pendente lite of Komatsu’s right to redeem the Pasong Tamo property, "must also necessarily be bound by the

outcome of the Komatsu case" ─ and that, perforce, "if he cannot intervene, then neither can he be allowed to file or maintain a separate case."

Maintaining that Quisumbing’s "judicial redemption" should not be allowed, SLDC contends that since redemption is inconsistent with the claim of invalidity of a foreclosure sale, then Komatsu’s act of assigning its right of redemption to Quisumbing was incompatible with its earlier remedy of contesting the validity of PNB’s foreclosure and is, therefore, prohibited.

SLDC further avers that Sec. 25 of PD No. 694 does not violate the due process clause, its provision requiring the mortgagors to pay the redemption price being in line with the purpose of the law, viz "to protect the investment of the government in the institution."

Aside from reiterating their previous arguments, petitioners, in their Consolidated Reply,19 refute SLDC’s and PNB’s arguments. They contend that the action is not barred by res judicata because in the Komatsu case, the Court "contemplated" that the issue of validity of the exercise of redemption would not be resolved in that case but in Civil Case No. 10513, and the reason why Quisumbing was not required to intervene in Komatsu was because he was not a party thereto, and the case involved annulment of the foreclosure sale, not the exercise of the right of redemption.

Petitioners further maintain that the issue of whether the assignment of rights made in Quisumbing’s favor was barred for being against public policy (under Art. 1491[5] of the Civil Code) can no longer be raised as an issue, respondents having failed to raise it in the proceedings below; and assuming arguendo that it had been raised, said provision would not apply, as what were assigned were merely the rights of redemption, not the properties themselves, and Quisumbing did not represent Komatsu or the other companies in the annulment of foreclosure proceedings.

In a Supplemental Petition20 filed on August 28, 2007, petitioners submit that the sale of the Philippine Government’s remaining minority shares (12.28%) in the PNB on August 1, 2007 reinforces their argument that if Sec. 25 of P.D. No. 694 is made applicable to accommodation mortgagors, the same should be struck down for being unconstitutional, as it would then be violative of the equal protection clause. And they assert that if, indeed, the purpose of said provision is to protect the government’s investment in PNB, then it has ceased to exist due to the privatization of said institution and, as such, Sec. 25 should be struck down.

The pivotal issue that needs to be resolved is whether the original plaintiff, Atty. Norberto J. Quisumbing, made a valid tender of redemption.

The Court rules in the negative.

Sec. 25 of P.D. No. 694 otherwise known as the Revised Charter of the Philippine National Bank enacted on May 8, 1975 provides:

Section 25. Right of redemption of foreclosed property Right of possession during redemption period. Within one year from the registration of the foreclosure sale of real estate, the mortgagor shall have the right to redeem the property by paying all claims of the Bank against him on the date of the sale including all the costs and

other expenses incurred by reason of the foreclosure sale and custody of the property, as well as charges and accrued interests.

The Bank may take possession of the foreclosed property during the redemption period. When the Bank takes possession during such period, it shall be entitled to the fruits of the property with no obligation to account for them, the same being considered compensation for the interest that would otherwise accrue on the account. Neither shall the Bank be obliged to post a bond for the purpose of such possession. (Emphasis supplied)

On the other hand, under Act No. 3135, An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages (which took effect on March 6, 1924), as amended by Act. No. 4118, redemption of extra-judicially foreclosed properties is undertaken as follows:

SECTION 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with the provisions of this Act. (Emphasis supplied)

And the pertinent provision of the Code of Civil Procedure, now Section 28 of Rule 39 of the Revised Rules of Civil Procedure, reads:

SEC. 28. Time and manner of, and amounts payable on, successive redemptions; notice to be given and filed. – The judgment obligor, or redemptioner, may redeem the property from the purchaser, at any time within one (1) year from the date of the registration of the certificate of sale, by paying the purchaser the amount of his purchase, with one per centum per month interest thereon in addition, up to the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on such last named amount of the same rate; and if the purchaser be also a creditor having a prior lien to that of the redemptioner, other than the judgment under which such purchase was made, the amount of such other lien, with interest. (Emphasis supplied)

As to the requisites for a valid tender of redemption in case of extra-judicially foreclosed properties by banks, Banco Filipino Savings and Mortgage Bank, Inc., v. Court of Appeals,21 instructs:

Section 6 of Act 3135 provides for the requisites for a valid redemption, thus:

SEC. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the

Code of Civil Procedure, insofar as these are not inconsistent with the provisions of this Act.

However, considering that petitioner is a banking institution, the determination of the redemption price is governed by Section 78 of the General Banking Act which provides:

In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution, within the purview of this Act shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, or the amount due under the mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income received from the property.

Clearly, the right of redemption should be exercised within the specified time limit, which is one year from the date of registration of the certificate of sale. The redemptioner should make an actual tender in good faith of the full amount of the purchase price as provided above, i.e., the amount fixed by the court in the order of execution or the amount due under the mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income received from the property.

x x x x

In BPI Family Savings Bank, Inc. vs. Veloso, we held:

The general rule in redemption is that it is not sufficient that a person offering to redeem manifests his desire to do so. The statement of intention must be accompanied by an actual and simultaneous tender of payment. This constitutes the exercise of the right to repurchase.

x x x x

Whether or not respondents were diligent in asserting their willingness to pay is irrelevant. Redemption within the period allowed by law is not a matter of intent but a question of payment or valid tender of the full redemption price within said period. (Emphasis supplied)

Evidently, whether the redemption is being made under Act No. 3135 or the General Banking Act, as amended by Presidential Decree No. 1828, or under P.D. No. 694, the mortgagor or his assignee is required to tender paymentto make said redemption valid – something which petitioners’ predecessor failed to do. The only instance when this rule may be construed liberally, i.e., allow the non-simultaneous tender of payment, is if a judicial action is instituted by the redemptioner. 22

Petitioner however claims, citing Banco Filipino Savings and Mortgage Bank v. Court of Appeals and Lee Chuy Realty Corporation v. Court of Appeals that in case of disagreement over the redemption price, the redemptioner may preserve his right of redemption through judicial action which must be filed within the one-year period of redemption. The filing of a court action to enforce redemption, being equivalent to a formal offer to redeem, would have the effect of preserving his redemptive rights and "freezing" the expiration of the one-year period. Bona fidetender of the redemption price, within the prescribed period is only essential to preserve the right of redemption for future enforcement beyond such period of redemption and within the period prescribed for the action by the statute of limitations. Where the right to redeem is exercised through judicial action within the reglementary period, the offer to redeem, accompanied by a bona fide tender of the redemption price, while proper, may be unessential. (Emphasis supplied)

For this exception to apply, however, certain conditions must be met, viz:

It should, however, be noted that in Hi-Yield Realty, Inc. v. Court of Appeals, we held that the action for judicial redemption should be filed on time and in good faith, the redemption price is finally determined and paid within a reasonable time, and the rights of the parties are respected. Stated otherwise, the foregoing interpretation has three critical dimensions: (1) timely redemption or redemption by expiration date; (2) good faith as always, meaning, the filing of the action must have been for the sole purpose of determining the redemption price and not to stretch the redemptive period indefinitely; and (3) once the redemption price is determined within a reasonable time, the redemptioner must make prompt payment in full. (Emphasis supplied)

While Quisumbing filed the Complaint on May 7, 1985, days or even weeks before the expiration of the one-year redemption period reckoned from the dates of registration of the different certificates of sale, it cannot be said that he was motivated by good faith when he filed the Complaint, as contemplated in the above ruling. For the Complaint was filed not for the sole purpose of determining the redemption price, but, as Quisumbing himself admitted on direct examination, it was to seek the annulment of Sec. 25 of P.D. No. 694, thus:

Q: And what is the purpose of your present suit?

A: To compel the redemption, because the redemption were (sic) disallowed unless the entire obligation rather than just leaving the purchase price of the foreclosure sale is paid. The purpose of suit therefore, is to seek the annulment of that provision of Section 25 of the Revised Chapter (sic) of the Philippine National Bank, which provides that redemption can be effected only by paying the entire claim of the Philippine National Bank, against in this case, Delta Motors Corporation. As the Complaint alleges the sale . . . contrary to law, moral, customs, public security, since the law favors in the long line of decisions of the right of redemption. Second, with such a provision no one can get a fair price at a foreclosure sale of an individual property.23 (Emphasis and underscoring supplied)

And on cross-examination, when questioned why he wrote to PNB on April 8, 1985 offering to redeem the property when the Deeds of Assignment in his favor were not yet executed, Quisumbing replied:

x x x x

Q: The Deeds of Assignment were executed either on April 12 or 11 in the case of Komatsu, 1985. Why did you write PNB a tender of letter as early as April 8 when the Deeds of Assignment were not yet executed   – have not yet been executed?

A: Well, there might have been a delay in the execution of the Deeds of Assignment; but since I was certain that PNB will reject a redemption, not in accordance with Sec. 25 of its charter. In other words, just offering the purchase price derive from… we began the process of redemption early. Besides, the Philippine National Bank, in some cases, in other creditors of . . . 24

x x x x (Emphasis and underscoring supplied)

Clearly, from the admissions reflected in the testimony, Quisumbing’s filing of the Complaint was not solely due to a mere disagreement in the redemption price; rather, it was because he was not willing to pay whatever amount PNB would compute on the basis of Sec. 25 of P.D. No. 694. By questioning the constitutionality of said provision, Quisumbing, wittingly delayed the redemption, since he must have known that raising the issue of constitutionality of a statute in any suit would result in a litigious process which could stretch for an indefinite period as, in fact, the history of the present case shows. More importantly, his act of executing his Affidavit of Redemption on April 23, 1985 and alleging therein his oft-repeated excuse of "PNB’s refusal to allow him to redeem the subject properties" even before PNB could provide him the computations by April 30, 1985, as he himself requested in his April 23, 1985 letter, and before PNB’s actual refusal as stated in its May 3, 1985 letter, reflected that from the very beginning, his mindset was that if any redemption would be had, the same should be made according to his terms and conditions and under Act No. 3135, not P.D. No. 694. Indubitably, such actuations belie good faith and, therefore, the exception as enunciated in Tolentino case would not apply.

Had Quisumbing believed in good faith that Act No. 3135 was applicable, he could have tendered the amount as computed thereunder, if only to show that he was able and willing to redeem the properties.

Respecting the issues raised by petitioners that Sec. 25 of P.D. No. 694 is unconstitutional, the same has been rendered moot and academic by the full privatization of PNB pursuant to E.O. 8025 which repealed said P.D., as well as the subsequent sale of the remaining shares of the government on August, 2007 which converted it from a government financial institution to a private banking institution.

The foregoing discussions render it unnecessary to address the other points pleaded by petitioners, such as the validity of the Deeds of Assignment, whether the Silverio spouses are accommodation mortgagors or direct debtors/mortgagors, or whether the suit is barred by the principle of res judicata.

WHEREFORE, the petition is DENIED. The February 14, 2007 Decision of the Court of Appeals and the June 5, 2007 Resolution in CA-G.R. CV No. 69337 are AFFIRMED.

Costs against petitioner.

SO ORDERED.

16. Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 176381               December 15, 2010

PCI LEASING AND FINANCE, INC., Petitioner, vs.TROJAN METAL INDUSTRIES INCORPORATED, WALFRIDO DIZON, ELIZABETH DIZON, and JOHN DOE,Respondents.

D E C I S I O N

CARPIO, J.:

The Case

This is a petition for review1 with application for the immediate issuance of a temporary restraining order and writ of preliminary injunction assailing the 5 October 2006 Decision2 and the 23 January 2007 Resolution3 of the Court of Appeals in CA-G.R. CV No. 75855. The 5 October 2006 Decision set aside the 23 July 2002 Decision4 of the Regional Trial Court (Branch 79) of Quezon City in Civil Case No. Q-99-37559, which granted petitioner’s complaint for recovery of sum of money and personal property with prayer for the issuance of a writ of replevin. The 23 January 2007 Resolution denied petitioner’s motion for reconsideration.

The Facts

Sometime in 1997, respondent Trojan Metal Industries, Inc. (TMI) came to petitioner PCI Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of extending a loan, PCILF offered to buy various equipment TMI owned, namely: a Verson double action hydraulic press with cushion, a Hinohara powerpress 75-tons capacity, a USI-clearing powerpress 60-tons capacity, a Watanabe powerpress 60-tons capacity, a YMGP powerpress 30-tons capacity, a YMGP powerpress 15-tons capacity, a lathe machine, a vertical milling machine, and a radial drill. Hard-pressed for money, TMI agreed. PCILF and TMI immediately executed deeds of sale5 evidencing TMI’s sale to PCILF of the various equipment in consideration of the total amount of P 2,865,070.00.

PCILF and TMI then entered into a lease agreement,6 dated 8 April 1997, whereby the latter leased from the former the various equipment it previously owned. Pursuant to the lease agreement, TMI issued postdated checks representing 24 monthly installments. The monthly rental for the Verson double action hydraulic press with cushion was in the amount of P62,328.00; for the Hinohara powerpress 75-tons capacity, the USI-clearing powerpress 60-tons capacity, the Watanabe powerpress 60-tons capacity, the YMGP powerpress 30-tons capacity, and the YMGP powerpress 15-tons capacity, the monthly rental was in the amount of P49,259.00; and for the lathe machine, the vertical milling machine, and the radial drill, the monthly rental was in the amount ofP22,205.00.

The lease agreement required TMI to give PCILF a guaranty deposit of P1,030,350.00,7 which would serve as security for the timely performance of TMI’s obligations under the lease agreement, to be automatically forfeited should TMI return the leased equipment before the expiration of the lease agreement.

Further, spouses Walfrido and Elizabeth Dizon, as TMI’s President and Vice-President, respectively executed in favor of PCILF a Continuing Guaranty of Lease Obligations.8 Under the continuing guaranty, the Dizon spouses agreed to immediately pay whatever obligations would be due PCILF in case TMI failed to meet its obligations under the lease agreement.

To obtain additional loan from another financing company,9 TMI used the leased equipment as temporary collateral.10 PCILF considered the second mortgage a violation of the lease agreement. At this time, TMI’s partial payments had reached P1,717,091.00.11 On 8 December 1998, PCILF sent TMI a demand letter12 for the payment of the latter’s outstanding obligation. PCILF’s demand remained unheeded.

On 7 May 1999, PCILF filed in the Regional Trial Court (Branch 79) of Quezon City a complaint13 against TMI, spouses Dizon, and John Doe (collectively referred to as "respondents" hereon) for recovery of sum of money and personal property with prayer for the issuance of a writ of replevin, docketed as Civil Case No. Q-99-37559.

On 7 September 1999, the RTC issued the writ of replevin14 PCILF prayed for, directing the sheriff to take custody of the leased equipment. Not long after, PCILF sold the leased equipment to a third party and collected the proceeds amounting to P1,025,000.00.15

In their answer,16 respondents claimed that the sale with lease agreement was a mere scheme to facilitate the financial lease between PCILF and TMI. Respondents explained that in a simulated financial lease, property of the debtor would be sold to the creditor to be repaid through rentals; at the end of the lease period, the property sold would revert back to the debtor. Respondents prayed that they be allowed to reform the lease agreement to show the true agreement between the parties, which was a loan secured by a chattel mortgage.

The Ruling of the RTC

In its 23 July 2002 Decision, the RTC granted the prayer of PCILF in its complaint. The RTC ruled that the lease agreement must be presumed valid as the law between the parties even if some of its provisions constituted unjust enrichment on the part of PCILF. The dispositive portion of its Decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff-PCI Leasing and Finance, Inc. and against defendants Trojan Metal, Walfrido Dizon, and Elizabeth Dizon, as follows:

1. Ordering the plaintiff to be entitled to the possession of herein machineries.

2. Ordering the defendants to pay the remaining rental obligation in the amount of Php 888,434.48 plus legal interest from the date of filing of the complaint;

3. Ordering defendant to pay an attorneys fees in the amount of Php 50,000.00;

4. Ordering the defendant to pay the cost of suit.

SO ORDERED.17

Respondents appealed to the Court of Appeals alleging that the RTC erred in ruling that PCILF was entitled to the possession of TMI’s equipment and that respondents still owed PCILF the balance of P888,423.48.

The Ruling of the Court of Appeals

The Court of Appeals ruled that the sale with lease agreement was in fact a loan secured by chattel mortgage. The Court of Appeals held that since PCILF sold the equipment to a third party for P1,025,000.00 and TMI paid PCILF a guaranty deposit of P1,030,000.00, PCILF had in its hands the sum of P2,055,250.00, as against TMI’s remaining obligation of P888,423.48, or an excess of P1,166,826.52, which should be returned to TMI in accordance with Section 14 of the Chattel Mortgage Law.

Thus, in its 5 October 2006 Decision, the Court of Appeals set aside the Decision of the RTC. The Court of Appeals entered a new one dismissing PCILF’s complaint and directing PCILF to pay TMI, by way of refund, the amount of P1,166,826.52. The decretal part of its Decision reads:

WHEREFORE, premises considered, the July 23, 2002 Decision of the Regional Trial Court of Quezon City, Branch 79, in Civil Case No. Q-99-37559, is hereby REVERSED and SET ASIDE, and a new one entered DISMISSING the complaint and DIRECTING the plaintiff-appellee PCI Leasing and Finance, Inc. to PAY, by way of REFUND, to the defendant-appellant Trojan Metal Industries, Inc., the net amount of Php 1,166,826.52.

SO ORDERED.18

The Issues

The issues for resolution are (1) whether the sale with lease agreement the parties entered into was a financial lease or a loan secured by chattel mortgage; and (2) whether PCILF should pay TMI, by way of refund, the amount of P1,166,826.52.

The Court’s Ruling

The petition lacks merit.

PCILF contends that the transaction between the parties was a sale and leaseback financing arrangement where the client sells movable property to a financing

company, which then leases the same back to the client. PCILF insists the transaction is not financial leasing, which contemplates extension of credit to assist a buyer in acquiring movable property which the buyer can use and eventually own. PCILF claims that the sale and leaseback financing arrangement is not contrary to law, morals, good customs, public order, or public policy. PCILF stresses that the guaranty deposit should be forfeited in its favor, as provided in the lease agreement. PCILF points out that this case does not involve mere failure to pay rentals, it deals with a flagrant violation of the lease agreement.

Respondents counter that from the very beginning, transfer to PCILF of ownership over the subject equipment was never the intention of the parties. Respondents claim that under the lease agreement, the guaranty deposit would be forfeited if TMI returned the leased equipment to PCILF before the expiration of the lease agreement; thus, since TMI never returned the leased equipment voluntarily, but through a writ of replevin ordered by the RTC, the guaranty deposit should not be forfeited.

Since the lease agreement in this case was executed on 8 April 1997, Republic Act No. 5980 (RA 5980), otherwise known as the Financing Company Act, governs as to what constitutes financial leasing. Section 1, paragraph (j) of the New Rules and Regulations to Implement RA 598019 defines financial leasing as follows:

LEASING shall refer to financial leasing which is a mode of extending credit through a non-cancelable contract under which the lessor purchases or acquires at the instance of the lessee heavy equipment, motor vehicles, industrial machinery, appliances, business and office machines, and other movable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least 70% of the purchase price or acquisition cost, including any incidental expenses and a margin of profit, over the lease period. The contract shall extend over an obligatory period during which the lessee has the right to hold and use the leased property and shall bear the cost of repairs, maintenance, insurance, and preservation thereof, but with no obligation or option on the part of the lessee to purchase the leased property at the end of the lease contract.

The above definition of financial leasing gained statutory recognition with the enactment of Republic Act No. 8556 (RA 8556), otherwise known as the Financing Company Act of 1998.20 Section 3(d) of RA 8556 defines financial leasing as:

a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least seventy (70%) of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two (2) years during which the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs, maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract.

Thus, in a true financial leasing, whether under RA 5980 or RA 8556, a finance company purchases on behalf of a cash-strapped lessee the equipment the latter wants to buy but, due to financial limitations, is incapable of doing so. The finance company then leases the equipment to the lessee in exchange for the latter’s periodic payment of a fixed amount of rental.

In this case, however, TMI already owned the subject equipment before it transacted with PCILF. Therefore, the transaction between the parties in this case cannot be deemed to be in the nature of a financial leasing as defined by law.

The facts in the instant case are analogous to those in Cebu Contractors Consortium Co. v. Court of Appeals.21There, Cebu Contractors Consortium Co. (CCCC) approached Makati Leasing and Finance Corporation (MLFC) to obtain a loan. MLFC agreed to extend financial assistance to CCCC but, instead of a loan with collateral, MLFC induced CCCC to adopt a sale and leaseback scheme. Under the scheme, several of CCCC’s equipment were made to appear as sold to MLFC and then leased back to CCCC, which in turn paid lease rentals to MLFC. The rentals were treated as installment payments to repurchase the equipment.

The Court held in Cebu Contractors Consortium Co. v. Court of Appeals22 that the transaction between CCCC and MLFC was not one of financial leasing as defined by law, but simply a loan secured by a chattel mortgage over CCCC’s equipment. The Court went on to explain that where the client already owned the equipment but needed additional working capital and the finance company purchased such equipment with the intention of leasing it back to him, the lease agreement was simulated to disguise the true transaction that was a loan with security. In that instance, continued the Court, the intention of the parties was not to enable the client to acquire and use the equipment, but to extend to him a loan.

Similarly, in Investors Finance Corporation v. Court of Appeals,23 a borrower came to Investors Finance Corporation (IFC) to secure a loan with his heavy equipment and machinery as collateral. The parties executed documents where IFC was made to appear as the owner of the equipment and the borrower as the lessee. As consideration for the lease, the borrower-lessee was to pay monthly amortizations over a period of 36 months. The parties executed a lease agreement covering various equipment described in the lease schedules attached to the lease agreement. As security, the borrower-lessee also executed a continuing guaranty.

The Court in Investors Finance Corporation v. Court of Appeals24 held that the transaction between the parties was not a true financial leasing because the intention of the parties was not to enable the borrower-lessee to acquire and use the heavy equipment and machinery, which already belonged to him, but to extend to him a loan to use as capital for his construction and logging businesses. The Court held that the lease agreement was simulated to disguise the true transaction between the parties, which was a simple loan secured by heavy equipment and machinery owned by the borrower-lessee. The Court differentiated between a true financial leasing and a loan with mortgage in the guise of a lease. The Court said that financial leasing contemplates the extension of credit to assist a buyer in acquiring movable property which he can use and eventually own. If the movable property already belonged to the borrower-lessee, the transaction between the parties, according to the Court, was a loan with mortgage in the guise of a lease.

In the present case, since the transaction between PCILF and TMI involved equipment already owned by TMI, it cannot be considered as one of financial leasing, as defined by law, but simply a loan secured by the various equipment owned by TMI.

Articles 1359 and 1362 of the Civil Code provide:

Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct, or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed.

Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention, the former may ask for the reformation of the instrument.

Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a written contract and for reformation of an instrument is ten years.25 The right of action for reformation accrued from the date of execution of the lease agreement on 8 April 1997. TMI timely exercised its right of action when it filed an answer26 on 14 February 2000 asking for the reformation of the lease agreement.

Hence, had the true transaction between the parties been expressed in a proper instrument, it would have been a simple loan secured by a chattel mortgage, instead of a simulated financial leasing. Thus, upon TMI’s default, PCILF was entitled to seize the mortgaged equipment, not as owner but as creditor-mortgagee for the purpose of foreclosing the chattel mortgage. PCILF’s sale to a third party of the mortgaged equipment and collection of the proceeds of the sale can be deemed in the exercise of its right to foreclose the chattel mortgage as creditor-mortgagee.

The Court of Appeals correctly ruled that the transaction between the parties was simply a loan secured by a chattel mortgage. However, in reckoning the amount of the principal obligation, the Court of Appeals should have taken into account the proceeds of the sale to PCILF less the guaranty deposit paid by TMI. After deducting payments made by TMI to PCILF, the balance plus applicable interest should then be applied against the aggregate cash already in PCILF’s hands.

Records show that PCILF paid TMI P2,865,070.0027 as consideration for acquiring the mortgaged equipment. In turn, TMI gave PCILF a guaranty deposit of P1,030,350.00.28 Thus, the amount of the principal loan wasP1,834,720.00, which was the net amount actually received by TMI (proceeds of the sale of the equipment to PCILF minus the guaranty deposit). Against the principal loan of P1,834,720.00 plus the applicable interest should be deducted loan payments, totaling P1,717,091.00.29 Since PCILF sold the mortgaged equipment to a third party for P1,025,000.00,30 the proceeds of the said sale should be applied to offset the remaining balance on the principal loan plus applicable interest.

However, the exact date of the sale of the mortgaged equipment, which is needed to compute the interest on the remaining balance of the principal loan, cannot be gleaned from the facts on record. We thus remand the case to the RTC for the computation of the total amount due from the date of demand on 8 December 1998 until the date of sale of the mortgaged equipment to a third party, which amount due shall be offset against the proceeds of the sale.

In the absence of stipulation, the applicable interest due on the remaining balance of the loan is the legal rate of 12% per annum, computed from the date PCILF sent a demand letter to TMI on 8 December 1998. No interest can be charged prior to this date because TMI was not yet in default prior to 8 December 1998. The interest due shall also earn legal interest from the time it is judicially demanded, pursuant to Article 2212 of the Civil Code, which provides:

Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.

The foregoing provision has been incorporated in the comprehensive summary of existing rules on the computation of legal interest laid down by the Court in Eastern Shipping Lines, Inc. v. Court of Appeals,31 to wit:

1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing.Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. (Emphasis supplied)

Applying the rules in the computation of interest, the remaining balance of the principal loan subject of the chattel mortgage must earn the legal interest of 12% per annum, which interest, as long as unpaid, also earns legal interest of 12% per annum, computed from the filing of the complaint on 7 May 1999.

In accordance with the rules laid down in Eastern Shipping Lines, Inc. v. Court of Appeals,32 we derive the following formula for the RTC’s guidance:

TOTAL AMOUNT DUE = [principal – partial payments made] + [interest + interest on interest], where

Interest = remaining balance x 12% per annum x no. of years from due date (8 December 1998 when demand was made) until date of sale to a third party

Interest on interest = interest computed as of the filing of the complaint on 7 May 1999 x 12% x no. of years until date of sale to a third party

From the computed total amount should be deducted P1,025,000.00 representing the proceeds of the sale already in PCILF’s hands. The difference represents overpayment by TMI, which the law requires PCILF to refund to TMI.1avvphi1

Section 14 of Act No. 1508, otherwise known as the Chattel Mortgage Law, provides:

Section 14. Sale of property at public auction; officer’s return; fees; disposition of proceeds. x x x The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgages, shall be paid to the mortgagor or person holding under him on demand.

Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor to the balance of the proceeds, upon satisfaction of the principal loan and costs. Prevailing jurisprudence33 also holds that the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds.

TMI’s right to the refund accrued from the time PCILF received the proceeds of the sale of the mortgaged equipment. However, since TMI never made a counterclaim or demand for refund due on the resulting overpayment after offsetting the proceeds of the sale against the remaining balance on the principal loan plus applicable interest, no interest applies on the amount of refund due. Nonetheless, in accord with prevailing jurisprudence,34 the excess amount PCILF must refund to TMI is subject to interest at 12% per annum from finality of this Decision until fully paid.

WHEREFORE, we DENY the petition. We AFFIRM with MODIFICATION the 5 October 2006 Decision and the 23 January 2007 Resolution of the Court of Appeals in CA-G.R. CV No. 75855. Petitioner PCI Leasing and Finance, Inc. is hereby ORDERED to PAY respondent Trojan Metal Industries, Inc., by way of refund, the excess amount to be computed by the Regional Trial Court based on the formula specified above, with interest at 12% per annum from finality of this Decision until fully paid.

Costs against petitioner.

SO ORDERED.

17. Republic of the PhilippinesSUPREME COURT

Manila

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 ownership of the land on which the house is built and We should not lay down distinctions not contemplated by law.

It must be pointed out that the characterization of the subject machinery as chattel by the private respondent is indicative of intention and impresses upon the property the character determined by the parties. As stated inStandard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by agreement treat as personal property that which by nature would be real property, as long as no interest of third parties would be prejudiced thereby.

Private respondent contends that estoppel cannot apply against it because it had never represented nor agreed that the machinery in suit be considered as personal property but was merely required and dictated on by herein petitioner to sign a printed form of chattel 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,

From what has been said above, the error of the appellate court in ruling that the questioned machinery is real, not personal property, becomes very apparent. Moreover, the case of Machinery and Engineering Supplies, Inc. v. CA, 96 Phil. 70,

heavily relied upon by said court is not applicable to the case at bar, the nature of the machinery and equipment involved therein as real properties never having been disputed nor in issue, and they were not the subject of a Chattel Mortgage. Undoubtedly, the Tumalad case bears more nearly perfect parity with the instant case to be the more controlling jurisprudential authority.

WHEREFORE, the questioned decision and resolution of the Court of Appeals are hereby reversed and set aside, and the Orders of the lower court are hereby reinstated, with costs against the private respondent.

SO ORDERED.

18. Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 92989 July 8, 1991

PERFECTO DY, JR. petitioner, vs.COURT OF APPEALS, GELAC TRADING INC., and ANTONIO V. GONZALES, respondents.

Zosa & Quijano Law Offices for petitioner.

Expedito P. Bugarin for respondent GELAC Trading, Inc.

 

GUTIERREZ, JR., J.:p

This is a petition for review on certiorari seeking the reversal of the March 23, 1990 decision of the Court of Appeals which ruled that the petitioner's purchase of a farm tractor was not validly consummated and ordered a complaint for its recovery dismissed.

The facts as established by the records are as follows:

The petitioner, Perfecto Dy and Wilfredo Dy are brothers. Sometime in 1979, Wilfredo Dy purchased a truck and a farm tractor through financing extended by Libra Finance and Investment Corporation (Libra). Both truck and tractor were mortgaged to Libra as security for the loan.

The petitioner wanted to buy the tractor from his brother so on August 20, 1979, he wrote a letter to Libra requesting that he be allowed to purchase from Wilfredo Dy the said tractor and assume the mortgage debt of the latter.

In a letter dated August 27, 1979, Libra thru its manager, Cipriano Ares approved the petitioner's request.

Thus, on September 4, 1979, Wilfredo Dy executed a deed of absolute sale in favor of the petitioner over the tractor in question.

At this time, the subject tractor was in the possession of Libra Finance due to Wilfredo Dy's failure to pay the amortizations.

Despite the offer of full payment by the petitioner to Libra for the tractor, the immediate release could not be effected because Wilfredo Dy had obtained financing not only for said tractor but also for a truck and Libra insisted on full payment for both.

The petitioner was able to convince his sister, Carol Dy-Seno, to purchase the truck so that full payment could be made for both. On November 22, 1979, a PNB check was issued in the amount of P22,000.00 in favor of Libra, thus settling in full the indebtedness of Wilfredo Dy with the financing firm. Payment having been effected through an out-of-town check, Libra insisted that it be cleared first before Libra could release the chattels in question.

Meanwhile, Civil Case No. R-16646 entitled "Gelac Trading, Inc. v. Wilfredo Dy", a collection case to recover the sum of P12,269.80 was pending in another court in Cebu.

On the strength of an alias writ of execution issued on December 27, 1979, the provincial sheriff was able to seize and levy on the tractor which was in the premises of Libra in Carmen, Cebu. The tractor was subsequently sold at public auction where Gelac Trading was the lone bidder. Later, Gelac sold the tractor to one of its stockholders, Antonio Gonzales.

It was only when the check was cleared on January 17, 1980 that the petitioner learned about GELAC having already taken custody of the subject tractor. Consequently, the petitioner filed an action to recover the subject tractor against GELAC Trading with the Regional Trial Court of Cebu City.

On April 8, 1988, the RTC rendered judgment in favor of the petitioner. The dispositive portion of the decision reads as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, pronouncing that the plaintiff is the owner of the tractor, subject matter of this case, and directing the defendants Gelac Trading Corporation and Antonio Gonzales to return the same to the plaintiff herein; directing the defendants jointly and severally to pay to the plaintiff the amount of P1,541.00 as expenses for hiring a tractor; P50,000 for moral damages; P50,000 for exemplary damages; and to pay the cost. (Rollo, pp. 35-36)

On appeal, the Court of Appeals reversed the decision of the RTC and dismissed the complaint with costs against the petitioner. The Court of Appeals held that the tractor in question still belonged to Wilfredo Dy when it was seized and levied by the sheriff by virtue of the alias writ of execution issued in Civil Case No. R-16646.

The petitioner now comes to the Court raising the following questions:

A.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED THE FACTS AND ERRED IN NOT AFFIRMING THE

TRIAL COURT'S FINDING THAT OWNERSHIP OF THE FARM TRACTOR HAD ALREADY PASSED TO HEREIN PETITIONER WHEN SAID TRACTOR WAS LEVIED ON BY THE SHERIFF PURSUANT TO AN ALIAS WRIT OF EXECUTION ISSUED IN ANOTHER CASE IN FAVOR OF RESPONDENT GELAC TRADING INC.

B.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS EMBARKED ON MERE CONJECTURE AND SURMISE IN HOLDING THAT THE SALE OF THE AFORESAID TRACTOR TO PETITIONER WAS DONE IN FRAUD OF WILFREDO DY'S CREDITORS, THERE BEING NO EVIDENCE OF SUCH FRAUD AS FOUND BY THE TRIAL COURT.

C.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED THE FACTS AND ERRED IN NOT SUSTAINING THE FINDING OF THE TRIAL COURT THAT THE SALE OF THE TRACTOR BY RESPONDENT GELAC TRADING TO ITS CO-RESPONDENT ANTONIO V. GONZALES ON AUGUST 2, 1980 AT WHICH TIME BOTH RESPONDENTS ALREADY KNEW OF THE FILING OF THE INSTANT CASE WAS VIOLATIVE OF THE HUMAN RELATIONS PROVISIONS OF THE CIVIL CODE AND RENDERED THEM LIABLE FOR THE MORAL AND EXEMPLARY DAMAGES SLAPPED AGAINST THEM BY THE TRIAL COURT. (Rollo, p. 13)

The respondents claim that at the time of the execution of the deed of sale, no constructive delivery was effected since the consummation of the sale depended upon the clearance and encashment of the check which was issued in payment of the subject tractor.

In the case of Servicewide Specialists Inc. v. Intermediate Appellate Court. (174 SCRA 80 [1989]), we stated that:

xxx xxx xxx

The rule is settled that the chattel mortgagor continues to be the owner of the property, and therefore, has the power to alienate the same; however, he is obliged under pain of penal liability, to secure the written consent of the mortgagee. (Francisco, Vicente, Jr., Revised Rules of Court in the Philippines, (1972), Volume IV-B Part 1, p. 525). Thus, the instruments of mortgage are binding, while they subsist, not only upon the parties executing them but also upon those who later, by purchase or otherwise, acquire the properties referred to therein.

The absence of the written consent of the mortgagee to the sale of the mortgaged property in favor of a third person, therefore, affects not the validity of the sale but only the penal liability of the mortgagor under the Revised Penal Code and the binding effect of such sale on the mortgagee under the Deed of Chattel Mortgage.

xxx xxx xxx

The mortgagor who gave the property as security under a chattel mortgage did not part with the ownership over the same. He had the right to sell it although he was under the obligation to secure the written consent of the mortgagee or he lays himself open to criminal prosecution under the provision of Article 319 par. 2 of the Revised Penal Code. And even if no consent was obtained from the mortgagee, the validity of the sale would still not be affected.

Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the subject tractor. There is no dispute that the consent of Libra Finance was obtained in the instant case. In a letter dated August 27, 1979, Libra allowed the petitioner to purchase the tractor and assume the mortgage debt of his brother. The sale between the brothers was therefore valid and binding as between them and to the mortgagee, as well.

Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any of the ways specified in Articles 1497 to 1501 or in any other manner signing an agreement that the possession is transferred from the vendor to the vendee. We agree with the petitioner that Articles 1498 and 1499 are applicable in the case at bar.

Article 1498 states:

Art. 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred.

xxx xxx xxx

Article 1499 provides:

Article 1499. The delivery of movable property may likewise be made by the mere consent or agreement of the contracting parties, if the thing sold cannot be transferred to the possession of the vendee at the time of the sale, or if the latter already had it in his possession for any other reason. (1463a)

In the instant case, actual delivery of the subject tractor could not be made. However, there was constructive delivery already upon the execution of the public instrument pursuant to Article 1498 and upon the consent or agreement of the parties when the thing sold cannot be immediately transferred to the possession of the vendee. (Art. 1499)

The respondent court avers that the vendor must first have control and possession of the thing before he could transfer ownership by constructive delivery. Here, it was Libra Finance which was in possession of the subject tractor due to Wilfredo's failure to pay the amortization as a preliminary step to foreclosure. As mortgagee, he has the right of foreclosure upon default by the mortgagor in the performance of the conditions mentioned in the contract of mortgage. The law implies that the mortgagee is entitled to possess the mortgaged property because possession is necessary in order to enable him to have the property sold.

While it is true that Wilfredo Dy was not in actual possession and control of the subject tractor, his right of ownership was not divested from him upon his default. Neither could it be said that Libra was the owner of the subject tractor because the mortgagee can not become the owner of or convert and appropriate to himself the property mortgaged. (Article 2088, Civil Code) Said property continues to belong to the mortgagor. The only remedy given to the mortgagee is to have said property sold at public auction and the proceeds of the sale applied to the payment of the obligation secured by the mortgagee. (See Martinez v. PNB, 93 Phil. 765, 767 [1953]) There is no showing that Libra Finance has already foreclosed the mortgage and that it was the new owner of the subject tractor. Undeniably, Libra gave its consent to the sale of the subject tractor to the petitioner. It was aware of the transfer of rights to the petitioner.

Where a third person purchases the mortgaged property, he automatically steps into the shoes of the original mortgagor. (See Industrial Finance Corp. v. Apostol, 177 SCRA 521 [1989]). His right of ownership shall be subject to the mortgage of the thing sold to him. In the case at bar, the petitioner was fully aware of the existing mortgage of the subject tractor to Libra. In fact, when he was obtaining Libra's consent to the sale, he volunteered to assume the remaining balance of the mortgage debt of Wilfredo Dy which Libra undeniably agreed to.

The payment of the check was actually intended to extinguish the mortgage obligation so that the tractor could be released to the petitioner. It was never intended nor could it be considered as payment of the purchase price because the relationship between Libra and the petitioner is not one of sale but still a mortgage. The clearing or encashment of the check which produced the effect of payment determined the full payment of the money obligation and the release of the chattel mortgage. It was not determinative of the consummation of the sale. The transaction between the brothers is distinct and apart from the transaction between Libra and the petitioner. The contention, therefore, that the consummation of the sale depended upon the encashment of the check is untenable.

The sale of the subject tractor was consummated upon the execution of the public instrument on September 4, 1979. At this time constructive delivery was already effected. Hence, the subject tractor was no longer owned by Wilfredo Dy when it was levied upon by the sheriff in December, 1979. Well settled is the rule that only properties unquestionably owned by the judgment debtor and which are not exempt by law from execution should be levied upon or sought to be levied upon. For the power of the court in the execution of its judgment extends only over properties belonging to the judgment debtor. (Consolidated Bank and Trust Corp. v. Court of Appeals, G.R. No. 78771, January 23, 1991).

The respondents further claim that at that time the sheriff levied on the tractor and took legal custody thereof no one ever protested or filed a third party claim.

It is inconsequential whether a third party claim has been filed or not by the petitioner during the time the sheriff levied on the subject tractor. A person other than the judgment debtor who claims ownership or right over levied properties is not precluded, however, from taking other legal remedies to prosecute his claim. (Consolidated Bank and Trust Corp. v. Court of Appeals, supra) This is precisely what the petitioner did when he filed the action for replevin with the RTC.

Anent the second and third issues raised, the Court accords great respect and weight to the findings of fact of the trial court. There is no sufficient evidence to show that the sale of the tractor was in fraud of Wilfredo and creditors. While it is

true that Wilfredo and Perfecto are brothers, this fact alone does not give rise to the presumption that the sale was fraudulent. Relationship is not a badge of fraud (Goquiolay v. Sycip, 9 SCRA 663 [1963]). Moreover, fraud can not be presumed; it must be established by clear convincing evidence.

We agree with the trial court's findings that the actuations of GELAC Trading were indeed violative of the provisions on human relations. As found by the trial court, GELAC knew very well of the transfer of the property to the petitioners on July 14, 1980 when it received summons based on the complaint for replevin filed with the RTC by the petitioner. Notwithstanding said summons, it continued to sell the subject tractor to one of its stockholders on August 2, 1980.

WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals promulgated on March 23, 1990 is SET ASIDE and the decision of the Regional Trial Court dated April 8, 1988 is REINSTATED.

SO ORDERED.

19. Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

 

G.R. No. 116363 December 10, 1999

SERVICEWIDE SPECIALISTS, INCORPORATED, petitioner, vs.THE HON. COURT OF APPEALS, JESUS PONCE, and ELIZABETH PONCE, respondents.

 

YNARES-SANTIAGO, J.:

This controversy is between a mortgagor who alienated the mortgaged property without the consent of the mortgagee, on the one hand, and the assignee of the mortgagee to whom the latter assigned his credit without notice to the mortgagor, on the other hand.

Sometime in 1975, respondent spouses Atty. Jesus and Elizabeth Ponce bought on installment a Holden Torana vehicle from C.R. Tecson Enterprises. They executed a promissory note and a chattel mortgage on the vehicle dated December 24, 1975 in favor of the C.R. Tecson Enterprises to secure payment of the note. The mortgage was registered both in the Registry of Deeds and the Land Transportation Office. On the same date, C.R. Tecson Enterprises, in turn, executed a deed of assignment of said promissory note and chattel mortgage in favor of Filinvest Credit Corporation with the conformity of respondent spouses. The latter were aware of the endorsement of the note and the mortgage to Filinvest as they in fact availed of its financing services to pay for the car. In 1976, respondent spouses transferred and delivered the vehicle to Conrado R. Tecson by way of sale with assumption of mortgage. Subsequently, in 1978, Filinvest assigned all its rights and interest over the same promissory note and chattel mortgage to petitioner Servicewide Specialists Inc. without notice to respondent spouses. Due to the failure of respondent spouses to pay the installments under the promissory note from October 1977 to March 1978, and despite demands to pay the same or to return the vehicle, petitioner was constrained to file before the Regional Trial Court of Manila on May 22, 1978 a complaint for replevin with damages against them, docketed as Civil Case No. 115567. In their answer, respondent spouses denied any liability claiming they had already returned the car to Conrado Tecson pursuant to the Deed of Sale with Assumption of Mortgage. Thus, they filed a third party complaint against Conrado Tecson praying that in case they are adjudged liable to petitioner, Conrado Tecson should reimburse them.

After trial, the lower court found respondent spouses jointly and solidarily liable to petitioner, however, the third party defendant Conrado Tecson was ordered to reimburse the respondent spouses for the sum that they would pay to petitioner. 1 On appeal, the Court of Appeals reversed and set aside the judgment of

the court a quo on the principal ground that respondent spouses were not notified of the assignment of the promissory note and chattel mortgage to petitioner. 2 Hence, this petition for review.

The resolution of the petition hinges on whether the assignment of a credit requires notice to the debtor in order to bind him. More specifically, is the debtor-mortgagor who sold the property to another entitled to notice of the assignment of credit made by the creditor to another party such that if the debtor was not notified of the assignment, he can no longer be held liable since he already alienated the property? Conversely, is the consent of the creditor-mortgagee necessary when the debtor-mortgagor alienates the property to a third person?

Only notice to the debtor of the assignment of credit is required. His consent is not required. In contrast, consent of the creditor-mortgagee to the alienation of the mortgaged property is necessary in order to bind said creditor. To evade liability, respondent spouses invoked Article 1626 of the Civil Code which provides that "the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation." They argue that they were not notified of the assignment made to petitioner. This provision, however, is applicable only where the debtor pays the creditor prior to acquiring knowledge of the latter's assignment of his credit. It does not apply, nor is it relevant, to cases of non-payment after the debtor came to know of the assignment of credit. This is precisely so since the debtor did not make any payment after the assignment.

In the case at bar, what is relevant is not the assignment of credit between petitioner and its assignor, but the knowledge or consent of the creditor's assignee to the debtor-mortgagor's sale of the property to another.

When the credit was assigned to petitioner, only notice to but not the consent of the debtor-mortgagor was necessary to bind the latter. Applying Article 1627 of the Civil Code, 3 the assignment made to petitioner includes the accessory rights such as the mortgage. Article 2141, on the other hand, states that the provisions concerning a contract of pledge shall be applicable to a chattel mortgage, such as the one at bar, insofar as there is no conflict with Act No. 1508, the Chattel Mortgage Law. As provided in Article 2096 in relation to Article 2141 of the Civil Code, 4 a thing pledged may be alienated by the pledgor or owner "with the consent of the pledgee." This provision is in accordance with Act No. 1508 which provides that "a mortgagor of personal property shall not sell or pledge such property, or any part thereof, mortgaged by him without the consent of the mortgagee in writing on the back of the mortgage and on the margin of the record thereof in the office where such mortgage is recorded."5 Although this provision in the chattel mortgage has been expressly repealed by Article 367 of the Revised Penal Code, yet under Article 319 (2) of the same Code, the sale of the thing mortgaged may be made provided that the mortgagee gives his consent and that the same is recorded. 6 In any case, applying by analogy Article 2128 of the Civil Code 7 to a chattel mortgage, it appears that a mortgage credit may be alienated or assigned to a third person. Since the assignee of the credit steps into the shoes of the creditor-mortgagee to whom the chattel was mortgaged, it follows that the assignee's consent is necessary in order to bind him of the alienation of the mortgaged thing by the debtor-mortgagor. This is tantamount to a novation. As the new assignee, petitioner's consent is necessary before respondent spouses' alienation of the vehicle can be considered as binding against third persons. Petitioner is considered a third person with respect to the sale with mortgage between respondent spouses and third party defendant Conrado Tecson.

In this case, however, since the alienation by the respondent spouses of the vehicle occurred prior to the assignment of credit to petitioner, it follows that the former were not bound to obtain the consent of the latter as it was not yet an assignee of the credit at the time of the alienation of the mortgaged vehicle.

The next question is whether respondent spouses needed to notify or secure the consent of petitioner's predecessor to the alienation of the vehicle. The sale with assumption of mortgage made by respondent spouses is tantamount to a substitution of debtors. In such case, mere notice to the creditor is not enough, his consent is always necessary as provided in Article 1293 of the Civil Code. 8 Without such consent by the creditor, the alienation made by respondent spouses is not binding on the former. On the other hand, Articles 1625, 9 1626 10and 1627 of the Civil Code on assignment of credits do not require the debtor's consent for the validity thereof and so as to render him liable to the assignee. The law speaks not of consent but of notice to the debtor, the purpose of which is to inform the latter that from the date of assignment he should make payment to the assignee and not to the original creditor. Notice is thus for the protection of the assignee because before said date, payment to the original creditor is valid.

When Tecson Enterprises assigned the promissory note and the chattel mortgage to Filinvest, it was made with respondent spouses' tacit approval. When Filinvest in turn, as assignee, assigned it further to petitioner, the latter should have notified the respondent spouses of the assignment in order to bind them. This, they failed to do. The testimony of petitioner's witness that notice of assignment was sent to respondent spouses was stricken off the record. Having asserted the affirmative on the issue of notice, petitioner should have substantiated its allegations in order to obtain a favorable judgment. In civil cases, the burden is on the party who would be defeated if no evidence is given on either side. 11 Being the plaintiff in the trial below, petitioner must establish its case, relying on the strength of its own evidence and not upon the weakness of that of its opponent. 12 The consent to the assignment given by respondent spouses to Filinvest cannot be construed as the spouses' knowledge of the assignment to petitioner precisely because at the time of the assignment to the latter, the spouses had earlier sold the vehicle to another.

One thing, however, that militates against the posture of respondent spouses is that although they are not bound to obtain the consent of the petitioner before alienating the property, they should have obtained the consent of Filinvest since they were already aware of the assignment to the latter. So that, insofar as Filinvest is concerned, the debtor is still respondent spouses because of the absence of its consent to the sale. Worse, Filinvest was not even notified of such sale. Having subsequently stepped into the shoes of Filinvest, petitioner acquired the same rights as the former had against respondent spouses. The defenses that could have been invoked by Filinvest against the spouses can be successfully raised by petitioner. Therefore, for failure of respondent spouses to obtain the consent of Filinvest thereto, the sale of the vehicle to Conrado R. Tecson was not binding on the former. When the credit was assigned by Filinvest to petitioner, respondent spouses stood on record as the debtor-mortgagor.

WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE. The decision of the Regional Trial Court is AFFIRMED and REINSTATED. Respondents Jesus Ponce and Elizabeth Ponce are ORDERED to pay petitioner, jointly and severally, the following sums:

a) P26,633,09, plus interest at 14% per annum from April 26, 1978 until fully paid;

b) 25% of the above sum in item (a) as liquidated damages;

c) P5,000.00 as attorney's fees; and

d) costs of suit.

In connection with the Third Party Complaint of the respondents, the third party defendant Conrado Tecson is hereby ordered to reimburse respondents Ponce for all the sums the latter would pay to petitioner, and attorney's fees of P3,000.00.

SO ORDERED.

20. Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

 

G.R. No. 106435 July 14, 1999

PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA V. TEVES and HIRAM DIDAY R. PULIDO, petitioners, vs.HON. COURT OF APPEALS and DEVELOPMENT BANK OF THE PHILIPPINES, respondents.

 

GONZAGA-REYES, J.:

Before Us for review on certiorari is the decision of the respondent Court of Appeals in C.A. G.R. C.V. No. 27861, promulgated on April 23, 1992, 1 affirming in toto the decision of the Regional Trial Court of Makati 2 to a award respondent bank's deficiency claim, arising from a loan secured by chattel mortgage.

The antecedents of the case are as follows:

On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of US$267,881.67, or the equivalent of P2,000,000.00 from respondent Bank. By virtue of this loan, petitioner PAMECA, through its President, petitioner Herminio C. Teves, executed a promissory note for the said amount, promising to pay the loan by installment. As security for the said loan, a chattel mortgage was also executed over PAMECA's properties in Dumaguete City, consisting of inventories, furniture and equipment, to cover the whole value of the loan.

On January 18, 1984, and upon petitioner PAMECA's failure to pay, respondent bank extrajudicially foreclosed the chattel mortgage, and, as sole bidder in the public auction, purchased the foreclosed properties for a sum of P322,350.00. On June 29, 1984, respondent bank filed a complaint for the collection of the balance of P4,366,332.46 3 with Branch 132 of the Regional Trial Court of Makati City against petitioner PAMECA and private petitioners herein, as solidary debtors with PAMECA under the promissory note.

On February 8, 1990, the RTC of Makati rendered a decision on the case, the dispositive portion of which we reproduce as follows:

WHEREFORE, judgment is hereby rendered ordering the defendants to pay jointly and severally plaintiff the (1) sum of P4,366,332.46 representing the deficiency claim of the latter as of

March 31, 1984, plus 21% interest per annum and other charges from April 1, 1984 until the whole amount is fully paid and (2) the costs of the suit. SO ORDERED." 4

The Court of Appeals affirmed the RTC decision. Hence, this Petition.

The petition raises the following grounds:

1. Respondent appellate court gravely erred in not reversing the decision of the trial court, and in not holding that the public auction sale of petitioner PAMECA's chattels were tainted with fraud, as the chattels of the said petitioner were bought by private respondent as sole bidder in only 1/6 of the market value of the property, hence unconscionable and inequitable, and therefore null and void.

2. Respondent appellate court gravely erred in not applying by analogy Article 1484 and Article 2115 of the Civil Code by reading the spirit of the law, and taking into consideration the fact that the contract of loan was a contract of adhesion.

3. The appellate court gravely erred in holding the petitioners Herminio Teves, Victoria Teves and Hiram Diday R. Pulido solidarily liable with PAMECA Wood Treatment Plant, Inc. when the intention of the parties was that the loan is only for the corporation's benefit.

Relative to the first ground, petitioners contend that the amount of P322,350.00 at which respondent bank bid for and purchased the mortgaged properties was unconscionable and inequitable considering that, at the time of the public sale, the mortgaged properties had a total value of more than P2,000,000.00. According to petitioners, this is evident from an inventory dated March 31, 1980 5, which valued the properties at P2,518,621.00, in accordance with the terms of the chattel mortgage contract 6 between the parties that required that the inventories "be maintained at a level no less than P2 million". Petitioners argue that respondent bank's act of bidding and purchasing the mortgaged properties for P322,350.00 or only about 1/6 of their actual value in a public sale in which it was the sole bidder was fraudulent, unconscionable and inequitable, and constitutes sufficient ground for the annulment of the auction sale.

To this, respondent bank contends that the above-cited inventory and chattel mortgage contract were not in fact submitted as evidence before the RTC of Makati, and that these documents were first produced by petitioners only when the case was brought to the Court of Appeals. 7 The Court of Appeals, in turn, disregarded these documents for petitioners' failure to present them in evidence, or to even allude to them in their testimonies before the lower courtr. 8 Instead, respondent court declared that it is not at all unlikely for the chattels to have sufficiently deteriorated as to have fetched such a low price at the time of the auction sale. 9 Neither did respondent court find anything irregular or fraudulent in the circumstance that respondent bank was the sole bidder in the sale, as all the legal procedures for the conduct of a foreclosure sale have been complied with, thus giving rise to the presumption of regularity in the performance of public duties. 10

Petitioners also question the ruling of respondent court, affirming the RTC, to hold private petitioners, officers and stockholders of petitioner PAMECA, liable with PAMECA for the obligation under the loan obtained from respondent bank, contrary to the doctrine of separate and distinct corporate personality. 11 Private petitioners contend that they became signatories to the promissory note "only as a matter of practice by the respondent bank", that the promissory note was in the nature of a contract of adhesion, and that the loan was for the benefit of the corporation, PAMECA, alone. 12

Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that Articles 1484 13 and 2115 14of the Civil Code be applied in analogy to the instant case to preclude the recovery of a deficiency claim. 15

Petitioners are not the first to posit the theory of the applicability of Article 2115 to foreclosures of chattel mortgage. In the leading case of Ablaza vs. Ignacio 16, the lower court dismissed the complaint for collection of deficiency judgment in view of Article 2141 of the Civil Code, which provides that the provisions of the Civil Code on pledge shall also apply to chattel mortgages, insofar as they are not in conflict with the Chattel Mortgage Law. It was the lower court's opinion that, by virtue of Article 2141, the provisions of Article 2115 which deny the creditor-pledgee the right to recover deficiency in case the proceeds of the foreclosire sale are less than the amount of the principal obligation, will apply.

This Court reversed the ruling of the lower court and held that the provisions of the Chattel Mortgage Law regarding the effects of foreclosure of chattel mortgage, being contrary to the provisions of Article 2115, Article 2115, in relation to Article 2141, may not be applied to the case.

Sec. 14 of Act No. 1508, as amended, or the chattel Mortgage Law, states:

xxx xxx xxx

The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in the office of the Registry of Deeds where the mortgage is recorded, and the Register of Deeds shall record the same. The fees of the officer for selling the property shall be the same as the case of sale on execution as provided in Act Numbered One Hundred and Ninety, and the amendments thereto, and the fees of the Register of Deeds for registering the officer's return shall be taxed as a part of the costs of sale, which the officer shall pay to the Register of Deeds. The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgage, shall be paid to the mortgagor or persons holding under him on demand. (Emphasis supplied).

It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in

pledge, the sale of the thing pledged extinguishes the entire principal obligation, such that the pledgor may no longer recover proceeds of the sale in excess of the amount of the principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation and costs.

Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there is a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in the price at public auction. As explained in Manila Trading and Supply Co. vs. Tamaraw Plantation Co. 17, cited inAblaza vs. Ignacio, supra:

While it is true that section 3 of Act No. 1508 provides that "a chattel mortgage is a conditional sale", it further provides that it "is a conditional sale of personal property as security for the payment of a debt, or for the performance of some other obligation specified therein." The lower court overlooked the fact that the chattels included in the chattel mortgage are only given as security and not as a payment of the debt, in case of a failure of payment.

The theory of the lower court would lead to the absurd conclusion that if the chattels mentioned in the mortgage, given as security, should sell for more than the amount of the indebtedness secured, that the creditor would be entitled to the full amount for which it might be sold, even though that amount was greatly in excess of the indebtedness. Such a result certainly was not contemplated by the legislature when it adopted Act No. 1508. There seems to be no reason supporting that theory under the provision of the law. The value of the chattels changes greatly from time to time, and sometimes very rapidly. If for example, the chattels should greatly increase in value and a sale under that condition should result in largely overpaying the indebtedness, and if the creditor is not permitted to retain the excess, then the same token would require the debtor to pay the deficiency in case of a reduction in the price of the chattels between the date of the contract and a breach of the condition.

Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors on the question of chattel mortgages, have said, that "in case of a sale under a foreclosure of a chattel mortgage, there is no question that the mortgagee or creditor may maintain an action for the deficiency, if any should occur." And the. fact that Act No. 1508 permits a private sale, such sale is not, in fact, a satisfaction of the debt, to any greater extent than the value of the property at the time of the sale. The amount received at the time of the sale, of course, always requiring good faith and honesty in the sale, is only a payment, pro tanto, and an action may be maintained for a deficiency in the debt.

We find no reason to disturb the ruling in Ablaza vs Ignacio, and the cases reiterating it. 18

Neither do We find tenable the application by analogy of Article 1484 of the Civil Code to the instant case. As correctly pointed out by the trial court, the said article

applies clearly and solely to the sale of personal property the price of which is payable in installments. Although Article 1484, paragraph (3) expressly bars any further action against the purchaser to recover an unpaid balance of the price, where the vendor opts to foreclose the chattel mortgage on the thing sold, should the vendee's failure to pay cover two or more installments, this provision is specifically applicable to a sale on installments.

To accommodate petitioners' prayer even on the basis of equity would be to expand the application of the provisions of Article 1484 to situations beyond its specific purview, and ignore the language and intent of the Chattel Mortgage Law. Equity, which has been aptly described as "justice outside legality", is applied only in the absence of, and never against, statutory law or judicial rules of procedure. 19

We are also unable to find merit in petitioners' submission that the public auction sale is void on grounds of fraud and inadequacy of price. Petitioners never assailed the validity of the sale in the RTC, and only in the Court of Appeals did they attempt to prove inadequacy of price through the documents, i.e., the "Open-End Mortgage on Inventory" and inventory dated March 31, 1980, likewise attached to their Petition before this Court. Basic is the rule that parties may not bring on appeal issues that were not raised on trial.

Having nonetheless examined the inventory and chattel mortgage document as part of the records, We are not convinced that they effectively prove that the mortgaged properties had a market value of at least P2,000,000.00 on January 18, 1984, the date of the foreclosure sale. At best, the chattel mortgage contract only indicates the obligation of the mortgagor to maintain the inventory at a value of at least P2,000,000.00, but does not evidence compliance therewith. The inventory, in turn, was as of March 31, 1980, or even prior to April 17, 1980, the date when the parties entered into the contracts of loan and chattel mortgage, and is far from being an accurate estimate of the market value of the properties at the time of the foreclosure sale four years thereafter. Thus, even assuming that the inventory and chattel mortgage contract were duly submitted as evidence before the trial court, it is clear that they cannot suffice to substantiate petitioners' allegation of inadequacy of price.1âwphi1.nêt

Furthermore, the mere fact that respondent bank was the sole bidder for the mortgaged properties in the public sale does not warrant the conclusion that the transaction was attended with fraud. Fraud is a serious allegation that requires full and convincing evidence, 20 and may not be inferred from the lone circumstance that it was only respondent bank that bid in the sale of the foreclosed properties. The sparseness of petitioners' evidence in this regard leaves Us no discretion but to uphold the presumption of regularity in the conduct of the public sale.

We likewise affirm private petitioners' joint and several liability with petitioner corporation in the loan. As found by the trial court and the Court of Appeals, the terms of the promissory note unmistakably set forth the solidary nature of private petitioners' commitment. Thus:

On or before May 12, 1980, for value received, PAMECA WOOD TREATMENT PLANT, INC., a corporation organized and existing under the laws of the Philippines, with principal office at 304 El Hogar Filipina Building, San Juan, Manila, promise to pay to the order of DEVELOPMENT BANK OF THE PHILIPPINES at its office located at corner Buendia and Makati Avenues, Makati, Metro Manila, the principal sum of TWO HUNDRED SIXTY SEVEN

THOUSAND EIGHT HUNDRED AND EIGHTY ONE & 67/100 US DOLLARS (US$ 267,881.67) with interest at the rate of three per cent (3%) per annum over DBP's borrowing rate for these funds. Before the date of maturity, we hereby bind ourselves, jointly and severally, to make partial payments as follows:

xxx xxx xxx

In case of default in the payment of any installment above, we bind ourselves to pay DBP for advances . . .

xxx xxx xxx

We further bind ourselves to pay additional interest and penalty charges on loan amortizations or portion thereof in arrears as follows:

xxx xxx xxx

In addition to the above, we also bind ourselves to pay for bank advances for insurance premiums, taxes . . .

xxx xxx xxx

We further bind ourselves to reimburse DBP on a pro-rata basis for all costs incurred by DBP on the foreign currency borrowings from where the loan shall be drawn . . .

xxx xxx xxx

In case of non-payment of the amount of this note or any portion of it on demand, when due, or any other amount or amounts due on account of this note, the entire obligation shall become due and demandable, and if, for the enforcement of the payment thereof, the DEVELOPMENT BANK OF THE PHILIPPINES is constrained to entrust the case to its attorneys, we jointly and severally bind ourselves to pay for attorney's fees as provided for in the mortgage contract, in addition to the legal fees and other incidental expenses. In the event of foreclosure of the mortgage securing this note, we further bind ourselves jointly and severally to pay the deficiency, if any. (Emphasis supplied) 21

The promissory note was signed by private petitioners in the following manner:

PAMECA WOOD TREATMENT PLANT, INC.

By:

(Sgd) HERMINIO G. TEVES

(For himself & as President of above-named corporation)

(Sgd) HIRAM DIDAY PULIDO

(Sgd) VICTORIA V. TEVES 22

From the foregoing, it is clear that private petitioners intended to bind themselves solidarily with petitioner PAMECA in the loan. As correctly submitted by respondent bank, private petitioners are not made to answer for the corporate act of petitioner PAMECA, but are made liable because they made themselves co-makers with PAMECA under the promissory note.

IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the Court of Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby AFFIRMED. Costs against petitioners.

SO ORDERED.