FIRST DIVISION

[G. R. No. 126800. November 29, 1999]

NATALIA P. BUSTAMANTE, petitioner vs. SPOUSES RODITO F. ROSEL and NORMA A. ROSEL,
respondents.

RESOLUTION

PARDO, J. :

The case before the Court is a petition for review on certiorarii[1] to annul the decision of the Court of Appeals,ii[2]
reversing and setting aside the decision of the Regional Trial Court,iii[3], dated November 10, 1992, Judge Teodoro
P. Regino. 3 Quezon City, Branch 84, in an action for specific performance with consignation.

On March 8, 1987, at Quezon City, Norma Rosel entered into a loan agreement with petitioner Natalia Bustamante
and her late husband Ismael C. Bustamante, under the following terms and conditions:

1. That the borrowers are the registered owners of a parcel of land, evidenced by TRANSFER CERTIFICATE OF
TITLE No. 80667, containing an area of FOUR HUNDRED TWENTY THREE (423) SQUARE Meters, more or
less, situated along Congressional Avenue.

2. That the borrowers were desirous to borrow the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS
from the LENDER, for a period of two (2) years, counted from March 1, 1987, with an interest of EIGHTEEN
(18%) PERCENT per annum, and to guaranty the payment thereof, they are putting as a collateral SEVENTY (70)
SQUARE METERS portion, inclusive of the apartment therein, of the aforestated parcel of land, however, in the
event the borrowers fail to pay, the lender has the option to buy or purchase the collateral for a total consideration of
TWO HUNDRED THOUSAND (P200,000.00) PESOS, inclusive of the borrowed amount and interest therein;

3. That the lender do hereby manifest her agreement and conformity to the preceding paragraph, while the borrowers
do hereby confess receipt of the borrowed amount.iv[4]

When the loan was about to mature on March 1, 1989, respondents proposed to buy at the pre-set price of
P200,000.00, the seventy (70) square meters parcel of land covered by TCT No. 80667, given as collateral to
guarantee payment of the loan. Petitioner, however, refused to sell and requested for extension of time to pay the
loan and offered to sell to respondents another residential lot located at Road 20, Project 8, Quezon City, with the
principal loan plus interest to be used as down payment. Respondents refused to extend the payment of the loan and
to accept the lot in Road 20 as it was occupied by squatters and petitioner and her husband were not the owners
thereof but were mere land developers entitled to subdivision shares or commission if and when they developed at
least one half of the subdivision area.v[5]

Hence, on March 1, 1989, petitioner tendered payment of the loan to respondents which the latter refused to accept,
insisting on petitioners signing a prepared deed of absolute sale of the collateral.

On February 28, 1990, respondents filed with the Regional Trial Court, Quezon City, Branch 84, a complaint for
specific performance with consignation against petitioner and her spouse.vi[6]

Nevertheless, on March 4, 1990, respondents sent a demand letter asking petitioner to sell the collateral pursuant to
the option to buy embodied in the loan agreement.

On the other hand, on March 5, 1990, petitioner filed in the Regional Trial Court, Quezon City a petition for
consignation, and deposited the amount of P153,000.00 with the City Treasurer of Quezon City on August 10,
1990.vii[7]
When petitioner refused to sell the collateral and barangay conciliation failed, respondents consigned the amount of
P47,500.00 with the trial court.viii[8] In arriving at the amount deposited, respondents considered the principal loan
of P100,000.00 and 18% interest per annum thereon, which amounted to P52,500.00.ix[9] The principal loan and the
interest taken together amounted to P152,500.00, leaving a balance of P 47,500.00.x[10]

After due trial, on November 10, 1992, the trial court rendered decision holding:

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

1. Denying the plaintiffs prayer for the defendants execution of the Deed of Sale to Convey the collateral in
plaintiffs favor;

2. Ordering the defendants to pay the loan of P100,000.00 with interest thereon at 18% per annum commencing on
March 2, 1989, up to and until August 10, 1990, when defendants deposited the amount with the Office of the City
Treasurer under Official Receipt No. 0116548 (Exhibit 2); and

3. To pay Attorneys Fees in the amount of P 5,000.00, plus costs of suit.

SO ORDERED.

Quezon City, Philippines, November 10, 1992.

TEODORO P. REGINO

Judgexi[11]

On November 16, 1992, respondents appealed from the decision to the Court of Appeals.xii[12] On July 8, 1996, the
Court of Appeals rendered decision reversing the ruling of the Regional Trial Court. The dispositive portion of the
Court of Appeals decision reads:

IN VIEW OF THE FOREGOING, the judgment appeal (sic) from is REVERSED and SET ASIDE and a new one
entered in favor of the plaintiffs ordering the defendants to accept the amount of P 47,000.00 deposited with the
Clerk of Court of Regional Trial Court of Quezon City under Official Receipt No. 0719847, and for defendants to
execute the necessary Deed of Sale in favor of the plaintiffs over the 70 SQUARE METER portion and the
apartment standing thereon being occupied by the plaintiffs and covered by TCT No. 80667 within fifteen (15) days
from finality hereof. Defendants, in turn, are allowed to withdraw the amount of P153,000.00 deposited by them
under Official Receipt No. 0116548 of the City Treasurers Office of Quezon City. All other claims and
counterclaims are DISMISSED, for lack of sufficient basis. No costs.

SO ORDERED.xiii[13]

Hence, this petition.xiv[14]

On January 20, 1997, we required respondents to comment on the petition within ten (10) days from notice.xv[15]
On February 27, 1997, respondents filed their comment.xvi[16]

On February 9, 1998, we resolved to deny the petition on the ground that there was no reversible error on the part of
respondent court in ordering the execution of the necessary deed of sale in conformity the with the parties stipulated
agreement. The contract is the law between the parties thereof (Syjuco v. Court of Appeals, 172 SCRA 111, 118,
citing Phil. American General Insurance v. Mutuc, 61 SCRA 22; Herrera v. Petrophil Corporation, 146 SCRA
360).xvii[17]
On March 17, 1998, petitioner filed with this Court a motion for reconsideration of the denial alleging that the real
intention of the parties to the loan was to put up the collateral as guarantee similar to an equitable mortgage
according to Article 1602 of the Civil Code.xviii[18]

On April 21, 1998, respondents filed an opposition to petitioners motion for reconsideration. They contend that the
agreement between the parties was not a sale with right of re-purchase, but a loan with interest at 18% per annum for
a period of two years and if petitioner fails to pay, the respondent was given the right to purchase the property or
apartment for P200,000.00, which is not contrary to law, morals, good customs, public order or public policy.
xix[19]

Upon due consideration of petitioners motion, we now resolve to grant the motion for reconsideration.

The questions presented are whether petitioner failed to pay the loan at its maturity date and whether the stipulation
in the loan contract was valid and enforceable.

We rule that petitioner did not fail to pay the loan.

The loan was due for payment on March 1, 1989. On said date, petitioner tendered payment to settle the loan which
respondents refused to accept, insisting that petitioner sell to them the collateral of the loan.

When respondents refused to accept payment, petitioner consigned the amount with the trial court.

We note the eagerness of respondents to acquire the property given as collateral to guarantee the loan. The sale of
the collateral is an obligation with a suspensive condition.xx[20] It is dependent upon the happening of an event,
without which the obligation to sell does not arise. Since the event did not occur, respondents do not have the right
to demand fulfillment of petitioners obligation, especially where the same would not only be disadvantageous to
petitioner but would also unjustly enrich respondents considering the inadequate consideration (P200,000.00) for a
70 square meter property situated at Congressional Avenue, Quezon City.

Respondents argue that contracts have the force of law between the contracting parties and must be complied with in
good faith.xxi[21] There are, however, certain exceptions to the rule, specifically Article 1306 of the Civil Code,
which provides:

Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the property given as
security for the loan. This is embraced in the concept of pactum commissorium, which is proscribed by law.xxii[22]

The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security
for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the
creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated
period.xxiii[23]

In Nakpil vs. Intermediate Appellate Court,xxiv[24] we said:

The arrangement entered into between the parties, whereby Pulong Maulap was to be considered sold to him
(respondent) xxx in case petitioner fails to reimburse Valdes, must then be construed as tantamount to pactum
commissorium which is expressly prohibited by Art. 2088 of the Civil Code. For, there was to be automatic
appropriation of the property by Valdes in the event of failure of petitioner to pay the value of the advances. Thus,
contrary to respondents manifestation, 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.
A significant task in contract interpretation is the ascertainment of the intention of the parties and looking into the
words used by the parties to project that intention. In this case, the intent to appropriate the property given as
collateral in favor of the creditor appears to be evident, for the debtor is obliged to dispose of the collateral at the
pre-agreed consideration amounting to practically the same amount as the loan. In effect, the creditor acquires the
collateral in the event of non payment of the loan. This is within the concept of pactum commissorium. Such
stipulation is void.xxv[25]

All persons in need of money are liable to enter into contractual relationships whatever the condition if only to
alleviate their financial burden albeit temporarily. Hence, courts are duty bound to exercise caution in the
interpretation and resolution of contracts lest the lenders devour the borrowers like vultures do with their prey.

WHEREFORE, we GRANT petitioners motion for reconsideration and SET ASIDE the Courts resolution of
February 9, 1998. We REVERSE the decision of the Court of Appeals in CA-G. R. CV No. 40193. In lieu thereof,
we hereby DISMISS the complaint in Civil Case No. Q-90-4813.

No costs.

SO ORDERED.

Davide, Jr., C.J., Puno, Kapunan, and Ynares-Santiago, JJ., concur.

i[1] Under Rule 45, 1964 Revised Rules of Court.

ii[2] In CA-G.R. CV No. 40193, promulgated on July 8, 1996.
iii[3] In Civil Case No. Q-90-481
iv[4] Exhibit A, RTC Record, p. 142.
v[5] Regional Trial Court Decision, Rollo, p. 31.
vi[6] Civil Case No. Q-90-4813
vii[7] Exhibit 2, RTC Record, p. 182.
viii[8] Under Official Receipt No. 0719847 dated February 28, 1990, issued by the City Treasurer, Quezon City,
with the Clerk of Court, Regional Trial Court, National Capitol Judicial Region, Quezon City, as payee, RTC
Record, p. 162.
ix[9] (P100,000.00 x 18%) 2 years and 11 months (March 8, 1987 up to February 9, 1990) P18,000 x 2 years and 11
months = P 52,500.
x[10] Comment, Rollo, pp. 41-45.
xi[11] Decision, Regional Trial Court, Quezon City, Rollo, pp. 30-39.
xii[12] Docketed as CA-G.R. CV No. 40193
xiii[13] Court of Appeals Decision, Rollo, pp. 19-26.
xiv[14] Petition, filed on November 29, 1996. Rollo, pp. 7-17. On November 27, 1996, the Court granted petitioner
an extension of thirty days from the expiration of the reglementary period within which to file a petition for review
on certiorari (Rollo, p. 14).
xv[15] Rollo, p. 40.
xvi[16] Rollo, pp. 41-45.
xvii[17] Rollo, p. 55.
xviii[18] Motion for Reconsideration, Rollo, pp. 56-58.
xix[19] Rollo, pp. 60-65.
xx[20] Article 1181, Civil Code. In conditional obligations, the acquisition of the rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the
condition.
xxi[21] Article 1159, Civil Code.
xxii[22] Article 2088, Civil Code. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.
xxiii[23] Development Bank of the Philippines vs. Court of Appeals, 284 SCRA 14, 26 (1998), citing Tolentino,
Arturo M., Commentaries & Jurisprudence on the Civil Code of the Philippines, Vol. V, pp. 536-537 (1992), citing
Uy Tong vs. Court of Appeals, 161 SCRA 383 (1988).
xxiv[24] 225 SCRA 456,467 (1993).
xxv[25] Article 2208, Civil Code, quoted above.

EN BANC

[G.R. Nos. L-4505 & L-5228. September 15, 1953.]

YSIDRA COJUANGCO, JUAN COJUANGCO, JOSE COJUANGCO, EDUARDO COJUANGCO and

RAMON COJUANGCO, in his capacity as administrator of the estate of ANTONIO COJUANGCO,
Plaintiffs-Appellees, v. MANUEL ERNESTO GONZALES, Defendant-Appellant.

Cardenas & Casal for Appellant.

Lorenzo Sumulong and Antonio C. Masaquel for Appellees.

SYLLABUS

1. EVIDENCE; PROBATIVE VALUE OF DOCUMENTS PRESENTED IN REBUTTAL. — Plaintiffs brought

this action to recover rentals merely. It is argued by the defendant that the only contract between the parties was the
original one of sale with the right to repurchase, as the subsequent contracts were not offered as evidence in chief,
but merely in rebuttal, and therefore, immaterial and inadmissible. Held: Their introduction as evidence on rebuttal
is proper. It was the defendant who put up the special defense that the land supposed to have been leased to him was
in fact conveyed as a security merely, and a counterclaim demanding the resale of the property to him. It was in
support of this special defense and counterclaim that he presented the original contract of sale with the right to
repurchase. In their reply, the plaintiffs expressly alleged that defendant’s right to repurchase had expired in the year
1937, and it was to support this allegation that the subsequent contracts were offered in rebuttal. They were,
therefore, offered in rebuttal of a new matter put up in defendant’s answer, which was developed in defendant’s
evidence in chief, and for that purpose perfectly proper and legal. Plaintiffs could not be expected to introduce them
as part of their evidence in chief, in anticipation merely of defendant’s evidence.

2. CONTRACTS AND OBLIGATIONS; NOVATION; REQUIREMENT OF A NOVATION. — The original sale

with right to repurchase executed in 1924 fixed the price of repurchase at P20,000, but the subsequent contracts
placed it at P60,000. The right to repurchase was expressly recognized in the original deed of sale. In the subsequent
agreements, plaintiffs’ title was expressly recognized and only an option to purchase was granted, this right being
made subject to the condition that the yearly rentals be paid. Held: It is evident that there has been a clear case of
novation within the purview of article 1204 of the Old Civil Code. (8 Manresa 386.) No specific form is required of
a novation. All that is required is incompatibility between the original and the subsequent contracts (8 Manresa, p.
430, Abel v. Lina Malasarte, L-2374, September 21, 1950.) In two respects, at least, there is incompatibility between
the original contract and the subsequent ones, namely, in the price of the repurchase, and in the holder of the title. In
the original contract, the price was only P20,000 and the owner was the defendant; in the latter deeds the price is
P60,000 and the owners, the plaintiffs. While there may not be any substantial difference between the right to
repurchase and the option to buy, the consideration was increased from P20.000 for the right to repurchase to
P60,000 for the option to buy. The transfer of the title from the vendor a retro to the vendee and the acquiescence
thereto of the vendor also had changed entirely their respective rights and obligations, for the right under the pacto
de retro sale would never terminate, except by an action to execute the security, whereas under the new contracts the
repurchase could be made only during the terms specified in the option.

3. ID.; MORTGAGE; THE DOCTRINE ONCE A MORTGAGE ALWAYS A MORTGAGE, EXPLAINED. —

The case of Macapinlac v. Gutierrez Repide (43 Phil., 799) quoted with approval the doctrine that if the instrument
is in its essence a mortgage, the parties can not 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 (Pomeroy Equity
Jurisprudence, section 1193). The principle just stated prohibits the parties from making stipulations that would tend
to destroy the contract of its essence as a mortgage and deprive the debtor of the equitable right of redemption. The
stipulations that are prohibited are those executed or made simultaneously with the original contract, not those
subsequently entered into. The principle does not prohibit modification of the original contract by subsequent
agreements such as the parties may see fit to adopt.

DECISION

LABRADOR, J.:

In G. R. No. L-4505 plaintiffs-appellees seek to recover from the defendant-appellant P24,355.30, representing the
total balance of an original indebtedness of P19,400.68 as of March 31, 1949, plus interest thereon (on P24,355.30)
at the rate of 10 per cent until the same is paid; while in G. R. No. L-5228 they seek to recover the rentals of a parcel
of riceland situated in San Manuel, Tarlac leased to defendant-appellant from March 1, 1941 at P6,000 a year, plus
interest on said rentals at 12 per cent per annum and P4,000 as attorney’s fees. In the first case, the defendant admits
an original indebtedness of P10.000 on June 30, 1947 plus an additional amount of P9,400.68, but denies the alleged
obligation to pay interest thereon. He claims that the above amounts are part of a transaction entered into and
mentioned in the other case, and expressed willingness to pay the amount actually due, but that upon deposit thereof
plaintiffs should be required to return the real estate described in the complaint in the second action. In his answer in
the second case, the defendant alleges that the land claimed to have been leased to him was conveyed by him to
plaintiffs to secure the payment of an original loan of P20,000, which contract was made to appear as a sale with
right to repurchase and a lease; that the loan was subsequently increased to P60,000; that he paid interests on the
said loan from the year 1933 to 1942, but that in the years 1942 to 1945, the plaintiffs refused to accept the interests;
that in 1943 and 1944 defendant offered to redeem the property, but plaintiffs refused to allow him to do so; and, by
way of counterclaim, that the defendant would pay all of his indebtedness, but that plaintiffs be required to execute a
deed of resale of the land in his favor. In reply to this counterclaim for the resale of the property, plaintiffs-appellees
allege that defendant’s right to purchase the property had expired in the year 1937 and, therefore, they prayed that
the defendant’s demand be denied. On these issues the parties went to trial, and thereafter the court rendered
judgment, in the second case, ordering the defendant to pay plaintiffs P6,000 a year from March 1, 1941, with
interest thereon at 12 per cent per annum from March, 1945. In the first case, the court ordered the defendant to pay
to plaintiffs the sum of P19,400.68 plus P4,954.62, plus interest on said P19,400.68 at 10 per cent from March 31,
1949, and dismissed defendant’s counterclaim. The payment of the rentals from 1942 to 1945 was declared
suspended by reason of the moratorium law.

The land involved in the second case originally belonged to defendant, who had a registered title thereto as early as
the year 1915 (Original Certificate of Title No. 376, Register of Deeds, Tarlac, Exhibit D-2.) It was mainly riceland,
but some of it were residential lots. In the year 1928, it was assessed at P102,706.84 Exhibits D-5-a to n.) In 1918, it
was mortgaged to the Philippine National Bank for P15,000. On March 3, 1924, it was sold to Jose Cojuangco, Sr.,
deceased father of plaintiffs, for P20,000, with the right to repurchase the same in two years. At the time of the sale,
a contract of lease was entered into between the vendor and the vendee, whereby the latter leased the land to the
vendor for P2,400 a year, payable in palay (Exhibit D-4). The defendant neglected to pay the annual rentals of the
land, or the taxes thereon, so it was declared forfeited to the government for non-payment of real estate taxes. On
June 23, 1931, the heirs of the vendee, thru their lawyer, notified defendant of these facts and gave him notice to
redeem the land, otherwise they would consolidate ownership thereof (Exhibit P-9.) As the vendor was not heard
from, the heirs of the vendee on July 5, 1932, consolidated their ownership (Exhibit P-14), and title to the property
was issued in their favor (Exhibit P-1). They also paid the delinquent taxes on the land on August 15, 1932 (Exhibits
P-16 to P- 20). On August 17, 1932, a liquidation of accounts of the defendant was made. The total indebtedness of
the defendant, including the principal and the interests, was found to have reached P57,200.54. An additional
amount of P2,799.46 was paid to him in order to raise his total indebtedness to P60,000 (Exhibits P-11 and P-12),
and on the same day a new contract of lease was entered into between them, whereby the defendant received the
property from the plaintiffs by way of lease, at a rental of P4,200 until March 1, 1933. It was expressly stipulated
that the land shall be returned to the lessors on March 1, 1933, but that if the lessee pay the rental agreed upon, he
may be allowed to repurchase the property for P60,000 (Exhibit P-13.) The defendant did not redeem the property
within the time agreed upon, and on August 23, 1933, upon defendant’s request, they again entered into another
contract of lease, fixing the yearly rental at P6,000. The defendant was again given the privilege to repurchase the
property until March 1, 1937 for the sum of P60,000, provided he regularly paid the yearly rental (Exhibit P-2.) But
again the defendant failed to redeem the property within this period, although he was allowed to continue in
possession of the land. He paid his rentals, however, until the outbreak of the war in 1941.

On May 5, 1945 plaintiffs, thru their lawyers, demanded the possession of the land from the defendant (Exhibit D-
8.) Upon receipt of this letter, the defendant replied that he was surprised by this demand as he believed that
plaintiffs would never assume to be the owners of the property in violation of their understanding or of their word of
honor (Exhibit D-9.) The defendant, nevertheless, was allowed to continue in possession of the property, although
he paid the yearly rentals or the interest on the capital of the debt. Plaintiffs brought these two actions in the year
1949.

The main question at issue is the nature of the transaction that was entered into between the parties in relation to the
property. Plaintiffs claim that they are the owners thereof since the year 1932, while the defendant denies this
alleged ownership, pretending that the conveyance of the land in favor of plaintiffs was merely as a security for the
payment of an indebtedness. On this issue, the trial court held that while the original contract entered into between
the parties was a loan with security, there has been a novation thereof, as supported by the preponderance of the
evidence, especially the title, Exhibit P-1, and the deeds of lease, Exhibit P-2 and Exhibit P-13. It therefore rendered
judgments in both cases in favor of plaintiffs and against the defendant, as already indicated above.

The defendant’s principal contention on this appeal is that no novation of the original contract of loan with security
was ever brought about by and between the parties. It is argued in support of this contention that the only contract
between the parties was the original one of sale with the right to repurchase dated March 3, 1924, Exhibit D-3, as the
subsequent contracts of August 17, 1932, Exhibit P-13 and of August 23, Exhibit P-2, were not offered as evidence
in chief, but merely in rebuttal (t. s. n. p. 281) and, therefore, immaterial and inadmissible (Assignment of Error No.
2.) The importance of this preliminary question becomes evident, when we take into account that these two
contracts, Exhibit P-13 and Exhibit P-2, are the main basis of the trial court’s conclusion that there has been a
novation of the original contract.

We hold that their introduction as evidence on rebuttal is proper. Plaintiffs brought the action to recover rentals
merely. It was the defendant who put up the special defense that the land supposed to have been leased to him was in
fact conveyed as a security merely, and a counterclaim demanding the resale of the property to him. It was in
support of this special defense and counterclaim that he presented the original contract of sale with the right to
repurchase, Exhibit D-3. In their reply, the plaintiffs expressly alleged that defendant’s right to repurchase had
expired in the year 1937, and it was to support this allegation that Exhibit P-2 and Exhibit P-13 were offered. They
were, therefore, offered in rebuttal of a new matter put up in defendant’s answer, which was developed in
defendant’s evidence in chief, and for that purpose perfectly proper and legal. Plaintiffs could not be expected to
introduce them as part of their evidence in chief, in anticipation merely of defendant’s evidence.

But the brunt of defendant’s argument is made to rest on the principle that "once a mortgage, always a mortgage",
claim being made that since the original contract was admittedly a mortgage or venta con pacto de retro, the
execution of Exhibit P-13 and Exhibit P-2, as well as of Exhibit P-11, upon which the trial court mainly based its
conclusion that the original contract was novated, did not have the effect of modifying the agreement.

It is to be noted that the contract of lease, Exhibit P-13, of August 17, 1932 contains the following
stipulation:jgc:chanrobles.com.ph

"(f) Que en o antes del 1 ° de Marzo de 1933, pero no después, y siempre que se cumplan puntual y fielmente las
demas condiciones de este contrato particularmente el pago del convenido alquiler o canon de P4,200 en o antes de
dicha fecha, el arrendatario podra comprar la finca arrendada mediante pago en efectivo du la suma de sesenta mil
pesos (P60,000) moneda filipina, sin perjuicio de que si la compra se hiciera antes de llegar el 1. ° de Marzo de
1933, se hara un descuento proporcional en el canon convenido por el tiempo no transcurrido del périodo del
arrendamiento."cralaw virtua1aw library

And on the same date of its execution, defendant executed the Memorandum, Exhibit P-11, expressly
declaring:jgc:chanrobles.com.ph

". . . un total de P60,000, que es el mismo precio estipulado para que yo pueda recomprar la referida finca de dichos
Señores según el contrato otorgado a mi favor en esta misma fecha, derecho que ahora se me concede porque de
hecho ya he perdido el derecho a recomprarlo bajo el contrato de venta-a-retro de fecha 3 de Marzo de 1924."
(Emphasis ours.)

About a year later, more specifically on August 23, 1933, plaintiffs and the defendant again agreed in Exhibit P-2, as
follows:jgc:chanrobles.com.ph

"(g) Que en o antes del primero de Marzo de 1937, pero no deepués, y siempre que se cumplan puntual y fielmente
las demas condiciones de este contrato particularmente el pago del convenido alquiler a canon anual de SEIS MIL
PESOS (P6,000) en o antes del primero de Marzo de cada año desde el año de 1934 hasta 1937, el arrendatario
podra comprar la finca arrendada mediante pago en efectivo de la suma de SESENTA MIL PESOS (P60,000)
moneda filipina, . . ."cralaw virtua1aw library

It is also to be noted that before the execution of the above documents, plaintiffs were already holders of the title of
the property (Exhibit P-1) by virtue of the affidavit of consolidation of July 5, 1932, Exhibit P-14. Did not these
documents and the above circumstances have the effect of bringing about a novation of the contract? The trial court
said they did, and the defendant-appellant contends they did not.

The original sale with right to repurchase executed in 1924, Exhibit D-3, fixed the price of repurchase at P20,000,
but the subsequent contracts placed it at P60,000. The right to repurchase was expressly recognized in the original
deed of sale, Exhibit D-3. In the subsequent agreements, plaintiffs’ title was expressly recognized and only an option
to purchase was granted, this right being made subject to the condition that the yearly rentals be paid. In two
respects, at least, there is incompatibility between the original contract and the subsequent ones, namely, in the price
of the repurchase, and in the holder of the title. In the original contract, the price was only P20,000 and the owner
was defendant; in the latter deeds the price is P60,000 and the owners — the plaintiffs. It is evident that there has
been a clear case of novation within the purview of Article 1204 of the old Civil Code. "La variación, según el
articulo anterior (1204), tendra que consistir, o en la sustitución del objeto, o en el cambio de la causa o de las
condiciones principales." (8 Manresa 386.) While there may not be any substantial difference between the right to
repurchase and the option to buy, the consideration was increased from P20,000 for the right to repurchase to
P60,000 for the option to buy. The transfer of the title from the vendor a retro to the vendee and the acquiescence
thereto of the vendor also had changed entirely their respective rights and obligations, for the right under the pacto
de retro sale would never terminate, except by an action to execute the security, whereas under the new contracts the
repurchase could be made only during the terms specified in the option. This limitation of the time is apparent from
the conduct of the defendant himself in asking for the extension of the time to buy. No specific form is required of a
novation. All that is required is incompatibility between the original and the subsequent contracts. (8 Manresa, p.
430; Abel v. De Lima and Malasarte, 87 Phil., 352.)

Capital is made by defendant of a citation from Pomeroy’s Equity Jurisprudence, quoted with approval in the case of
Macapinlac v. Gutierrez Repide, (43 Phil. 779) and cited in the decision of the court below. The citation is as
follows:jgc:chanrobles.com.ph

"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 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
can not 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. The debtor or mortgagor can not in the inception of the
instrument as a part or collateral to its execution, in any manner deprive himself of his equitable right to come in
after a default in paying the money at the stipulated time and to pay the debt and interest, and thereby to redeem the
land from the lien and encumbrance of the mortgage; the equitable right of redemption, after a default is preserved,
remains in full force, and will be protected and enforced by a court of equity, no matter what stipulations the parties
may have made in the original transaction purporting to cut off this right. Macapinlac v. Gutierrez Repide, 43, 779,
quoting Pomeroy Equity Jurisprudence section 1193."cralaw virtua1aw library

The principle stated in the quotation prohibits the parties from making stipulations that would tend to destroy the
contract of its essence as a mortgage and deprive the debtor of the equitable right of redemption. The stipulations
that are prohibited are those executed or made simultaneously with the original contract, not those subsequently
entered into. The principle does not prohibit modification of the original contract by subsequent agreements such as
the parties may see fit to adopt. In the case at bar, the array of facts and circumstances adduced to support
defendant’s contention may support conclusively the fact that the original contract was a mere equitable mortgage,
which is not disputed. But they do not support the proposition that the contract was always a mortgage, in view of
the positive acts of both parties indicative of a novation of the contract. The intent of the plaintiffs to terminate the
original contract was evident from the time they executed the affidavit of consolidation, Exhibit P-14. It was also
evident from the fact that they had the land transferred to their names in the tax records, and the land taxes were no
longer charged against the defendant. The defendant acquiesced in this consolidation when he made his
Memorandum, Exhibit P-11, admitting that his right to repurchase had been lost. His acquiescence was expressly
admitted by him in the trial, thus:chanrob1es virtual 1aw library

Q. And from 1933 up to the present time you also allowed the title over the land in question to remain in the name of
the Cojuangcos?. — A. It was not permitted by me, but it was already done so there is nothing I can do but to agree
to it. (t. s. n., pp. 145- 146; Emphasis supplied.)

His acquiescence is further to be inferred from the fact that his concern in the years 1932 and 1933, after plaintiffs
had consolidated their ownership, was not to insist on his original right to repurchase, but only to secure an
extension of the period within which he could make repurchase, thus:jgc:chanrobles.com.ph

". . . I was only interested in that part (referring to Exhibit P- 13) that gives me the option to buy within the period
stipulated in the contract." (t. s. n., pp. 212-213.)

Defendant’s letter, Exhibit D-9, with which he answered plaintiffs’ lawyer’s demand that the land be returned to
plaintiffs, discloses the fact that he had complacently indulged in the belief that the plaintiffs would not deny him
the right to redeem or repurchase the property at any time, because of the laxity that was shown him in the grant of
an extension of the period of repurchase and in demanding the rentals, so that when the return of the property was
demanded he was taken by surprise. But his belief does not show that he believed plaintiffs did not intend to change
the original contract; it only shows his knowledge that there was a change, and his acceptance thereof. But reliance
on another’s indulgence or on the latter’s past laxity may not be the basis of an enforceable legal right; this must be
the result of a mutual understanding or agreement. Obligations can only be created by law or by contract.

Defendant-appellant also argues that the new contracts of lease with option, Exhibit P-2 and Exhibit P-13, do not
constitute a new contract because the price of P60,000 is inadequate. There is no evidence of record that P60,000 is
so grossly inadequate as to be shocking to the conscience. A parcel of adjoining land of similar size purchased in
June, 1933 from a relative of the defendant (Exhibit P- 21) was priced also at P60,000.

Our conclusion that there was a novation of the contract in 1932 when plaintiffs secured title to the property and
defendant acquiesced in such issuance of title, his right being limited to an option to repurchase the property within
a fixed period, renders consideration of the errors assigned unnecessary. If plaintiffs became owners of the land in
1932 and defendant a mere lessee with option to buy, certainly the provisions of the new Civil Code may not be
invoked in his favor.

Wherefore, the judgments appealed from should be, as they hereby are, affirmed, with costs against the appellant. So
ordered.
G.R. No. L-5572 October 26, 1954
PEDRO GUERRERO, petitioner,
vs.
SERAPION D. YÑIGO and THE COURT OF APPEALS, respondents.
Lauro O. Sansano and Epifanio Garcia for petitioner.
Alfonso Espinosa for respondents.
PADILLA, J.:
This is a petition for a writ of certiorari to review the judgment of the Court of Appeals which reversed that
of the Court of First Instance of Nueva Ecija (Civil No. 207). The last mentioned Court held that the
plaintiff therein, now petitioner, is —
. . . the legal owner of the western part of the land described in Certificate of Title No. 19251,
Exhibit B, subject to alien for P1,847.22 in favor of defendant Yñigo within the stipulated period
mentioned in Exhibits 3, 4 and 5;
voided and annulled Exhibit 2, the deed of sale in favor of the defendants therein, the spouses Serapion
D. Yñigo and Francisca D. Batañgan, as to the western half of the parcel of land described in the
certificate of title above mentioned, and —
. . . for the purpose of final adjudication of the corresponding half, plaintiff Guerrero and defendant
Yñigo are hereby ordered to cause the measurement and subdivision of the property described in
Certificate of Title No. 19251. Certificate of Title No. T-520 is ordered cancelled. With costs
against defendant Catabona.
On appeal the Court of Appeals reversed the foregoing judgment of the Court of first Instance of Nueva
Ecija and absolved the defendants from the complaint and declared them the absolute and exclusive
owners of the parcel of land on the ground that the plaintiff therein, now the petitioner, was a purchaser in
bad faith. The Court of Appeals further held that as the parcel of land was sold with pacto de retro and the
corresponding deed was executed and registered prior to the purchase of one-half of the land by
Guerrero from Catabona, Yñigo has a better right.
The Court of Appeals found the following:
. . . the defendant Amado Catabona who has been adjudged in default had been mortgaging the
land described in the complaint, as follows:
A parcel of land, situated in Maranac, barrio of Baquiao, municipality of Guimba, bounded on the
North by Maranac Creek; on the east, by property of Fernando Pimentel; on the south, by
property of Casimiro de la Cruz; and on the west, by a creek and property of Engracio Pilapil.
Containing an area of one hundred seventy-five thousand forty-one square meters,
in favor of Serapion Yñigo and his wife, Francisca D. Batañgan prior to March 2, 1944 when
again he mortgaged it in favor of same parties for the sum of P18,000 payable within five years
from said date on condition, among others, "that should he desire to convey or sell in the future
the above described land he promised to sell the same to the mortgagees for the sum of
P18,000, and that the amount of the mortgage, to wit P18,000, shall be treated as payment of
one-half, or 87,520 square meters more or less, of the above described parcel of land covered by
Transfer Certificate of Title No. 19251 of the land records of Nueva Ecija, and further warrants
that he shall sell the said mentioned land to no other except to the said spouses and by virtue
thereof shall give the latter the right to sue him for damages which they may incur plus
reasonable attorney's fees. Said mortgage was duly registered in the Office of the Register of
Deeds on March 18, 1944.
On April 20, 1944, Amando Catabona again secured a loan of P4,000 from Serapion Yñigo and
his wife, and to insure payment thereof executed a second mortgage on the same parcel of land
payable within two months after the expiration of five years from said date and subject to the
same condition that should Catabona desire to sell the above described land he promised to sell
the same to the same mortgagees, at the price of P2,000 per hectare and that should he sell it to
others, the mortgagees may sue him for damages, plus reasonable attorney's fees (Exhibit 4).
Said mortgage was registered on the back of Transfer Certificate of Title No. 19251 on May 18,
1944.
 On July 11, 1944, Catabona again mortgaged or sold the land to Serapion Yñigo and his wife for
the sum of P5,000 on condition that should he fail to redeem and property after the period of five
years by paying back and returning the above mentioned amount and the right of possession,
and within the said period, title thereto shall pass to and become vested absolutely in the said
spouses. Again corresponding deed, Exhibit 5, was registered on the back of Transfer Certificate
of Title No. 19251 on the same date, July 11, 1944.
On August 4, 1944, Catabona sold one-half of the same land and executed a deed of absolute
sale in favor of Pedro L. Guerrero married to Consolacion Silvestre for the sum of P90,000.
Guerrero testified that Catabona offered to sell one-half of the land to him with the information
that one-half of the land was mortgaged in favor of Atty. Yñigo and that he offered to sell the land
to the mortgagees but the latter could not afford to pay the price he was asking for it. He then
invited Catabona to see Yñigo and Serapion himself told Catabona that he could not afford to pay
the high price that Catabona was asking. He asked Yñigo "How is it then, do you not resent if I
buy the property?" to which Yñigo answered "I will not, provided that the obligation to me is paid."
(Emphasis supplied)
After the execution of the deed of sale, Exhibit A, and the payment Guerrero and Catabona went
to see Yñigo but only found his wife to whom they talked about the matter. Mrs. Yñigo told them
that her husband was in Manila and advised them to return upon his arrival. They again went to
see Yñigo in September to pay the obligation and get the certificate of title but again failed to see
him. Guerrero was not able to take possession of the land because Catabona requested him to
allow him to plant palay until the harvest was over. Catabona, however, kept the land from 1944
up to 1947 on the pretext that because he was paid in Japanese war notes which were rendered
worthless, he wanted to continue in possession of the land so as to be able to compensate his
loss, and since 1947 Yñigo has the one in possession including the one-half portion involved
which, according to Guerrero's compadre, Catabona yields four (?) cavanes annually and that
was the net share Catabona was to receive from the tenants.
On July 20, 1945 Atty. Lauro Sansano filed a petition for the surrender of the owner's duplicate of
Transfer Certificate of Title No. 19251, Exhibit C, to which Atty. Espinosa, in behalf of Serapio
Yñigo, filed an opposition, Exhibit C-1. On August 6 the petition was denied (Exhibit C-2). A
motion to reconsider said order was again denied on September 26, 1945. On October 18,
however, the order was reconsidered and Serapion Yñigo, the holder of Transfer Certificate of
Title No. 19251, was ordered to surrender the same to the register of deeds for the registration of
the sale above-mentioned subject to his preferential right.
On October 24 Exhibit A, the deed of sale in favor of Guerrero, and Exhibit B, the deed of
partition entered into between Catabona and Guerrero whereby the eastern half of the land was
adjudged to Catabona and the western half to Guerrero were presented to the Register of Deeds
of Nueva Ecija for registration, but because of the failure of Guerrero to produce the owner's
duplicate of the owners copy of the corresponding Transfer Certificate of Title, the registration
was not completed. Guerrero secured on October 24 the issuance of Tax Declaration No. 21868,
Exhibit F, in his favor, for one-half of the land in question and paid the corresponding tax for the
year 1946.
On November 16, 1946, Amado Catabona executed a deed of absolute sale of the land in
question in favor of Yñigo for the sum of P6,000, Exhibit 2, which was presented for registration in
the office of the Register of Deeds on November 18, 1946, as a result of which Transfer
Certificate of Title No. T-520, Exhibit 1, was issued in favor of Yñigo married to Francisca D.
Batañgan, subject to the lis pendens filed in connection with Civil Case No. 207 of the Court of
First Instance of Nueva Ecija.
All the instruments attached to the complaint executed by Amado Catabona conveying the parcel of land,
half of which is involved in this litigation, to the spouses Serapion D. Yñigo and Francisca D. Batañgan,
the first for P18,000 executed on 2 March 1944, the second for P4,000 executed on 20 April 1944 and the
third for P5,000 executed on 11 July 1944, are mortgages to secure the payment of the loans. It is true
that in the last instrument the words "mortgage with conditional sale" were used and the following was
stipulated:
That the Party of the First Part, by these presents, reserves for himself and his heirs the right to
redeem the said property after the period of five years from the date hereof by paying back and
 returning the above-mentioned amount and the right of possession and use within the said
period; and that on failure of the Party of the First Part to exercise the said right to redeem the
said property according to the terms hereof, title thereto shall pass to and become vested,
absolutely, in the Party of the Second Part.
The first clause was an attempt to stipulate the time when payment of the loan was to be made but except
as to the period of five years from the date of the instrument within which the mortgagor may not redeem
the property there is no period after the five years within which the mortgagor may redeem it; 1 and if the
second clause be construed as giving the mortgagees the right to own the property upon failure of the
mortgagor to pay the loan on the stipulated time — which is not provided — that would be pactum
commissorium which is unlawful and void.2 The clause is conclusive proof that it is a mortgage and not a
sale with pacto de retro because if it were the latter title to the parcel of land would pass unto the vendee
upon the execution of the sale and not later as stipulated that "title thereto shall pass to and become
vested, absolutely, in the Party of the Second Part" "on failure of the Party of the First Part to exercise the
said right to redeem the said property according to the terms hereof." Therefore, no sale of the parcel of
land with the right to repurchase was made by Amando Catabona to the spouses of Serapion D. Yñigo
and Francisca D. Batañgan.
The registration of the three instruments created a real right in favor of the mortgagees. But the fact that
in the instruments the mortgagor undertook, bound and promised to sell the parcel of land to the
mortgagees, such undertaking, obligation or promise to sell the parcel of land to the mortgagees does not
bind the land. It is just a personal obligation of the mortgagor. So that when Amando Catabona sold one-
half of the parcel of land (the western part) on 4 August 1944 to Pedro Guerrero the sale was legal and
valid. If there should be any action accruing to Yñigo it would be a personal action for damages against
Catabona. If Guerrero contributed to the breach of the contract by Catabona, the former together with the
latter may also be liable for damages. If Guerrero was guilty of fraud which would be a ground for
rescission of the contract of sale in his favor, Catabona and not Yñigo would be the party entitled to bring
the action for annulment.
The judgment of the Court of Appeals is reversed and the petitioner is declared the lawful owner of one-
half of the parcel of land (the western part) described in transfer certificate of title No. 19251, subject to a
mortgage to secure the payment of P1,847.223 in favor of the spouses Serapion D. Yñigo and Francisca
D. Batañgan payable within such period of time as may be fixed by the Court upon petition, without
pronouncement as to costs.

DEVELOPMENT BANK G.R. No. 167238

OF THE PHILIPPINES,
Petitioner, Present:

PUNO, C.J., Chairperson,

YNARES-SANTIAGO,
- v e r s u s - CARPIO,
CORONA and
LEONARDO-DE CASTRO, JJ.
SPOUSES JESUS and
ANACORITA DOYON,
Respondents. Promulgated:
March 25, 2009

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

DECISION
CORONA, J.:

This petition[1] seeks to the set aside the November 23, 2004 decision[2] and February 18, 2005
resolution[3] of the Court of Appeals (CA) in CA-G.R. CV No. 74660.
 In the early 1990s, respondent spouses Jesus and Anacorita Doyon obtained several loans amounting to P10
million[4] from petitioner Development Bank of the Philippines (DBP). As security for the loans, respondents
mortgaged their real estate properties as well as the motor vehicles of JD Bus Lines.

Due to their inability to fully pay their obligations upon maturity, [5] respondents requested petitioner to
restructure their past due loans.[6] Petitioner agreed. Hence, respondents signed three promissory notes on June 29,
1994.[7]
Nonetheless, respondents still failed to pay the quarterly installments on the promissory notes. Thus,
petitioner demanded the payment of the total value of their loans from respondents. [8] Respondents, however,
ignored petitioner and adamantly refused to pay their loans.
Consequently, petitioner filed an application for extrajudicial foreclosure of real estate mortgages in the
Regional Trial Court (RTC) of Ormoc City in 1995. To forestall the foreclosure proceedings, respondents
immediately filed an action for their nullification in the RTC of Ormoc City, Branch 35 claiming that they had
already paid the principal amount of their loans (or P10 million) to petitioner. This was docketed as Civil Case No.
3314-O.

For three years, Civil Case No. 3314-O was not acted upon by the RTC.

In 1998, petitioner withdrew the application for extrajudicial foreclosure and thereafter moved for the
dismissal of Civil Case No. 3314-O. The RTC granted the motion in an order dated March 2, 1998. [9] It held:

In todays hearing, which is for the reception of evidence for [petitioner], [it] informed the Court
about its withdrawal of the [application] for extrajudicial foreclosure of real estate made subject of
the present case. In view of the withdrawal, [petitioner] moved for the dismissal of the case
considering that the action would be rendered moot and academic.

When [respondents were] made to comment, they interposed no objection to the motion to
dismiss.

By agreement therefore between the parties, this case is considered DISMISSED with prejudice.

Weeks later, petitioner demanded from respondents the payment of their outstanding obligations which had
by then ballooned to more than P20 million. Again, respondents ignored petitioner.

Petitioner filed an application for extrajudicial foreclosure of respondents real and chattel mortgages with
the DBP special sheriff in Makati[10] and subsequently took constructive possession of the foreclosed properties.[11] It
posted guards at the perimeter of respondents property in Barangay Cabulihan, Ormoc City (Cabulihan property)
where the foreclosed motor vehicles of JD Bus Lines were parked. [12] Subsequently, the DBP special sheriff issued
notices of sale at public auction of the foreclosed properties.[13]

Meanwhile, respondents filed a complaint for damages[14] against petitioner and the DBP special sheriff in
the RTC of Ormoc City, Branch 35. According to respondents, by withdrawing the application for extrajudicial
foreclosure and moving for the dismissal of Civil Case No. 3314-O, petitioner led them to believe that it would no
longer seek the satisfaction of its claims. Petitioner therefore acted contrary to Article 19 of the Civil Code [15] when
it foreclosed on the real and chattel mortgages anew.

Furthermore, respondents claimed that the provision in the mortgage contracts [16] allowing petitioner as
mortgagee to take constructive possession of the mortgaged properties upon respondents default was void. The
provision allegedly constituted a pactum commissorium[17] since it permitted petitioner to appropriate the mortgaged
properties.

Lastly, respondents assailed the validity of the public auctions conducted by the DBP special sheriff. The
September 9, 1998 notices of sale stated that the foreclosed real properties would be sold at public auction on
September 16, 1998 at 10:00 a.m. or soon thereafter[18] while the foreclosed motor vehicles would be sold on
September 16, 1998 at 2:00 p.m. or soon thereafter. [19] Section 4 of Act 3135,[20] however, requires that public
auctions must take place from 9 a.m. until 4 p.m. or, allegedly, for seven continuous hours.

Petitioner, in its answer, pointed out that despite the restructuring, respondents refused to pay the
amortizations on the June 29, 2004 promissory notes. Moreover, the filing of Civil Case No. 3314-O and the delay
in its resolution prevented petitioner from collecting on the said notes from respondents. It withdrew the application
in the RTC and moved for the dismissal of Civil Case No. 3314-O only for the purpose of availing of a more
efficient legal remedy, that is, foreclosure through a special sheriff, as authorized by its charter. [21]
In a decision dated January 25, 2002,[22] the RTC found that, by withdrawing its application for
extrajudicial foreclosure and moving for the dismissal of Civil Case No. 3314-O, petitioner led respondents to
believe that their loans had been extinguished. Thus, petitioner acted in bad faith when it foreclosed on the real and
chattel mortgages anew. The dispositive portion of the decision read:

WHEREFORE, after due consideration of all the foregoing, judgment is hereby rendered
in favor of [respondents] and against [petitioner], ordering as follows:

1. [petitioner] to immediately stop the presence of its security guards in the compound or
premises of the plaintiffs at Barangay Cabulihan, Ormoc City, and to vacate them from
said premises;

2. [petitioner] to pay actual damages to [respondents] in the total amount of P16,000 per
day for the four buses, or a total of P480,000 per month for these buses starting from
April 27, 1998 until the time the buses shall have been allowed to leave the compound of
[respondents] or until [petitioner] shall vacate the said premises, and P200,000 as
compensatory damages for the injury to [respondents'] business standing;

3. [petitioner] to pay P1,000,000 as exemplary damages;

4. [petitioner and the DBP special sheriff] jointly and severally to pay the plaintiffs the
sum of P2,000,000 as moral damages, the sum of P50,000 as attorney's fees, the sum
of P10,000 as litigation expenses and costs of the suit.

Aggrieved, petitioner appealed to the CA. [23]

In a decision dated November 23, 2004, the CA affirmed the RTC decision with modification of the
liability for damages. Because the DBP special sheriff merely performed his ministerial duty (when he foreclosed on
the real and chattel mortgages and issued notices of sale in public auction of the foreclosed properties), petitioner
alone was liable.

Petitioner moved for reconsideration but it was denied. Hence, this petition.

Petitioner basically asserts that it did not act in bad faith when it foreclosed on respondents real and chattel
mortgages anew. Because respondents loans were past due, it had the right to satisfy its credit by foreclosing on the
mortgages.
We grant the petition.
This Court is not a trier of facts and, as a rule, it only entertains questions of law in a petition for review on
certiorari. This rule, however, admits of exceptions such as when the assailed decision is based on a
misapprehension of facts.[24]

In this instance, the RTC and the CA both found that petitioner acted with bad faith when it foreclosed on
the real and chattel mortgages. We disagree.
What is due to a person is determined by the circumstances of each particular case. [25] Article 19 of the
Civil Code provides:
 Article 19. Every person must, in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due and observe honesty and good faith.

For an action for damages under this provision to prosper, the complainant must prove that:

(a) defendant has a legal right or duty;

(b) he exercised his right or performed his duty with bad faith and
(c) complainant was prejudiced or injured as a result of the said exercise or performance by
defendant.

On the first requisite, we find that petitioner had the legal right to foreclose on the real and chattel
mortgages.

Since respondents neither assailed the due execution of the June 29, 1994 promissory notes nor presented
proof of payment thereof, their obligation remained outstanding. Upon default, by prior mutual agreement, petitioner
had the right to foreclose on the real and chattel mortgages securing their loans.

The June 29, 1994 promissory notes uniformly stated that failure to pay an installment (or interest) on the
due date was an event of default.[26] Respondents were therefore in default when they failed to pay the quarterly
amortizations on the designated due dates.

When the principal obligation becomes due and the debtor fails to perform his obligation, the creditor may
foreclose on the mortgage[27] for the purpose of alienating the (mortgaged) property to satisfy his credit. [28]

Regarding the second requisite, bad faith imports a dishonest purpose or some moral obliquity or conscious
doing of a wrong that partakes of the nature of fraud. [29]

We note that the RTC of Ormoc City (Judge Fortunito L. Madrona) sat on Civil Case No. 3314-O for three
long years. This inordinate delay prejudiced petitioner. Inasmuch as petitioner was in the business of lending out
money it borrowed from the public, sound banking practice called for the exercise of a more efficient legal remedy
against a defaulting debtor like respondent.[30] Thus, petitioner could not be faulted for resorting to foreclosure
through a special sheriff. Such procedure was, after all, the more efficient method of enforcing petitioners rights as
mortgagee under its charter.[31]

Moreover, the March 2, 1998 order of the RTC (quoted above) merely stated that the withdrawal of the
application for extrajudicial foreclosure in the RTC rendered Civil Case No. 3314-O moot and academic. Nothing in
the said order stated, or even hinted, that respondents obligation to petitioner had in fact been extinguished. Thus,
there was nothing on the part of petitioner even remotely showing that it led respondents to believe that it had
waived its claims.

Lastly, inasmuch as petitioner demanded payment from them right after the dismissal of Civil Case No.
3314-O, respondents could not have reasonably presumed that the bank had waived its claims against them.
Furthermore, the fact that a demand for payment was made negated bad faith on the part of petitioner. Despite
giving respondents the opportunity to pay their long overdue obligations and avoid foreclosure, respondents still
refused to pay. Since respondents did not have a cause of action against petitioner, the RTC and CA erred in
granting damages to them.

A stipulation allowing the mortgagee to take actual or constructive possession of a mortgaged property
upon foreclosure is valid. In Agricultural and Industrial Bank v. Tambunting, [32] we explained:

A stipulation authorizing the mortgagee, for the purpose stated therein specified, to take
possession of the mortgaged premises upon the foreclosure of a mortgage is not repugnant [to
either Article 2088 or Article 2137]. On the contrary, such a stipulation is in consonance or
analogous to the provisions of Article [2132], et seq. of the Civil Code regarding antichresis and
 the provision of the Rules of Court regarding the appointment of a receiver as a convenient and
feasible means of preserving and administering the property in litigation. [33]

The real estate and chattel mortgage contracts[34] uniformly provided that petitioner could take possession
of the foreclosed properties upon the failure of respondents to pay even one amortization. Thus, respondents refusal
to pay their obligations gave rise to petitioners right to take constructive possession of the foreclosed motor vehicles.

In Philippine National Bank v. Cabatingan,[35] we held that a sale at public auction held at any time
between 9:00 a.m. and 4:00 p.m. of a particular day, regardless of duration, was valid. Since the sale at public
auction of the foreclosed real properties and chattels was conducted between 10:00 a.m. and 11:00 a.m. and between
2:00 p.m. and 3:30 p.m., respectively, the auctions were valid.
WHEREFORE, the petition is hereby GRANTED. The November 23, 2004 decision and February 18,
2005 resolution of the Court of Appeals in CA-G.R. CV 74660 affirming the January 25, 2002 decision of the
Regional Trial Court of Ormoc City, Branch 35 in Civil Case No. 3592-0 are SET ASIDE. New judgment is hereby
entered dismissing Civil Case No. 3592-0 for lack of cause of action.
No pronouncement as to costs.

SO ORDERED.