G.R. No. L-53955 January 13, 1989

THE MANILA BANKING CORPORATION, plaintiff-appellee, vs.ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendants-appellants.

Formoso & Quimbo Law Office for plaintiff-appellee.

Serafin P. Rivera for defendants-appellants.

 

BIDIN, J.:

This is an appeal from the decision* of the Court of First Instance of Manila, Branch XVII in Civil Case No. 78178 for collection of sum of money based on promissory notes executed by the defendants-appellants in favor of plaintiff-appellee bank. The dispositive portion of the appealed decision (Record on Appeal, p. 33) reads as follows:

WHEREFORE judgment is hereby rendered (a) sentencing defendants, Anastacio Teodoro, Jr. and Grace Anna Teodoro jointly and severally, to pay plaintiff the sum of P15,037.11 plus 12% interest per annum from September 30, 1969 until fully paid, in payment of Promissory Notes No. 11487, plus the sum of P1,000.00 as attorney's fees; and (b) sentencing defendant Anastacio Teodoro, Jr. to pay plaintiff the sum of P8,934.74, plus interest at 12% per annum from September 30, 1969 until fully paid, in payment of Promissory Notes Nos. 11515 and 11699, plus the sum of P500.00 an attorney's fees.

With Costs against defendants.

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

On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and severally, executed in favor of plaintiff a Promissory Note (No. 11487) for the sum of P10,420.00 payable in 120 days, or on August 25, 1966, at 12% interest per annum. Defendants failed to pay the said amount inspire of repeated demands and the obligation as of September 30, 1969 stood at P 15,137.11 including accrued interest and service charge.

On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father) and Anastacio Teodoro, Jr. (Son) executed in favor of plaintiff two Promissory Notes (Nos. 11515 and 11699) for P8,000.00 and P1,000.00 respectively, payable in 120 days at 12% interest per annum. Father and Son made a partial payment on the May 3, 1966 promissory Note but

none on the June 20, 1966 Promissory Note, leaving still an unpaid balance of P8,934.74 as of September 30, 1969 including accrued interest and service charge.

The three Promissory Notes stipulated that any interest due if not paid at the end of every month shall be added to the total amount then due, the whole amount to bear interest at the rate of 12% per annum until fully paid; and in case of collection through an attorney-at-law, the makers shall, jointly and severally, pay 10% of the amount over-due as attorney's fees, which in no case shall be leas than P200.00.

It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed of Assignment of Receivables from the Emergency Employment Administration in the sum of P44,635.00. The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts and other credit accommodations extended to defendants as security for the payment of said sum and the interest thereon, and that defendants do hereby remise, release and quitclaim all its rights, title, and interest in and to the accounts receivables. Further.

(1) The title and right of possession to said accounts receivable is to remain in the assignee, and it shall have the right to collect the same from the debtor, and whatsoever the Assignor does in connection with the collection of said accounts, it agrees to do as agent and representative of the Assignee and in trust for said Assignee ;

xxx xxx xxx

(6) The Assignor guarantees the existence and legality of said accounts receivable, and the due and punctual payment thereof unto the assignee, ... on demand, ... and further, that Assignor warrants the solvency and credit worthiness of each and every account.

(7) The Assignor does hereby guarantee the payment when due on all sums payable under the contracts giving rise to the accounts receivable ... including reasonable attorney's fees in enforcing any rights against the debtors of the assigned accounts receivable and will pay upon demand, the entire unpaid balance of said contract in the event of non-payment by the said debtors of any monthly sum at its due date or of any other default by said debtors;

xxx xxx xxx

(9) ... This Assignment shall also stand as a continuing guarantee for any and all whatsoever there is or in the future there will be justly owing from the Assignor to the Assignee ...

In their stipulations of Fact, it is admitted by the parties that plaintiff extended loans to defendants on the basis and by reason of certain contracts entered into by the defunct Emergency Employment Administration (EEA) with defendants for the fabrication of fishing boats, and that the Philippine Fisheries Commission succeeded the EEA after its abolition; that non-payment of the notes was due to the failure of the Commission to pay defendants after the latter had complied with their contractual obligations; and that the President of plaintiff Bank took steps to collect from the Commission, but no collection was effected.

For failure of defendants to pay the sums due on the Promissory Note, this action was instituted on November 13, 1969, originally against the Father, Son, and the latter's wife. Because the Father died, however, during the pendency of the suit, the case as against him was dismiss under the provisions of Section 21, Rule 3 of the Rules of Court. The action, then is against defendants Son and his wife for the collection of the sum of P 15,037.11 on Promissory Note No. 14487; and against defendant Son for the recovery of P 8,394.7.4 on Promissory Notes Nos. 11515 and 11699, plus interest on both amounts at 12% per annum from September 30, 1969 until fully paid, and 10% of the amounts due as attorney's fees.

Neither of the parties presented any testimonial evidence and submitted the case for decision based on their Stipulations of Fact and on then, documentary evidence.

The issues, as defined by the parties are: (1) whether or not plaintiff claim is already considered paid by the Deed of Assign. judgment of Receivables by the Son; and (2) whether or not it is plaintiff who should directly sue the Philippine Fisheries Commission for collection.' (Record on Appeal, p. 29- 32).

On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8, 1972, defendants filed a motion for reconsideration (Record on Appeal, p. 33) which was denied by the trial court in its order of June 14, 1972 (Record on Appeal, p. 37). On June 23, 1972, defendants filed with the lower court their notice of appeal together with the appeal bond (Record on Appeal, p. 38). The record of appeal was forwarded to the Court of Appeals on August 22, 1972 (Record on Appeal, p. 42).

In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment of error, that is —

THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING OF THE CONTRACT BETWEEN THE PARTIES, IN VIOLATION OF LAW; HENCE, TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION.

As the appeal involves a pure question of law, the Court of Appeals, in its resolution promulgated on March 6, 1980, certified the case to this Court (Rollo, p. 24). The record on Appeal was forwarded to this Court on March 31, 1980 (Rollo, p. 1).

In the resolution of May 30, 1980, the First Division of this Court ordered that the case be docketed and declared submitted for decision (Rollo, p. 33).

On March 7, 1988, considering the length of time that the case has been pending with the Court and to determine whether supervening events may have rendered the case moot and academic, the Court resolved (1) to require the parties to MOVE IN THE PREMISES within thirty days from notice, and in case they fail to make the proper manifestation within the required period, (2) to consider the case terminated and closed with the entry of judgment accordingly made thereon (Rollo, p. 40).

On April 27, 1988, appellee moved for a resolution of the appeal review interposed by defendants-appellants (Rollo, p. 41).

The major issues raised in this case are as follows: (1) whether or not the assignment of receivables has the effect of payment of all the loans contracted by appellants from appellee bank; and (2) whether or not appellee bank must first exhaust all legal remedies against the Philippine Fisheries Commission before it can proceed against appellants for collections of loan under the promissory notes which are plaintiffs bases in the action for collection in Civil Case No. 78178.

Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without the need of the consent of the debtor, transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. ... It may be in the form of a sale, but at times it may constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against a third person, or it may constitute a donation as when it is by gratuitous title; or it may even be merely by way of guaranty, as when the creditor gives as a collateral, to secure his own debt in favor of the assignee, without transmitting ownership. The character that it may assume determines its requisites and effects. its regulation, and the capacity of the parties to execute it; and in every case, the obligations between assignor and assignee will depend upon the judicial relation which is the basis of the assignment: (Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. 5, pp. 165-166).

There is no question as to the validity of the assignment of receivables executed by appellants in favor of appellee bank.

The issue is with regard to its legal effects.

I

It is evident that the assignment of receivables executed by appellants on January 24, 1964 did not transfer the ownership of the receivables to appellee bank and release appellants from their loans with the bank incurred under promissory notes Nos. 11487,11515 and 11699.

The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts, and their credit accommodations in the sum of P10,000.00 extended to appellants by appellee bank, and as security for the payment of said sum and the interest thereon; that appellants as assignors, remise, release, and quitclaim to assignee bank all their rights, title and interest in and to the accounts receivable assigned (lst paragraph). It was further stipulated that the assignment will also stand as a continuing guaranty for future loans of appellants to appellee bank and correspondingly the assignment shall also extend to all the accounts receivable; appellants shall also obtain in the future, until the consideration on the loans secured by appellants from appellee bank shall have been fully paid by them (No. 9).

The position of appellants, however, is that the deed of assignment is a quitclaim in consideration of their indebtedness to appellee bank, not mere guaranty, in view of the following provisions of the deed of assignment:

... the Assignor do hereby remise, release and quit-claim unto said assignee all its rights, title and interest in the accounts receivable described hereunder. (Emphasis supplied by appellants, first par., Deed of Assignment).

... that the title and right of possession to said account receivable is to remain in said assignee and it shall have the right to collect directly from the debtor, and whatever the Assignor does in connection with the collection of said accounts, it agrees to do so as agent and representative of the Assignee and it trust for said Assignee ...(Ibid. par. 2 of Deed of Assignment).' (Record on Appeal, p. 27)

The character of the transactions between the parties is not, however, determined by the language used in the document but by their intention. Thus, the Court, quoting from the American Jurisprudence (68 2d, Secured Transaction, Section 50) said:

The characters of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it

must be construed as a pledge. However, even though a transfer, if regarded by itself, appellate to have been absolute, its object and character might still be qualified and explained by a contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been Id that a transfer of property by the debtor to a creditor, even if sufficient on its farm to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms ordinarily exporting conveyance, of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and ambiguous language or other circumstances excluding an intent to pledge. (Lopez v. Court of Appeals, 114 SCRA 671 [1982]).

Definitely, the assignment of the receivables did not result from a sale transaction. It cannot be said to have been constituted by virtue of a dation in payment for appellants' loans with the bank evidenced by promissory note Nos. 11487, 11515 and 11699 which are the subject of the suit for collection in Civil Case No. 78178. At the time the deed of assignment was executed, said loans were non-existent yet. The deed of assignment was executed on January 24, 1964 (Exh. "G"), while promissory note No. 11487 is dated April 25, 1966 (Exh. 'A), promissory note 11515, dated May 3, 1966 (Exh. 'B'), promissory note 11699, on June 20, 1966 (Exh. "C"). At most, it was a dation in payment for P10,000.00, the amount of credit from appellee bank indicated in the deed of assignment. At the time the assignment was executed, there was no obligation to be extinguished except the amount of P10,000.00. Moreover, in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other (Article 1292, New Civil Code).

Obviously, the deed of assignment was intended as collateral security for the bank loans of appellants, as a continuing guaranty for whatever sums would be owing by defendants to plaintiff, as stated in stipulation No. 9 of the deed.

In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests (Lopez v. Court of Appeals, supra).

In one case, the assignments of rights, title and interest of the defendant in the contracts of lease of two buildings as well as her rights, title and interest in the land on which the buildings were constructed to secure an overdraft from a bank amounting to P110,000.00 which was increased to P150,000.00, then to P165,000.00 was considered by the Court to be documents of mortgage contracts inasmuch as they were executed to guarantee the principal obligations of the defendant consisting of the overdrafts or the indebtedness resulting therefrom. The Court ruled that an assignment to guarantee an obligation is in effect a mortgage and not an absolute conveyance of

title which confers ownership on the assignee (People's Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).

II

As to whether or not appellee bank must have to exhaust all legal remedies against the Philippine Fisheries Commission before it can proceed against appellants for collection of loans under their promissory notes, must also be answered in the negative.

The obligation of appellants under the promissory notes not having been released by the assignment of receivables, appellants remain as the principal debtors of appellee bank rather than mere guarantors. The deed of assignment merely guarantees said obligations. That the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor, under Article 2058 of the New Civil Code does not therefore apply to them. It is of course of the essence of a contract of pledge or mortgage that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor (Article 2087, New Civil Code). In the instant case, appellants are both the principal debtors and the pledgors or mortgagors. Resort to one is, therefore, resort to the other.

Appellee bank did try to collect on the pledged receivables. As the Emergency Employment Agency (EEA) which issued the receivables had been abolished, the collection had to be coursed through the Office of the President which disapproved the same (Record on Appeal, p. 16). The receivable became virtually worthless leaving appellants' loans from appellee bank unsecured. It is but proper that after their repeated demands made on appellants for the settlement of their obligations, appellee bank should proceed against appellants. It would be an exercise in futility to proceed against a defunct office for the collection of the receivables pledged.

WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the trial court is affirmed in toto.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr. and Cortes, JJ., concur.

 

G.R. No. L-5741            March 13, 1911

ESTANISLAUA ARENAS, ET AL., plaintiffs-appellees, vs.FAUSTO O. RAYMUNDO, defendant-appellant.

A.D. Gibbs, for appellant.Gabriela La O, for appellees.

TORRES, J.:

This is an appeal field by the defendant from a judgment of conviction rendered by the Hon. Judge Araullo.

On the date of August 31, 1908, the attorneys for the plaintiffs, Estanislaua Arenas and Julian La O, brought suit against Fausto O. Raymundo, alleging, as a cause of action, that Estanislaua Arenas was the owner and proprietor of the jewelry described below with the respective value thereof:

Two gold tamborin rosaries, without bow or reliquary at P40 each P80

One lady's comb for fastening the hair, made of gold and silver, adorned with pearls of ordinary size and many small pearls, one of which is missing 80

One gold ring set with a diamond of ordinary size 1,000

One gold bracelet with five small diamonds and eight brillantitos de almendras 700

One pair of gold picaporte earrings with two diamonds of ordinary size and two small ones 1,100

The plaintiffs alleged that the said jewelry, during the last part of April or the beginning of May, 1908, was delivered to Elena de Vega to sell on commission, and that the latter, in turn, delivered it to Conception Perello, likewise to sell on commission, but that Perello, instead of fulfilling her trust, pledged the jewelry in the defendant's pawnshop, situated at No. 33 Calle de Ilaya, Tondo, and appropriated to her own use the money thereby obtained; that on July 30, 1908, Conception Perello was prosecuted for estafa, convicted, and the judgment became final; that the said jewelry was then under the control and in the possession of the defendant, as a result of the pledge by Perello, and that the former refused to deliver it to the plaintiffs, the owners thereof, wherefore counsel for the plaintiffs asked that judgment be rendered sentencing the defendant to make restitution of the said jewelry and to pay the costs.

In the affidavit presented by the attorney for the plaintiffs dated September 2, 1908, after a statement and description of the jewelry mentioned, it is set forth that the defendant was retaining it for the reason given in the complaint, and that it was not sequestrated for the purpose of satisfying any tax or fine or by reason of any attachment issued in compliance with any judgment rendered against the plaintiffs' property.

In discharge of the writ of seizure issued for the said jewelry on the 2nd of September, 1908, aforementioned, the sheriff of this city made the return that he had, on the same date, delivered one copy of the bond and another of the said writ to the defendant personally and, on the petition and designation of the attorney for the plaintiffs, proceeded to seize the jewelry described in the writ, taking it out of the defendant's control, and held it in his possession during the five days prescribed by law.

On the 15th of the same month and year, five days having elapsed without the defendant's having given bond before the court, the sheriff made delivery of all the jewelry described in the said order to the attorney for the plaintiff to the latter's entire satisfaction, who with the sheriff signed the return of the writ.

After the demurrer to the complaint had been overruled the defendant answered, setting forth that he denied each and all of the allegations thereof which were not specifically admitted, explained, or qualified, and as a special defense alleged that the jewelry, the subject matter of the complaint was pledged on his pawnshop by Conception Perello, the widow of Pazos, as security for a loan of P1,524, with the knowledge, consent, and mediation of Gabriel La O, a son of the plaintiffs, as their agent, and that, in consequence thereof, the said plaintiffs were estopped from disavowing the action of the said Perello; the defendant therefore prayed that the complaint be dismissed and that the jewelry seized at the instance of the plaintiffs, or the amount of the loan made thereon, together with the interest due, be returned to the defendant, with the costs of the suit against the plaintiffs.

The case came up for hearing on March 17, 1909, and after the presentation of oral testimony by both parties, the count, on June 23 of the same year, rendered judgment sentencing the defendant to restore to the plaintiff spouses the jewelry described in the complaint, the right being reserved to the defendant to institute his action against the proper party. The counsel for the defendant excepted to this judgment, asked that the same be set aside, and a new trial granted. This motion was denied, exceptions was taken by the appellant, and the proper bill of exceptions was duly approved certified to, and forwarded to the clerk of this court.

This is an action for the replevin of certain jewelry delivered by its owner for sale on commission, and pledged without his knowledge by Concepcion Perello in the pawnshop of the defendant, Fausto O. Raymundo, who refuses to deliver the said jewelry unless first redeemed.

The said Concepcion Perello, who appropriated to herself the money derived from the pledging of the jewels before mentioned, together with others, to the prejudice of their owner Estanislaua Arenas, was prosecuted in the Court of First Instance of this City in cause No. 3955 and sentenced on July 30, 1908, to the penalty of one year eight months and twenty-one days of prision correccional, to restore to the offended party the jewelry specified in the complaint, or to pay the value thereof, amounting to P8,660, or, in case of insolvency, to suffer the corresponding subsidiary imprisonment, and to pay the costs. This judgment is attested by the certified copy attached under letter D to folio 26 of the record of the proceedings in the case of the same plaintiff against Antonio Matute — the pledgee of the other jewelry also appropriated by the said Concepcion Perello — which record forms a part of the evidence in this cause.

Perello having pledged the jewelry in question to the defendant Raymundo, and not having redeemed it by paying him the amount received, it follows that the convicted woman, now serving the sentence imposed upon her, could not restore the jewelry as ordered in that judgment, which has become final by the defendant's acquiescence.

Article 120 of the Penal Code prescribes:

The restitution of the thing itself must be made, if be in the possession of a third person, who had acquired it in a legal manner, reserving, however, his action against the proper person.

Restitution shall be made, even though the thing may be in the possession of a third person, who had acquired it in a legal manner, reserving, however, his action against the proper person.

This provision is not applicable to a case in which the third person has acquired the thing in the manner and with the requisites established by law to make it unrecoverable.

The provisions contained in the first two paragraphs of the preinserted article are based on the uncontrovertible principle of justice that the party injured through a crime has, as against all others, a preferential right to be indemnified, or to have restored to him the thing of which he was unduly deprived by criminal means.

In view of the harmonious relation between the different codes in force in these Islands, it is natural and logical that the aforementioned provision of the Penal Code, based on the rule established in article 17 of the same, to wit, that every person criminally liable for a crime or misdemeanor is also civilly liable, should be in agreement and accordance with the provisions of article 464 of the Civil Code which prescribes:

The possession of personal property, acquired in good faith, is equivalent to a title thereto. However, the person who has lost personal property or has been illegally deprived thereof may recover it from whoever possesses it.

If the possessor of personal property, lost or stolen, has acquired it in good faith at a public sale, the owner can not recover it without reimbursing the price paid therefor.

Neither can the owner of things pledged in pawnshops, established with the authorization of the Government, recover them, whosoever may be the person who pledged them, without previously refunding to the institution the amount of the pledge and the interest due.

With regard to things acquired on exchange, or at fairs or markets or from a merchant legally established and usually employed in similar dealings, the provisions of the Code of Commerce shall be observed.

On January 2, 1908, this court had occasion to decide, among other cases, two which were entirely analogous to the present one. They were No. 3889, Varela vs. Matute, and No. 3890, Varela vs. Finnick (9 Phil., 479, 482).

In the decisions in both cases it appears that Nicolasa Pascual received various jewels from Josefa Varela to sell on commission and that, instead of fulfilling the trust or returning the jewels to their owner, she pledged some of them in the pawnshop of Antonio Matute and others in that of H.J. Finnick and appropriated to herself the amounts that she received, to the detriment of the owner of the jewelry.

Tried estafa in cause No. 2429, the said Pascual was convicted and sentenced to the penalty of one year and eleven months of prision correccional, to restore to Varela, the jewelry appropriated, or to pay the value thereof, and, in case of insolvency, to subsidiary imprisonment; this judgment became final, whereupon the defendant began to serve her sentence. The case just cited is identical to that of Concepcion Perello.

Josefa Varela, in separate incidental proceedings, demanded the restitution or delivery of possession of the said jewelry; the pledgees, the pawnbrokers, refused to comply with her demand, alleging, among other reasons, that they were entitled to possession. The two cases were duly tried, and the Court of First Instance pronounced judgment, supporting the plaintiff's claims in each. Both cases were appealed by the defendants, Matute and Finnick, and this court affirmed the judgments on the same grounds, with costs, and the decisions on appeal established the following legal doctrines:

1. Crimes against property; criminal and civil liability. — Where, in a proceeding instituted by reason of a crime committed against property, the criminal liability of the accused has been declared, it follows that he shall also be held civilly liable therefor, because every person who is criminally responsible on account of a crime or misdemeanor is also civilly liable.

2. Id.; Recovery of property unlawfully in possession. — Whoever may have been deprived this property in consequence of a crime is entitled to the recovery thereof, even if such property is in the possession of a third party who acquired it by legal means other than those expressly stated in article 464 of the Civil Code.

3. Personal property; title by possession. — In order that the possession of personal property may be considered as a title thereto it is indispensable that the same shall have been acquired in good faith.

4. Id.; Ownership; prescription. — The ownership of personal property prescribes in the manner and within the time fixed by articles 1955 and 1962, in connection with article 464, of the Civil Code.

In the cause prosecuted against Perello, as also in the present suit, it was not proven that Estanislaua Arenas authorized the former to pawn the jewelry given to her by Arenas to sell on commission. Because of the mere fact of Perello's having been convicted and sentenced for

estafa, and for the very reason that she is now serving her sentence must be complied with, that is, the jewelry misappropriated must be restored to its owner, inasmuch as it exists and has not disappeared this restitution must be made, although the jewelry is found in the pawnshop of Fausto O. Raymundo and the latter had acquired it by legal means. Raymundo however retains his right to collect the amounts delivered upon the pledge, by bringing action against the proper party. This finding is in accord with the provisions of the above article 120 of the Penal Code and first paragraph of article 464 of the Civil Code.

The aforementioned decision, No. 3890, Varela vs. Finnick, recites among other considerations, the following:

The exception contained in paragraph 3 of said article is not applicable to the present case because a pawnshop does not enjoy the privilege established by article 464 of the Civil Code. The owner of the loan office of Finnick Brothers, notwithstanding the fact that he acted in good faith, did not acquire the jewels at a public sale; it is not a question of public property, securities, or other such effects, the transfer, sale, or disposal of which is subject to the provisions of the Code of Commerce. Neither does a pawnshop enjoy the privilege granted to a monte de piedad; therefore, Josefa Varela, who lost said jewels and was deprived of the same in consequence of a crime, is entitled to the recovery thereof from the pawnshop of Finnick Brothers, where they were pledged; the latter can not lawfully refuse to comply with the provisions of article 120 of the Penal Code, as it is a question of jewels which has been misappropriated by the commission of the crime of estafa, and the execution of the sentence which orders the restitution of the jewels can not be avoided because of the good faith with which the owner of the pawnshop acquired them, inasmuch as they were delivered to the accused, who was not the owner nor authorized to dispose of the same.

Even supposing that the defendant Raymundo had acted in good faith in accepting the pledge of the jewelry in litigation, even then he would not be entitled to retain it until the owner thereof reimburse him for the amount loaned to the embezzler, since the said owner of the jewelry, the plaintiff, did not make any contract with the pledgee, that would obligate him to pay the amount loaned to Perello, and the trial record does not disclose any evidence, even circumstantial, that the plaintiff Arenas consented to or had knowledge of the pledging of her jewelry in the pawnshop of the defendant.

For this reason, and because Conception Perello was not the legitimate owner of the jewelry which she pledged to the defendant Raymundo, for a certain sum that she received from the latter as a loan, the contract of pledge entered the jewelry so pawned can not serve as security for the payment of the sum loaned, nor can the latter be collected out of the value of the said jewelry.

Article 1857 of the Civil Code prescribes as one of the essential requisites of the contracts of pledge and of mortgage, that the thing pledged or mortgaged must belong to the person who pledges or mortgages it. This essential requisite for the contract of pledge between Perello and the defendant being absent as the former was not the owner of the jewelry given in pledge, the contract is as devoid of value and force as if it had not been made, and as it was executed with marked violation of an express provision of the law, it can not confer upon the defendant any

rights in the pledged jewelry, nor impose any obligation toward him on the part of the owner thereof, since the latter was deprived of her possession by means of the illegal pledging of the said jewelry, a criminal act.

Between the supposed good faith of the defendant Raymundo and the undisputed good faith of the plaintiff Arenas, the owner of the jewelry, neither law nor justice permit that the latter, after being the victim of the embezzlement, should have to choose one of the two extremes of a dilemma, both of which, without legal ground or reason, are injurious and prejudicial to her interest and rights, that is, she must either lose her jewelry or pay a large sum received by the embezzler as a loan from the defendant, when the plaintiff Arenas is not related to the latter by any legal or contractual bond out of which legal obligations arise.

It is true that the plaintiffs' son, attorney Gabriel La O, intervened and gave his consent when the Concepcion Perello pawned the jewelry in litigation with Fausto Raymundo for P1,524? In view of the evidence offered by the trial record, the answer is, of course, in the negative.

The parents of the attorney Gabriel La O being surprised by the disagreeable news of the disappearance of various jewels, amounting in value to more than P8,600, delivered to Elena Vega for sale on commission and misappropriated by Conception Perello, who received them from Vega for the same purpose, it is natural that the said attorney, acting in representation of his parents and as an interested party, should have proceeded to ascertain the whereabouts of the embezzled jewelry an to enter into negotiations with the pawnshop of Fausto O. Raymundo, in whose possession he had finally learned were to be found a part of the embezzled jewels, as he had been informed by the said Perello herself; and although, at first, at the commencement of his investigations, he met with opposition on the part of the pledgee Raymundo, who objected to showing him the jewels that he desired to see in order to ascertain whether they were those embezzled and belonging to his mother, the plaintiff Arenas, thanks to the intervention of attorney Chicote and to the fact that they succeeded in obtaining from the embezzler, among other papers, the pawn ticket issued by Raymundo's pawnshop, Exhibit E, of the date of May 4, 1908, folio 19 of the record in the case against Matute, Gabriel La O succeeded in getting the defendant to show him the jewelry described in the said ticket together with other jewels that did not belong to La O's mother, that had been given the defendant by Ambrosia Capistrano, Perello's agent, in pledge or security for a loan of P170.

Gabriel La O, continuing the search for other missing jewelry belonging to his mother, found that Fausto O. Raymundo was in possession of it and had received it from the same embezzler as security for a debt, although the defendant Raymundo would not exhibit it until he issued the pawn tickets corresponding to such jewels; therefore, at Raymundo's request, Perello, by means of the document Exhibit C, signed by herself and bearing date of June 10, 1908, folio 28 of the record, authorized her son Ramon to get from the defendant, in her name, the pawn tickets of the said other jewelry, for which such tickets had not yet been issued; Raymundo then wrote out the tickets — Exhibits L, LL, and M, all dated June 22, 1908, and found on folios 20, 21 and 22 of the record of the aforesaid proceedings against Matute — in the presence of the attorney Gabriel La O, who kept the said three pawn tickets, after he had made sure that the jewels described therein and which Raymundo, taking them out of his cabinet, exhibited to him at the time, were among those embezzled from his mother.

So that, when the three aforementioned pawn tickets, Exhibits L, LL, and M, from the pawnshop of the defendant were made out, the latter already, and for some time previous, had in his possession as a pledge the jewelry described in them, and the plaintiffs' son naturally desiring to recover his parent's jewelry, was satisfied for the time being with keeping the three pawn tickets certifying that such jewelry was pawned to the defendant.

Moreover, the record discloses no proof that the attorney Gabriel La O consented to or took any part in the delivery of the jewelry in question to the defendant as a pledge, and both the said defendant, Raymundo, and the embezzler Perello, averred in their respective testimony that the said attorney La O had no knowledge of and took no part in the pledging of the jewelry, and Perello further stated that she had received all the money loaned to her by the defendant Raymundo. (Folios 13 to 14, and 76 to 80 of the record in the case against Matute.)

The business of pawnshops, in exchange for the high and onerous interest which constitutes its enormous profits, is always exposed to the contingency of receiving in pledge or security for the loans, jewels and other articles that have been robbed, stolen, or embezzled from their legitimate owners; and as the owner of the pawnshop accepts the same and asks for money on it, without assuring himself whether such bearer is or is not the owner thereof, he can not, by such procedure, expect from the law better and more preferential protection than the owner of the jewels or other articles, who was deprived thereof by means of a crime and is entitled to be excused by the courts.

Antonio Matute, the owner of another pawnshop, being convinced that he was wrong, refrained from appealing from the judgment wherein he was sentenced to return, without redemption, to the plaintiffs, another jewel of great value which had been pledged to him by the same Perello. He undoubtedly had in mind some of the previous decisions of this court, one of which was against himself.

For the foregoing reasons, whereby the errors attributed to the judgment of the Court of First Instance have been discussed and decided upon, and the said judgment being in harmony with the law, the evidence and the merits of the case, it is proper, in our opinion, to affirm the same, as we hereby do, with the costs against the appellant. So ordered.

Arellano, C.J., and Mapa, J., concur.Carson, Moreland, and Trent, JJ., concur in the result.

G.R. No. L-32116 April 2l, 1981

RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR., petitioners, vs.THE COURT OF APPEALS and MAXIMA CASTRO, respondents.

 

DE CASTRO, * J.:

This is a petition for review by way of certiorari of the decision 1 of the Court of Appeals in CA-G.R. No. 39760-R entitled "Maxima Castro, plaintiff-appellee, versus Severino Valencia, et al., defendants; Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes, defendants-appellants," which affirmed in toto the decision of the Court of First Instance of Manila in favor of plaintiff- appellee, the herein private respondent Maxima Castro.

On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia, went to the Rural Bank of Caloocan to apply for an industrial loan. It was Severino Valencia who arranged everything about the loan with the bank and who supplied to the latter the personal data required for Castro's loan application. On December 11, 1959, after the bank approved the loan for the amount of P3,000.00, Castro, accompanied by the Valencia spouses, signed a promissory note corresponding to her loan in favor of the bank.

On the same day, December 11, 1959, the Valencia spouses obtained from the bank an equal amount of loan for P3,000.00. They signed a promissory note (Exhibit "2") corresponding to their loan in favor of the bank and had Castro affixed thereon her signature as co-maker.

The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house and lot of 150 square meters, covered by Transfer Certificate of Title No. 7419 of the Office of the Register of Deeds of Manila.

On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff Basilio Magsambol, sent a notice of sheriff's sale addressed to Castro, announcing that her property covered by T.C.T. No. 7419 would be sold at public auction on March 10, 1961 to satisfy the obligation covering the two promissory notes plus interest and attorney's fees.

Upon request by Castro and the Valencias and with conformity of the bank, the auction sale that was scheduled for March 10, 1961 was postponed for April 10, 1961. But when April 10, 1961 was subsequently declared a special holiday, the sheriff of Manila sold the property covered by T.C.T. No. 7419 at a public auction sale that was held on April 11, 1961, which was the next succeeding business day following the special holiday.

Castro alleged that it was only when she received the letter from the Acting Deputy Sheriff on February 13, 1961, when she learned for the first time that the mortgage contract (Exhibit "6") which was an encumbrance on her property was for P6.000.00 and not for P3,000.00 and that she was made to sign as co-maker of the promissory note (Exhibit "2") without her being informed of this.

On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against petitioners Bank and Desiderio, the Spouses Valencia, Basilio Magsambol and Arsenio Reyes as defendants in Civil Case No. 46698 before the Court of First Instance of Manila upon the charge, amongst others, that thru mistake on her part or fraud on the part of Valencias she was induced to sign as co-maker of a promissory note (Exhibit "2") and to constitute a mortgage on her house and lot to secure the questioned note. At the time of filing her complaint, respondent Castro deposited the amount of P3,383.00 with the court a quo in full payment of her personal loan plus interest.

In her amended complaint, Castro prayed, amongst other, for the annulment as far as she is concerned of the promissory note (Exhibit "2") and mortgage (Exhibit "6") insofar as it exceeds P3,000.00; for the discharge of her personal obligation with the bank by reason of a deposit of P3,383.00 with the court a quo upon the filing of her complaint; for the annulment of the foreclosure sale of her property covered by T.C.T. No. 7419 in favor of Arsenio Reyes; and for the award in her favor of attorney's fees, damages and cost.

In their answers, petitioners interposed counterclaims and prayed for the dismissal of said complaint, with damages, attorney's fees and costs. 2

The pertinent facts arrived from the stipulation of facts entered into by the parties as stated by respondent Court of Appeals are as follows:

Spawning the present litigation are the facts contained in the following stipulation of facts submitted by the parties themselves:

1. That the capacity and addresses of all the parties in this case are admitted .

2. That the plaintiff was the registered owner of a residential house and lot located at Nos. 1268-1270 Carola Street, Sampaloc, Manila, containing an area of one hundred fifty (150) square meters, more or less, covered by T.C.T. No. 7419 of the Office of the Register of Deeds of Manila;

3. That the signatures of the plaintiff appearing on the following documents are genuine:

a) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 7, 1959 in the amount of P3,000.00 attached as Annex A of this partial stipulation of facts;

b) Promissory Note dated December 11, 1959 signed by the plaintiff in favor of the Rural Bank of Caloocan for the amount of P3,000.00 as per Annex B of this partial stipulation of facts;

c) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 11, 1959, signed only by the defendants, Severino Valencia and Catalina Valencia, attached as Annex C, of this partial stipulation of facts;

d) Promissory note in favor of the Rural Bank of Caloocan, dated December 11, 1959 for the amount of P3000.00, signed by the spouses Severino Valencia and Catalina Valencia as borrowers, and plaintiff Maxima Castro, as a co-maker, attached as Annex D of this partial stipulation of facts;

e) Real estate mortgage dated December 11, 1959 executed by plaintiff Maxima Castro, in favor of the Rural Bank of Caloocan, to secure the obligation of P6,000.00 attached herein as Annex E of this partial stipulation of facts;

All the parties herein expressly reserved their right to present any evidence they may desire on the circumstances regarding the execution of the above-mentioned documents.

4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff, Basilio Magsambol, sent a notice of sheriff's sale, address to the plaintiff, dated February 13, 1961, announcing that plaintiff's property covered by TCT No. 7419 of the Register of Deeds of the City of Manila, would be sold at public auction on March 10, 1961 to satisfy the total obligation of P5,728.50, plus interest, attorney's fees, etc., as evidenced by the Notice of Sheriff's Sale and Notice of Extrajudicial Auction Sale of the Mortgaged property, attached herewith as Annexes F and F-1, respectively, of this stipulation of facts;

5. That upon the request of the plaintiff and defendants-spouses Severino Valencia and Catalina Valencia, and with the conformity of the Rural Bank of Caloocan, the Sheriff of Manila postponed the auction sale scheduled for March 10, 1961 for thirty (30) days and the sheriff re-set the auction sale for April 10, 1961;

6. That April 10, 1961 was declared a special public holiday; (Note: No. 7 is omitted upon agreement of the parties.)

8. That on April 11, 1961, the Sheriff of Manila, sold at public auction plaintiff's property covered by T.C.T. No. 7419 and defendant, Arsenio Reyes, was the highest bidder and the corresponding certificate of sale was issued to him as per Annex G of this partial stipulation of facts;

9. That on April 16, 1962, the defendant Arsenio Reyes, executed an Affidavit of Consolidation of Ownership, a copy of which is hereto attached as Annex H of this partial stipulation of facts;

10. That on May 9, 1962, the Rural Bank of Caloocan Incorporated executed the final deed of sale in favor of the defendant, Arsenio Reyes, in the amount of P7,000.00, a copy of which is attached as Annex I of this partial stipulation of facts;

11. That the Register of Deeds of the City of Manila issued the Transfer Certificate of Title No. 67297 in favor of the defendant, Arsenio Reyes, in lieu of Transfer Certificate of Title No. 7419 which was in the name of plaintiff, Maxima Castro, which was cancelled;

12. That after defendant, Arsenio Reyes, had consolidated his title to the property as per T.C.T. No. 67299, plaintiff filed a notice of lis pendens with the Register of Deeds of Manila and the same was annotated in the back of T.C.T. No. 67299 as per Annex J of this partial stipulation of facts; and

13. That the parties hereby reserved their rights to present additional evidence on matters not covered by this partial stipulation of facts.

WHEREFORE, it is respectfully prayed that the foregoing partial stipulation of facts be approved and admitted by this Honorable Court.

As for the evidence presented during the trial, We quote from the decision of the Court of Appeals the statement thereof, as follows:

In addition to the foregoing stipulation of facts, plaintiff claims she is a 70-year old widow who cannot read and write the English language; that she can speak the Pampango dialect only; that she has only finished second grade (t.s.n., p. 4, December 11, 1964); that in December 1959, she needed money in the amount of P3,000.00 to invest in the business of the defendant spouses Valencia, who accompanied her to the defendant bank for the purpose of securing a loan of P3,000.00; that while at the defendant bank, an employee handed to her several forms already prepared which she was asked to sign on the places indicated, with no one explaining to her the nature and contents of the documents; that she did not even receive a copy thereof; that she was given a check in the amount of P2,882.85 which she delivered to defendant spouses; that sometime in February 1961, she received a letter from the Acting Deputy Sheriff of Manila, regarding the extrajudicial foreclosure sale of her property; that it was then when she learned for the first time that the mortgage indebtedness secured by the mortgage on her property was P6,000.00 and not P3,000.00; that upon investigation of her lawyer, it was found that the papers she was made to sign were:

(a) Application for a loan of P3,000.00 dated December 7, 1959 (Exh. B-1 and Exh. 1);

(b) Promissory note dated December 11, 1959 for the said loan of P3,000.00 (Exh- B-2);

(c) Promissory note dated December 11, 1959 for P3,000.00 with the defendants Valencia spouses as borrowers and appellee as co-maker (Exh. B-4 or Exh. 2).

The auction sale set for March 10, 1961 was postponed co April 10, 1961 upon the request of defendant spouses Valencia who needed more time within which to pay their loan of P3,000.00 with the defendant bank; plaintiff claims that when she filed the complaint she deposited with the Clerk of Court the sum of P3,383.00 in full payment of her loan of P3,000.00 with the defendant bank, plus interest at the rate of 12% per annum up to April 3, 1961 (Exh. D).

As additional evidence for the defendant bank, its manager declared that sometime in December, 1959, plaintiff was brought to the Office of the Bank by an employee- (t.s.n., p 4, January 27, 1966). She wept, there to inquire if she could get a loan from the bank. The claims he asked the amount and the purpose of the loan and the security to he given and plaintiff said she would need P3.000.00 to be invested in a drugstore in which she was a partner (t.s.n., p. 811. She offered as security for the loan her lot and house at Carola St., Sampaloc, Manila, which was promptly investigated by the defendant bank's inspector. Then a few days later, plaintiff came back to the bank with the wife of defendant Valencia A date was allegedly set for plaintiff and the defendant spouses for the processing of their application, but on the day fixed, plaintiff came without the defendant spouses. She signed the application and the other papers pertinent to the loan after she was interviewed by the manager of the defendant. After the application of plaintiff was made, defendant spouses had their application for a loan also prepared and signed (see Exh. 13). In his interview of plaintiff and defendant spouses, the manager of the bank was able to gather that plaintiff was in joint venture with the defendant spouses wherein she agreed to invest P3,000.00 as additional capital in the laboratory owned by said spouses (t.s.n., pp. 16-17) 3

The Court of Appeals, upon evaluation of the evidence, affirmed in toto the decision of the Court of First Instance of Manila, the dispositive portion of which reads:

FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment and:

(1) Declares that the promissory note, Exhibit '2', is invalid as against plaintiff herein;

(2) Declares that the contract of mortgage, Exhibit '6', is null and void, in so far as the amount thereof exceeds the sum of P3,000.00 representing the principal obligation of plaintiff, plus the interest thereon at 12% per annum;

(3) Annuls the extrajudicial foreclosure sale at public auction of the mortgaged property held on April 11, 1961, as well as all the process and actuations made in pursuance of or in implementation thereto;

(4) Holds that the total unpaid obligation of plaintiff to defendant Rural Bank of Caloocan, Inc., is only the amount of P3,000.00, plus the interest thereon at 12% per annum, as of April 3, 1961, and orders that plaintiff's deposit of P3,383.00 in the Office of the Clerk of Court be applied to the payment thereof;

(5) Orders defendant Rural Bank of Caloocan, Inc. to return to defendant Arsenio Reyes the purchase price the latter paid for the mortgaged property at the public auction, as well as reimburse him of all the expenses he has incurred relative to the sale thereof;

(6) Orders defendants spouses Severino D. Valencia and Catalina Valencia to pay defendant Rural Bank of Caloocan, Inc. the amount of P3,000.00 plus the corresponding 12% interest thereon per annum from December 11, 1960 until fully paid; and

Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and spouses Severino D. Valencia and Catalina Valencia to pay plaintiff, jointly and severally, the sum of P600.00 by way of attorney's fees, as well as costs.

In view of the conclusion that the court has thus reached, the counterclaims of defendant Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes are hereby dismissed, as a corollary

The Court further denies the motion of defendant Arsenio Reyes for an Order requiring Maxima Castro to deposit rentals filed on November 16, 1963, resolution of which was held in abeyance pending final determination of the case on the merits, also as a consequence of the conclusion aforesaid. 4

Petitioners Bank and Jose Desiderio moved for the reconsideration 5 of respondent court's decision. The motion having been denied, 6 they now come before this Court in the instant petition, with the following Assignment of Errors, to wit:

I

THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL ANNULMENT OF THE PROMISSORY NOTE, EXHIBIT 2, AND THE MORTGAGE, EXHIBIT 6, INSOFAR AS THEY AFFECT RESPONDENT MAXIMA CASTRO VIS-A-VIS PETITIONER BANK DESPITE THE TOTAL ABSENCE OF EITHER ALLEGATION IN THE COMPLAINT OR COMPETENT PROOF IN THE EVIDENCE OF ANY FRAUD OR OTHER UNLAWFUL CONDUCT COMMITTED OR PARTICIPATED IN BY PETITIONERS IN PROCURING THE EXECUTION OF SAID CONTRACTS FROM RESPONDENT CASTRO.

II

THE COURT OF APPEALS ERRED IN IMPUTING UPON AND CONSIDERING PREJUDICIALLY AGAINST PETITIONERS, AS BASIS FOR THE PARTIAL ANNULMENT OF THE CONTRACTS AFORESAID ITS FINDING OF FRAUD PERPETRATED BY THE VALENCIA SPOUSES UPON RESPONDENT CASTRO IN UTTER VIOLATION OF THE RES INTER ALIOS ACTA RULE.

III

THE COURT OF APPEAL ERRED IN NOT HOLDING THAT, UNDER THE FACTS FOUND BY IT, RESPONDENT CASTRO IS UNDER ESTOPPEL TO IMPUGN THE REGULARITY AND VALIDITY OF HER QUESTIONED TRANSACTION WITH PETITIONER BANK.

IV

THE COURT OF APPEALS ERRED IN NOT FINDING THAT, BETWEEN PETITIONERS AND RESPONDENT CASTRO, THE LATTER SHOULD SUFFER THE CONSEQUENCES OF THE FRAUD PERPETRATED BY THE VALENCIA SPOUSES, IN AS MUCH AS IT WAS THRU RESPONDENT CASTRO'S NEGLIGENCE OR ACQUIESCENSE IF NOT ACTUAL CONNIVANCE THAT THE PERPETRATION OF SAID FRAUD WAS MADE POSSIBLE.

V

THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF THE DEPOSIT BY RESPONDENT CASTRO OF P3,383.00 WITH THE COURT BELOW AS A TENDER AND CONSIGNATION OF PAYMENT SUFFICIENT TO DISCHARGE SAID RESPONDENT FROM HER OBLIGATION WITH PETITIONER BANK.

VI

THE COURT OF APPEALS ERRED IN NOT DECLARING AS VALID AND BINDING UPON RESPONDENT CASTRO THE HOLDING OF THE SALE ON FORECLOSURE ON THE BUSINESS DAY NEXT FOLLOWING THE ORIGINALLY SCHEDULED DATE THEREFOR WHICH WAS DECLARED A HOLIDAY WITHOUT NECESSITY OF FURTHER NOTICE THEREOF.

The issue raised in the first three (3) assignment of errors is whether or not respondent court correctly affirmed the lower court in declaring the promissory note (Exhibit 2) invalid insofar as they affect respondent Castro vis-a-vis petitioner bank, and the mortgage contract (Exhibit 6) valid up to the amount of P3,000.00 only.

Respondent court declared that the consent of Castro to the promissory note (Exhibit 2) where she signed as co-maker with the Valencias as principal borrowers and her acquiescence to the mortgage contract (Exhibit 6) where she encumbered her property to secure the amount of P6,000.00 was obtained by fraud perpetrated on her by the Valencias who had abused her confidence, taking advantage of her old age and ignorance of her financial need. Respondent court added that "the mandate of fair play decrees that she should be relieved of her obligation under the contract" pursuant to Articles 24 7 and 1332 8 of the Civil Code.

The decision in effect relieved Castro of any liability to the promissory note (Exhibit 2) and the mortgage contract (Exhibit 6) was deemed valid up to the amount of P3,000.00 only which was equivalent to her personal loan to the bank.

Petitioners argued that since the Valencias were solely declared in the decision to be responsible for the fraud against Castro, in the light of the res inter alios acta rule, a finding of fraud perpetrated by the spouses against Castro cannot be taken to operate prejudicially against the bank. Petitioners concluded that respondent court erred in not giving effect to the promissory note (Exhibit 2) insofar as they affect Castro and the bank and in declaring that the mortgage contract (Exhibit 6) was valid only to the extent of Castro's personal loan of P3,000.00.

The records of the case reveal that respondent court's findings of fraud against the Valencias is well supported by evidence. Moreover, the findings of fact by respondent court in the matter is deemed final. 9 The decision declared the Valencias solely responsible for the defraudation of Castro. Petitioners' contention that the decision was silent regarding the participation of the bank in the fraud is, therefore, correct.

We cannot agree with the contention of petitioners that the bank was defrauded by the Valencias. For one, no claim was made on this in the lower court. For another, petitioners did not submit proof to support its contention.

At any rate, We observe that while the Valencias defrauded Castro by making her sign the promissory note (Exhibit 2) and the mortgage contract (Exhibit 6), they also misrepresented to the bank Castro's personal qualifications in order to secure its consent to the loan. This must be the reason which prompted the bank to contend that it was defrauded by the Valencias. But to reiterate, We cannot agree with the contention for reasons above-mentioned. However, if the contention deserves any consideration at all, it is in indicating the admission of petitioners that the bank committed mistake in giving its consent to the contracts.

Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the Valencias both Castro and the bank committed mistake in giving their consents to the contracts. In other words, substantial mistake vitiated their consents given. For if Castro had been aware of what she signed and the bank of the true qualifications of the loan applicants, it is evident that they would not have given their consents to the contracts.

Pursuant to Article 1342 of the Civil Code which provides:

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual.

We cannot declare the promissory note (Exhibit 2) valid between the bank and Castro and the mortgage contract (Exhibit 6) binding on Castro beyond the amount of P3,000.00, for while the contracts may not be invalidated insofar as they affect the bank and Castro on the ground of fraud because the bank was not a participant thereto, such may however be invalidated on the ground of substantial mistake mutually committed by them as a consequence of the fraud and misrepresentation inflicted by the Valencias. Thus, in the case of Hill vs. Veloso, 10 this Court declared that a contract may be annulled on the ground of vitiated consent if deceit by a third person, even without connivance or complicity with one of the contracting parties, resulted in mutual error on the part of the parties to the contract.

Petitioners argued that the amended complaint fails to contain even a general averment of fraud or mistake, and its mention in the prayer is definitely not a substantial compliance with the requirement of Section 5, Rule 8 of the Rules of Court. The records of the case, however, will show that the amended complaint contained a particular averment of fraud against the Valencias in full compliance with the provision of the Rules of Court. Although, the amended complaint made no mention of mistake being incurred in by the bank and Castro, such mention is not essential in order that the promissory note (Exhibit 2) may be declared of no binding effect between them and the mortgage (Exhibit 6) valid up to the amount of P3,000.00 only. The reason is that the mistake they mutually suffered was a mere consequence of the fraud perpetrated by the Valencias against them. Thus, the fraud particularly averred in the complaint, having been proven, is deemed sufficient basis for the declaration of the promissory note (Exhibit 2) invalid insofar as it affects Castro vis-a-vis the bank, and the mortgage contract (Exhibit 6) valid only up to the amount of P3,000.00.

The second issue raised in the fourth assignment of errors is who between Castro and the bank should suffer the consequences of the fraud perpetrated by the Valencias.

In attributing to Castro an consequences of the loss, petitioners argue that it was her negligence or acquiescence if not her actual connivance that made the fraud possible.

Petitioners' argument utterly disregards the findings of respondent Court of Appeals wherein petitioners' negligence in the contracts has been aptly demonstrated, to wit:

A witness for the defendant bank, Rodolfo Desiderio claims he had subjected the plaintiff-appellee to several interviews. If this were true why is it that her age was placed at 61 instead of 70; why was she described in the application (Exh. B-1-9) as drug manufacturer when in fact she was not; why was it placed in the application that she has income of P20,000.00 when according to plaintiff-appellee, she his not even given such kind of information -the true fact being that she was being paid P1.20 per picul of the sugarcane production in her hacienda and 500 cavans on the palay production. 11

From the foregoing, it is evident that the bank was as much , guilty as Castro was, of negligence in giving its consent to the contracts. It apparently relied on representations made by the Valencia spouses when it should have directly obtained the needed data from Castro who was the acknowledged owner of the property offered as collateral. Moreover, considering Castro's personal circumstances – her lack of

education, ignorance and old age – she cannot be considered utterly neglectful for having been defrauded. On the contrary, it is demanded of petitioners to exercise the highest order of care and prudence in its business dealings with the Valencias considering that it is engaged in a banking business –a business affected with public interest. It should have ascertained Castro's awareness of what she was signing or made her understand what obligations she was assuming, considering that she was giving accommodation to, without any consideration from the Valencia spouses.

Petitioners further argue that Castro's act of holding the Valencias as her agent led the bank to believe that they were authorized to speak and bind her. She cannot now be permitted to deny the authority of the Valencias to act as her agent for one who clothes another with apparent authority as her agent is not permitted to deny such authority.

The authority of the Valencias was only to follow-up Castro's loan application with the bank. They were not authorized to borrow for her. This is apparent from the fact that Castro went to the Bank to sign the promissory note for her loan of P3,000.00. If her act had been understood by the Bank to be a grant of an authority to the Valencia to borrow in her behalf, it should have required a special power of attorney executed by Castro in their favor. Since the bank did not, We can rightly assume that it did not entertain the notion, that the Valencia spouses were in any manner acting as an agent of Castro.

When the Valencias borrowed from the Bank a personal loan of P3,000.00 evidenced by a promissory note (Exhibit 2) and mortgaged (Exhibit 6) Castro's property to secure said loan, the Valencias acted for their own behalf. Considering however that for the loan in which the Valencias appeared as principal borrowers, it was the property of Castro that was being mortgaged to secure said loan, the Bank should have exercised due care and prudence by making proper inquiry if Castro's consent to the mortgage was without any taint or defect. The possibility of her not knowing that she signed the promissory note (Exhibit 2) as co-maker with the Valencias and that her property was mortgaged to secure the two loans instead of her own personal loan only, in view of her personal circumstances – ignorance, lack of education and old age – should have placed the Bank on prudent inquiry to protect its interest and that of the public it serves. With the recent occurrence of events that have supposedly affected adversely our banking system, attributable to laxity in the conduct of bank business by its officials, the need of extreme caution and prudence by said officials and employees in the discharge of their functions cannot be over-emphasized.

Question is, likewise, raised as to the propriety of respondent court's decision which declared that Castro's consignation in court of the amount of P3,383.00 was validly made. It is contended that the consignation was made without prior offer or tender of payment to the Bank, and it therefore, not valid. In holding that there is a substantial compliance with the provision of Article 1256 of the Civil Code, respondent court considered the fact that the Bank was holding Castro liable for the sum of P6,000.00 plus 12% interest per annum, while the amount consigned was only P3,000.00 plus 12% interest; that at the time of consignation, the Bank had long foreclosed the mortgage extrajudicially and the sale of the mortgage property had already been scheduled for April 10, 1961 for non-payment of the obligation, and that despite the fact that the Bank already knew of the deposit made by Castro because the receipt of the deposit was attached to the record of the case, said Bank had not made any claim of such deposit, and that therefore, Castro was right in thinking that it was futile and useless for her to make previous offer and tender of payment directly to the Bank only in the aforesaid amount of P3,000.00 plus 12% interest. Under the foregoing circumstances, the consignation made by Castro was valid. if not under the strict provision of the law, under the more liberal considerations of equity.

The final issue raised is the validity or invalidity of the extrajudicial foreclosure sale at public auction of the mortgaged property that was held on April 11, 1961.

Petitioners contended that the public auction sale that was held on April 11, 1961 which was the next business day after the scheduled date of the sale on April 10, 1961, a special public holiday, was permissible and valid pursuant to the provisions of Section 31 of the Revised Administrative Code which ordains:

Pretermission of holiday. – Where the day, or the last day, for doing any act required or permitted by law falls on a holiday, the act may be done on the next succeeding business day.

Respondent court ruled that the aforesaid sale is null and void, it not having been carried out in accordance with Section 9 of Act No. 3135, which provides:

Section 9. – 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.

We agree with respondent court. The pretermission of a holiday applies only "where the day, or the last day for doing any act required or permitted by law falls on a holiday," or when the last day of a given period for doing an act falls on a holiday. It does not apply to a day fixed by an office or officer of the government for an act to be done, as distinguished from a period of time within which an act should be done, which may be on any day within that specified period. For example, if a party is required by law to file his answer to a complaint within fifteen (15) days from receipt of the summons and the last day falls on a holiday, the last day is deemed moved to the next succeeding business day. But, if the court fixes the trial of a case on a certain day but the said date is subsequently declared a public holiday, the trial thereof is not automatically transferred to the next succeeding business day. Since April 10, 1961 was not the day or the last day set by law for the extrajudicial foreclosure sale, nor the last day of a given period but a date fixed by the deputy sheriff, the aforesaid sale cannot legally be made on the next succeeding business day without the notices of the sale on that day being posted as prescribed in Section 9, Act No. 3135.

WHEREFORE, finding no reversible error in the judgment under review, We affirm the same in toto. No pronouncement as to cost.

SO ORDERED.

Teehankee (Acting, C.J.) Makasiar, Fernandez, Guerrero and Melencio-Herrera, JJ., concur.

G.R. No. 3227            March 22, 1907

PEDRO ALCANTARA, plaintiff-appellee, vs.AMBROSIO ALINEA, ET AL., defendants-appellants.

S.D. Reyes for appellants.J. Gerona for appellee.

TORRES, J.:

On the 13th day of March, 1905, the plaintiff filed a complaint in the Court of First Instance of La Laguna, praying that judgment be rendered in his behalf ordering the defendants to de liver to him the house and lot claimed, and to pay him in addition thereto as rent the sum of 8 pesos per month from February of that year, and to pay the costs of the action; and the plaintiff alleged in effect that on the 29th day of February, 1904, the defendants, Ambrosio Alinea and Eudosia Belarmino, borrowed from him the sum of 480 pesos, payable in January of said year 1905 under

the agreement that if, at the expiration of the said period, said amount should not be paid it would be understood that the house and lot, the house being constructed of strong materials, owned by the said defendants and located in the town of San Pablo on the street of the same name, Province of La Laguna, be considered as absolutely sold to the plaintiff for the said sum; that the superficial extent and boundaries of said property are described in the complaint; and that, notwithstanding that the time for the payment of said sum has expired and no payment has been made, the defendants refuse to deliver to plaintiff the said property, openly violating that which they contracted to do and depriving him to his loss of the rents which plaintiff should received, the same counting from February, 1905.

The defendants, after the overruling of a demurrer to the complaint herein, answered denying generally and specifically all the allegations contained in the complaint, except those which were expressly admitted, and alleged that the amount claimed included the interest; and that the principal borrowed was only 200 pesos and that the interest was 280 pesos, although in drawing the document by mutual consent of the parties thereto the amount of indebtedness was made to appear in the sum of 480 pesos; and that as their special defense defendants alleged that they offered to pay the plaintiff the sum of 480 pesos, but the plaintiff had refused to accept the same, therefore they persisted in making said offer and tender of payment, placing at the disposal of the plaintiff the said 480 pesos first tendered; and defendants asked for the costs of action.

After having taken the evidence of both parties and attaching the documents presented in evidence to the record, the judge on November 27, 1905, rendered a judgment ordering the defendants to deliver to the plaintiff the house and lot, the object of this litigation, and to pay the costs of the action, not making any finding upon the question of loss or damages by reason of the absence of proof on these points. The defendants duly took exception to this decision, and asked for a new trial of the case on the ground that the findings of the court below in its decision were plainly contrary to law, which motion was overruled and from which ruling defendants also excepted.

We have in this case a contract of loan and a promise of sale of a house and lot, the price of which should be the amount loaned, if within a fixed period of time such amount should not be paid by the debtor-vendor of the property to the creditor-vendee of same.

Either one of the contracts are perfectly legal and both are authorized respectively by articles 1451, 1740, and 1753, and those following, of the Civil Code. The fact that the parties have agreed at the same time, in such a manner that the fulfillment of the promise of sale would depend upon the nonpayment or return of the amount loaned, has not produced any charge in the nature and legal conditions of either contract, or any essential defect which would tend to nullify the same.

If the promise of sale is not vitiated because, according to the agreement between the parties thereto, the price of the same is to be the amount loaned and not repaid, neither would the loan be null or illegal, for the reason that the added agreement provides that in the event of failure of payment the sale of property as agreed will take effect, the consideration being the amount loaned and not paid. No article of the Civil Code, under the rules or regulations of which such double contract was executed, prohibits expressly, or by inference from any of its provisions,

that an agreement could not be made in the form in which the same has been executed; on the contrary, article 1278 of the aforesaid code provides that "contracts shall be binding, whatever may be the form in which they may have been executed, provided the essential conditions required for their validity exist." This legal prescription appears firmly sustained by the settled practice of the courts.

The property, the sale of which was agreed to by the debtors, does not appear mortgaged in favor of the creditor, because in order to constitute a valid mortgage it is indispensable that the instrument be registered in the Register of Property, in accordance with article 1875 of the Civil Code, and the document of contract, Exhibit A, does not constitute a mortgage, nor could it possibly be a mortgage, for the reason of said document is not vested with the character and conditions of a public instrument.

By the aforesaid document, Exhibit A, said property could not be pledged, not being personal property, and notwithstanding the said double contract the debtor continued in possession thereof and the said property has never been occupied by the creditor.

Neither was there ever nay contract of antichresis by reason of the said contract of loan, as is provided in articles 1881 and those following of the Civil Code, inasmuch as the creditor-plaintiff has never been in possession thereof, nor has he enjoyed the said property, nor for one moment ever received its rents; therefore, there are no proper terms in law, taking into consideration the terms of the conditions contained in the aforesaid contract, whereby this court can find that the contract was null, and under no consideration whatever would it be just to apply to the plaintiff articles 1859 and 1884 of the same code.

The contract ( pactum commissorium) referred to in Law 41, title 5, and law 12, title 12, of the fifth Partida, and perhaps included in the prohibition and declaration of nullity expressed in articles 1859 and 1884 of the Civil Code, indicates the existence of the contracts of mortgage or of pledge or that of antichresis, none of which have coincided in the loan indicated herein.

It is a principle in law, invariably applied by the courts in the decisions of actions instituted in the matter of compliance with obligations, that the will of the contracting parties is the law of contracts and that a man obligates himself to that to which he promises to be bound, a principle in accordance with Law 1, title 1, book 10 of the Novisima Recopilacion, and article 1091 of the Civil Code. That which is agreed to in a contract is law between the parties, a doctrine established, among others, in judgments of the supreme court of Spain of February 20, 1897, and February 13, 1904.

It was agreed between plaintiff and defendants herein that if defendants should not pay the loan of 480 pesos in January, 1905, the property belonging to the defendants and described in the contract should remain sold for the aforesaid sum, and such agreement must be complied with, inasmuch as there is no ground in law to oppose the compliance with that which has been agreed upon, having been so acknowledged by the obligated parties.

The supreme court of Spain, applying the aforementioned laws of Spanish origin to a similar case, establishes in its decision of January 16, 1872, the following legal doctrine:

Basing the complaint upon the obligation signed by the debtor, which judicially recognized his signature; and after confessing to have received from the plaintiff a certain amount, binding himself to return same to the satisfaction of the plaintiff within the term of four years, or in case of default to transfer direct domain of the properties described in the obligation and to execute the necessary sale; and the term having expired and the aforesaid amount not having been paid, said plaintiff has his right free from impediment to claim same against the heirs of the debtor.

The document of contract has been recognized by the defendant Alinea and by the witnesses who signed same with him, being therefore an authentic and efficacious document, in accordance with article 1225 of the Civil Code; and as the amount loaned has not been paid and continues in possession of the debtor, it is only just that the promise of sale be carried into effect, and the necessary instrument be executed by the vendees.

Therefore, by virtue of the reasons given above and accepting the findings given in the judgment appealed from, we affirm the said judgment herein, with the costs against the appellants.

After expiration of twenty days from the date of the notification of this decision let judgment be entered in accordance herewith and ten days thereafter let the case be remanded to the court from whence it came for proper action. So ordered.

Arellano, C.J., Mapa, Johnson, and Tracey, JJ., concur.

G.R. No. 125055 October 30, 1998

A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner, vs.COURT OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P. JAVILLONAR, respondents.

 

MENDOZA, J.:

This is a petition for review on certiorari of the decision rendered on February 29, 1996 by the Court of Appeals 1 reversing, in toto, the decision of the Regional Trial Court of Pasig City in Civil Case No. 62290, as well as the appellate court's resolution of May 7, 1996 denying reconsideration.

Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to private respondents, the spouses Romulo and Erlinda Javillonar, in consideration of which the latter executed the following documents: (a) a promissory note, dated November 27, 1991, stating an interest charge of 4% per month for six months; (b) a deed of mortgage over realty covered by TCT No. 58748, together with the improvements thereon; and (c) an undated deed of sale of the mortgaged property in favor of the mortgagee, petitioner A. Francisco Realty. 2

The interest on the said loan was to be paid in four installments: half of the total amount agreed upon (P900,000.00) to be paid in advance through a deduction from the proceeds of the loan, while the balance to be paid monthly by means of checks post-dated March 27, April 27, and May 27, 1992. The promissory note expressly provided that upon "failure of the MORTGAGOR (private respondents) to pay the interest without prior arrangement with the MORTGAGEE (petitioner), full possession of the property will be transferred and the deed of sale will be registered. 3 For this purpose, the owner's duplicate of TCT No. 58748 was delivered to petitioner A. Francisco Realty.

Petitioner claims that private respondents failed to pay the interest and, as a consequence, it registered the sale of the land in its favor on February 21, 1992. As a result, TCT No. 58748 was cancelled and in lieu thereof TCT No. PT-85569 was issued in the name of petitioner A. Francisco Realty. 4

Private respondents subsequently obtained an additional loan of P2.5 Million from petitioner on March 13, 1992 for which they signed a promissory note which reads:

PROMISSORY NOTE

For value received I promise to pay A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, the additional sum of Two Million Five Hundred Thousand Pesos (P2,500,000.00) on or before April 27, 1992, with interest at the rate of four percent (4%) a month until fully paid and if after the said date this note and/or the other promissory note of P7.5 Million remains unpaid and/or unsettled, without any need for prior demand or notification, I promise to vacate voluntarily and willfully and/or allow A.FRANCISCO REALTY AND DEVELOPMENT CORPORATION to appropriate and occupy for their exclusive use the real property located at 56 Dragonfly, Valle Verde VI, Pasig, Metro Manila. 5

Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly interest from May 1992, plus surcharges. As respondent spouses refused to vacate, petitioner filed the present action for possession before the Regional Trial Court in Pasig City. 6

In their answer, respondents admitted liability on the loan but alleged that it was not their intent to sell the realty as the undated deed of sale was executed by them merely as an additional security for the payment of their loan. Furthermore, they claimed that they were not notified of the registration of the sale in favor of petitioner A. Francisco Realty and that there was no interest then unpaid as they had in fact been paying interest even subsequent to the registration of the sale. As an alternative defense, respondents contended that the complaint was actually for ejectment and, therefore, the Regional Trial Court had no jurisdiction to try the case. As counterclaim, respondents sought the cancellation of TCT No. PT-85569 as secured by petitioner and the issuance of a new title evidencing their ownership of the property. 7

On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive portion of which reads as follows:

WHEREFORE, prescinding from the foregoing considerations, judgment is hereby rendered declaring as legal and valid, the right of ownership of A. Francisco Realty Find Development Corporation, over the property subject of this case and now registered in its name as owner thereof, under TCT No. 85569 of the Register of Deeds of Rizal, situated at No. 56 Dragonfly Street, Valle Verde VI, Pasig, Metro Manila.

Consequently, defendants are hereby ordered to cease and desist from further committing acts of dispossession or from withholding possession from plaintiff of the said property as herein described and specified.

Claim for damages in all its forms, however, including attorney's fees, are hereby denied, no competent proofs having been adduced on record, in support thereof. 8

Respondent spouses appealed to the Court of Appeals which reversed the decision of the trial court and dismissed the complaint against them. The appellate court ruled that the Regional Trial Court had no jurisdiction over the case because it was actually an action for unlawful detainer which is exclusively cognizable by municipal trial courts. Furthermore, it ruled that, even presuming jurisdiction of the trial court, the deed of sale was void for being in fact a pactum commissorium which is prohibited by Art. 2088 of the Civil Code.

Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of Appeals denied the motion in its resolution, dated May 7, 1996. Hence, this petition for review on certiorari raising the following issues:

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL TRIAL COURT HAD NO JURISDICTION OVER THE COMPLAINT FILED BY THE PETITIONER.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE CONTRACTUAL DOCUMENTS SUBJECT OF THE INSTANT CASE ARE CONSTITUTIVE OF PACTUM COMMISSORIUM AS DEFINED UNDER ARTICLE 2088 OF THE CIVIL CODE OF THE PHILIPPINES.

On the first issue, the appellate court stated:

Ostensibly, the cause of action in the complaint indicates a case for unlawful detainer, as contra-distinguished from accion publiciana. As contemplated by Rule 70 of the Rules of Court, an action for unlawful detainer which falls under the exclusive jurisdiction of the Metropolitan or Municipal Trial Courts, is defined as withholding from by a person from another for not more than one year, the possession of the land or building to which the latter is entitled after the expiration or termination of the supposed rights to hold possession by virtue of a contract, express or implied. (Tenorio vs. Gamboa, 81 Phil. 54; Dikit vs. Dicaciano, 89 Phil. 44). If no action is initiated for forcible entry or unlawful detainer within the expiration of the 1 year period, the case may still be filed under the plenary action to recover possession by accion publiciana before the Court of First Instance (now the Regional Trial Court) (Medina vs. Valdellon, 63 SCRA 278). In plain language, the case at bar is a legitimate ejectment case filed within the 1 year period from the jurisdictional demand to vacate. Thus, the Regional Trial Court has no jurisdiction over the case. Accordingly, under Section 33 of B.P. Blg. 129 Municipal Trial Courts are vested with the exclusive original jurisdiction over forcible entry and unlawful detainer case. (Sen Po Ek Marketing Corp. vs. CA, 212 SCRA 154 [1990]) 9

We think the appellate court is in error. What really distinguishes an action for unlawful detainer from a possessory action (accion publiciana) and from a reivindicatory action (accion reivindicatoria) is that the first is limited to the question of possession de facto.

An unlawful detainer suit (accion interdictal) together with forcible entry are the two forms of an ejectment suit that may be filed to recover possession of real property. Aside from the summary action of ejectment, accion publiciana or the plenary action to recover the right of possession and accion reivindicatoria or the action to recover ownership which includes recovery of possession, make up the three kinds of actions to judicially recover possession.

Illegal detainer consists in withholding by a person from another of the possession of a land or building to which the latter is entitled after the expiration or termination of the former's right to hold possession by virtue of a contract, express or implied. An ejectment suit is brought before the proper inferior court to recover physical possession only or possession de facto and not possession de jure, where dispossession has lasted for not more than one year. Forcible entry and unlawful detainer are quieting processes and the one-year time bar to the suit is in pursuance of the summary nature of the action. The use of summary procedure in ejectment cases is intended to provide an expeditious means of protecting actual possession or right to possession of the property. They are not processes to determine the actual title to an estate. If at all, inferior courts are empowered to rule on the question of ownership raised by the defendant in such suits,

only to resolve the issue of possession. Its determination on the ownership issue is, however, not conclusive. 10

The allegations in both the original and the amended complaints of petitioner before the trial court clearly raise issues involving more than the question of possession, to wit: (a) the validity of the Transfer of ownership to petitioner; (b) the alleged new liability of private respondents for P400,000.00 a month from the time petitioner made its demand on them to vacate; and (c) the alleged continuing liability of private respondents under both loans to pay interest and surcharges on such. As petitioner A. Francisco Realty alleged in its amended complaint:

5. To secure the payment of the sum of 7.5 Million together with the monthly interest, the defendant spouses agreed to execute a Deed of Mortgage over the property with the express condition that if and when they fail to pay monthly interest or any infringement thereof they agreed to convert the mortgage into a Deed of Absolute Sale in favor of the plaintiff by executing Deed of Sale thereto, copy of which is hereto attached and incorporated herein as Annex "A";

6. That in order to authorize the Register of Deeds into registering the Absolute Sale and transfer to the plaintiff, defendant delivered unto the plaintiff the said Deed of Sale together with the original owner's copy of Transfer Certificate of Title No. 58748 of the Registry of Rizal, copy of which is hereto attached and made an integral part herein as Annex "B";

7. That defendant spouses later secured from the plaintiff an additional loan of P2.5 Million with the same condition as aforementioned with 4% monthly interest;

8. That defendants spouses failed to pay the stipulated monthly interest and as per agreement of the parties, plaintiff recorded and registered the Absolute Deed of Sale in its favor on and was issued Transfer Certificate of Title No. PT-85569, copy of which is hereto attached and incorporated herein as Annex "C";

9. That upon registration and transfer of the Transfer Certificate of Title in the name of the plaintiff, copy of which is hereto attached and incorporated herein as Annex "C", plaintiff demanded the surrender of the possession of the above-described parcel of land together with the improvements thereon, but defendants failed and refused to surrender the same to the plaintiff without justifiable reasons thereto; Neither did the defendants pay the interest of 4% a month from May, 1992 plus surcharges up to the present;

10. That it was the understanding of the parties that if and when the defendants shall fail to pay the interest due and that the Deed of Sale be registered in favor of plaintiff, the defendants shall pay a monthly rental of P400,000.00 a month until they vacate the premises, and that if they still fail to pay as they are still failing to pay the amount of P400,000.00 a month as rentals and/or interest, the plaintiff shall take physical possession of the said property; 11

It is therefore clear from the foregoing that petitioner A. Francisco Realty raised issues which involved more than a simple claim for the immediate possession of the subject property. Such issues range across the full scope of rights of the respective parties under their contractual arrangements. As held in an analogous case:

The disagreement of the parties in Civil Case No. 96 of the Justice of the Peace of Hagonoy, Bulacan extended far beyond the issues generally involved in unlawful detainer suits. The litigants therein did not raise merely the question of who among them was entitled to the possession of the fishpond of Federico Suntay. For all judicial purposes,

they likewise prayed of the court to rule on their respective rights under the various contractual documents — their respective deeds of lease, the deed of assignment and the promissory note — upon which they predicate their claims to the possession of the said fishpond. In other words, they gave the court no alternative but to rule on the validity or nullity of the above documents. Clearly, the case was converted into the determination of the nature of the proceedings from a mere detainer suit to one that is "incapable of pecuniary estimation" and thus beyond the legitimate authority of the Justice of the Peace Court to rule on. 12

Nor can it be said that the compulsory counterclaim filed by respondent spouses challenging the title of petitioner A. Francisco Realty was merely a collateral attack which would bar a ruling here on the validity of the said title.

A counterclaim is considered a complaint, only this time, it is the original defendant who becomes the plaintiff (Valisno v. Plan, 143 SCRA 502 (1986). It stands on the same footing and is to be tested by the same rules as if it were an independent action. Hence, the same rules on jurisdiction in an independent action apply to a counterclaim (Vivar v. Vivar, 8 SCRA 847 (1963); Calo v. Ajar International, Inc. v. 22 SCRA 996 (1968); Javier v. Intermediate Appellate Court, 171 SCRA 605 (1989); Quiason, Philippine Courts and Their Jurisdictions, 1993 ed., p. 203). 13

On the second issue, the Court of Appeals held that, even "on the assumption that the trial court has jurisdiction over the instant case," petitioner's action could not succeed because the deed of sale on which it was based was void, being in the nature of a pactum commissorium prohibited by Art. 2088 of the Civil Code which provides:

Art. 2088. The creditor cannot appropriate the things given by way to pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.

With respect to this question, the ruling of the appellate court should be affirmed. Petitioner denies, however, that the promissory notes contain a pactum commissorium. It contends that —

What is envisioned by Article 2088 of the Civil Code of the Philippines is a provision in the deed of mortgage providing for the automatic conveyance of the mortgaged property in case of the failure of the debtor to pay the loan (Tan v. West Coast Life Assurance Co., 54 Phil. 361). A pactum commissorium is a forfeiture clause in a deed of mortgage (Hechanova v. Adil, 144 SCRA 450; Montevergen v. Court of Appeals, 112 SCRA 641; Report of the Code Commission, 156).

Thus, before Article 2088 can find application herein, the subject deed of mortgage must be scrutinized to determine if it contains such a provision giving the creditor the right "to appropriate the things given by way of mortgage without following the procedure prescribed by law for the foreclosure of the mortgage" (Ranjo v. Salmon, 15 Phil. 436). IN SHORT, THE PROSCRIBED STIPULATION SHOULD BE FOUND IN THE MORTGAGE DEED ITSELF. 14

The contention is patently without merit. To sustain the theory of petitioner would be to allow a subversion of the prohibition in Art. 2088.

In Nakpil v. Intermediate Appellate Court, 15 which involved the violation of a constructive trust, no deed of mortgage was expressly executed between the parties in that case: Nevertheless, this Court ruled that an agreement whereby property held in trust was ceded to the trustee upon failure of the beneficiary to pay his debt to the former as secured by the said property was void for being a pactum commissorium. Itwas there held:

The arrangement entered into between the parties, whereby Pulong Maulap was to be "considered sold to him (respondent) . . ." in case petitioner fails to reimburse Valdes, must then be construed as tantamount to a pactum commissorium which is expressly prohibited by Art. 2088 of the Civil Code. For, there was to be automatic appropriation of the property by Valdez in the event of failure of petitioner to pay the value of the advances. Thus, contrary to respondent's manifestations, all the elements of a pactum commissorium were present: there was a creditor-debtor relationship between the parties; the property was used as security for the loan; and, there was automatic appropriation by respondent of Pulong Maulap in case of default of petitioner. 16

Similarly, the Court has struck down such stipulations as contained in deeds of sale purporting to be pacto de retro sales but found actually to be equitable mortgages.

It has been consistently held that the presence of even one of the circumstances enumerated in Art. 1602 of the New Civil Code is sufficient to declare a contract of sale with right to repurchase an equitable mortgage. This is so because pacto de retro sales with the stringent and onerous effects that accompany them are not favored. In case of doubt, a contract purporting to be a sale with the right to repurchase shall be construed as an equitable mortgage.

Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that complete and absolute title shall be vested on the vendee should the vendors fail to redeem the property on the specified date. Such stipulation that the ownership of the property would automatically pass to the vendee in case no redemption was effected within the stipulated period is void for being a pactum commissorium which enables the mortgagee to acquire ownership of the mortgaged property without need of foreclosure. Its insertion in the contract is an avowal of the intention to mortgage rather that to sell the property. 17

Indeed, in Reyes v. Sierra 18 this Court categorically ruled that a mortgagee's mere act of registering the mortgaged property in his own name upon the mortgagor's failure to redeem the property amounted to the exercise of the privilege of a mortgagee in a pactum commissorium.

Obviously, from the nature of the transaction, applicant's a predecessor-in-interest is a mere mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran, the mortgagor. The mortgagee, however, may recover the loan, although the mortgage document evidencing the loan was nonregistrable being a purely private instrument. Failure of mortgagor to redeem the property does not automatically vest ownership of the property to the mortgagee, which would grant the latter the right to appropriate the thing mortgaged or dispose of it. This violates the provision of Article 2088 of the New Civil Code, which reads:

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

The act of applicant in registering the property in his own name upon mortgagor's failure to redeem the property would to a pactum commissorium which is against good morals and public policy. 19

Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of respondent spouses to pay interest, ownership of the property would be automatically transferred to petitioner A. Francisco Realty and the deed of sale in its favor would be registered, are in substance a pactum commissorium. They embody the two elements of pactum commissorium as laid down in Uy Tong v. Court of Appeals, 20 to wit:

The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgagee, or dispose of the same. Any stipulation to the contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period. 21

The subject transaction being void, the registration of the deed of sale, by virtue of which petitioner A. Francisco Realty was able to obtain TCT No. PT-85569 covering the subject lot, must also be declared void, as prayed for by respondents in their counterclaim.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it dismissed petitioner's complaint against respondent spouses on the ground that the stipulations in the promissory notes are void for being a pactum commissorium, but REVERSED insofar as it ruled that the trial court had no jurisdiction over this case. The Register of Deeds of Pasig City is hereby ORDERED to CANCEL TCT No. PT-85569 issued to petitioner and ISSUE a new one in the name of respondent spouses.

SO ORDERED.

Melo, Puno and Martinez, JJ., concur.

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

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

 

DE CASTRO, J.:

Appeal from the decision dated December 29, 1966 of the Court of First Instance of Rizal Branch 1, Pasig, which declared applicant Vicente Reyes the true and rightful owner of the land covered by Plan Psu-189753 and ordered the registration of his title thereto.

On January 3, 1961, Vicente Reyes filed an application for registration of his title to a parcel of land situated in Antipolo, Rizal and covered by Plan Psu-189753 of the Bureau of Lands. In his application, he declared that he acquired the land by inheritance from his father who died sometime in 1944. Applicant is one of the heirs of the deceased Vicente Reyes Sr. but the other heirs executed a deed of quit claim in favor of the applicant.

The notice of initial hearing was published in the Official Gazette, and a copy thereof was posted in a conspicuous place in the land in question and in the municipal building of Antipolo, Rizal. An opposition was filed by the Director of Lands, Francisco Sierra and Emilio Sierra. An Order of General Default was issued on June 28, 1962. A motion to set aside an interlocutory default order was filed by Alejandra, Felimon, Aurelio, Apolonio, Constancio, Cirilo, all surnamed Sierra and Antonia Santos, thru counsel, and the trial court issued an Order on February 4, 1966 amending the general order of default so as to include the aforementioned movants as oppositors.

The case was set for hearing, and after trial the court rendered a decision, the dispositive portion of which reads as follows:

IN VIEW OF THE ABOVE CONSIDERATIONS this Court declares Vicente Reyes the true and rightful owner of the land covered by Plan, Psu-189753 and orders the registration of his title thereto, provided that the title to be issued shall be subject to a public easement of right of-way over a 2.00 meter-wide strip of the land along Lucay Street for the latter's widening and improvement.

As soon as this decision is final let, the corresponding degree be issued in favor of VICENTE REYES, widower, Pilipino, of legal age and resident of 1851 P. Guevarra Street, Santa Cruz, Manila. (P. 25, Record on Appeal).

Oppositors appealed from the aforesaid decision, with the following assignment of errors:

I

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT ARTICLES 1134 AND 1137 OF THE NEW CIVIL CODE ARE APPLICABLE TO THIS INSTANT CASE ALTHOUGH THERE WAS NO FORECLOSURE OR SALE OF THE PROPERTY TO THE HIGHEST BIDDER.

II

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT APPLICANT-APPELLEE AND HIS PREDECESSOR-IN-INTEREST HAD BEEN IN CONSTRUCTIVE POSSESSION OF THE LAND FROM APRIL 19, 1926 UP TO THE PRESENT AS SHOWING BY THE FACT THAT THEY HAD PAID THE REALTY TAXES.

III

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT BECAUSE OPPOSITORS-APPELLANTS AND THEIR

PREDECESSORS-IN-INTEREST HAD NOT TAKEN ANY ACTIVE INTEREST TO PAY REALTY TAXES SINCE 1926 AND IT WAS APPLICANT- APPELLEE AND HIS PREDECESSOR-IN-INTEREST THAT PAID THE REALTY 'TAXES FROM THE SAME PERIOD, THIS CONSTITUTES STRONG CORROBORATING EVIDENCE OF APPLICANT'S ADVERSE POSSESSION.

IV

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT DOCUMENT EXH. "D" EXECUTED BY BASILIA BELTRAN IN 1926 WAS ALREADY A CONVEYANCE OF THE LAND I N QUESTION TO VICENTE REYES AND THE FAILURE OF BASILIA BELTRAN AND HER CHILDREN TO REDEEM THE SAME, COULD BE CONSIDERED AS IF THE LAND HAD ALREADY BEEN SOLD TO HIM. (p. 2 1, Rollo.)

The land applied for was originally owned by Basilia Beltran's parents, and upon their death in 1894, Basilia inherited the property. On April 19, 1926, Basilia Beltran, a widow, borrowed from applicant's father, Vicente Reyes, Sr. the amount of P100.00 and secured the loan with the piece of land in question, AS evidenced by exhibit "D" quoted hereunder:

SA KAALAMAN NANG LAHAT NA BUMASA AT

NAKAKITA NITONG KASULATAN:

Kaming mag-kakapatid may sapat na gulang na nakalagda Sa kasulatan ito, bilang katibayan nang pag papahintulot sa aming Ina na si Bacilia Beltran na ipananagutan kay G. Vicente Reyes sa inutang ha halagang isang daan piso (P100.00) na walang anopamang pakinabang; ang isang lagay na lupa sa kallehon Sukay, Antipolo, Rizal, naliligiran nang mga lupang may titulo Torrents, expendientes Nos. 770, 1831, lote 1, 645 at 1839 lote 2, may kabu-uan humigit kumulang sa apat na raan metro; ito'y aring naiwan ng ama naming namatay na si Melecio Sierra.

Ang katotohanan kahit isangla o ipag-bile man ng tuluyan ang nasabing pag-aaral' o lupa wala kaming kinalaman, sapagkat ipinauubaya nang lubusan sa arming Ina ang kapamahalaan.

Sa katunayan nagsilagda kaming mga anak, at apo kay Esteban, sa harap nang saksing magpapatotoo.

Ngayon ika 19 nang Abril nang 1926. Antipolo, Rizal. K.P.

Lagda ni

Bacilia Beltran

Gregorio Sierra

Saksi:

-------------------------

-------------------------

Since the execution of this document, Vicente Reyes, Sr. began paying the realty taxes up to the time of his death in 1944, after which, his children continued paying the taxes. Basilia Beltran died in 1938 before Reyes could recover from the loan.

Applicant, in seeking the registration of the land, relied on his belief that the property belongs to his father who bought the same from Basilia Beltran, as borne out by his testimony during the trial on direct examination.

Q. Mr. Reyes, do you claim to be the owner of this property included or described in your application?

A Yes, sir.

Q How did you acquire this property'?

A. Since 1926 we were the ones paying the land taxes.

Q. From whom did you acquire this property?

A. Basilia Beltran.

Q. Do you mean to say that you yourself bought this property.

A. My father was the one who bought the property.

Q. What is the name of your father?

A. Vicente C. Reyes.

Q. Where is he now?

A. He is already dead.

Q. Can you inform this Honorable Court, if you know, how your father acquired this property?

A. Since 1926 my father bought that land.

Q. Was that transaction evidenced by a document?

A. Yes, there is a document.

Q. From whom did your father allegedly purchase the property?

A. Basilia Beltran.

From the above-quoted testimony of applicant, it is evident that he considered the document marked Exhibit "D as contract of Sale and not as a mortgage. Oppositors contended that the words "isinangla," "na ipananagutan sa inutang na halagang isang daang piso," "Kahit isangla o ipagbili," etc., manifest that the document should be treated as a mortgage, antichresis, or pactum commission and not as an absolute sale or pacto de retro sale. (p. 28, Brief, Oppositors-Appellants).

The Court is of the opinion that Exhibit "D" is a mortgage contract. The intention of the parties at the time of the execution of the contract must prevail, that is, the borrowing and lending of money with security. The use of the word Debt (utang) in an agreement helps to point out that the transaction was intended to be a loan with mortgage, because the term "utang" implies the existence of a creditor-debtor relationship. The ' Court has invariably upheld the validity of an agreement or understanding whereby the lender of money has taken a deed to the land as security for repayment of the loan. Thus:

The fact that the real transaction between the parties was a borrowing and lending, will, whenever, or however, it may appear, show that a deed, absolute on its face was intended as a security for money; and whenever it can be ascertained to be a security for money, it is only a mortgage, however artfully it may be disguised. (Villa vs. Santiago, 38 Phil. 163).

The whole case really turns on the question of whether the written instrument in controversy was a mortgage or a conditional sale. ... The real intention of the parties at the time the written instrument was made must concern in the interpretation given to it by the courts. ... The correct test, where it can be applied, is the continued existence of a debt or liability between the parties. If such exists, the conveyance may be held to be merely a security for the debt or an indemnity against the liability. (Cuyugan vs. Santos, 34 Phil. 112).

The Cuyugan Case quoted some provisions in Jones' Commentaries on Evidence, vol. 3, paragraphs 446-447 which are likewise applicable to the facts of the case at bar:

446. To show that instruments apparently absolute are only securities. ... It is an established doctrine that a court of equity will treat a deed, absolute in form, as a mortgage, when it is executed as security for loan of money, The court looks beyond the terms of the instrument to the real transaction; and when that is shown to be one of security and not of sale, it will give effect to the actual contract of the parties.

447. Same-Real intention of the parties to be ascertained ... As we have shown in the preceding section, the intention of the parties must govern and it matters not what peculiar form the transaction may have taken. The inquiry always is, Was a security for the loan of money or other property intended? ... A debt owing to the mortgagee, or a liability incurred for the grantor, either pre-existing or created at the time the deed is made, is essential to give the deed the character of a mortgage. The relation of debtor and creditor must appear. The existence of the debt is one on the tests. ... In construing the deed to be a mortgage, its character as such must have existed from its very inception, - created at the time the conveyance was made.

The same principle was laid down in a later case, that of Macapinlac vs. Gutierrez Rapide, 43 Phil. 781, quoting 3 Pomeroy's Equity Jurisdiction, Section .1195, wherein it was stated:

... The doctrine has been firmly established from an early day that when the character of a mortgage has attached at the commencement of the transaction, so that the instrument, whatever be its form, is regarded in equity as a mortgage, that character of mortgage must and will always continue. If the instrument is in its essence a mortgage, the parties cannot by any stipulations, however express and positive, render it anything but a mortgage or deprive it of the essential attributes belonging to a mortgage in equity.

Concerning the legal effects of such contract, Pomeroy observes:

... Whenever a deed absolute on its face is thus treated as a mortgage, the parties are clothed with all the rights, are subject to all liabilities, and are entitled to all the remedies of ordinary mortgagors and mortgagees. The grantee may maintain an action for the foreclosure of the grantor equity of redemption; the grantor may maintain an action to redeem and to compel a reconvayance upon his payment of the debt secured. If the grantee goes into possession, and as such is liable to account for the rents and profits.

Obviously, from the nature of the transaction, applicant's predecessor-in-interest is a mere mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran, the mortgagor. The mortgagee, however, may recover the loan, although the mortgage document evidencing the loan was non-registrable being a purely private instrument. Failure of mortgagor to redeem the property does not automatically vest ownership of the property to the mortgagee, which would grant the latter the right to appropriate the thing mortgaged or dispose of it. This violates the provision of Article 2088 of the New Civil Code, which reads:

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

The act of applicant in registering the property in his own name upon mortgagor's failure to redeem the property would amount to a pactum commissorium which is against good morals and public policy.

In declaring applicant as the "true and rightful owner of the land in question," the trial court held that applicant and his predecessor-in- interest acquired ownership over the property by means of prescription having been in constructive possession of the land applied for since 1926, applying Arts, 1134 and 1137 of the New Civil Code:

Art. 1134. - Ownership and other real rights over immovable property are acquired by ordinary prescription through possession of ten years.

Art. 1137. - Ownership and other real rights over immovables also prescribe through uninterrupted adverse possession thereof for thirty years, without need of title or good faith.

Applicant in his testimony on cross-examination, admitted that he and his father did not take possession of the property but only made use of the same for the purpose of spending vacation there, which practice they discontinued for the last 23 years. Possession of the property must. be in the concept of an owner. This is a fundamental principle of the law of prescription in this jurisdiction. In the case at bar, the possession of applicant was not adverse, nor continuous.

An applicant for registration of title must prove his title and should not rely on the absence or weakness of the evidence of the oppositors. For purposes of prescription, there is just title when adverse claimant came into possession of the property through one of the modes recognized by law for the acquisition of ownership (Art. 1129, New Civil Code). Just title must be proved and is never presumed (Art. 1131, New Civil Code). Mortgage does not constitute just title on the part of the mortgagee. since ownership is retained by the mortgagor. When possession is asserted to convert itself into ownership, a new right is sought to be created, and the law becomes more exacting and requires positive proof of title. Applicant failed to present sufficient evidence to prove that he is entitled to register the property. The trial court's finding that since applicant and his father had been continuously paying the realty taxes, that fact "constitutes strong corroborating evidence of applicant's adverse possession," does not carry much weight. Mere failure of the owner to pay the taxes does not warrant a conclusion that there was abandonment of a right to the property. The payment of taxes on property does not alone constitute sufficient evidence of title. (Elumbaring vs. Elumbaring, 12 Phil. 389)

The belief of applicant that he owns the property in question which he inherited from his father cannot overthrow the fact that the transaction is a mortgage. The doctrine "once a mortgage always a mortgage" has been firmly established whatever be its form. (Macapinlac vs. Gutierrez Rapide, supra) The parties cannot by any stipulation, however express and positive, render it anything but a mortgage. No right passes to applicant except that of a mortgage since one cannot acquire a right from another who was not in possession thereof A derivative right cannot rise higher than its source.

Applicant having failed to show by sufficient evidence a registrable title to the land in question, the application for registration should be dismissed.

WHEREFORE, the decision appealed from is hereby set aside, and let another one be entered ordering the registration of the title of the land in question in the name of the oppositors- appellants. The said oppositors-appellants are hereby directed to pay the applicant- appellee within ninety (90) days from the finality of this decision, the debt in the amount of P100.00 plus interest at the rate of six per cent (6%) per annum from April 19, 1926 until paid. No pronouncement as to costs.

SO ORDERED.

G.R. No. 77465 May 21, 1988

SPOUSES UY TONG & KHO PO GIOK, petitioners, vs.HONORABLE COURT OF APPEALS, HONORABLE BIENVENIDO C. EJERCITO, Judge of the Court of First Instance of Manila, Branch XXXVII and BAYANIHAN AUTOMOTIVE CORPORATION, respondents.

Platon A. Baysa for petitioner.

Manuel T. Ybarra for respondents.

 

CORTES, J.:

In the present petition, petitioners assail the validity of a deed of assignment over an apartment unit and the leasehold rights over the land on which the building housing the said apartment stands for allegedly being in the nature of a pactum commissorium.

The facts are not disputed.

Petitioners Uy Tong (also known as Henry Uy) and Kho Po Giok (SPOUSES) used to be the owners of Apartment No. 307 of the Ligaya Building, together with the leasehold right for ninety- nine (99) years over the land on which the building stands. The land is registered in the name of Ligaya Investments, Inc. as evidenced by Transfer Certificate of Title No. 79420 of the Registry of Deeds of the City of Manila. It appears that Ligaya Investments, Inc. owned the building which houses the apartment units but sold Apartment No. 307 and leased a portion of the land in which the building stands to the SPOUSES.

In February, 1969, the SPOUSES purchased from private respondent Bayanihan Automotive, Inc. (BAYANIHAN) seven (7) units of motor vehicles for a total amount of P47,700.00 payable in three (3) installments. The transaction was evidenced by a written "Agreement" wherein the terms of payment had been specified as follows:

That immediately upon signing of this Agreement, the VENDEE shall pay unto the VENDOR the amount of Seven Thousand Seven Hundred (P7,000.00) Pesos, Philippine Currency, and the amount of Fifteen Thousand (P15,000.00) Pesos shah be paid on or before March 30, 1969 and the balance of Twenty Five Thousand (P25,000.00) Pesos shall be paid on or before April 30, 1969, the said amount again to be secured by another postdated check with maturity on April 30, 1969 to be drawn by the VENDEE;

That it is fully understood that should the two (2) aforementioned checks be not honored on their respective maturity dates, herein VENDOR will give VENDEE another sixty (60) days from maturity dates, within which to pay or redeem the value of the said checks;

That if for any reason the VENDEE should fail to pay her aforementioned obligation to the VENDOR, the latter shall become automatically the owner of the former's apartment which is located at No. 307, Ligaya Building, Alvarado St., Binondo, Manila, with the only obligation on its part to pay unto the VENDEE the amount of Three Thousand Five Hundred Thirty Five (P3,535.00) Pesos, Philippine Currency; and in such event the VENDEE shall execute the corresponding Deed of absolute Sale in favor of the VENDOR and or the Assignment of Leasehold Rights. [emphasis supplied]. (Quoted in Decision in Civil Case No. 80420, Exhibit "A" of Civil Case No. 1315321].

After making a downpayment of P7,700.00, the SPOUSES failed to pay the balance of P40,000.00. Due to these unpaid balances, BAYANIHAN filed an action for specific performance against the SPOUSES docketed as Civil Case No. 80420 with the Court of First Instance of Manila.

On October 28, 1978, after hearing, judgment was rendered in favor of BAYANIHAN in a decision the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered, ordering the defendants, jointly and severally, to pay the plaintiffs, the sum of P40,000.00, with interest at the legal rate from July 1, 1970 until full payment. In the event of their failure to do so within thirty (30) days from notice of this judgment, they are hereby ordered to execute the corresponding deed of absolute sale in favor of the plaintiff and/or the assignment of leasehold rights over the defendant's apartment located at 307 Ligaya Building, Alvarado Street, Binondo, Manila, upon the payment by the plaintiff to the defendants of the sum of P3,535.00. [emphasis supplied].

Pursuant to said judgment, an order for execution pending appeal was issued by the trial court and a deed of assignment dated May 27, 1972, was executed by the SPOUSES [Exhibit "B", CFI Records, p. 127] over Apartment No. 307 of the Ligaya Building together with the leasehold right over the land on which the building stands. The SPOUSES acknowledged receipt of the sum of P3,000.00 more or less, paid by BAYANIHAN pursuant to the said judgment.

Notwithstanding the execution of the deed of assignment the SPOUSES remained in possession of the premises. Subsequently, they were allowed to remain in the premises as lessees for a stipulated monthly rental until November 30,1972.

Despite the expiration of the said period, the SPOUSES failed to surrender possession of the premises in favor of BAYANIHAN. This prompted BAYANIHAN to file an ejectment case against them in the City Court of Manila docketed as Civil Case No. 240019. This action was however dismissed on the ground that BAYANIHAN was not the real party in interest, not being the owner of the building.

On February 7, 1979, after demands to vacate the subject apartment made by BAYANIHAN's counsel was again ignored by the SPOUSES, an action for recovery of possession with damages was filed with the Court of First Instance of Manila, docketed as Civil Case No. 121532

against the SPOUSES and impleading Ligaya Investments, Inc. as party defendant. On March 17, 1981, decision in said case was rendered in favor of BAYANIHAN ordering the following:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants spouses UY TONG and KHO GIOK and defendant Ligaya Investment, Inc., dismissing defendants' counterclaim and ordering:

1. The defendants spouses UY TONG and KHO PO GIOK and any andlor persons claiming right under them, to vacate, surrender and deliver possession of Apartment 307, Ligaya Building, located at 64 Alvarado Street, Binondo, Manila to the plaintiff;

2. Ordering defendant Ligaya Investment, Inc. to recognize the right of ownership and possession of the plaintiff over Apartment No. 307, Ligaya Building;

3. Ordering Ligaya Investment, Inc. to acknowledge plaintiff as assignee-lessee in liue of defendants spouses Uy Tong and Kho Po Giok over the lot on which the building was constructed;

4. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay to the plaintiff the sum of P200.00 commencing from June, 1971 to November 30, 1972, or a total amount of P3,400.00 as rental for the apartment, and the sum of P200.00 from December 1, 1972 until the premises are finally vacated and surrendered to the plaintiff, as reasonable compensation for the use of the apartment; and

5. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay P3,000.00 as and for attorney's fees to the plaintiff, and the costs of this suit.

Not satisfied with this decision, the SPOUSES appealed to the Court of Appeals. On October 2,1984, the respondent Court of Appeals affirmed in toto the decision appealed from [Petition, Annex "A", Rollo, pp. 15-20]. A motion for reconsideration of the said decision was denied by the respondent Court in a resolution dated February 11, 1987 [Petition, Annex "C", Rollo, pp. 31- 34].

Petitioners-SPOUSES in seeking a reversal of the decision of the Court of Appeals rely on the following reasons:

I. The deed of assignment is null and void because it is in the nature of a pactum commissorium and/or was borne out of the same.

II. The genuineness and due Prosecution of the deed of assignment was not deemed admitted by petitioner.

III. The deed of assignment is unenforceable because the condition for its execution was not complied with.

IV. The refusal of petitioners to vacate and surrender the premises in question to private respondent is justified and warranted by the circumstances obtaining in the instant case.

I. In support of the first argument, petitioners bring to the fore the contract entered into by the parties whereby petitioner Kho Po Giok agreed that the apartment in question will automatically become the property of private respondent BAYANIHAN upon her mere failure to pay her obligation. This agreement, according to the petitioners is in the nature of a pactum commissorium which is null and void, hence, the deed of assignment which was borne out of the same agreement suffers the same fate.

The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of the same. Any stipulation to the contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period.

A perusal of the terms of the questioned agreement evinces no basis for the application of the pactum commissorium provision. First, there is no indication of 'any contract of mortgage entered into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks.

Second, there is no case of automatic appropriation of the property by BAYANIHAN. When the SPOUSES defaulted in their payments of the second and third installments of the trucks they purchased, BAYANIHAN filed an action in court for specific performance. The trial court rendered favorable judgment for BAYANIHAN and ordered the SPOUSES to pay the balance of their obligation and in case of failure to do so, to execute a deed of assignment over the property involved in this case. The SPOUSES elected to execute the deed of assignment pursuant to said judgment.

Clearly, there was no automatic vesting of title on BAYANIHAN because it took the intervention of the trial court to exact fulfillment of the obligation, which, by its very nature is ". . anathema to the concept of pacto commissorio" [Northern Motors, Inc. v. Herrera, G.R. No. L-32674, February 22, 1973, 49 SCRA 392]. And even granting that the original agreement between the parties had the badges of pactum commissorium, the deed of assignment does not suffer the same fate as this was executed pursuant to a valid judgment in Civil Case No. 80420 as can be gleaned from its very terms and conditions:

DEED OF ASSIGNMENT

KNOW ALL MEN BY THESE PRESENTS:

This deed made and entered into by Uy Tiong also known as Henry Uy and Kho Po Giok, both of legal age, husband and wife, respectively, and presently residing at 307 Ligaya Bldg., Alvarado St., Binondo, Manila, and hereinafter to be known and called as the ASSIGNORS, in favor of Bayanihan Automotive Corporation, an entity duly organized and existing under the laws of the Philippines, with principal business address at 1690 Otis St., Paco, Manila and hereinafter to be known and called the ASSIGNEE;

-witnesseth-

WHEREAS, the ASSIGNEE has filed a civil complaint for "Specific Performance with Damages" against the ASSIGNORS in the Court of First Instance of Manila, Branch V, said case having been docketed as Civil Case No. 80420;

WHEREAS, the ASSIGNEE was able to obtain a judgment against the ASSIGNOR wherein the latter was ordered by the court as follows, to wit:

WHEREFORE, judgment is hereby rendered ordering the defendants, jointly and severally to pay the plaintiff the sum of P40,000.00, with interest at the legal rate from July 31, 1970 until full payment. In the event of their failure to do so within thirty (30) days from notice of this judgment, they are hereby ordered to execute the corresponding deed of absolute sale in favor of the plaintiff and/or the assignment of leasehold, rights over the defendants' apartment located at No. 307 Ligaya Building, Alvarado Street, Binondo, Manila, upon the payment by the plaintiff to the defendants the sum of P 3,535.00. The defendants shall pay the costs.

WHEREAS, the court, upon petition by herein ASSIGNEE and its deposit of sufficient bond, has ordered for the immediate execution of the said decision even pending appeal of the aforesaid decision;

WHEREAS, the ASSIGNORS have elected to just execute the necessary deed of sale and/or assignment of leasehold rights over the apartment mentioned in the decision in favor of the herein ASSIGNEE;

NOW, THEREFORE, for and in consideration of the foregoing premises, the ASSIGNORS have transferred assigned and ceded, and by these presents do hereby transfer, assign and cede all their rights and interests over that place known as Apartment No. 307 at the Ligaya Building which is located at No. 864 Alvarado St., Binondo, Manila, together with the corresponding leasehold rights over the lot on which the said building is constructed, in favor of the hererein ASSIGNEE, its heirs or assigns.

IN WITNESS WHEREOF, We have hereunto signed our names this 27th day of May, 1971 at Manila, Philippines.

UY TONG/HENRY UY KHO PO GIOK

Assignor Assignor

ACR-2151166 Manila 1/13/51 ACR-C-001620

Manila March 3, 1965

This being the case, there is no reason to impugn the validity of the said deed of assignment.

II. The SPOUSES take exception to the ruling of the Court of Appeals that their failure to deny the genuineness and due execution of the deed of assignment was deemed an admission thereof. The basis for this exception is the SPOUSES' insistence that the deed of assignment having been borne out of pactum commissorio is not subject to ratification and its invalidity cannot be waived.

There is no compelling reason to reverse the abovementioned ruling of the appellate court. Considering this Court's above conclusion that the deed of assignment is not invalid, it follows that when an action founded on this written instrument is filed, the rule on contesting its genuineness and due execution must be followed.

That facts reveal that the action in Civil Case No. 121532 was founded on the deed of assignment. However, the SPOUSES, in their answer to the complaint, failed to deny under oath and specifically the genuineness and due execution of the said deed. Perforce, under Section 8, Rule 8 of the Revised Rules of Court, the SPOUSES are deemed to have admitted the deed's genuineness and due execution. Besides, they themselves admit that ". . . the contract was duly executed and that the same is genuine" [Sur-Rejoinder, Rollo, p. 67]. They cannot now claim otherwise.

III. The SPOUSES also question the enforceability of the deed of assignment. They contend that the deed is unenforceable because the condition for its execution was not complied with. What petitioners SPOUSES refer to is that portion of the disposition in Civil Case No. 80420 requiring BAYANIHAN to pay the former the sum of P 3,535.00. To buttress their claim of non- compliance, they invoke the following receipt issued by the SPOUSES to show that BAYANIHAN was P535.00 short of the complete payment.

RECEIPT

This is to acknowledge the fact that the amount of THREE THOUSAND (P3,000.00) PESOS, more or less as indicated in the judgment of the Hon. Conrado Vasquez, Presiding Judge of the Court of First Instance of Manila, Branch V, in Civil Case entitled "Bayanihan Automotive Corp. v. Pho (sic) Po Giok, etc." and docketed as Civil Case No. 80420 has been applied for the payment of the previous rentals of the property which is the subject matter of the aforesaid judgment. [emphasis supplied.]

(Sgd.) Pho (sic) Po Glok

(Sgd.) Henry Uy

August 21, 1971

The issue presented involves a question of fact which is not within this Court's competence to look into. Suffice it to say that this Court is of the view that findings and conclusion of the trial court and the Court of Appeals on the question of whether there was compliance by BAYANIHAN of its obligation under the decision in Civil Case No. 80420 to pay the SPOUSES the sum of P3,535.00 is borne by the evidence on record. The Court finds merit in the following findings of the trial court:

... Defendants 'contention that the P 3,535.00 required in the decision in Civil Case No. 80420 as a condition for the execution of the deed of assignment was not paid by the plaintiff to the defendants is belied by the fact that the defendants acknowledged payment of P3,000.00, more or less, in a receipt dated August 21, 1971. This amount was expressly mentioned in this receipt as indicated in the judgment of the Honorable Conrado Vasquez, presiding Judge of the CFI of Manila, Branch V, in Civil Case entitled Bayanihan Automotive Corp. versus Kho Po Giok, docketed as Civil Case No. 80420, and also expressly mentioned as having been applied for the payment of the previous rentals of the property subject matter of the said judgment. Nothing could be more explicit. The contention that there is still a difference of P535.00 is had to believe because the spouses Kho Po Giok and Uy Tong executed the deed of assignment without first demanding from the plaintiff the payment of P535.00. Indeed, as contended by the plaintiff, for it to refuse to pay this small amount and thus gave defendants a reason not to execute the Deed of Assignment. is hard to believe Defendants further confirm by the joint manifestation of plaintiff and defendants, duly assisted by counsel, Puerto and Associates, dated September, 1971, Exhibit "O", wherein it was stated that plaintiff has fully complied with its obligation to the defendants caused upon it (sic) by the pronouncement of the judgment as a condition for the execution of their (sic) leasehold rights of defendants, as evidenced by the receipt duly executed by the defendants, and which was already submitted in open court for the consideration of the sum of P3,535.00. [Emphasis supplied]. [Decision, Civil Case No. 121532, pp. 3-4].

This Court agrees with private respondent BAYANIHAN's reasoning that inasmuch as the decision in Civil Case No. 80420 imposed upon the parties correlative obligations which were simultaneously demandable so much so that if private respondent refused to comply with its obligation under the judgment to pay the sum of P 3,535.00 then it could not compel petitioners to comply with their own obligation to execute the deed of assignment over the subject premises. The fact that petitioners executed the deed of assignment with the assistance of their counsel leads to no other conclusion that private respondent itself had paid the full amount.

IV. Petitioners attempt to justify their continued refusal to vacate the premises subject of this litigation on the following grounds:

(a) The deed of assingnment is in the nature of a pactum commissorium and, therefore, null and void.

(b) There was no full compliance by private respondent of the condition imposed in the deed of assignment.

(c) Proof that petitioners have been allowed to stay in the premises, is the very admission of private respondent who declared that petitioners were allowed to stay in the premises until November 20, 1972. This admission is very significant. Private respondent merely stated that there was a term-until November 30, 1972-in order to give a

semblance of validity to its attempt to dispossess herein petitioners of the subject premises. In short, this is one way of rendering seemingly illegal petitioners 'possession of the premises after November 30, 1972.

The first two classifications are mere reiterations of the arguments presented by the petitioners and which had been passed upon already in this decision. As regards the third ground, it is enough to state that the deed of assignment has vested in the private respondent the rights and interests of the SPOUSES over the apartment unit in question including the leasehold rights over the land on which the building stands. BAYANIHAN is therefore entitled to the possession thereof. These are the clear terms of the deed of assignment which cannot be superseded by bare allegations of fact that find no support in the record.

WHEREFORE, the petition is hereby DENIED for lack of merit and the decision of the Court of Appeals is AFFIRMED in toto.

SO ORDERED.

G.R. No. 109696 August 14, 1995

THELMA P. OLEA, petitioner, vs.COURT OF APPEALS, ELENA VDA. DE PACARDO, JESUS PALENCIA, ELIZABETH PALENCIA AND MONSERRAT PACIENTE, respondents.

 

BELLOSILLO, J.:

This is a petition for review of the decision of the Court of Appeals affirming that of the court a quo which dismissed the complaint of petitioner for recovery of possession on the ground that the action had already prescribed and that the deed of sale with right to repurchase on which petitioner based her claim was an equitable mortgage.

On 27 January 1947 spouses Filoteo Pacardo and Severa de Pacardo executed a deed of Sale Con Pacto de Retro over Lot No. 767 of the Passi Cadastre covered by Transfer Certificate of Title No. 26424 in their name for a consideration of P950.00 in favor of Maura Palabrica, predecessor in interest of petitioner, subject to the condition that —

. . . if we, the said spouses, Filoteo Pacardo and Severa de Pacardo, our heirs, assigns, successors-in-interest, executors and administrators shall and will truly repurchase the above-described parcel of land from the said Maura Palabrica, her heirs, assigns, successors-in-interest after THREE YEARS counting from the date of the execution of this instrument, to wit, on January 27, 1950 in cash payment in the sum of Five Hundred Pesos, Philippine currency, plus Four Hundred and Fifty Pesos (P450), also lawful currency, in cash or eighteen (18) cavans of palay (Provincial Measurement) at our option, then this sale shall become null and void and of no force and effect whatsoever. On the contrary, the same will become irrevocable, definite and final and will vest complete and absolute title on the vendee

upon the premises. 1

The contract of sale with right to repurchase was acknowledged by the vendors before Notary Public Victorio Tagamolila on the same day the contract was executed in the Municipality of Passi, Province of Iloilo. The vendors also delivered to the vendee their owner's copy of the title.

After the execution of the sale, the Pacardo spouses as vendors remained in possession of the land and continued the cultivation thereof. Since the sale on 27 January 1947 up to August 1987, or for a period of about 40 years, the spouses delivered annually one-third (1/3) of the produce of the land to Maura Palabrica and kept for themselves the remaining two-thirds (2/3).

On 27 January 1950, despite the lapse of three (3) years, the Pacardo spouses did not repurchase the land but faithfully continued to give 1/3 of the produce to Maura Palabrica. When the spouses died, their son Filoteo Jr., took over the possession and assumed the cultivation of the land and, like his parents, gave 1/3 of the produce to Maura Palabrica and later to her daughter, petitioner herein, who would eventually buy from her the lot subject of the litigation.

On 22 September 1966 Maura Palabrica caused the registration of the Sale Con Pacto de Retro with the Register of Deeds of Iloilo and its annotation on Transfer Certificate of Title No. 26424 covering the subject lot.

On 10 May 1978 Maura Palabrica sold Lot No. 767 for P40,000.00 to one of her daughters, petitioner Thelma Olea. From then on it was petitioner who received the one-third (1/3) share of the annual produce of the land from Filoteo Pacardo, Jr., until he died in August 1987. His widow Elena Vda. de Pacardo however refused to give to petitioner the one-third (1/3) share of the produce. After Elena transferred residence to another barangay the spouses Jesus and Elizabeth Palencia took over the possession and cultivation of the property. Elizabeth Palencia is a sister of Filoteo Jr., and is one of the children of spouses Filoteo and Severina Pacardo. The Palencias delivered the share of the produce not to petitioner but to respondent Elena Pacardo.

Hence, on 25 January 1989, petitioner filed a complaint against Elena Pacardo and the spouses Jesus and Elizabeth Palencia for recovery of possession with damages. She alleged that she was the owner of Lot No. 767 having acquired the same from her mother Maura Palabrica through a deed of sale, who in turn acquired the lot from the spouses Filoteo and Severa Pacardo through a pacto de retro sale, and that due to the failure of the spouses to redeem the property three (3) years thereafter ownership thereof passed on to Maura Palabrica who later caused the registration of the Sale Con Pacto de Retro with the Registry of Deeds of Iloilo and its annotation on TCT No. 26424.

Private respondents Elena Vda. de Pacardo and Jesus and Elizabeth Palencia filed their answer alleging that their parents intended the disputed transaction to be an equitable mortgage and not a sale with right to repurchase. Respondent Monserrat Paciente, another daughter of the vendor-spouses Filoteo and Severa Pacardo, filed an answer in intervention raising likewise as defense that the Sale Con Pacto de Retro was indeed an equitable mortgage.

On 19 February 1991 the trial court rendered judgment dismissing the complaint. Petitioner appealed to the Court of Appeals which on 16 December 1992 affirmed the judgment of the trial court.

In the instant recourse, petitioner assails the Court of Appeals for its conclusions and findings allegedly grounded entirely on speculations, surmises, conjectures and misapprehension of facts. 2 Petitioner submits that the terms and conditions of the Sale Con Pacto de Retro between her mother Maura Palabrica and the Pacardos on 27 January 1947 are clear and leave no room for interpretation; that the parties to the transaction have specified that the consideration of the sale was P950.00 and the repurchase price was P500.00 in cash plus P450.00 cash or eighteen (18) cavans of palay at the option of the vendor-spouses in case they repurchased the property three (3) years afterwards; and that the Court of Appeals erred in holding that the repurchase price was only P450.00 or eighteen cavans of palay.

Petitioner also asserts that the failure of her mother, the vendee Maura Palabrica, to consolidate ownership under Art. 1607 of the New Civil Code should not be a ground for considering the sale to be an equitable mortgage because both parties have stipulated in the contract that when the spouses should fail to repurchase Lot No. 767 on 27 January 1950 complete and absolute title would forthwith be vested in Maura Palabrica; and that even granting that Art. 1607 of the New Civil Code, which took effect 30 August 1950, be granted retroactive effect Maura Palabrica had already acquired a vested right of ownership over the land as of 27 January 1950 which Art. 1607 can no longer invalidate under Art. 2252 of the New Civil Code. Moreover, petitioner submits that the Pacardo spouses remained in possession of the land they sold to Palabrica because of their good relations with each other and the latter consented that the spouses would be the ones to till the land.

We cannot sustain petitioner. Art. 1602 of the New Civil Code provides that the contract of sale with right to repurchase shall be presumed to be an equitable mortgage in any of the following cases: (a) when the price of the sale is unusually inadequate; (b) when the vendor remains in possession as lessee or otherwise; (c) when upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (d) when the purchaser retains for himself a part of the purchase price; (e) when the vendor binds himself to pay the taxes on the thing sold; and, (f) in any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. Being remedial in nature,

Art. 1602 may be applied retroactively to cases prior to the effectivity of the New Civil Code 3 Hence it may apply to the instant case where the deed of sale with right to repurchase was executed on 27 January 1947.

It has been held that a contract should be construed as a mortgage or a loan instead of a pacto de retro sale when its terms are ambiguous or the circumstances surrounding its execution or its performance are incompatible or inconsistent with the theory that it is a sale. 4 Even when a document appears on its face to be a sale with pacto de retro the owner of the property may prove that the contract is really a loan with mortgage by raising as an issue the fact that the document does not express the true intent and agreement of the parties. In this case, parol evidence then becomes competent and admissible to prove that the instrument was in truth and in fact given merely as a security for the repayment of a loan. And upon proof of the truth of such allegations, the court will enforce the agreement or understanding in consonance with the true intent of the parties at the time of execution of the contract. 5 This principle is applicable even if the purported Sale Con Pacto de Retro was registered in the name of the transferee and a new certificate of title was issued in the name of the latter. 6

There is no dispute that when Maura Palabrica "bought" the land on 27 January 1947 the vendors, the Pacardo spouses, remained in possession of the property and cultivated the same. Their son continued the cultivation when the spouses died, which cultivation was continued later by his widow Elena Vda. de Pacardo and then by his sister Elizabeth Palencia. During the direct examination, petitioner admitted —

Q. And who later on cultivated this lot 767 if you know?

A. When the Pacardos sold to my mother, it was the spouses who cultivated the land. When Filoteo Pacardo Sr. could no longer till, it was Filoteo Pacardo Jr. who took over. 7

Defendant-intervenor Monserrat Paciente also testified —

Q. Do you know whether any transaction was had between your mother Severa Pacardo and Maura Palabrica involving this Lot No. 767?

A. There was a transaction. Every year, dues was (sic) paid to this land when the land was mortgaged. It was a 1/3 transaction, 1/3 was given to them and 2/3 were taken by us.

Q. When did you come to know that alleged transaction between your parents and the late Maura Palabrica?

A. When I came to the age of reason, it was told to me by my parents. 8

The rule is settled that where in a contract of sale with pacto de retro the vendor remains in physical possession of the land sold as lessee or otherwise, the contract should be considered an equitable mortgage. 9 The same presumption applies when the vendee was given the right to appropriate the fruits thereof in lieu of receiving interest on the loan. 10

Moreover, the terms of the document itself can aid in arriving at the true nature of the transaction. Where the contract contains a stipulation, as in this case, that upon payment by the vendor of the purchase price within a certain period the document shall become null and void and have no legal force or effect, the purported sale should be considered a mortgage contract. In pacto de retro sale the payment of the repurchase price does not merely render the document null and void but there is the obligation on the part of the vendee to sell back the property. 11

It has been consistently held that the presence of even one of the circumstances enumerated in Art. 1602 of the New Civil Code is sufficient to declare a contract of sale with right to repurchase an equitable mortgage. 12 This is so because pacto de retro sales with the stringent and onerous effects that accompany them are not favored. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. 13

Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that complete and absolute title shall be vested on the vendee should the vendors fail to redeem the property on the specified date. Such stipulation that the ownership of the property would automatically pass to the vendee in case no redemption was effected within the stipulated period is void for being a pactum commissorium which enables the mortgagee to acquire ownership of the mortgaged property without need of foreclosure. Its insertion in the contract is an avowal of the intention to mortgage rather than to sell the property. 14

Consequently, there was no valid sale to Maura Palabrica. Ownership over the property was not transferred to her for she was merely a mortgagee. There being no title to the land that Palabrica acquired from the spouses Filoteo and Severa Pacardo, it follows that Palabrica had no title to the same land which could be conveyed to petitioner. 15 Hence there is no legal basis for petitioner to recover possession of the property.

It is clear from the contract that the amount loaned to the Pacardo spouses was P950.00 and Lot No. 767 was mortgaged as security. The spouses were allowed under the contract to pay the amount of the loan on 27 January 1950 by tendering the amount of the P500.00 in cash and P450.00 cash or 18 cavans of palay at their option. The trial court made its factual finding that from 1947 when the purported sale was executed to 1972 alone, the spouses and their successors in interest delivered a total of 1,166 cavans of palay to Maura Palabrica. The delivery of 1/3 of the annual produce to Palabrica and later to petitioner continued until 1987. Under the last paragraph of Art. 1602, this produce received by the alleged vendee as rent or otherwise should be considered as interest.

There is no dispute that the Pacardo spouses or their successors in interest failed to pay the amount of the loan on 27 January 1950 as stipulated in the contract although they continued to deliver the produce to Palabrica and petitioner until 1987 by way of interest on the loan. Even if we treat petitioner's action to recover possession of Lot No. 767 as one for the enforcement of her right as mortgagee, the same has already prescribed. Art. 1142 of the New Civil Code provides that a mortgage action prescribes after ten (10) years. Since 27 January 1950 when the Pacardo spouses failed to pay the loan up to 1989 when the action for recovery of possession was filed, thirty-nine (39) years had already elapsed. As a result, petitioner is not only barred by prescription from instituting her action; she is also guilty of estoppel by laches.

WHEREFORE, the petition is DENIED and the assailed decision of the Court of Appeals dated 16 December 1992 sustaining that of the Regional Trial Court of Iloilo City is AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. L-41395 July 31, 1986

ALMARIO T. SALTA, HONORABLE CONSTANTE A. ANCHETA, in his capacity as Presiding Judge of the Circuit Criminal Court, 5th Judicial District, HONORABLE CATALINO BALAGTAS, in his capacity as District State Prosecutor, and PEOPLE OF THE PHILIPPINES, petitioners, vs.COURT OF APPEALS and RENATO D. TAYAG, respondents,

G.R. No. L-42973 July 3l, 1986

PATROCINIO DAYRIT, petitioner, vs.HONORABLE COURT OF APPEALS, HONORABLE CONSTANTE A. ANCHETA, in his capacity as Presiding Judge of the Circuit Criminal Court, 5th Judicial District, San Fernando, Pampanga, ALMARIO T. SALTA, and PEOPLE OF THE PHILIPPINES, respondents.

 

GUTIERREZ, JR., J.:

Before us in these petitions for review are the decisions of the Court of Appeals in CA-G.R. No. SP-03464 entitled "Patrocinio Dayrit v. Honorable Constante Ancheta, et al.," and CA-G.R. No. SP-03475 entitled "Renato D. Tayag v. Hon. Constante A. Ancheta, et al." These cases are considered jointly because the conflicting decisions of the Court of Appeals in the two cases involve the same action of respondent Constante A. Ancheta in his capacity as presiding judge of the Circuit Criminal Court, Fifth Judicial District at Malolos, Bulacan.

On April 22, 1970, Almario T. Salta was charged by the Philippine National Bank before the Provincial Fiscal of Bulacan for violation of Republic Act No. 3019 (Anti-Graft and Corrupt Practices Act). The complaint was docketed as I.S. No. 3934.

On December 18, 1970, Salta filed a complaint with the Office of the Provincial Fiscal of Bulacan against Patrocinio Dayrit, Renato Tayag and others, docketed as I.S. No. 3934-A. In support of his complaint and as part of his defense in I.S. No. 3934, Salta submitted his affidavit taken December 15, 1970.

After conducting an investigation, the Provincial Fiscal of Bulacan dismissed both cases (I.S. Nos. 3934 and 3934-A) on the ground that the Philippine National Bank refused to submit documents considered by the fiscal as material.

The Philippine National Bank moved that the dismissal of I.S. No. 3934 be reconsidered. The then Department of Justice assigned District State Prosecutor Pascual C. Kliatchko to reinvestigate the case against Salta. Salta, likewise appealed the order of the Provincial Fiscal of Bulacan which dismissed I.S. No. 3934-A. Prosecutor Kliatchko reinvestigated both complaints.

Prosecutor Kliatchko conducted hearings after which: a) a prima facie case was found in I.S. No. 3934 and an information was filed against Salta with the Circuit Criminal Court at Malolos Bulacan docketed as CCC-V-668, and b) the case against Dayrit, et al. (I.S. No. 3934) was "with the approval of the Department of Justice" dismissed.

On January 17, 1973, while CCC-V-668 was pending trial before Judge Constante A. Ancheta of the Circuit Criminal Court at Malolos, Bulacan, Salta filed a complaint against Patrocinio Dayrit, Renato Tayag, Adoracion Tayag and Montano Bundad directly with Judge Ancheta for violation of the Anti-Graft Law. The complaint, docketed as Case No. CCC-V-668-A, alleged the same grounds and issues raised by Salta in the earlier complaint against Dayrit, Tayag and the others filed with the Provincial Fiscal of Bulacan. The complaint had been dismissed by both the Provincial Fiscal and District State Prosecutor Kliatchko.

On the other hand, the Philippine National Bank charged Salta before the Provincial Fiscal in Pampanga for alleged violations of the Anti-Graft Act committed by Salta in the PNB Guagua Branch where he was transferred after his Malolos assignment. After an investigation, the Provincial Fiscal of Pampanga found a prima facie case against Salta and filed the corresponding information with the Circuit Criminal Court presided by Judge Ancheta. The case was docketed as CCC-V-656.

On January 19, 1973, Judge Ancheta issued an order ruling that "unless otherwise restrained by higher courts, the requisite preliminary investigation thereon on Salta's complaint shall be conducted on January 24 and 25, 1973." Judge Ancheta further held that "until such time when the preliminary investigation shall have been terminated, the hearings on the merits of the criminal case No. CCC-V-668 is hereby suspended."

The scheduled preliminary investigation was postponed upon motions of respondents Adoracion S. Tayag, Renato D. Tayag, Montano Bundad and Patrocinio Dayrit. Subsequently, these respondents filed their respective motions to dismiss, premised on the principle that under Section 13, Rule 112 of the Revised Rules of Court, the judge may take cognizance of and conduct preliminary investigation of a complaint filed directly with him only if there has been no "... previous preliminary examination and investigation conducted by fiscal ... ."

Judge Ancheta denied the motion to dismiss. A joint motion for reconsideration filed by the respondents was likewise denied. The judge then reset the preliminary investigation.

On March 12, 1973, respondents Renato Tayag, Adoracion S. Tayag, Patrocinio Dayrit, Hector Gonzales and Montano Bundad filed with this Court a petition for certiorari and prohibition with preliminary injunction. The case was docketed as G. R. No. L-36460. The petitioner questioned the jurisdiction of the Circuit Criminal Court presided by Judge Ancheta to conduct a preliminary investigation of the complaint filed by Salta against Tayag, Dayrit and others (CCC-V-668-A) when the previous Identical complaint filed by Salta with the Provincial Fiscal of Bulacan had already been dismissed by the fiscal and, later, by the district state prosecutor for insufficiency of evidence.

On June 7, 1973, this Court issued a minute resolution dismissing the petition for lack of merit.

On June 21, 1973, Judge Ancheta acquitted Salta in Criminal Case Nos. CCC-V-668 and CCC-V-656.

On March 22, 1974, Judge Ancheta issued a resolution in connection with the preliminary investigation he conducted in CCC-V-668-A, to wit:

As far as respondents RENATO TAYAG and PATROCINIO DAYRIT are concerned, we find that a prima facie case has been established against them, sufficient to support an indictment. Pursuant to the mandate of Sec. 13, Rule 112 of the Revised Rules of Court let a Warrant of Arrest for RENATO TAYAG and PATROCINIO DAYRIT be issued. The bail bond of P 8,000.00 each is hereby fixed for their provisional liberty.

The District State Prosecutor of this Court is hereby directed to file the requisite Information in consonance with the findings made and conclusions reached within TEN (10) days from receipt of this Resolution.

This March 22, 1974 resolution of Judge Ancheta was the subject matter of two separate petitions for certiorari filed by Tayag and Dayrit with the Court of Appeals. The petition filed by Tayag was docketed as CA-G.R. No. SP-03475 while that of Dayrit was docketed as CA-G.R. No. SP-03464.

The Dayrit petition was dismissed for lack of jurisdiction. On the other hand, the Tayag petition was granted and the resolutions and orders complained of were set aside and declared as null and void.

A motion for reconsideration filed by Dayrit was denied. Likewise, a motion for reconsideration filed by Salta in CA-G.R. No. SP-03475 was denied. Hence, both Dayrit and Salta filed the present petitions for certiorari.

The main issue in both petitions is whether or not Judge Ancheta had jurisdiction to conduct the preliminary investigation over Salta's complaint against petitioner Dayrit in G.R. No. L-42973 and Renato Tayag, the respondent in G.R. No. L-41395.

We have in the past viewed with disfavor the unseemly interest of Judges of Circuit Criminal Courts to conduct preliminary investigations in cases they will later try. We stated in Collector of Customs v. Villaluz (71 SCRA 357) that the authority given to regular Courts of First Instance to conduct preliminary investigations is likewise conferred on Circuit Criminal Courts. However, we made it clear that even as said courts may have such authority, they must concentrate on hearing and deciding criminal cases filed before them instead of discharging a function that could very well be handled b the provincial or city fiscal.

A preliminary investigation is intended to protect the accused from the inconvenience, expense, and burden of defending himself in a formal trial until the reasonable probability of his guilt has first been ascertained in a fairly summary proceeding by a competent officer. It is also intended to protect the State from having to conduct useless and expensive trials (U.S. v. Marfori, 35 Phil. 666; U.S. v. Grant & Kennedy, 18 Phil. 122). Section 1, Rule 112 of the present Rules of Court states that it is conducted for the purpose of determining whether there is sufficient ground to engender a well-founded belief that a crime cognizable by the court has been committed and that the respondent is probably guilty thereof and should be held for trial. The preliminary investigation proper is, therefore, not a judicial function. It is a part of the prosecution's job, a function of the executive.

Necessity and practical considerations constrained the Government to assign this non-judicial function to justice of the peace or municipal courts and to a very limited extent to courts of first instance. There are not enough fiscals and prosecutors to investigate crimes in all municipalities all over the country. Moreover, the preliminary examination for the issuance of a warrant of arrest which only a judge could conduct subject to the qualification in the 1973 Bill of Rights, is usually integrated with the preliminary investigation proper when conducted by a court. (See Collector of Customs v. Villaluz supra at pp. 385-396 for the historical background of this procedure).

Wherever there are enough fiscals or prosecutors to conduct preliminary investigations, courts are counseled to leave this job which is essentially executive to them. The fact that a certain power is granted does not necessarily mean that it should be indiscriminately exercised.

Cognizant of the above, Section 37 of Batas Pambansa Blg. 129 reiterates the removal from Judges of Metropolitan Trial Courts in the National Capital Region the authority to conduct preliminary investigations. There are enough fiscals and prosecutors in the region to do the job. Similarly, Section 2 of Rule 112 of the 1985 Rules on Criminal Procedure no longer authorizes Regional Trial Judges to conduct preliminary investigations.

The respondent Judge conducted the questioned preliminary investigation pursuant to Section 13, Rule 112 of the Revised Rules of Court, to wit:

SEC. 13. Preliminary examination and investigation by the judge of the Court of First Instance.-Upon complaint filed directly with the Court of First Instance without previous preliminary examination and investigation conducted by the fiscal, the judge thereof shall either refer the complaint to the justice of the peace referred to in the second paragraph of section 2 hereof for preliminary examination and investigation, or himself conduct both preliminary examination and investigation simultaneously in the manner provided in the preceding petitions and should he find reasonable ground to believe that the defendant has comitted the offense charged, he shall issue a warrant for his arrest, and thereafter refer the case to the fiscal for the filing of the corresponding information.

In the instant cases, the complaint filed by Salta directly before Judge Araneta was the subject of two previous preliminary investigations conducted by first, the provincial fiscal of Bulacan and second, District State Prosecutor Kliatchko, representing the then Department of Justice. The complaint was dismissed by both investigators.

Under these circumstances, respondent Judge Ancheta had no authority to conduct another preliminary investigation against Dayrit and Tayag, more so since it is admitted that the complaint alleged exactly the same grounds and issues earlier charged against them. As we ruled in the case of People V. Hechanova (54 SCRA 101):

Relative to Section 13, Rule 112 of the New Rules of Court, it is stated thereby with pristine clarity that the complaints over which a judge of a court of first instance may conduct preliminary examination and investigation are those 'filed directly' before it, 'without previous preliminary examination and investigation conducted by the fiscal ... (Emphasis supplied).

Even if we assume that there had been no prior investigations and granting that Judge Ancheta had jurisdiction to conduct another preliminary investigation, the record shows that he behaved in such a manner that the respondents, among them Tayag and Dayrit, were virtually deprived of due process of law. We agree with the then Court of Appeals in CA-G.R. No. SP-03475 which observed:

Petitioner deplores the fact that respondent judge has shown extreme bias in favor of the private respondent and against the herein petitioner and his fellow witnesses for the Philippine National Bank, the aggrieved party. We find indeed a considerable number of circumstances that lend substance to this claim. Taken singly, these circumstances may at best be termed harsh as applied to the petitioner, but taken together in their entirety they paint a picture in which one can discern that the private respondent received all the protection in his trial while the petitioner and his fellow witnesses were virtually subjected to intimidation by the prospect of their prosecution.

When the respondent judge accepted the counter-complaints of the private respondent, which indisputably covered the same subject matter as those investigated previously by the fiscals, the respondent judge should have reacted in a different manner. Even assuming that he had the requisite jurisdiction, he should have treated the subsequent preliminary investigations as prejudicial matters to be heard before the trial of respondent Salta, which should have been held in abeyance. If he then found a prima facie case against the respondents, then he should have had the respondents included as the co-accused of Salta in the two cases (Malolos and Guagua). As it is, the trial of Salta was heard first and said accused was acquitted in the two cases, in the Malolos case on a mere demurrer to the evidence. If during the Salta's trial the respondent judge found the prosecution witnesses timid, it could only have been the consequence of the unfair and unusual procedure he had followed.

The procedure followed was just one circumstance. Other evidence of partiality can be gleaned from the records. For instance, he did not consider the evidence of herein petitioner saying that these 'partakes of defenses which will become pertinent in a trial on the merits. This is an error. If in fact said evidences were enough to overcome the judge's prima facie findings, respondent judge did not have to proceed to a 'trial on the merits' and he could have just declared the cases dismissed for insufficiency of evidence. A trial under the circumstances would be a superfluity that could only do unjust harm to the petitioner, aside from wasting the time and money of the government. Then, there are the decisions promulgated by respondent judge acquitting the private respondent Salta, Truly, after acquitting Salta, making all those pronouncements, respondent judge at that stage should have voluntarily inhibited himself from investigating the charges, based on the same set of facts, instituted by Salta against the petitioner and others. His insistence that he should investigate the complaints of Salta exposed him, and with good reason, to charges of partiality in favor of Salta. He could not have resolved the complaints with an unprejudiced mind. His indefensible attitude resulted in the deprivation of petitioner and the others of their right to due process.

Respondent judge also directed that the petitioner be arrested, fixing a bail bond of P8,000.00 for the latter's provisional liberty, even before the filing of the information. At the same time, he directed the District State Prosecutor 'to file the requisite Information in consonance with the findings made and conclusions reached herein, within ten (10) days from receipt of this Resolution.' The implication of such an unjust order is that the District State Prosecutor would be guilty of contempt of court if he disobeyed the instruction of the court. This is irregular. It is elementary that a court cannot order the prosecution to submit to such a dictation.

xxx xxx xxx

... [P]etitioner makes a serious claim which should not escape our attention and scrutiny. This is the charge made by petitioner in his Motion for Reconsideration of April 13, 1974, in which it was alleged:

(e) That this Court lacks that impartiality which is so essential and vital in the dispensation of justice, thereby vitiating the entire proceedings, is established by the fact, recently discovered by respondent Renato D. Tayag, much to his dismay and consternation, that the Presiding Judge of the Court had been seen on numerous occasions and in the unlikeliest of places, before and after the dismissal of the two (2) criminal cases against Salta, consorting, fraternizing and socializing, directly and indirectly, with said Salta. . .

Later, petitioner amplified in his above complaint with a tender and offer of proof on August 22, 1974:

(b) During the pendency of CCC-V-656 (Guagua case) and CCC-V-668 (Malolos case), as well as during the pendency of the preliminary investigations filed by complainant Salta against respondent Tayag, et al., the Presiding Judge has been a frequent guest, not a few but on many instances, of complainant Salta and not only in one province but in three (3) provinces, whereas Salta gave food and drinks to the Presiding Judge, particularly in restaurants in Malolos, San Fernando and Balanga. Respondent reiterates that he is not, as yet, making formal charges against the Presiding Judge. He merely desires to adduce evidence that there was 'extrinsic fraud' utilized by complainant Salta in obtaining the resolutions against respondents and which factor deprived the respondents of their right to due process, to a fair and impartial trial, thus vitiating the entire proceedings of the above-entitled investigations-rendering the resolutions thereof as null and void and of no legal force and effect.'

The petitioner never had a chance to present his evidence, hence, his tender and offer of proof. The petitioner claims (and this has not been disputed) 'that the respondent judge, motu propio, suppressed the issuance of the subpoena directed to the employees of the court and to the wife of the Presiding Judge on the ground that the matters sought to be proven in the hearing are irrelevant and immaterial. The Court, invoking the inherent power of the court to control its own processes, directed the clerk of court not to issue subpoena. In the case of the court's employees, the reason adduced was irrelevancy and immateriality. In the case of the wife of the Presiding Judge, the reason adduced (as appears in the TSN, but not in the July 18, 1974 order) is that a wife cannot testify against the husband without the latter's consent and, in the case of complainant Salta and his wife, in view of the opposition of complainant's counsel, the latter's Motion to Quash subpoena was granted on grounds of irrelevancy and immateriality of the evidence sought to be elicited.

We find the charge of petitioner to be very material and relevant. After receiving the Motion for Reconsideration of April 13, 1974, in which the charge was first made, respondent Judge should have lost no time in disqualifying himself and in requesting that another judge be named to take over the proceedings. The records show that he dilly-dallied on the motion for reconsideration and when he finally resolved it on September 9, 1974, it was with a defense of himself against the charges all explicatio non petita, uncalled for under the situation.

Indeed, Judge Ancheta was heedless of his duty to be impartial in conducting the preliminary investigation of the cases against Dayrit and Tayag. We remind Judge Ancheta of what we said in the case of Mateo, Jr. v. Villaluz (50 SCRA 18):

xxx xxx xxx

... There is relevance to what was said by Justice Sanchez in Pimentel v. Salanga, (21 SCRA 160) drawing' attention of all judges to appropriate guidelines in a situation where their capacity to try and decide a case fairly and judiciously comes to the fore by way of challenge from any one of the parties. A judge may not be legally prohibited from sitting in a litigation. But when suggestion is made of record that he might be induced to act in favor of one party or with bias or prejudice against a litigant arising out of a circumstance reasonably capable of inciting such a state of mind, he should conduct a careful self-examination. He should exercise his discretion in a way that the people's faith in the courts of justice is not impaired. A salutary norm is that he reflect on the probability that a losing party might nurture at the back of his mind the thought that the judge had unmeritoriously tilted the scales of justice against him. That passion on the part of a judge may be generated because of serious charges of misconduct against him by a suitor or his counsel, is not altogether remote. He is a man, subject to the frailties of other men. He should, therefore, exercise great care and caution before making up his mind to act or withdraw from a suit where that party or counsel is involved. He could in good grace inhibit himself where that case could be heard by another judge and where no appreciable prejudice would be occasioned to others involved therein. On the result of his decisions to sit or not to sit may depend to a great extent the all important confidence in the impartiality of the judiciary. If after reflection he should resolve to voluntarily desist from sitting in a case where his motives or fairness might be seriously impugned, his action is to be interpreted as giving meaning and substance to the second paragraph of Section 1, Rule 137. He serves the cause of the law who forestalls carriage of justice.' (Ibid, 167-168).

The death of Renato D. Tayag, private respondent in G.R. No. L-41395 has rendered the said petition moot and academic. This however, does not preclude this Court from cautioning trial judges on their obligation to observe "the cold neutrality of an impartial judge" at all times to satisfy the requirements of due process.

WHEREFORE, the petition in G.R. No. L-42973 is GRANTED. The questioned decision of the then Court of Appeals is hereby REVERSED and SET ASIDE. The resolution of Judge Ancheta dated March 22, 1974 is likewise SET ASIDE. The petition in G.R. No. L-41395 is DISMISSED for having become moot and academic.

SO ORDERED.

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island Savings Bank, petitioners,

vs.THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February 15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable within 3 years from the date of execution of the contract at semi-annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the P63,000.00 balance (p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering liquidity problems, issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the Board, by unanimous vote, decided as follows:

1) To prohibit the bank from making new loans and investments [except investments in government securities] excluding extensions or renewals of already approved loans, provided that such extensions or renewals shall be subject to review by the Superintendent of Banks, who may impose such limitations as may be necessary to insure correction of the bank's deficiency as soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec).

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction, specific performance or rescission and damages with preliminary injunction, alleging that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and investments, and nowhere did it prohibit island Savings Bank from releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and

Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an exercise of his right to it, which right exist independently of his right to demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court previously ruled that bank officials and employees are expected to exercise caution and prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the bank's officials and employees that before they approve the loan application of their customers, they must investigate the existence and evaluation of the properties being offered as a loan security. The recent rush of events where collaterals for bank loans turn out to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere reliance by bank officials and employees on their customer's representation regarding the loan collateral being offered as loan security is a patent non-performance of this responsibility. If ever bank officials and employees totally reIy on the representation of their customers as to the valuation of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued. The representation made by the customer is immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged over-valuation because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same issue before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either case. But since Island Savings Bank is now prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio M, Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan because he cannot possibly be in default as there was no date for him to perform his reciprocal obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy his P 17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then in existence, as there was no debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary that any consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the consideration is

subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among the successors in interest of the debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not 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 have received his share of the debt return the pledge or cancel the mortgage, to the prejudice of other heirs who have not been paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.

NO COSTS. SO ORDERED.

G.R. No. 134330            March 1, 2001

SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO, petitioners, vs.PHILIPPINE NATIONAL BANK and SPOUSES MARCOS and ARSENIA ESLABON, respondents.

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision1 and Resolution2 in CA-G.R. No. 53865 of the Court of Appeals3 dated May 21, 1998 and June 29, 1998, respectively, which modified the Decision4 dated April 30, 1996 of the Regional Trial Court of Roxas City, Branch 19 in a suit5 for Declaration of Nullity of the Contract of Mortgage.

The facts are as follows:

Eduarda Belo owned an agricultural land with an area of six hundred sixty one thousand two hundred eighty eight (661,288) square meters located in Timpas, Panitan, Capiz, covered and described in Transfer Certificate of Title (TCT for brevity) No. T-7493. She leased a portion of the said tract of land to respondents spouses Marcos and Arsenia Eslabon in connection with the said spouses' sugar plantation business. The lease contract was effective for a period of seven (7) years at the rental rate of Seven Thousand Pesos (P7,000.00) per year.

To finance their business venture, respondents spouses Eslabon obtained a loan from respondent Philippine National Bank (PNB for brevity) secured by a real estate mortgage on their own four (4) residential houses located in Roxas City, as well as on the agricultural land owned by Eduarda Belo. The assent of Eduarda Belo to the mortgage was acquired through a special power of attorney which she executed in favor of respondent Marcos Eslabon on June 15, 1982.

Inasmuch as the respondents spouses Eslabon failed to pay their loan obligation, extrajudicial foreclosure proceedings against the mortgaged properties were instituted by respondent PNB. At the auction sale on June 10, 1991, respondent PNB was the highest bidder of the foreclosed properties at Four Hundred Forty Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00).

In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo of the sale at public auction of her agricultural land on June 10, 1991 as well as the registration of the Certificate of Sheriff's Sale in its favor on July 1, 1991, and the one-year period to redeem the land.

Meanwhile, Eduarda Belo sold her right of redemption to petitioners spouses Enrique and Florencia Belo under a deed of absolute sale of proprietary and redemption rights.

Before the expiration of the redemption period, petitioners spouses Belo tendered payment for the redemption of the agricultural land in the amount of Four Hundred Eighty Four Thousand Four Hundred Eighty Two Pesos and Ninety Six Centavos (P484,482.96), which includes the bid price of respondent PNB, plus interest and expenses as provided under Act No. 3135.

However, respondent PNB rejected the tender of payment of petitioners spouses Belo. It contended that the redemption price should be the total claim of the bank on the date of the auction sale and custody of property plus charges accrued and interests amounting to Two Million Seven Hundred Seventy Nine Thousand Nine Hundred Seventy Eight and Seventy Two Centavos (P2,779,978.72).6 Petitioners spouses disagreed and refused to pay the said total claim of respondent PNB.

On June 18, 1992, petitioners spouses Belo initiated in the Regional Trial Court of Roxas City, Civil Case No. V-6182 which is an action for declaration of nullity of mortgage, with an alternative cause of action, in the event that the accommodation mortgage be held to be valid, to compel respondent PNB to accept the redemption price tendered by petitioners spouses Belo which is based on the winning bid price of respondent PNB in the extrajudicial foreclosure in the amount of Four Hundred Forty Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00) plus interest and expenses.

In its Answer, respondent PNB raised, among others, the following defenses, to wit:

xxx           xxx           xxx

77. In all loan contracts granted and mortgage contracts executed under the 1975 Revised Charter (PD 694, as amended), the proper rate of interest to be charged during the redemption period is the rate specified in the mortgage contract based on Sec. 25 7 of PD 694 and the mortgage contract which incorporates by reference the provisions of the PNB Charters. Additionally, under Sec. 78 of the General Banking Act (RA No. 337, as amended) made applicable to PNB pursuant to Sec. 38 of PD No. 694, the rate of interest collectible during the redemption period is the rate specified in the mortgage contract.

78. Since plaintiffs failed to tender and pay the required amount for redemption of the property under the provisions of the General Banking Act, no redemption was validly effected;8

xxx           xxx           xxx

After trial on the merits, the trial court rendered its Decision dated April 30, 1996 granting the alternative cause of action of spouses Belo, the decretal portion of which reads:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of plaintiffs Spouses Enrique M. Belo and Florencia G. Belo and against defendants Philippine National Bank and Spouses Marcos and Arsenia Eslabon:

1. Making the injunction issued by the court permanent, insofar as the property of Eduarda Belo covered by Transfer Certificate of Title No. T-7493 is concerned;

2. Ordering defendant Philippine National Bank to allow plaintiff Enrique M. Belo to redeem only Eduarda Belo's property situated in Brgy. Timpas, Panitan, Capiz, and covered by Transfer Certificate of Title No. T-7493 by paying only its bid price of P447,632.00, plus interest and other charges provided for in Section 30, Rule 39 of the Rules of Court, less the loan value, as originally appraised by said defendant Bank, of the foreclosed four (4) residential lots of defendants Spouses Marcos and Arsenia Eslabon; and

3. Dismissing for lack of merit the respective counterclaims of defendants Philippine National Bank and spouses Marcos and Arsenia Eslabon.

With costs against defendants.

SO ORDERED.9

Dissatisfied with the foregoing judgment of the trial court, respondent PNB appealed to the Court of Appeals. In its Decision rendered on May 21, 1998, the appellate court, while upholding the decision of the trial court on the validity of the real estate mortgage on Eduarda Belo's property, the extrajudicial foreclosure and the public auction sale, modified the trial court's finding on the appropriate redemption price by ruling that the petitioners spouses Belo should pay the entire amount due to PNB under the mortgage deed at the time of the foreclosure sale plus interest, costs and expenses.10

Petitioners spouses Belo sought reconsideration11 of the said Decision but the same was denied by the appellate court in its Resolution promulgated on June 29, 1998, ratiocinating, thus:

Once more, the Court shies away from declaring the nullity of the mortgage contract obligating Eduarda Belo as co-mortgagor, considering that it has not been sufficiently established that Eduarda Belo's assent to the special power of attorney and to the mortgage contract was tainted by any vitiating cause. Moreover, in tendering an offer to redeem the property (Exhibit "20", p. 602 Record) after its extrajudicial foreclosure, she has thereby admitted the validity of the mortgage, as well as the transactions leading to its inception. Eduarda Belo, and the appellees as mere assignees of Eduarda's right to redeem the property, are therefore estopped from questioning the efficacy of the mortgage and its subsequent foreclosure.12

The appellate court further declared that petitioners spouses Belo are obligated to pay the total bank's claim representing the redemption price for the foreclosed properties, as provided by Section 25 of P.D No. 694, holding that:

On the other hand, the court's ruling that the appellees, being the assignee of the right of repurchase of Eduarda Belo, were bound by the redemption price as provided by Section 25 of P.D. 694, stands. The attack on the constitutionality of Section 25 of P.D. 694 cannot be allowed, as the High Court, in previous instances, (Dulay v. Carriaga, 123 SCRA 794 [1983]; Philippine National Bank v. Remigio, 231 SCRA 362 [1994]) has regarded the said provision of law with respect, using the same in determining the proper redemption price in foreclosure of mortgages involving the PNB as mortgagee.

The terms of the said provision are quite clear and leave no room for qualification, as the appellees would have us rule. The said rule, as amended, makes no specific distinction as to assignees or transferees of the mortgagor of his redemptive right. In the absence of such distinction by the law, the Court cannot make a distinction. As admitted assignees of Eduarda Belo's right of redemption, the appellees succeed to the precise right of Eduarda including all conditions attendant to such right.

Moreover, the indivisible character of a contract of mortgage (Article 2089, Civil Code) will extend to apply in the redemption stage of the mortgage.

As we have previously remarked, Section 25 of P.D. 694 is a sanctioned deviation from the rule embodied in Rule 39, Section 30 of the Rules of Court, and is a special protection given to government lending institutions, particularly, the Philippine National Bank. (Dulay v. Carriaga, supra)13

Hence, the instant petition.

During the oral argument, petitioners, through counsel, Atty. Enrique M. Belo, agreed to limit the assignment of errors to the following:

xxx           xxx           xxx

II. THE COURT OF APPEALS ERRED IN NOT REVERSING THE TRIAL COURT ON THE BASIS OF THE ASSIGNMENT OF ERRORS ALLEGED BY PETITIONERS IN THEIR BRIEF:

(1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED BY EDUARDA BELO IN FAVOR OF RESPONDENT ESLABON WAS NULL AND VOID:

(2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY RESPONDENT MARCOS ESLABON UNDER SAID INVALID SPECIAL POWER OF ATTORNEY IS ALSO NULL AND VOID;

III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB ACTED IN BAD FAITH AND CONNIVED WITH RESPONDENTS-DEBTORS ESLABONS TO OBTAIN THE CONSENT OF EDUARDA BELO, PETITIONERS' PREDECESSOR, THROUGH FRAUD.

IV. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB WAS NEGLIGENT IN THE PERFORMANCE OF ITS DUTY AS COMMERCIAL MONEY LENDER.

V. THE COURT OF APPEALS ERRED IN HOLDING THAT EDUARDA BELO, PETITIONERS' PREDECESSOR, HAD WAIVED THE RIGHT TO QUESTION THE LEGALITY OF THE ACCOMMODATION MORTGAGE.

VI. THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURT BY HOLDING THAT ON REDEMPTION, PETITIONERS SHOULD PAY THE ENTIRE CLAIM OF PNB AGAINST RESPONDENTS-DEBTORS ESLABONS.

VII. THE COURT OF APPEALS ERRED IN NOT ORDERING THAT SHOULD PETITIONERS DECIDE TO PAY THE ENTIRE CLAIM OF RESPONDENT PNB AGAINST THE RESPONDENTS-DEBTORS ESLABONS, PETITIONERS SHALL SUCCEED TO ALL THE RIGHTS OF RESPONDENT PNB WITH THE RIGHT TO REIMBURSEMENT BY RESPONDENTS-DEBTORS ESLABONS.

VIII. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT SHOULD PETITIONERS DECIDE NOT TO EXERCISE THEIR RIGHT OF REDEMPTION, PETITIONERS SHALL BE ENTITLED TO THE VALUE OF THEIR IMPROVEMENTS MADE IN GOOD FAITH AND FOR THE REAL ESTATE TAX DUE PRIOR TO THE FORECLOSURE SALE.14

Petitioners challenge the appreciation of the facts of the appellate court, pointing out the following facts which the appellate court allegedly failed to fully interpret and appreciate:

1. That respondent PNB in its Answer admitted that Eduarda Belo was merely an accommodation mortgagor and that she has no personal liability to respondent PNB.

xxx           xxx           xxx

2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh. "D") used to bind Eduarda Belo as accommodation mortgagor authorized the agent Eslabons to borrow and mortgage her agricultural land for her (Eduarda Belo) use and benefit. Instead, said PNB SPA Form No. 74 was used by debtors Eslabons and PNB to bind Eduarda Belo as accommodation mortgagor for the crop loan extended by PNB to the Eslabons.

3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo in blank, without specifying the amount of the loan to be granted by respondent PNB to the respondents-debtors Eslabons upon assurance by the PNB manager that the SPA was merely a

formality and that the bank will not lend beyond the value of the four (4) [Roxas City] residential lots located in Roxas City mortgaged by respondents-debtors Eslabons (see Exhibit "D"; Eduarda Belo's deposition, Exhibit "V", pp. 7 to 24).

4. That PNB did not advise Eduarda Belo of the amount of the loan granted to the Eslabons, did not make demands upon her for payment, did not advise her of Eslabons' default. The pre-auction sale notice intended for Eduarda Belo was addressed and delivered to the address of the debtors Eslabons residence at Baybay Roxas City, not to the Belo Family House which is the residence of Eduarda Belo located in the heart of Roxas City. The trial court stated in its Decision that the PNB witness Miss Ignacio "admitted that through oversight, no demand letters were sent to Eduarda Belo, the accommodation mortgagor" (see p. 7, RTC Decision).

xxx           xxx           xxx

5. As an agreed fact stated in the Pre-Trial Order of the Regional Trial Court, the loan which was unpaid at the time of the extrajudicial foreclosure sale was only P789,897.00.

xxx           xxx           xxx

6. That herein petitioners Spouses Belo in making the tender to redeem Eduarda Belo's agricultural land expressly reserved the right to question the legality of the accommodation mortgage in the event that said tender to redeem was rejected by PNB (Exh. "I").15

Petitioners present basically two (2) issues before this Court. First, whether or not the Special Power of Attorney (SPA for brevity), the real estate mortgage contract, the foreclosure proceedings and the subsequent auction sale involving Eduarda Belo's property are valid. Second, assuming they are valid, whether or not the petitioners are required to pay, as redemption price, the entire claim of respondent PNB in the amount of P2,779,978.72 as of the date of the public auction sale on June 10, 1991.

On the first issue, the petitioners contend that the SPA is void for the reason that the amount for which the spouses Eslabon are authorized to borrow from respondent bank was unlimited; and that, while the SPA states that the amount loaned is for the benefit of Eduarda Belo, it was in fact used for the benefit of the respondents spouses Eslabon. For the said reasons petitioners contend that the mortgage contract lacks valid consent, object and consideration; that it violates a concept in the law of agency which provides that the contract entered into by the agent must always be for the benefit of the principal; and, that it does not express the true intent of the parties.

The subject SPA, the real estate mortgage contract, the foreclosure proceedings and the subsequent auction sale of Eduarda Belo's property are valid and legal.

First, the validity of the SPA and the mortgage contract cannot anymore be assailed due to petitioners' failure to appeal the same after the trial court rendered its decision affirming their validity. After the trial court rendered its decision granting petitioners their alternative cause of

action, i.e., that they can redeem the subject property on the basis of the winning bid price of respondent PNB, petitioners did not anymore bother to appeal that decision on their first cause of action. If they felt aggrieved by the trial court's decision upholding the validity of the said two (2) documents, then they should have also partially appealed therefrom but they did not. It is an abuse of legal remedies for petitioners to belatedly pursue a claim that was settled with finality due to their own shortcoming. As held in Caliguia v. National Labor Relations Commission,16 where a party did not appeal from the Labor Arbiter's decision denying claims for actual, moral and exemplary damages and instead moved for immediate execution, the decision then became final as to him and by asking for its execution, he was estopped from relitigating his claims for damages.

Second, well-entrenched is the rule that the findings of trial courts which are factual in nature, especially when affirmed by the Court of Appeals, deserve to be respected and affirmed by the Supreme Court, provided it is supported by substantial evidence. 17 The finding of facts of the trial court to the effect that Eduarda Belo was not induced by the manager of respondent PNB but instead that she freely consented to the execution of the SPA is given the highest respect as it was affirmed by the appellate court. In the case at bar, the burden of proof was on the petitioners to prove or show that there was alleged inducement and misrepresentation by the manager of respondent PNB and the spouses Eslabon. Their allegation that Eduarda Belo only agreed to sign the SPA after she was assured that the spouses Eslabon would not borrow more than the value of their own four (4) residential lots in Roxas City was properly objected to by respondent PNB.18 Also their contention that Eduarda Belo signed the SPA in blank was properly objected to by respondent PNB on the ground that the best evidence was the SPA. There is also no proof to sustain petitioners' allegation that respondent PNB acted in bad faith and connived with the debtors, respondents spouses Eslabon, to obtain Eduarda Belo's consent to the mortgage through fraud. Eduarda Belo very well knew that the respondents spouses Eslabon would use her property as additional mortgage collateral for loans inasmuch as the mortgage contract states that "the consideration of this mortgage is hereby initially fixed at P229,000.00."19 The mortgage contract sufficiently apprises Eduarda Belo that the respondents spouses Eslabon can apply for more loans with her property as continuing additional security. If she found the said provision questionable, she should have complained immediately. Instead, almost ten (10) years had passed before she and the petitioners sought the annulment of the said contracts.

Third, after having gone through the records, this Court finds that the courts a quo did not err in holding that the SPA executed by Eduarda Belo in favor of the respondents spouses Eslabon and the Real Estate Mortgage executed by the respondents spouses in favor of respondent PNB are valid. It is stipulated in paragraph three (3) of the SPA that Eduarda Belo appointed the Eslabon spouses "to make, sign, execute and deliver any contract of mortgage or any other documents of whatever nature or kind . . . which may be necessary or proper in connection with the loan herein mentioned, or with any loan which my attorney-in-fact may contract personally in his own name . . .20 This portion of the SPA is quite relevant to the case at bar. This was the main reason why the SPA was executed in the first place inasmuch as Eduarda Belo consented to have her land mortgaged for the benefit of the respondents spouses Eslabon. The SPA was not meant to make her a co-obligor to the principal contract of loan between respondent PNB, as lender, and the spouses Eslabon, as borrowers. The accommodation real estate mortgage over her property,

which was executed in favor of respondent PNB by the respondents spouses Eslabon, in their capacity as her attorneys-in-fact by virtue of her SPA, is merely an accessory contract.

Eduarda Belo consented to be an accommodation mortgagor in the sense that she signed the SPA to authorize respondents spouses Eslabons to execute a mortgage on her land. Petitioners themselves even acknowledged that the relation created by the SPA and the mortgage contract was merely that of mortgagor-mortgagee relationship. The SPA form of the PNB was utilized to authorize the spouses Eslabon to mortgage Eduarda Belo's land as additional collateral of the Eslabon spouses' loan from respondent PNB. Thus, the petitioners' contention that the SPA is void is untenable. Besides, Eduarda Belo benefited, in signing the SPA, in the sense that she was able to collect the rentals on her leased property from the Eslabons.21

An accommodation mortgage is not necessarily void simply because the accommodation mortgagor did not benefit from the same. The validity of an accommodation mortgage is allowed under Article 2085 of the New Civil Code which provides that "(t)hird persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property." An accommodation mortgagor, ordinarily, is not himself a recipient of the loan, otherwise that would be contrary to his designation as such. It is not always necessary that the accommodation mortgagor be appraised beforehand of the entire amount of the loan nor should it first be determined before the execution of the SPA for it has been held that:

"(real) mortgages given to secure future advancements are valid and legal contracts; that the amounts named as consideration in said contract do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. A mortgage given to secure advancements is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid."22

Fourth, the courts a quo correctly held that the letter of Eduarda Belo addressed to respondent PNB manifesting her intent to redeem the property is a waiver of her right to question the validity of the SPA and the mortgage contract as well as the foreclosure and the sale of her subject property. Petitioners claim that her letter was not an offer to redeem as it was merely a declaration of her intention to redeem. Respondent PNB's answer to her letter would have carried certain legal effects. Had respondent PNB accepted her letter-offer, it would have surely bound the bank into accepting the redemption price offered by Eduarda Belo. If it was her opinion that her SPA and the mortgage contract were null and void, she would not have manifested her intent to redeem but instead questioned their validity before a court of justice. Her offer was a recognition on her part that the said contracts are valid and produced legal effects. Inasmuch as Eduarda Belo is estopped from questioning the validity of the contracts, her assignees who are the petitioners in the instant case, are likewise estopped from disputing the validity of her SPA, the accommodation real estate mortgage contract, the foreclosure proceedings, the auction sale and the Sheriff's Certificate of Sale.

The second issue pertains to the applicable law on redemption to the case at bar. Respondent PNB maintains that Section 25 of Presidential Decree No. 694 should apply, thus:

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.23

Additionally, respondent bank seeks the application to the case at bar of Section 78 of the General Banking Act, as amended by P.D. No. 1828, which states that —

. . . 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.24

On the other hand, petitioners assert that only the amount of the winning bidder's purchase together with the interest thereon and on all other related expenses should be paid as redemption price in accordance with Section 6 of Act No. 3135 which provides that:

SECTION 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successor 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 Procedure25 , in so far as these are not inconsistent with the provisions of this Act.

Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states that:

SECTION 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, within one per centum per month interest thereon in addition, up to the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on such last named amount at the same rate; and if the purchaser be also a creditor having a prior lien to that of the redemptioner,

other than the judgment under which such purchase was made, the amount of such other lien, with interest. (Italic supplied)

xxx           xxx           xxx

This Court finds the petitioners' position on that issue to be meritorious.

There is no doubt that Eduarda Belo, assignor of the petitioners, is an accommodation mortgagor. The Pre-trial Order and respondent PNB's brief contain a declaration of this fact. The dispute between the parties is whether Section 25 of P.D. No. 694 applies to an accommodation mortgagor, or her assignees. The said legal provision does not make a distinction between a debtor-mortgagor and an accommodation mortgagor as it uses the broad term "mortgagor". The appellate court thus ruled that the provision applies even to an accommodation mortgagor inasmuch as the law does not make any distinction. We disagree. Where a word used in a statute has both a restricted and a general meaning, the general must prevail over the restricted unless the nature of the subject matter or the context in which it is employed clearly indicates that the limited sense is intended.26 It is presumed that the legislature intended exceptions to its language which would avoid absurd consequences of this character.27 In the case at bar, the qualification to the general rule applies. The same provision of Section 25 of P.D. No. 694 provides that "the mortgagor shall have the right to redeem the property by paying all claims of the Bank against him". From said provision can be deduced that the mortgagor referred to by that law is one from whom the bank has a claim in the form of outstanding or unpaid loan; he is also called a borrower or debtor-mortgagor. On the other hand, respondent PNB has no claim against accommodation mortgagor Eduarda Belo inasmuch as she only mortgaged her property to accommodate the Eslabon spouses who are the loan borrowers of the PNB. The principal contract is the contract of loan between the Eslabon spouses, as borrowers/debtors, and the PNB as lender. The accommodation real estate mortgage (which secures the loan) is only an accessory contract. It is our view and we hold that the term "mortgagor" in Section 25 of P.D. No. 694 pertains only to a debtor-mortgagor and not to an accommodation mortgagor.

It is well settled that courts are not to give a statute a meaning that would lead to absurdities. If the words of a statute are susceptible of more than one meaning, the absurdity of the result of one construction is a strong argument against its adoption, and in favor of such sensible interpretation.28 We test a law by its result. A law should not be interpreted so as not to cause an injustice. There are laws which are generally valid but may seem arbitrary when applied in a particular case because of its peculiar circumstances. We are not bound to apply them in slavish obedience to their language.29

The interpretation accorded by respondent PNB to Section 25 of P.D. No. 694 is unfair and unjust to accommodation mortgagors and their assignees. Forcing an accommodation mortgagor like Eduarda Belo to pay for what the principal debtors (Eslabon spouses) owe to respondent bank is to punish her for the accommodation and generosity she accorded to the Eslabon spouses who were then hard pressed for additional collateral needed to secure their bank loan. Respondents PNB and spouses Eslabons very well knew that she merely consented to be a mere accommodation mortgagor.

The circumstances of the case at bar also provide for ample reason why petitioners cannot be made to pay the entire liability of the principal debtors, Eslabon spouses, to respondent PNB.

The trial court found that respondent PNB's application for extrajudicial foreclosure and public auction sale of Eduarda Belo's mortgaged property30 was filed under Act No. 3135, as amended by P.D. No. 385. The notice of extrajudicial sale, the Certificate of Sheriff's Sale, and the letter it sent to Eduarda Belo did not mention P. D. No. 694 as the basis for redemption. As aptly ruled by the trial court —

In fairness to these mortgagors, their successors-in-interest, or innocent purchasers for value of their redemption rights, PNB should have at least advised them that redemption would be governed by its Revised Charter or PD 69, and not by Act 3135 and the Rules of Court, as commonly practiced . . . This practice of defendant Bank is manifestly unfair and unjust to these redemptioners who are caught by surprise and usually taken aback by the enormous claims of the Bank not shown in the Notice of Extrajudicial Sale or the Certificate of Sheriff's Sale as in this case.31

Moreover, the mortgage contract explicitly provides that ". . . the mortgagee may immediately foreclose this mortgage judicially in accordance with the Rules of Court or extrajudicially in accordance with Act No. 3135, as amended and Presidential Decree No. 385 . . .32 Since the mortgage contract in this case is in the nature of a contract of adhesion as it was prepared solely by respondent, it has to be interpreted in favor of petitioners. The respondent bank however tries to renege on this contractual commitment by seeking refuge in the 1989 case of Sy v. Court of Appeals33 wherein this Court ruled that the redemption price is equal to the total amount of indebtedness to the bank's claim inasmuch as Section 78 of the General Banking Act is an amendment to Section 6 of Act No. 3135, despite the fact that the extrajudicial foreclosure procedure followed by the PNB was explicitly under or in accordance with Act No. 3135.

In the 1996 case of China Banking Corporation v. Court of Appeals,34 where the parties also stipulated that Act No. 3135 is the controlling law in case of foreclosure, this Court ruled that;

By invoking the said Act, there is no doubt that it must "govern the manner in which the sale and redemption shall be effected." Clearly, the fundamental principle that contracts are respected as the law between the contracting parties finds application in the present case, specially where they are not contrary to law, morals, good customs and public policy.35

More importantly, the ruling pronounced in Sy v. Court of Appeals and other cases,36 that the General Banking Act and P.D. No. 694 shall prevail over Act No. 3135 with respect to the redemption price, does not apply here inasmuch as in the said cases the redemptioners were the debtors themselves or their assignees, and not an accommodation mortgagor or the latter's assignees such as in the case at bar. In the said cases, the debtor-mortgagors were required to pay as redemption price their entire liability to the bank inasmuch as they were obligated to pay their loan which is a principal obligation in the first place. On the other hand, accommodation mortgagors as such are not in anyway liable for the payment of the loan or principal obligation of the debtor/borrower The liability of the accommodation mortgagors extends only up to the loan

value of their mortgaged property and not to the entire loan itself. Hence, it is only just that they be allowed to redeem their mortgaged property by paying only the winning bid price thereof (plus interest thereon) at the public auction sale.

One wonders why respondent PNB invokes Act No. 3135 in its contracts without qualification and yet in the end appears to disregard the same when it finds its provisions unfavorable to it. This is unfair to the other contracting party who in good faith believes that respondent PNB would comply with the contractual agreement.

It is therefore our view and we hold that Section 78 of the General Banking Act, as amended by P.D. No. 1828, is inapplicable to accommodation mortgagors in the redemption of their mortgaged properties.

While the petitioners, as assignees of Eduarda Belo, are not required to pay the entire claim of respondent PNB against the principal debtors, spouses Eslabon, they can only exercise their right of redemption with respect to the parcel of land belonging to Eduarda Belo, the accommodation mortgagor. Thus, they have to pay the bid price less the corresponding loan value of the foreclosed four (4) residential lots of the spouses Eslabon.

The respondent PNB contends that to allow petitioners to redeem only the property belonging to their assignor, Eduarda Belo, would violate the principle of indivisibility of mortgage contracts. We disagree.

Article 2089 of the Civil Code of the Philippines, provides that:

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 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 them 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.

There is no dispute that the mortgage on the four (4) parcels of land by the Eslabon spouses and the other mortgage on the property of Eduarda Belo both secure the loan obligation of respondents spouses Eslabon to respondent PNB. However, we are not persuaded by the contention of the respondent PNB that the indivisibility concept applies to the right of

redemption of an accommodation mortgagor and her assignees. The jurisprudence in Philippine National Bank v. Agudelo37 is enlightening to the case at bar, to wit:

xxx           xxx           xxx

However, Paz Agudelo y Gonzaga (the principal) . . . gave her consent to the lien on lot No. 878 . . . . This acknowledgment, however, does not extend to lots Nos. 207 and 61 . . . inasmuch as, although it is true that a mortgage is indivisible as to the contracting parties and as to their successors in interest (Article 1860, Civil code), it is not so with respect to a third person who did not take part in the constitution thereof either personally or through an agent x x x. Therefore, the only liability of the defendant-appellant Paz Agudelo y Gonzaga is that which arises from the aforesaid acknowledgment but only with respect to the lien and not to the principal obligation secured by the mortgage acknowledged by her to have been constituted on said lot No. 878 . . . . Such liability is not direct but a subsidiary one.38

xxx           xxx           xxx

Wherefore, it is hereby held that the liability contracted by the aforesaid defendant-appellant Paz Agudelo y Gonzaga is merely subsidiary to that of Mauro A. Garrucho (the agent), limited to lot No. 87.

xxx           xxx           xxx

From the wording of the law, indivisibility arises only when there is a debt, that is, there is a debtor-creditor relationship. But, this relationship is wanting in the case at bar in the sense that petitioners are assignees of an accommodation mortgagor and not of a debtor-mortgagor. Hence, it is fair and logical to allow the petitioners to redeem only the property belonging to their assignor, Eduarda Belo.

With respect to the four (4) parcels of residential land belonging to the Eslabon spouses, petitioners — being total strangers to said lots — lack legal personality to redeem the same. Fair play and justice demand that the respondent PNB's interest of recovering its entire bank claim should not be at the expense of petitioners, as assignees of Eduarda Belo, who is not indebted to it. Besides, the letter39 sent by respondent PNB to Eduarda Belo states that "your (Belo) mortgaged property/ies with PNB covered by TCT # T-7493 was/were sold at public auction . . . .". It further states that "You (Belo) have, therefore, one year from July 1, 1991 within which to redeem your mortgaged property/ies, should you desire to redeem it." Respondent PNB never mentioned that she was bound to redeem the entire mortgaged properties including the four (4) residential properties of the spouses Eslabon. The letter was explicit in mentioning Eduarda Belo's property only. From the said statement, there is then an admission on the part of respondent PNB that redemption only extends to the subject property of Eduarda Belo for the reason that the notice of the sale limited the redemption to said property.

WHEREFORE, the petition is partially granted in that the petitioners are hereby allowed to redeem only the property, covered and described in Transfer Certificate of Title No. T-7493-

Capiz registered in the name of Eduarda Belo, by paying only the bid price less the corresponding loan value of the foreclosed four (4) residential lots of the respondents spouses Marcos and Arsenia Eslabon, consistent with the Decision of the Regional Trial Court of Roxas City in Civil Case No. V-6182.

SO ORDERED.

G.R. No. 118585 September 14, 1995

AJAX MARKETING & DEVELOPMENT CORPORATION, ANTONIO TAN, ELISA TAN, TAN YEE, and SPS. MARCIAL SEE and LILIAN TAN, petitioners, vs.HON. COURT OF APPEALS, METROPOLITAN BANK AND TRUST COMPANY, and THE SHERIFF OF MANILA, respondents.

 

FRANCISCO, J.:

In its March 30, 1994 decision, public respondent Court of Appeals affirmed the trial court's judgment upholding the validity of the extra-judicial foreclosure of the real estate property of petitioners — spouses Marcial See and Lilian Tan, located at Paco District, Manila covered

by TCT 105233, by private respondent Metropolitan Bank and Trust Company (Metrobank). 1 Petitioners' motion for reconsideration was denied; hence, this petition for review on certiorari raising the following assignments of errors:

FIRST: The Honorable Court of Appeals erred in holding that the consolidation of the three (3) loans granted separately to three entities into a single loan of P1.0 Million was a mere restructuring and did not effect a novation of the loan as to extinguish the accessory mortgage contracts.

SECOND: The Honorable Court of Appeals erred in not holding that the consolidated loan of P1.0 Million was not accompanied by the execution of a new REM, as was done by the Bank in the earlier three (3) loans, and hence, was, to all legal intents/purposes, unsecured.

THIRD: The Honorable Court of Appeals erred in holding that the inclusion in the extra-judicial foreclosure of the admittedly unsecured loan of P970,000.00 is a mere error that does not invalidated said foreclosure, contrary to the pronouncement in C & C Commercial Corp. vs. PNB, 175 SCRA 1.

FOURTH: The Honorable Court of Appeals erred in not declaring as null and void the extra-judicial foreclosure undertaken by Metrobank on the property of Sps. Marcial See and Lilian Tan. 2

The facts as found by public respondent Court of Appeals are as follows:

It is not disputed that Ylang-Ylang Merchandising Company, a partnership between Angelita Rodriguez and Antonio Tan, obtained a loan in the amount of P250,000.00 from the Metropolitan Bank and Trust Company, and to secure payment of the same, spouses Marcial See and Lilian Tan constituted a real estate mortgage in favor of said bank over their property in the District of Paco, Manila, covered by TCT No. 105233 of the Registry of Deeds of Manila. The mortgage was annotated at the back of the title.

Subsequently, after the partnership had changed its name to Ajax Marketing Company albeit without changing its composition, it obtained a loan in the sum of P150,000.00 from

Metropolitan Bank and Trust Company. Again to secure the loan, spouses Marcial See and Lilian Tan executed in favor of said bank a second real estate mortgage over the same property. As in the first instance, the mortgage was duly annotated at the back of TCT No. 105233.

On February 19, 1979, the partnership (Ajax Marketing Company) was converted into a corporation denominated as Ajax Marketing and Development Corporation, with the original partners (Angelita Rodriguez and Antonio Tan) as incorporators and three (3) additional incorporators, namely, Elisa Tan, the wife of Antonio Tan, and Jose San Diego and Tessie San Diego. Ajax Marketing and Development Corporation obtained from Metropolitan Bank and Trust Company a loan of P600,000.00, the payment of which was secured by another real estate mortgage executed by spouses Marcial See and Lilian Tan in favor of said bank over the same realty located in the District of Paco, Manila. Again, the third real estate mortgage was annotated at the back of TCT No. 105233.

In December 1980, the three (3) loans with an aggregate amount of P1,000,000.00 were re-structured and consolidated into one (1) loan and Ajax Marketing and Development Corporation, represented by Antonio Tan as Board Chairman/President and in his personal capacity as solidary co-obligor, and Elisa Tan as Vice-President/Treasurer and in her personal capacity as solidary co-obligor, executed a Promissory Note (PN) No. BDS-3605. 3

In their interrelated first and second assignment of errors, petitioners argue that a novation occurred when their three (3) loans, which are all secured by the same real estate property covered by TCT No. 105233 were consolidated into a single loan of P1 million under Promissory Note No. BDS-3605, thereby extinguishing their monetary obligations and releasing the mortgaged property from liability.

Basic principles on novation need to be stressed at the outset. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor. 4 Novation, unlike other modes of extinction of obligations, is a juridical act with a dual function, namely, it extinguishes an obligation and creates a new one in lieu of the old. It can be objective, subjective, or mixed. Objective novation occurs when there is a change of the object or principal conditions of an existing obligation while subjective novation occurs when there is a change of either the person of the debtor, or of the creditor in an existing obligation. 5 When the change of the object or principal conditions of an obligation occurs at the same time with the change of either in the person of the debtor or creditor a mixed novation occurs. 6

The well settled rule is that novation is never presumed. 7 Novation will not be allowed unless it is clearly shown by express agreement, or by acts of equal import. Thus, to effect an objective novation it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the new one. 8 In the same vein, to effect a subjective novation by a change in the person of the debtor it is necessary that the old debtor be released expressly from the obligation, and the third person or new debtor assumes his place in the relation. 9 There is no novation without such release as the third person who has assumed the debtor's obligation becomes merely a co-debtor or surety. 10

The attendant facts herein do not make a case of novation. There is nothing in the records to show the unequivocal intent of the parties to novate the three loan agreements through the execution of PN No. BDS-3065. The provisions of PN No. BDS-3065 yield no indication of the extinguishment of, or an incompatibility with, the three loan agreements secured by the real estate mortgages over TCT No. 105233. On its face, PN No. BDS-3065 has these words typewritten: "secured by REM" and "9. COLLATERAL. This is wholly/partly secured by: (x) "real estate", 11 which strongly negate petitioners' asseveration that the consolidation of the three loans effected the discharge of the mortgaged real estate property. Otherwise, there would be no sense placing these material provisions. Moreover; the real estate mortgages contained this common provision, to wit:

That for and in consideration of credit accommodations obtained from the MORTGAGEE (Metropolitan Bank and Trust Company), by the MORTGAGOR and/or AJAX MKTG. DEV. CORP./AJAX MARKETING COMPANY/YLANG-YLANG MERCHANDISING COMPANY detailed as follows:

Nature Date Granted Due Date Amount or Line

Loans and/or P 600,000.00

Advances in 150,000.00

current account 250,000.00

and to secure the payment of the same and those that may hereafter be obtained including the renewals or extension thereof.

xxx xxx xxx

the principal of all of which is hereby fixed at (P600,000.00/ P150,000.00/ P250,000.00) . . .as well as those that the MORTGAGEE may have previously extended or may later extend to the MORTGAGOR, 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 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 page three 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 encumbrances. However, if the MORTGAGOR shall pay to the MORTGAGEE, its successors or assigns, the obligation secured by this mortgage when due, together with interest, and shall keep and perform all and singular the covenants and agreements herein contained for the MORTGAGOR to keep and perform, then the mortgage shall be void; otherwise, it shall remain in full force and effect. 12

The foregoing shows that petitioners agreed to apply the real estate property to secure obligations that they may thereafter obtain including their renewals or extensions with the principals fixed at P600,000.00, P150,000.00, and P250,000.00 which when added have an aggregate sum of P1.0 million. PN No. BDS-3605 merely restructured and renewed the three previous loans to expediently make the loans current. There was no change in the object of the prior obligations. The consolidation of the three loans, contrary to petitioners' contention, did not release the mortgaged real estate property from any liability because the mortgage annotations at the back of TCT No. 105233, in fact, all remained uncancelled, thus indicating the continuing subsistence of the real estate mortgages.

Neither can it be validly contended that there was a change, or substitution in the persons of either the creditor (Metrobank) or more specifically the debtors (petitioners) upon the consolidation of the loans in PN No. BDS 3605. The bare fact of petitioners' conversion from a partnership to a corporation, without sufficient evidence, either testimonial or documentary, that they were expressly released from their obligations, did not make petitioner AJAX, with its new corporate personality, a third person or new debtor within the context of a subjective novation. If at all, petitioner AJAX only became a co-debtor or surety. Without express release of the debtor from the obligation, any third party who may thereafter assume the obligation shall be considered merely as co-debtor or surety. Novation arising from a purported change in the person of the debtor must be clear and express because, to repeat, it is never presumed. Clearly then, from the aforediscussed points, neither objective nor subjective novation occurred here.

Anent the third assigned error, petitioners posit that the extra-judicial foreclosure is invalid as it included two unsecured loans: one, the consolidated loan of P1.0 million under PN BDS No. 3605, and two, the P970,000.00 loan under PN BDS No. 3583 subsequently extended by Metrobank.

An action to foreclose a mortgage is usually limited to the amount mentioned in the mortgage, but where on the four corners of the mortgage contracts, as in this case, the intent of the contracting parties is manifest that the mortgaged property shall also answer for future loans or advancements then the same is not improper as it is valid and binding between the parties. 13 For merely consolidating and expediently making current the three previous loans, the loan of P1.0 million under PN BDS No. 3605, secured by the real estate property, was correctly included in the foreclosure's bid price. The inclusion of the unsecured loan of P970,000.00 under PN BDS NO. 3583, however, was found to be improper by public respondent which ruling we shall not disturb for Metrobank's failure to appeal therefrom. Nonetheless, the inclusion of PN BDS No. 3583 in the bid price did not invalidate the foreclosure proceedings. As correctly pointed out by the Court of Appeals, the proceeds of the auction sale should be applied to the obligation pertaining to PN BDS No. 3605 only, plus interests, expenses and other charges accruing thereto. It is Metrobank's duty as mortgagee to return the surplus in the selling price to the mortgagors. 14

Lastly, petitioners cite as supporting authority C & C Commercial Corp. v. Philippine National Bank 15 where this Court enjoined the foreclosure proceedings for including unsecured obligations. Petitioners' reliance on the C & C Commercial Corp. v. Philippine National Bank case is misplaced. In that case, the foreclosure sale included previously incurred unsecured obligations in favor of PNB which were not in the contemplation of the mortgage contract, whereas in the instant case, the mortgages were one in providing that the mortgaged real estate property shall also secure future advancements or loans, as well as renewals or extensions of the same.

Prescinding from the above discussions, the fourth assignment of error obviously needs no further discussion.

WHEREFORE, the decision appealed from is hereby AFFIRMED in toto.

G.R. No. L-19227             February 17, 1968

DIOSDADO YULIONGSIU, plaintiff-appellant, vs.PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.

Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant. Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee.

BENGZON, J.P., J.:

          Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels, namely: The M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-203, valued at P210,672.24, which was purchased by him from the Philippine Shipping Commission, by installment or on account. As of January or February, 1943, plaintiff had paid to the Philippine Shipping Commission only the sum of P76,500 and the balance of the purchase price was payable at P50,000 a year, due on or before the end of the current year. 2

          On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine National Bank, Cebu Branch. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S

Don Dino and its equity in the FS-203 to the defendant bank, as evidenced by the pledge contract, Exhibit "A" & "1-Bank", executed on the same day and duly registered with the office of the Collector of Customs for the Port of Cebu. 3

          Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The remaining balance was renewed by the execution of two (2) promissory notes in the bank's favor. The first note, dated December 18, 1947, for P20,000, was due on April 16, 1948 while the second, dated February 26, 1948, for P10,000, was due on June 25, 1948. These two notes were never paid at all by plaintiff on their respective due dates. 4

          On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused for estafa thru falsification of commercial documents, because plaintiff had, as last indorsee, deposited with defendant bank, from March 11 to March 31, 1948, seven Bank of the Philippine Islands checks totalling P184,000. The drawer thereof — one of the co-accused — had no funds in the drawee bank. However, in connivance with one employee of defendant bank, plaintiff was able to withdraw the amount credited to him before the discovery of the defraudation on April 2, 1948. Plaintiff and his co-accused were convicted by the trial court and sentenced to indemnify the defendant bank in the sum of P184,000. On appeal, the conviction was affirmed by the Court of Appeals on October 31, 1950. The corresponding writ of execution issued to implement the order for indemnification was returned unsatisfied as plaintiff was totally insolvent. 5

          Meanwhile, together with the institution of the criminal action, defendant bank took physical possession of three pledged vessels while they were at the Port of Cebu, and on April 29, 1948, after the first note fell due and was not paid, the Cebu Branch Manager of defendant bank, acting as attorney-in-fact of plaintiff pursuant to the terms of the pledge contract, executed a document of sale, Exhibit "4", transferring the two pledged vessels and plaintiff's equity in FS-203, to defendant bank for P30,042.72. 6

          The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping Commission which rescinded the sale to plaintiff on September 8, 1948, for failure to pay the remaining installments on the purchase price thereof. 7 The other two boats, the M/S Surigao and the M/S Don Dino were sold by defendant bank to third parties on March 15, 1951.

          On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to recover the three vessels or their value and damages from defendant bank. The latter filed its answer, with a counterclaim for P202,000 plus P5,000 damages. After issues were joined, a pretrial was held resulting in a partial stipulation of facts dated October 2, 1958, reciting most of the facts above-narrated. During the course of the trial, defendant amended its answer reducing its claim from P202,000 to P8,846.01, 8 but increasing its alleged damages to P35,000.

          The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's taking of physical possession of the vessels on April 6, 1948 was justified by the pledge contract, Exhibit "A" & "1-Bank" and the law; (b) that the private sale of the pledged vessels by defendant bank to itself without notice to the plaintiff-pledgor as stipulated in the pledge contract was likewise valid; and (c) that the defendant bank should pay to plaintiff the sums of P1,153.99 and

P8,000, as his remaining account balance, or set-off these sums against the indemnity which plaintiff was ordered to pay to it in the criminal cases.

          When his motion for reconsideration and new trial was denied, plaintiff brought the appeal to Us, the amount involved being more than P200,000.00.

          In support of the first assignment of error, plaintiff-appellant would have this Court hold that Exhibit "A" & "1-Bank" is a chattel mortgage contract so that the creditor defendant could not take possession of the chattels object thereof until after there has been default. The submission is without merit. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract —

          3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank, and the plaintiff obtained and received from the said Bank the sum of P50,000.00, and in order to guarantee the payment of this loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was executed and duly registered with the Office of the Collector of Customs for the Port of Cebu on the date appearing therein; (Emphasis supplied)1äwphï1.ñët

          Necessarily, this judicial admission binds the plaintiff. Without any showing that this was made thru palpable mistake, no amount of rationalization can offset it. 9

          The defendant bank as pledgee was therefore entitled to the actual possession of the vessels. While it is true that plaintiff continued operating the vessels after the pledge contract was entered into, his possession was expressly made "subject to the order of the pledgee." 10 The provision of Art. 2110 of the present Civil Code 11 being new — cannot apply to the pledge contract here which was entered into on June 30, 1947. On the other hand, there is an authority supporting the proposition that the pledgee can temporarily entrust the physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the pledgee. 12

          Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to make pledge effective. He points to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be actual delivery of the chattels pledged. But then there is also Banco Español-Filipino v. Peterson, 7 Phil. 409 ruling that symbolic delivery would suffice. An examination of the peculiar nature of the things pledged in the two cases will readily dispel the apparent contradiction between the two rulings. In Betita v. Ganzon, the objects pledged — carabaos — were easily capable of actual, manual delivery unto the pledgee. In Banco Español-Filipino v. Peterson, the objects pledged — goods contained in a warehouse — were hardly capable of actual, manual delivery in the sense that it was impractical as a whole for the particular transaction and would have been an unreasonable requirement. Thus, for purposes of showing the transfer of control to the pledgee, delivery to him of the keys to the warehouse sufficed. In other words, the type of delivery will depend upon the nature and the peculiar circumstances of each case. The parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said property subject to the order of the pledgee." Considering the circumstances of this case and the nature of the objects pledged, i.e., vessels used in maritime business, such delivery is sufficient.

          Since the defendant bank was, pursuant to the terms of pledge contract, in full control of the vessels thru the plaintiff, the former could take actual possession at any time during the life of the pledge to make more effective its security. Its taking of the vessels therefore on April 6, 1948, was not unlawful. Nor was it unjustified considering that plaintiff had just defrauded the defendant bank in the huge sum of P184,000.

          The stand We have taken is not without precedent. The Supreme Court of Spain, in a similar case involving Art. 1863 of the old Civil Code, 13 has ruled: 14

          Que si bien la naturaleza del contrato de prenda consiste en pasar las cosas a poder del acreedor o de un tercero y no quedar en la del deudor, como ha sucedido en el caso de autos, es lo cierto que todas las partes interesadas, o sean acreedor, deudor y Sociedad, convinieron que continuaran los coches en poder del deudor para no suspender el trafico, y el derecho de no uso de la prenda pertenence al deudor, y el de dejar la cosa bajo su responsabilidad al acreedor, y ambos convinieron por creerlo util para las partes contratantes, y estas no reclaman perjuicios no se infringio, entre otros este articulo.

          In the second assignment of error imputed to the lower court plaintiff-appellant attacks the validity of the private sale of the pledged vessels in favor of the defendant bank itself. It is contended first, that the cases holding that the statutory requirements as to public sales with prior notice in connection with foreclosure proceedings are waivable, are no longer authoritative in view of the passage of Act 3135, as amended; second, that the charter of defendant bank does not allow it to buy the property object of foreclosure in case of private sales; and third, that the price obtained at the sale is unconscionable.

          There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44 Phil. 763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative despite the passage of Act 3135. This law refers only, and is limited, to foreclosure of real estate mortgages. 15 So, whatever formalities there are in Act 3135 do not apply to pledge. Regarding the bank's authority to be the purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747 and 2938 only states that if the sale is public, the bank could purchase the whole or part of the property sold " free from any right of redemption on the part of the mortgagor or pledgor." This even argues against plaintiff's case since the import thereof is this if the sale were private and the bank became the purchaser, the mortgagor or pledgor could redeem the property. Hence, plaintiff could have recovered the vessels by exercising this right of redemption. He is the only one to blame for not doing so.

          Regarding the third contention, on the assumption that the purchase price was unconscionable, plaintiff's remedy was to have set aside the sale. He did not avail of this. Moreover, as pointed out by the lower court, plaintiff had at the time an obligation to return the P184,000 fraudulently taken by him from defendant bank.

          The last assignment of error has to do with the damages allegedly suffered by plaintiff-appellant by virtue of the taking of the vessels. But in view of the results reached above, there is no more need to discuss the same.

          On the whole, We cannot say the lower court erred in disposing of the case as it did. Plaintiff-appellant was not all-too-innocent as he would have Us believe. He did defraud the defendant bank first. If the latter countered with the seizure and sale of the pledged vessels pursuant to the pledge contract, it was only to protect its interests after plaintiff had defaulted in the payment of the first promissory note. Plaintiff-appellant did not come to court with clean hands.

          WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs against plaintiff-appellant. So ordered.

G.R. No. L-24893             August 23, 1926

Involuntary Insolvency of The Gulf Plantation Co. PACIFIC COMMERCIAL COMPANY, PHILIPPINE-AMERICAN DRUG COMPANY and STANDARD OIL COMPANY, petitioners-appellants, vs.PHILIPPINE NATIONAL BANK, creditor-appellee. H. B. Hughes, assignee.

Simon R. Cruz for appellants.Dionisio de Leon for appellee.

STATEMENT

At Davao, Davao P. I., on august 24, 1918, the Gulf Plantation Company, a corporation, through its president executed to the Philippine National Bank a certain instrument known in the record as Exhibit A, in which the Plantation Company is named and styled as the pledgor, and the Philippine National Bank as the pledges, in which it is recited that the Gulf Plantation Company has obtained certain credits, loans, overdrafts, etc., from the pledgee, which the parties have mutually agreed should be guaranteed and secured, including costs, charges, and interest "of keeping the pledged property," and "all other expenditures of the pledgee incurred in connection with this pledge." In consideration thereof, all other valuable consideration received by the pledgor, and for the purpose of securing the payment of all sums not exceeding P165,000, the pledgor hypothecated and pledged to the pledgee and hereby delivered the possession, for the purpose of the pledge, of all the property itemized in schedule A on the back of this pledge. The pledgor agreed without demand to pledge and deliver to the pledgee any further and additional securities required, and to pay the taxes and keep the property insured. That, if the pledgor shall pay to the pledgee such sums of money as the pledgee, may advance under the terms of the pledge, then the pledged property may be turned to the pledgor, and "this pledge shall be of no further, otherwise, to remain in force, and the pledgee may dispose of the pledged property in the manner herein provided, or in accordance with the Chattel Mortgage Law, at the option of the pledgee." The pledgor appoints the pledgee as attorney-in-fact of the pledgor with full power and authority after any condition of the pledge may have been broken to enter the premises where the pledged property is located, and take possession of it by force, if necessary, and seize and take

actual possession of it without an order of the court, and to sell, assign and deliver the property pledged, or any part thereof, at the option of the pledgee. Provision is then made for the application of the proceeds of any sale of the property under the pledge. The instrument was duly executed and acknowledged before a notary public as of the date it was signed.

Schedule A, which is part of the instrument, is as follows:

Lease No. 63 of 534 hectares of public situated in the municipality of Pantucan, Davao Province, P. I., planted to 236,000 hemp and 700 coconut trees, valued at P430,000.

Forty-eight buildings of permanent materials valued at P5,500 situated on above lease. Two buildings of strong materials valued at P15,000.

One thousand piculs hemp now in the plantation bodega at Pantucan all belonging to the "Gulf Plantation, Incorporated," valued at P45,000.

Twenty three carabaos, 38 bullocks, 18 horses, valued at P6,450.

One launch "Peril" valued at P18,000; one auxiliary boat "Manuela," P9,000; one launch "Rigel," P800; one launch "New Kirk," P3,500 and cargo boats, P200.

The instrument contains the following endorsement:

Doc. stamps affixed P17.20

THE PROVINCIAL GOVERNMENT OF DAVAOOFFICE OF THE REGISTER OF DEEDS

Received this 24th day of Feb., 1921,at 9.30 o'clock a. m.

Entry No. 90, page 3, Volume Day Book (Provisional).

THE PROVINCIAL GOVERNMENT OF DAVAOOFFICE OF THE REGISTER OF DEEDS

Received this 24th day of Feb., 1921.at 9.30 o'clock a. m.

March 25, 1922, an insolvency petition was filed to have the Gulf Plantation Company declared insolvent, and it was declared insolvent on September 16, 1922, and the court ordered the sheriff to take possession of all the assets of the insolvent estate. October 23, 1922, with the consent and approval of all creditors, including the Philippine National Bank, and assignee was appointed, and on October 27, 1922, he filed an inventory of all of the properties of the plantation company, March 17, 1923, the court made an order requiring the assignee to render an account and to give the creditors a copy. March 20, 1923, the assignee filed his account for the period between October 1, 1922, and February 28, 1923. On January 7, 1924, the assignee filed a further account covering the period from October 1, 1922, to November 30, 1923. Both of which accounts are

still pending and waiting the approval of the court. November 28, 1923, the assignee filed a petition for authority to sell at public auction all of the properties of the insolvent estate, which application is also now pending and waiting the order of the court. November 3, 1922, the Philippine National Bank filed a petition, to which was attached a copy of Exhibit A and made a part of it, reciting the execution of the instrument and a breach of its conditions, and praying for the following order from the court:

(a) That the mortgage or pledge executed in its favor by the Gulf Plantation, Inc., a copy of which is attached to this claim as appendix A be declared effective and matured;

(b) That the assignee appointed in this insolvency proceeding, or if the latter has not yet been appointed, the sheriff of the Province of Davao be authorized to sell at public or private sale, after notice to the Philippine National Bank, all such interest, right or share as the Gulf Plantation, Inc., has or may have in the properties described in Exhibit A;

(c) That should the proceeds of the sale of the properties mentioned in appendix A be greater than the sum of P165,000, this amount of P165,000 be delivered to the Philippine National Bank, and the balance to the assignee in insolvency; and

(d) In the event that the proceeds of the sale of the properties mentioned in Appendix A is less than the sum of P165,000 that said proceeds be delivered to the Philippine National Bank, and for the balance of difference not paid of the debt of the insolvent corporation to the claimant company, the Philippine National Bank be admitted as an ordinary creditor in this insolvency proceeding.

February 9, 1924, the bank, through the fiscal of Davao, and in compliance with an order of the court, filed objections to the approval of the accounts rendered by the assignee.

In this situation, the court rendered a judgment in favor of the Philippine National Bank to the effect that it was entitled to the possession of all of the estate of the insolvent corporation, and that in the year 1919 the bank had appointed H. B. Hughes as its representative or administrator of the properties of the Plantation Company, and requiring the bank to pay certain preferred claims, including the income tax and the land tax, and that the bank was entitled to, and should have, possession of all the properties of the insolvent corporation, and to have the property sold and the proceeds of the sale applied to the satisfaction of the claim of the bank, and upon the payment of such preferred claims, to have the proceeds of the sale applied to the satisfaction of the claim of the bank, and that the creditors of the Plantation Company should share in any amount remaining after such application, and dismissed the case, without costs.

From this judgment, the creditors appeal and assign the following errors:

I. The lower court erred in not finding and holding that the so-called "agreement of pledge" executed by the insolvent Gulf Plantation Company in favor of the Philippine National Bank is null and void on account of its many defects.

II. The lower court erred in not finding and holding that the Philippine National Bank has renounced its alleged preferred lien on the properties of the insolvent covered by the pledge, by giving its consent to the appointment of and assignee and by permitting said assignee to take possession of said properties.

III. The lower court erred in not finding and holding that the claim of the Philippine National Bank is an ordinary claim.

IV. The lower court erred in holding that the Philippine National Bank is entitled to the possession of the properties of the insolvent.

V. The lower court erred in holding that the mortgage in favor of the Philippine National Bank is effective and due.

VI. The lower court erred in not overruling the opposition of the Philippine National Bank dated February 9, 1924, to the accounts submitted by the assignee.

VIII. The lower court erred in dismissing the insolvency proceedings.

 

JOHNS, J.:

In view of the numerous recitals made in it, what is known in the record as Exhibit A must be construed as a pledge in both form and substance. It is very apparent from the language used in the instrument that it was prepared on the customary blank form of a pledge for the taking of properties under a pledge. It will be noted that it was never received or filed for any purpose until the 24th of February, 1921, which was two years and a half after it was executed, and that it was then endorsed, only received in the "office of the register of deeds" with "Entry No. 90 page 3, Volume Day Book (Provisional)." That is to say, there is no evidence that it was ever received, filed or recorded anywhere or by anyone, either as a chattel mortgaged or a pledge of personal property. Hence, the receiving of it in the office of the register of deeds on February 24, 1921, is a nullity as to both a pledge and a chattel mortgage.

The only witness for either party was Carlos Garcia, the manager of the bank at Davao, and he was called for the sole purpose of testifying as to the amount of the bank's claim, which he placed at about P60,000, and that it was due and owing. To make Exhibit A valid as a pledge, as to the personal property therein described , it was the duty of the bank to take the actual, physical possession of the property, and to continue and remain in such possessions, and to make it valid against creditors or the assignee, the bank must have been in such actual, physical possession at the time the Plantation Company was declared insolvent. Upon the question, there is no evidence in the record. Without it, Exhibit A is void as a pledge, and the bank would not have a preference, and would not now be entitled to the possession of the property of the Plantation Company, or to have it sold and the proceeds applied to the satisfaction of its claim.

Upon the question of pledge, article 1863 of the Civil Code provides:

In addition to the requisites mentioned in article 1857, it shall be necessary, in order to constitute the contract of pledge, that the pledge, be placed in the possession of the creditor or, of a third person appointed by common consent.

Section 4 of Act No. 1508, entitled "an Act providing for the mortgaging of personal property, and for the registration of the mortgages so executed," provides:

A chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators, unless the possession of the property is delivered to and retained by the mortgagee or unless the mortgage is recorded in the office of the register of deeds of the province in which the mortgagor resides at the time of making the same, or, if he resides without the Philippine Islands, in the province in which the property is situated.

That is to say, a chattel mortgage is not valid against any person except the mortgagor, his executors or administrators, without delivery of possession of the property, unless the mortgage is recorded in the office of the register of deeds of the province. It will be noted that, in the absence of such delivery of possession on the recording of the instrument in the office of the register of deeds, a chattel mortgages is valid only as to the mortgagor, his executors or administrators. Hence, it follows that, in the absence of such record and the delivery of possession a chattel mortgage is void as against the creditors or the assignee of an insolvent estate, and upon that question, there is no evidence in the record.

If it was the purpose and intent of the bank to have Exhibit A received, filed and recorded as a chattel mortgage, it was not only its duty to so instruct the register of deeds, but it was its further duty to see that the instrument was received, filed and recorded as a chattel mortgage. Upon that point there is no evidence.

Again, in the every nature of things, a pledge or chattel mortgage is confined and limited to personal property, and it cannot be extended or made to apply to real property.

In what is known as schedule A, attached to Exhibit A, the property is described as lease No. 63 of 534 hectares of public land planted to 236,000 hemp and 700 coconut trees valued at P430,000, and forty-eight buildings of permanent materials valued at P5,500, and two buildings of strong materials valued at P15,000. It may well be doubted whether that kind of property could become the subject matter of a pledge or chattel mortgage.

It will be noted that it is a pledge of a lease of public land which is planted to hemp and coconut trees, and of forty-eight buildings of permanent materials and of two buildings of strong materials, clearly indicating that the buildings were attached to the soil and as such would be real estate.

It will also be noted that the pledge was executed in 1918, and it is very probable that the one thousand piculs of hemp have long since been sold. As to the twenty-three carabaos, thirty-eight bullocks and eighteen horses, there is no provision for the increase. Hence, the pledge, if valid

for any purpose, should be confined and limited to the particular property described in the pledge, and would not include any increase.

That is to say, if it be a fact that at time the pledge was executed the bank took actual, physical possession of the property described in it, and continued to remain in such possession up to the time the petition for insolvency was filed, or that it was in such possession for more than thirty days prior to the filing of the petition, the pledge would then be valid as to the personal property, and the bank would then have a preference on that property for the amount found due and owing upon its claim. If be a fact that the bank was not in the actual, physical possession of the property at the time the insolvency petition was filed, and that the Plantation Company was in such possession as its own, then the bank would not have a preference over any other unsecured creditor.

From what has been said, it follows that the judgment of the lower court is reversed, and the case remanded, with instructions for the assignee to proceed with the administration of the insolvent estate in the ordinary course of business and in the manner provided by law, and for such further proceedings as are not inconsistent with this opinion, with costs in favor of the appellant. So ordered.

Avanceña, C. J., Street, Villamor, Ostrand, Romualdez and Villa-Real, JJ., concur.

G.R. No. L-6342             January 26, 1954

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs.LAUREANO ATENDIDO, defendants-appellant.

Nicolas Fernandez for appellee.Gaudencio L. Atendido for appellant.

BAUTISTA, ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Nueva Ecija which orders the defendant to pay to the plaintiff the sum of P3,000, with interest thereon at the rate of 6% per annum from June 26, 1940, and the costs of action.

On June 26, 1940, Laureano Atendido obtained from the Philippine National Bank a loan of P3,000 payable in 120 days with interests at 6% per annum from the date of maturity. To guarantee the payment of the obligation the borrower pledged to the bank 2,000 cavanes of palay which were then deposited in the warehouse of Cheng Siong Lam & Co. in San Miguel, Bulacan, and to that effect the borrower endorsed in favor of the bank the corresponding warehouse receipt. Before the maturity of the loan, the 2,000 cavanes of palay disappeared for unknown reasons in the warehouse. When the loan matured the borrower failed to pay either the principal or the interest and so the present action was instituted.

Defendant set up a special defense and a counterclaim. As regards the former, defendant claimed that the warehouse receipt covering the palay which was given as security having been endorsed in blank in favor of the bank, and the palay having been lost or disappeared, he thereby became relieved of liability. And, by way of counterclaim, defendant claimed that, as a corollary to his theory, he is entitled to an indemnity which represents the difference between the value of the palay lost and the amount of his obligation.

The case was submitted on an agreed statements of facts and thereupon the court rendered judgment as stated in the early part of this decision.

Defendant took the case on appeal to the Court of Appeals but later it was certified to this Court on the ground that the question involved is purely one of law.

The only issue involved in this appeal is whether the surrender of the warehouse receipt covering the 2,000 cavanes of palay given as a security, endorsed in blank, to appellee, has the effect of transferring their title or ownership to said appellee, or it should be considered merely as a guarantee to secure the payment of the obligation of appellant.

In upholding the view of appellee, the lower court said: "The surrendering of warehouse receipt No. S-1719 covering the 2,000 cavanes of palay by the defendant in favor of the plaintiff was not that of a final transfer of that warehouse receipt but merely as a guarantee to the fulfillment of the original obligation of P3,000.00. In other word, plaintiff corporation had no right to dispose (of) the warehouse receipt until after the maturity of the promissory note Exhibit A. Moreover, the 2,000 cavanes of palay were not in the first place in the actual possession of plaintiff corporation, although symbolically speaking the delivery of the warehouse receipt was actually done to the bank."

We hold this finding to be correct not only because it is in line with the nature of a contract of pledge as defined by law (Articles 1857, 1858 & 1863, Old Civil Code), but is supported by the stipulations embodied in the contract signed by appellant when he secured the loan from the appellee. There is no question that the 2,000 cavanes of palay covered by the warehouse receipt were given to appellee only as a guarantee to secure the fulfillment by appellant of his obligation. This clearly appears in the contract Exhibit A wherein it is expressly stated that said 2,000 cavanes of palay were given as a collateral security. The delivery of said palay being merely by way of security, it follows that by the very nature of the transaction its ownership remains with the pledgor subject only to foreclose in case of non-fulfillment of the obligation. By this we mean that if the obligation is not paid upon maturity the most that the pledgee can do is to sell the property and apply the proceeds to the payment of the obligation and to return the balance, if any, to the pledgor (Article 1872, Old Civil Code). This is the essence of this contract, for, according to law, a pledgee cannot become the owner of, nor appropriate to himself, the thing given in pledge (Article 1859, Old Civil Code). If by the contract of pledge the pledgor continues to be the owner of the thing pledged during the pendency of the obligation, it stands to reason that in case of loss of the property, the loss should be borne by the pledgor. The fact that the warehouse receipt covering the palay was delivered, endorsed in blank, to the bank does not alter the situation, the purpose of such endorsement being merely to transfer the juridical possession of the property to the pledgee and to forestall any possible disposition thereof on the

part of the pledgor. This is true notwithstanding the provisions to the contrary of the Warehouse Receipt Law.

In case recently decided by this Court (Martinez vs. Philippine National Bank, 93 Phil., 765) which involves a similar transaction, this Court held:

In conclusion, we hold that where a warehouse receipt or quedan is transferred or endorsed to a creditor only to secure the payment of a loan or debt, the transferee or endorsee does not automatically become the owner of the goods covered by the warehouse receipt or quedan but he merely retains the right to keep and with the consent of the owner to sell them so as to satisfy the obligation from the proceeds of the sale, this for the simple reason that the transaction involved is not a sale but only a mortgage or pledge, and that if the property covered by the quedans or warehouse receipts is lost without the fault or negligence of the mortgagee or pledgee or the transferee or endorsee of the warehouse receipt or quedan, then said goods are to be regarded as lost on account of the real owner, mortgagor or pledgor.

Wherefore, the decision appealed from is affirmed, with costs against appellant.

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner, vs.COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.

 

REGALADO, J.:

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent court on March 8, 1991 in

CA-G.R. CV No. 23615 1 affirming with modifications, the earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein by herein petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and adopted by respondent court, appears of record:

1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280);

CTD CTDDates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,00026 Feb. 82 74602 to 74691 90 360,0002 Mar. 82 74701 to 74740 40 160,000

4 Mar. 82 90127 to 90146 20 80,0005 Mar. 82 74797 to 94800 4 16,0005 Mar. 82 89965 to 89986 22 88,0005 Mar. 82 70147 to 90150 4 16,0008 Mar. 82 90001 to 90020 20 80,0009 Mar. 82 90023 to 90050 28 112,0009 Mar. 82 89991 to 90000 10 40,0009 Mar. 82 90251 to 90272 22 88,000——— ————Total 280 P1,120,000===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with his purchased of fuel products from the latter (Original Record, p. 208).

3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).

4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de la Cruz) surrenders to defendant bank "full control of the indicated time deposits from and after date" of the assignment and further authorizes said bank to pre-terminate, set-off and "apply the said time deposits to the payment of whatever amount or amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein plaintiff formally informing it of its possession of the CTDs in question and of its decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time deposits (Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).

11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).

12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded interest therein at 16% per annum, moral and exemplary damages as well as attorney's fees.

After trial, the court a quo rendered its decision dismissing the instant complaint. 3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not become a holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer. 4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues involved in this recourse.

SECURITY BANKAND TRUST COMPANY6778 Ayala Ave., Makati No. 90101Metro Manila, PhilippinesSUCAT OFFICEP 4,000.00CERTIFICATE OF DEPOSITRate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of this certificate, with interest at the rate of 16% per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important to note that after the word "BEARER" stamped on the space provided supposedly for the name of the depositor, the words "has deposited" a certain amount follows. The document further provides that the amount deposited shall be "repayable to said depositor" on the period indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are payable, not to whoever purports to be the

"bearer" but only to the specified person indicated therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz as the person who made the deposit and further engages itself to pay said depositor the amount indicated thereon at the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable, viz:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in these certificates states that it was Angel dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic) the amount.

Atty. Calida:

q And no other person or entity or company, Mr. Witness?

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as the bank is concerned?

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the

face of the instrument itself. 9 In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing may be read in the light of surrounding circumstances in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility so expressed that fact in clear and categorical terms in the documents, instead of having the word "BEARER" stamped on the space provided for the name of the depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction between them would not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the plain import of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. 14 A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. 16

If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now labors under the presumption that evidence willfully suppressed would be adverse if produced. 19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:

. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:

The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in inexistence and is not discharged by the transfer, and that accordingly the use of the terms ordinarily importing conveyance of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge.

Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed.

Art. 2096. 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.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could affect or bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private respondent observed the requirements of the law in the case of lost negotiable instruments and the issuance of replacement certificates therefor, on the ground that petitioner failed to raised that issue in the lower court. 28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent was not included in the stipulation of the parties and in the statement of issues submitted by them to the trial court. 29 The issues agreed upon by them for resolution in this case are:

1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDs against the depositor's loan by virtue of the assignment (Annex "C").

3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs and the depositor's outstanding account with defendant, if any.

4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each other.

As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing enumeration does not include the issue of negligence on the part of respondent bank. An issue

raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as may involve privileged or impeaching matters. The determination of issues at a pre-trial conference bars the consideration of other questions on appeal. 32

To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can be premised on a multitude of other legal reasons and causes of action, of which respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial delimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely permissive and not mandatory. The very first article cited by petitioner speaks for itself.

Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of competent jurisdiction, asking that the principal, interest or dividends due or about to become due, be not paid a third person, as well as in order to prevent the ownership of the instrument that a duplicate be issued him. (Emphasis ours.)

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and possibility. 36

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a replacement of the instrument. Significantly, none of the provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or replacement instrument sans compliance with the procedure outlined therein, and none establishes a mandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is hereby AFFIRMED.

SO ORDERED.

G.R. No. L-18500             October 2, 1922

FILOMENA SARMIENTO and her husband EUSEBIO M. VILLASEÑOR, plaintiffs-appellants, vs.GLICERIO JAVELLANA, defendant-appellant.

Montinola, Montinola and Hontiveros for plaintiffs-appellants. J. M. Arroyo and Fisher and DeWitt for defendant-appellant.

AVANCEÑA, J.:

On August 28, 1991, the defendant loaned the plaintiffs the sum of P1,500 with interest at the rate of 25 per cent per annum for the term of one year. To guarantee this loan, the plaintiffs pledged a large medal with a diamond in the center and surrounded with ten diamonds, a pair of diamond earrings, a small comb with twenty-two diamonds, and two diamond rings, which the contracting parties appraised at P4,000. This loan is evidenced by two documents (Exhibits A and 1) wherein the amount appears to be P1,875, which includes the 25 per cent interest on the sum of P1,500 for the term of one year.

The plaintiffs allege that at the maturity of this loan, August 31, 1912, the plaintiff Eusebio M. Villaseñor, being unable to pay the loan, obtained from the defendant an extension, with the condition that the loan was to continue, drawing interest at the rate of 25 per cent per annum, so long as the security given was sufficient to cover the capital and the accrued interest. In the month of August, 1919, the plaintiff Eusebio M. Villaseñor, in company with Carlos M. Dreyfus, went to the house of the defendant and offered to pay the loan and redeem the jewels, taking with him, for this purpose, the sum of P11,000, but the defendant then informed them that the time for the redemption had already elapsed. The plaintiffs renewed their offer to redeem the jewelry by paying the loan, but met with the same reply. These facts are proven by the testimony of the plaintiffs, corroborated by Carlos M. Dreyfus.

The plaintiffs now bring this action to compel the defendant to return the jewels pledged, or their value, upon the payment by them of the sum they owe the defendant, with the interest thereon.

The defendant alleges, in his defense, that upon the maturity of the loan, August 31, 1912, he requested the plaintiff, Eusebio M. Villaseñor, to secure the money, pay the loan and redeem the jewels, as he needed money to purchase a certain piece of land; that one month thereafter, the plaintiff, Filomena Sarmiento, went to his house and offered to sell him the jewels pledged for P3,000; that the defendant then told her to come back on the next day, as he was to see his brother, Catalino Javellana, and ask him if he wanted to take the jewels for that sum; that on the next day the plaintiff, Filomena Sarmiento, went back to the house of the defendant who then paid her the sum of P1,125, which was the balance remaining of the P3,000 after deducting the plaintiff's loan.

It appearing that the defendant possessed these jewels originally, as a pledge to secure the payment of a loan stated in writing, the mere testimony of the defendant to the effect that later they were sold to him by the plaintiff, Filomena Sarmiento, against the positive testimony of the latter that she did not make any such sale, requires a strong corroboration to be accepted. We do

not find the testimony of Jose Sison to be of sufficient value as such corroboration. This witness testified to having been in the house of the defendant when Filomena went there to offer to sell the defendant the jewels, as well as on the third day when she returned to receive the price. According to this witness, he happened to be in the house of the defendant, having gone there to solicit a loan, and also accidentally remained in the house of the defendant for three days, and that that was how he happened to witness the offer to sell, as well as the receipt of the price on the third day. But not only do we find that the defendant has not sufficiently established, by his evidence, the fact of the purchase of the jewels, but also that there is a circumstance tending to show the contrary, which is the fact that up to the trial of this cause the defendant continued in possession of the documents, Exhibits A and 1, evidencing the loan and the pledge. If the defendant really bought these jewels, its seems natural that Filomena would have demanded the surrender of the documents evidencing the loan and the pledge, and the defendant would have returned them to plaintiff.

Our conclusion is that the jewels pledged to defendant were not sold to him afterwards.

Another point on which evidence was introduced by both parties is as to the value of the jewels in the event that they were not returned by the defendant. In view of the evidence of record, we accept the value of P12,000 fixed by the trial court.

From the foregoing it follows that, as the jewels in question were in the possession of the defendant to secure the payment of a loan of P1,500, with interest thereon at the rate of 25 per cent per annum from Augusts 31, 1911, to August 31, 1912, and the defendant having subsequently extended the term of the loan indefinitely, and so long as the value of the jewels pledged was sufficient to secure the payment of the capital and the accrued interest, the defendant is bound to return the jewels or their value (P12,000) to plaintiffs, and the plaintiffs have the right to demand the same upon the payment by them of the sum of P1,5000, plus the interest thereon at the rate of 25 per cent per annum from August 28, 1911.

The judgment appealed from being in accordance with this findings, the same is affirmed without special pronouncement as to costs. So ordered.

Araullo, C.J., Street, Malcolm, Villamor, Ostrand and Romualdez, JJ., concur.

R E S O L U T I O N

April 4, 1923          

AVANCEÑA, J.:

The defendant contends that the plaintiffs' action for the recovery of the jewels pledged has prescribed. Without deciding whether or not the action to recover the thing pledged may prescribe in any case, it not being necessary for the purposes of this opinion, but supposing that it may, still the defendant's contention is untenable. In the document evidencing the loan in question there is stated: "I transfer by way of pledge the following jewels." That this is a valid contract of pledge there can be no question. As a matter of fact the defendant does not question

it, but take s it for granted. However, it is contended that the obligation of the defendant to return the jewels pledged must be considered as not stated in writing, for this obligation is not expressly mentioned in the document. But if this contract of pledge is in writing, it must necessarily be admitted that the action to enforce the right, which constitutes the essence of this contract, is covered by a written contract. The duty of the creditor to return the thing pledged in case the principal obligation is fulfilled is essential in all contracts of pledge. This constitutes, precisely, the consideration of the debtor in this accessory contract, so that if this obligation of the creditor to return to thing pledged, and the right of the debtor to demand the return thereof, are eliminated, the contract would not be a contract of pledge. It would be a donation.

If the right of the plaintiffs to recover the thing pledged is covered by a written contract, the time for the prescription of this action is ten years, according to section 43 of the Code of Civil Procedure.

The defendant contends that the time of prescription of the action of the plaintiffs to recover the thing pledged must be computed from August 28, 1911, the date of the making of the contract of loan secured by this pledge. The term of this loan is one year. However, it is contended that the action of the plaintiff to recover the thing pledged accrued on the very date of the making of the contract, inasmuch as from that date they could have recovered the same by paying the loan even before the expiration of the period fixed for payment. This view is contrary to law. Whenever a term for the performance of an obligation is fixed, it is presumed to have been established for the benefit of the creditor as well as that of the debtor, unless from its tenor or from other circumstances it should appear that the term was established for the benefit of one or the other only (art. 1128 of the Civil Code.) In this case it does not appear, either from any circumstance, or from the tenor of the contract, that the term of one year allowed the plaintiffs to pay the debt was established in their favor only. Hence it must be presumed to have been established for the benefit of the defendant also. And it must be so, for this is a case of a loan, with interest, wherein the term benefits the plaintiffs by the use of the money, as well as the defendant by the interest. This being so, the plaintiffs had no right to pay the loan before the lapse of one year, without the consent of the defendant, because such a payment in advance would have deprived the latter of the benefit of the stipulated interest. It follows from this that appellant is in error when he contents that the plaintiffs could have paid the loan and recovered the thing pledged from the date of the execution of the contract and, therefore, his theory that the action of the plaintiffs to recover the thing pledged accrued from the date of the execution of the contract is not tenable. 1awph!l.net

It must, therefore, be admitted that the action of the plaintiffs for the recovery of the thing pledged did not accrue until August 31, 1912, when the term fixed for the loan expired. Computing the time from that date to that of the filing of the complaint in this cause, October 9, 1920, it appears that the ten years fixed by the law for the prescription of the action have not yet elapsed.

On the other hand, the contract of loan with pledge is in writing and the action of the defendant for the recovery of the loan does not prescribe until after ten years. It is unjust to hold that the action of the plaintiffs for the recovery of the thing pledged, after the payment of the loan, has already prescribed while the action of the defendant for the recovery of the loan has not yet

prescribed. The result of this would be that the defendant might have collected the loan and at the same time kept the thing pledged.

The motion for reconsideration is denied.

Araullo, C.J., Malcolm, Ostrand and Romualdez, JJ., concur.

G.R. No. L-21069            October 26, 1967

MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee, vs.RODOLFO R. VELAYO, defendant-appellant.

Villaluz Law Office for plaintiff-appellee. Rodolfo R. Velayo for and in his own behalf as defendant-appellant.

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

Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435) sentencing appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum of P2,565.00 with interest at 12-½% per annum from July 13, 1954; P120.93 as premiums with interest at the same rate from June 13, 1954: attorneys' fees in an amount equivalent to 15% of the total award, and the costs.

Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil Code of the Philippines (1950).

The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to pay the surety company an annual premium of P112.00; to indemnify the Company for any damage and loss of whatsoever kind and nature that it shall or may suffer, as well as reimburse the same for all money it should pay or become liable to pay under the bond including costs and attorneys' fees.

As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety Company "for the latter's further protection", with power to sell the same in case the surety paid or become obligated to pay any amount of money in connection with said bond, applying the proceeds to the payment of any amounts it paid or will be liable to pay, and turning the balance, if any, to the persons entitled thereto, after deducting legal expenses and costs (Rec. App. pp. 12-15).

Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing therefrom a net product of P235.00 only. Thereafter and

upon Velayo's failure to pay the balance, the surety company brought suit in the Municipal Court. Velayo countered with a claim that the sale of the pledged jewelry extinguished any further liability on his part under Article 2115 of the 1950 Civil Code, which recites:

Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary.

The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to the Court of First Instance, the defense was once more overruled, and the case decided in the terms set down at the start of this opinion.

Thereupon, Velayo resorted to this Court on appeal.

The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72):

It is thus crystal clear that the main agreement between the parties is the Indemnity Agreement and if the pieces of jewelry mentioned by the defendant were delivered to the plaintiff, it was merely as an added protection to the latter. There was no understanding that, should the same be sold at public auction and the value thereof should be short of the undertaking, the defendant would have no further liability to the plaintiff. On the contrary, the last portion of the said agreement specifies that in case the said collateral should diminish in value, the plaintiff may demand additional securities. This stipulation is incompatible with the idea of pledge as a principal agreement. In this case, the status of the pledge is nothing more nor less than that of a mortgage given as a collateral for the principal obligation in which the creditor is entitled to a deficiency judgment for the balance should the collateral not command the price equal to the undertaking.

It appearing that the collateral given by the defendant in favor of the plaintiff to secure this obligation has already been sold for only the amount of P235.00, the liability of the defendant should be limited to the difference between the amounts of P2,800.00 and P235.00 or P2,565.00.

We agree with the appellant that the above quoted reasoning of the appealed decision is unsound. The accessory character is of the essence of pledge and mortgage. As stated in Article 2085 of the 1950 Civil Code, an essential requisite of these contracts is that they be constituted to secure the fulfillment of a principal obligation, which in the present case is Velayo's undertaking to indemnify the surety company for any disbursements made on account of its attachment counterbond. Hence, the fact that the pledge is not the principal agreement is of no significance nor is it an obstacle to the application of Article 2115 of the Civil Code.

The reviewed decision further assumes that the extinctive effect of the sale of the pledged chattels must be derived from stipulation. This is incorrect, because Article 2115, in its last

portion, clearly establishes that the extinction of the principal obligation supervenes by operation of imperative law that the parties cannot override:

If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency notwithstanding any stipulation to the contrary.

The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the articles pledged, instead of suing on the principal obligation, the creditor has waived any other remedy, and must abide by the results of the sale. No deficiency is recoverable.

It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the legal prescription contained in Article 1484(3) of the same Code, concerning the effect of a foreclosure of a chattel mortgage constituted to secure the price of the personal property sold in installments, and which originated in Act 4110 promulgated by the Philippine Legislature in 1933.

WHEREFORE, the decision under appeal is modified and the defendant absolved from the complaint, except as to his liability for the 1954 premium in the sum of P120.93, and interest at 12-1/2% per annum from June 13, 1954. In this respect the decision of the Court below is affirmed. No costs. So ordered.

Concepcion, C.J., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.