REPUBLIC ACT No.
3765 (4) the charges, individually itemized, which are paid or to be paid by such person in
AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN
CONNECTION WITH EXTENSIONS OF CREDIT.
Section 1. This Act shall be known as the "Truth in Lending Act."
Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to
protect its citizens from a lack of awareness of the true cost of credit to the user by
assuring a full disclosure of such cost with a view of preventing the uninformed use of
credit to the detriment of the national economy.
Section 3. As used in this Act, the term
(1) "Board" means the Monetary Board of the Central Bank of the Philippines.
(2) "Credit" means any loan, mortgage, deed of trust, advance, or discount; any
conditional sales contract; any contract to sell, or sale or contract of sale of property or
services, either for present or future delivery, under which part or all of the price is
payable subsequent to the making of such sale or contract; any rental-purchase
contract; any contract or arrangement for the hire, bailment, or leasing of property; any
option, demand, lien, pledge, or other claim against, or for the delivery of, property or
money; any purchase, or other acquisition of, or any credit upon the security of, any
obligation of claim arising out of any of the foregoing; and any transaction or series of
transactions having a similar purpose or effect.
(3) "Finance charge" includes interest, fees, service charges, discounts, and such other
charges incident to the extension of credit as the Board may be regulation prescribe.
(4) "Creditor" means any person engaged in the business of extending credit (including
any person who as a regular business practice make loans or sells or rents property or
services on a time, credit, or installment basis, either as principal or as agent) who
requires as an incident to the extension of credit, the payment of a finance charge.
(5) "Person" means any individual, corporation, partnership, association, or other
organized group of persons, or the legal successor or representative of the foregoing,
and includes the Philippine Government or any agency thereof, or any other
government, or of any of its political subdivisions, or any agency of the foregoing.
Section 4. Any creditor shall furnish to each person to whom credit is extended, prior to
the consummation of the transaction, a clear statement in writing setting forth, to the
extent applicable and in accordance with rules and regulations prescribed by the Board,
the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
connection with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed
as a simple annual rate on the outstanding unpaid balance of the obligation.
Section 5. The Board shall prescribe such rules and regulations as may be necessary
or proper in carrying out the provisions of this Act. Any rule or regulation prescribed
hereunder may contain such classifications and differentiations as in the judgment of
the Board are necessary or proper to effectuate the purposes of this Act or to prevent
circumvention or evasion, or to facilitate the enforcement of this Act, or any rule or
regulation issued thereunder.
Section 6. (a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any regulation issued
thereunder shall be liable to such person in the amount of P100 or in an amount equal
to twice the finance charged required by such creditor in connection with such
transaction, whichever is the greater, except that such liability shall not exceed P2,000
on any credit transaction. Action to recover such penalty may be brought by such
person within one year from the date of the occurrence of the violation, in any court of
competent jurisdiction. In any action under this subsection in which any person is
entitled to a recovery, the creditor shall be liable for reasonable attorney's fees and
court costs as determined by the court.
(b) Except as specified in subsection (a) of this section, nothing contained in this Act or
any regulation contained in this Act or any regulation thereunder shall affect the validity
or enforceability of any contract or transactions.
(c) Any person who willfully violates any provision of this Act or any regulation issued
thereunder shall be fined by not less than P1,00 or more than P5,000 or imprisonment
for not less than 6 months, nor more than one year or both.
(d) No punishment or penalty provided by this Act shall apply to the Philippine
Government or any agency or any political subdivision thereof.
(e) A final judgment hereafter rendered in any criminal proceeding under this Act to the
effect that a defendant has willfully violated this Act shall be prima facie evidence
against such defendant in an action or proceeding brought by any other party against
such defendant under this Act as to all matters respecting which said judgment would
be an estoppel as between the parties thereto.
Section 7. This Act shall become effective upon approval.
Approved: June 22, 1963
CIRCULAR NO. 158
 Rural Banks
Series of 1998
Series of 1998
Pursuant to Monetary Board Resolution No. 369 dated 12 March 1998, amending the
composition of the reserve requirement on all types of peso deposit and deposit
substitute liabilities of expanded commercial banks, commercial banks and non-banks
with quasi-banking (NBQBs) functions and certain types of deposit and deposit
substitute liabilities of thrift banks and rural banks, and Monetary Board Resolution No.
403 dated 18 March 1998, advancing the effectivity date of the abovementioned
changes, Books I, II, III and IV of the Manual of Regulations are hereby amended as
follows:
Book I
Expanded Commercial Banks and Commercial Banks
SECTION 1. Sections 1203, 1214, 1225, 1232, 1236 and 1253 of Book 1 of the Manual
of Regulations are hereby amended by reducing the required reserves against demand
and savings deposits, NOW accounts, time deposits and negotiable certificate of time
deposits regardless of maturity of banks with expanded commercial banking authority,
commercial banks, the Land Bank of the Philippines, the Development Bank of the
Philippines and the Al-Amanah Islamic Investment Bank of the Philippines from thirteen
percent (13%) to ten percent (10%).
SECTION 2. Section 1283 of Book I of the Manual of Regulations is hereby amended
by reducing the required reserves against deposit substitute liabilities regardless of
maturity from thirteen percent (13%) to ten percent (10%).
Book II
Thrift Banks
SECTION 3. Section 2203, Section 2225 and Section 2253 of Book II of the Manual of
Regulations are hereby amended by reducing the required reserves against demand
deposits and NOW accounts from thirteen percent (13%) to ten percent (10%).
SECTION 4. Section 2283 of Book II of the Manual of Regulations is hereby amended
by reducing the required reserves against deposit substitute liabilities regardless of
maturity from thirteen percent (13%) to ten percent (10%).
SECTION 5. Sections 2232, 2236, and 2253 of Book II of the Manual of Regulations
are hereby amended by reducing the required reserves against time deposits and
negotiable certificates of time deposits regardless of maturity from eleven percent
(11%) to eight percent (8%).
SECTION 6. Sections 2214 and 2253 of Book II of the Manual of Regulations are
hereby amended by reducing the required reserves against savings deposits from
eleven percent (11%) to eight percent (8%).
Book III
SECTION 7. Sections 3203 and 3253 of Book III of the Manual of Regulations are
hereby amended by reducing the required reserves against demand deposits from
thirteen percent (13%) to ten percent (10%).

SECTION 8. Sections 3225, 3236, and 3253 of Book III of the Manual of Regulations
are hereby amended by reducing the required reserves against NOW accounts from
thirteen percent (13%) to ten percent (10%).

SECTION 9. Under Sections 3214 and 3232 of Book III of the Manual of Regulations,
the required reserves against savings and time deposits regardless of maturity shall
remain at five percent (5%).
Book IV
Non-Bank Financial Intermediaries
SECTION 10. The first paragraph of Section 4283Q of Book IV of the Manual of
Regulations is hereby amended by reducing the required reserves against deposit
substitute liabilities, regardless of maturity, from thirteen percent (13%) to ten percent
(10%).
Books I, II, III and IV
Liquidity Reserves for all Financial Intermediaries
SECTION 11. On top of the regular reserve requirements, liquidity reserve ratios
against peso demand, savings, time deposit and deposit substitute liabilities shall be
raised, as follows:
a. For expanded commercial banks, commercial banks, and non-bank financial
intermediaries with quasi-banking functions (NBQBs), from four percent (4%)
to seven percent (7%);
b. For thrift banks, from three percent (3%) to six percent (6%); and
c. For rural banks, from zero to three percent (3%) against their demand deposit
liabilities.
The required liquidity reserve may be maintained in the form of short-term market-
yielding government securities purchased directly from the BSP-Treasury Department,
pursuant to Circular No. 10 dated 29 December 1993.
Form and Composition of Regular Reserves for all Financial Intermediaries
SECTION 12. Regular reserves shall be maintained in the same form and composition
as provided in Sections 1254, 2254, 3254, 1283, 2283.1, 3283, and 4283Q of Books I,
II, III, and IV, respectively, of the Manual of Regulations for Banks and Other Financial
Intermediaries.
This Circular shall take effect 20 March 1998.
OSMUNDO S. CANLAS and ANGELINA CANLAS, petitioner, vs. COURT OF
APPEALS, ASIAN SAVINGS BANK, MAXIMO C. CONTRERAS and VICENTE
MAOSCA, respondents.
DECISION
PURISIMA, J.: Mi-so
At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
seeking to review and set aside the Decision[1] of the Court of Appeals in CA-G.R. CV
No. 25242, which reversed the Decision[2] of Branch 59 of the Regional Trial Court of
Makati City in Civil Case No. M-028; the dispositive portion of which reads:
"WHEREFORE, the decision appealed from is hereby
REVERSED and SET ASIDE and a new one is hereby entered
DISMISSING the complaint of the spouses Osmundo and
Angelina Canlas. On the counterclaim of defendant Asian
Savings Bank, the plaintiffs Canlas spouses are hereby
ordered to pay the defendant Asian Savings Bank the amount
of P50,000.00 as moral and exemplary damages
plus P15,000.00 as and for attorney's fees.
With costs against appellees.
SO ORDERED."[3]
The facts that matter:
Sometime in August, 1982, the petitioner, Osmundo S. Canlas, and private respondent,
Vicente Maosca, decided to venture in business and to raise the capital needed
therefor. The former then executed a Special Power of Attorney authorizing the latter to
mortgage two parcels of land situated in San Dionisio, (BF Homes) Paranaque, Metro
Manila, each lot with semi-concrete residential house existing thereon, and respectively
covered by Transfer Certificate of Title No. 54366 in his (Osmundo's) name and
Transfer Certificate of Title No. S-78498 in the name of his wife Angelina Canlas.
Subsequently, Osmundo Canlas agreed to sell the said parcels of land to Vicente
Manosca, for and in consideration of P850,000.00, P500,000.00 of which payable
within one week, and the balance of P350,000.00 to serve as
his (Osmundo's) investment in the business. Thus, Osmundo Canlas delivered to
Vicente Maosca the transfer certificates of title of the parcels of land involved. Vicente
Maosca, as his part of the transaction, issued two postdated checks in favor of
Osmundo Canlas in the amounts of P40,000.00 and P460,000.00, respectively, but it
turned out that the check covering the bigger amount was not sufficiently funded.[4]Ne-
xold
On September 3, 1982, Vicente Maosca was able to mortgage the same parcels of land
for P100,000.00 to a certain Attorney Manuel Magno, with the help of impostors who
misrepresented themselves as the spouses, Osmundo Canlas and Angelina Canlas.[5]
On September 29, 1982, private respondent Vicente Maosca was granted a loan by the
respondent Asian Savings Bank (ASB) in the amount of P500,000.00, with the use of
subject parcels of land as security, and with the involvement of the same impostors who
again introduced themselves as the Canlas spouses.[6] When the loan it extended was
not paid, respondent bank extrajudicially foreclosed the mortgaged.
On January 15, 1983, Osmundo Canlas wrote a letter informing the respondent bank
that the execution of subject mortgage over the two parcels of land in question was
without their (Canlas spouses) authority, and request that steps be taken to annul and/
or revoke the questioned mortgage. On January 18, 1983, petitioner Osmundo Canlas
also wrote the office of Sheriff Maximo C. Contreras, asking that the auction sale
scheduled on February 3, 1983 be cancelled or held in abeyance. Butrespondents
Maximo C. Contreras and Asian Savings Bank refused to heed petitioner Canlas'
stance and proceeded with the scheduled auction sale.[7]
Consequently, on February 3, 1983 the herein petitioners instituted the present case for
annulment of deed of real estate mortgage with prayer for the issuance of a writ of
preliminary injunction; and on May 23, 1983, the trial court issued an Order restraining
the respondent sheriff from issuing the corresponding Certificate of Sheriffs Sale.[8]
For failure to file his answer, despite several motions for extension of time for the filing
thereof, Vicente Maosca was declared in default.[9]
On June 1, 1989, the lower court a quo came out with a decision annulling subject deed
of mortgage and disposing, thus:
"Premises considered, judgment is hereby rendered as follows:
1. Declaring the deed of real estate mortgage (Exhibit 'L)
involving the properties of the plaintiffs as null and void; Man-
ikx
2. Declaring the public auction sale conducted by the defendant
Sheriff, involving the same properties as illegal and without
binding effect;
3. Ordering the defendants, jointly and severally, to pay the
plaintiffs the sum of P20,000.00 representing attorney's fees;
4. On defendant ASB's crossclaim: ordering the cross-
defendant Vicente Maosca to pay the defendant ASB the sum
of P350,000.00, representing the amount which he received as
proceeds of the loan secured by the void mortgage, plus
interest at the legal rate, starting February 3, 1983, the date
when the original complaint was filed, until the amount is fully
paid;
5. With costs against the defendants.
SO ORDERED."[10]
From such Decision below, Asian Savings Bank appealed to the Court of Appeals,
which handed down the assailed judgment of reversal, dated September 30, 1983, in
CA-G.R. CV No. 25242. Dissatisfied therewith, the petitioners found their way to this
Court via the present Petition; theorizing that:
 "I
RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE
MORTGAGE OF THE PROPERTIES SUBJECT OF THIS CASE WAS
VALID.
II
RESPONDENT COURT OF APPEALS ERRED IN HIOLDING THAT
PETITIONERS ARE NOT ENTITLED TO RELIEF BECAUSE THEY WERE
NEGLIGENT AND THEREFORE MUST BEAR THE LOSS.
III
RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT
RESPONDENT ASB EXERCISED DUE DILIGENCE IN GRANTING THE
LOAN APPLICATION OF RESPONDENT. Manik-s
IV
RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT
RESPONDENT ASB DID NOT ACT WITH BAD FAITH IN PROCEEDING
WITH THE FORECLOSURE SALE OF THE PROPERTIES.
V A:.....Yes, among others the signature and TAX Account
RESPONDENT COURT OF APPEALS ERRED IN AWARDING
RESPONDENT ASB MORAL DAMAGES."[11]
The Petition is impressed with merit.
Article 1173 of the Civil Code, provides:
"Article 1173. The fault or negligence of the obligor consist in
the omission of that diligence which is required by the nature of
the obligation and corresponds with the circumstances of the
persons, of the time and of the place. When negligence shows
bad faith, the provisions of articles 1171 and 2201, paragraph
2, shall apply.
If the law or contract does not state the diligence which is to be
observed in the performance, that which is expected of a good
father of a family shall be required. (1104)"
The degree of diligence required of banks is more than that of a good father of a family;
[12] in keeping with their responsibility to exercise the necessary care and prudence in
dealing even on a register or titled property. The business of a bank is affected with
public interest, holding in trust the money of the depositors, which bank deposits the
bank should guard against loss due to negligence or bad faith, by reason of which the
bank would be denied the protective mantle of the land registration law, accorded only
to purchases or mortgagees for value and in good faith.[13]Man-ikan
In the case under consideration, from the evidence on hand it can be gleaned
unerringly that respondent bank did not observe the requisite diligence in ascertaining
or verifying the real identity of the couple who introduced themselves as the spouses
Osmundo Canlas and Angelina Canlas. It is worthy to note that not even a single
identification card was exhibited by the said impostors to show their true identity;
andyet, the bank acted on their representations simply on the basis of the residence
certificates bearing signatures which tended to match the signatures affixed on a
previous deed of mortgage to a certain Atty. Magno, covering the same parcels of land
in question. Felizado Mangubat, Assistant Vice President of Asian Savings Bank, thus
testified inter alia:
"x x x
Q:.....According to you, the basis for your having recommended
for the approval of MANASCO's (sic) loan particularly that one
involving the property of plaintiff in this case, the spouses
OSMUNDO CANLAS and ANGELINA CANLAS, the basis for
such approval was that according to you all the signatures and
other things taken into account matches with that of the
document previously executed by the spouses CANLAS?
A:.....That is the only basis for accepting the signature on the
mortgage, the basis for the recommendation of the approval of
the loan are the financial statement of MAOSCA?
Number, Residence Certificate appearing on the previous loan
executed by the spouses CANLAS, I am referring to EXHIBIT
5, mortgage to ATTY. MAGNO, those were made the basis.
A:.....That is just the basis of accepting the signature, because
at that time the loan have been approved already on the basis
of the financial statement of the client the Bank Statement.
Wneh (sic) it was approved we have to base it on the Financial
statement of the client, the signatures were accepted only for
the purpose of signing the mortgage not for the approval, we
don't (sic) approve loans on the signature.
ATTY. CLAROS:
.....Would you agree that as part of ascertaining the identify of
the parties particularly the mortgage, you don't consider also
the signature, the Residence Certificate, the particular address
of the parties involved.
A:.....I think the question defers (sic) from what you asked a
while ago.
Q:.....Among others?
A:.....We have to accept the signature on the basis of the other
signatures given to us it being a public instrument. Ol-dmiso
 ATTY. CARLOS:
.....You mean to say the criteria of ascertaining the identity of
the mortgagor does not depend so much on the signature on
the residence certificate they have presented.
A:.....We have to accept that
xxx.....xxx.....xxx
A:.....We accepted the signature on the basis of the mortgage
in favor of ATTY. MAGNO duly notarized which I have been
reiterrting (sic) entitled to full faith considering that it is a public
instrument.
ATTY. CARLOS:
.....What other requirement did you take into account in
ascertaining the identification of the parties particularly the
mortgagor in this case.
A:.....Residence Certificate.
Q:.....Is that all, is that the only requirement?
A:.....We requested for others but they could not produce, and
because they presented to us the Residence Certificate which
matches on the signature on the Residence Certificate in favor
of Atty. Magno."[14]M-isjuris
Evidently, the efforts exerted by the bank to verify the identity of the couple posing as
Osmundo Canlas and Angelina Canlas fell short of the responsibility of the bank to
observe more than the diligence of a good father of a family. The negligence of
respondent bank was magnified by the fact that the previous deed of mortgage (which
was used as the basis for checking the genuineness of the signatures of the suppose
Canlas spouses) did not bear the tax account number of the spouses,[15] as well as the
Community Tax Certificate of Angelina Canlas.[16] But such fact notwithstanding, the
bank did not require the impostors to submit additional proof of their true identity.
Under the doctrine of last clear chance, which is applicable here, the respondent bank
must suffer the resulting loss. In essence, the doctrine of last clear chance is to the
effect that where both parties are negligent but the negligent act of one is appreciably
later in point of time than that of the other, or where it is impossible to determine whose
fault or negligence brought about the occurrence of the incident, the one who had the
last clear opportunity to avoid the impending harm but failed to do so, is chargeable
with the consequences arising therefrom. Stated differently, the rule is that the
antecedent negligence of a person does not preclude recovery of damages caused by
the supervening negligence of the latter, who had the last fair chance to prevent the
impending harm by the exercise of due diligence.[17]
Assuming that Osmundo Canlas was negligent in giving Vicente Maosca the
opportunity to perpetrate the fraud, by entrusting to latter the owner's copy of the
transfer certificates of title of subject parcels of land, it cannot be denied that the bank
had the last clear chance to prevent the fraud, by the simple expedient of faithfully
complying with the requirements for banks to ascertain the identity of the persons
transacting with them.
For not observing the degree of diligence required of banking institutions, whose
business is impressed with public interest, respondent Asian Savings Bank has to bear
the loss sued upon.
In ruling for respondent bank, the Court of Appeals concluded that the petitioner
Osmundo Canlas was a party to the fraudulent scheme of Maosca and therefore,
estopped from impugning the validity of subject deed of mortgage; ratiocinating
thus: Sd-aamiso
"x x x
Thus, armed with the titles and the special power of attorney,
Manosca went to the defendant bank and applied for a loan.
And when Maosca came over to the bank to submit additional
documents pertinent to his loan application, Osmundo Canlas
was with him, together with a certain Rogelio Viray. At that time,
Osmundo Canlas was introduced to the bank personnel as
'Leonardo Rey.
When he was introduced as 'Leonardo Rey for the first time
Osmundo should have corrected Maosca right away. But he did
not. Instead, he even allowed Maosca to avail of his
(Osmundo's) membership privileges at the Metropolitan Club
when Maosca invited two officers of the defendant bank to a
luncheon meeting which Osmundo also attended. And during
that meeting, Osmundo did not say who he really is, but even
let Maosca introduced him again as 'Leonardo Rey, which all
the more indicates that he connived with Maosca in deceiving
the defendant bank.
Finally after the loan was finally approved, Osmundo
accompanied Maosca to the bank when the loan was released.
At that time a manger's check for P200,000.00 was issued in
the name of Oscar Motorworks, which Osmundo admits he
owns and operates.
Collectively, the foregoing circumstances cannot but conjure to
a single conclusion that Osmundo actively participated in the
loan application of defendant Asian Savings Bank, which
culminated in his receiving a portion of the process thereof."[18]
A meticulous and painstaking scrutiny of the Records on hand, reveals, however, that
the findings arrived at by the Court of Appeals are barren of any sustainable basis. For
instance, the execution of the deeds of mortgages constituted by Maosca on subject
pieces of property of petitioners were made possible not by the Special Power of
Attorney executed by Osmundo Canlas in favor of Maosca but through the use of
impostors who misrepresented themselves as the spouses Angelina Canlas and
Osmundo Canlas. It cannot be said therefore, that the petitioners authorized Vicente
Maosca to constitute the mortgage on their parcels of land.
What is more, Osmundo Canlas was introduced as "Leonardo Rey" by Vicente Maosca,
only on the occasion of the luncheon meeting at the Metropolitan Club.[19]Thereat, the
failure of Osmundo Canlas to rectify Maosca's misrepresentations could not be taken
as a fraudulent act. As well explained by the former, he just did not want to embarrass
Maosca, so that he waited for the end of the meeting to correct Maosca.[20]
Then, too, Osmundo Canlas recounted that during the said luncheon meeting, they did
not talk about the security or collateral for the loan of Maosca with ASB.[21] So also, Mrs.
Josefina Rojo, who was the Account Officer of Asian Savings Bank when Maosca
applied for subject loan, corroborated the testimony of Osmundo Canlas, she
testified:S-daad
"xxx.....xxx.....xxx
QUESTION:.....Now could you please
describe out the lunch conference at
the Metro Club in Makati?
ANSWER:.....Mr. Mangubat, Mr.
Maosca and I did not discuss with
respect to the loan application and
discuss primarily his business.
xxx.....xxx.....xxx
xxx.....xxx.....xxx
QUESTION:..... So, what is the main topic of your discussion
during the meeting?
ANSWER:..... The main topic was then, about his business
although, Mr, Leonardo Rey, who actually turned out as Mr.
Canlas, supplier of Mr. Maosca.
QUESTION:..... I see ... other than the business of Mr. Maosca,
were there any other topic discussed?
ANSWER:..... YES.
QUESTION:..... And what was the topic?
ANSWER:..... General Economy then.
x x x"[22]
Verily, Osmundo Canlas was left unaware of the illicit plan of Maosca, explaining thus
why he (Osmundo) did not bother to correct what Maosca misrepresented and to assert
ownership over the two parcels of land in question. Scs-daad
Not only that; while it is true that Osmundo Canlas was with Vicente Maosca when the
latter submitted the documents needed for his loan application, and when the check
of P200,000.000 was released, the former did not know that the collateral used by
Maosca for the said loan were their (Canlas spouses) properties. Osmundo happened
to be with Maosca at the time because he wanted to make sure that Maosca would
make good his promise to pay the balance of the purchase price of the said lots out of
the proceeds of the loan.[23]
The receipt by Osmundo Canlas of the P200,000.00 check from ASB could not estop
him from assailing the validity of the mortgage because the said amount was in
payment of the parcels of land he sold to Maosca.[24]
What is decisively clear on record is that Maosca managed to keep Osmundo Canlas
uninformed of his (Maosca's) intention to use the parcels of land of the Canlas spouses
as security for the loan obtained from Asian Savings Bank. Since Vicente Maosca
showed Osmundo Canlas several certificates of title of lots which, according to Maosca
were the collaterals, Osmundo Canlas was confident that their (Canlases) parcels of
land were not involved in the loan transaction with the Asian Savings Bank.[25] Under
the attendant facts and circumstances, Osmundo Canlas was undoubtedly negligent,
which negligence made them (petitioners) undeserving of an award of Attorneys fees.
Settled is the rule that a contract of mortgage must be constituted only by the absolute
owner on the property mortgaged;[26] a mortgage, constituted by an impostor is void.
[27]Considering that it was established indubitably that the contract of mortgage sued
upon was entered into and signed by impostors who misrepresented themselves as the
spouses Osmundo Canlas and Angelina Canlas, the Court is of the ineluctible
conclusion and finding that subject contract of mortgage is a complete nullity.
WHEREFORE, the Petition is GRANTED and the Decision of the Court of Appeals,
dated September 30, 1993, in CA-G.R. CV No. 25242 SET ASIDE. The Decision of
Branch 59 of the Regional Trial Court of Makati City in Civil Case No. M-028 is hereby
REINSTATED. No pronouncement as to costs.
SO ORDERED.
G.R. No. 129471 April 28, 2000
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs.COURT OF APPEALS
and CARLOS CAJES, respondents.
MENDOZA, J.:
This is a petition for certiorari seeking to reverse the decision1 and resolution2 of the
Court of Appeals dated August 30, 1996 and April 23, 1997, respectively, declaring
private respondent Carlos Cajes the owner of 19.4 hectares of land embraced in TCT
No. 10101 and ordering the segregation and reconveyance of said portion to him.
The antecedent facts are as follows:
The land in dispute, consisting of 19.4 hectares located in San Miguel, Province of
Bohol, was originally owned by Ulpiano Mumar, whose ownership since 1917 was
evidenced by Tax Declaration No. 3840.3 In 1950,4 Mumar sold the land to private
respondent who was issued Tax Declaration No. R-1475 that same year.5 The tax
declaration was later superseded by Tax Declaration Nos. R-799 issued in 19616 and
D-2247 issued in 1974.7 Private respondent occupied and cultivated the said land,
8 planting cassava and camote in certain portions of the land.9
In 1969, unknown to private respondent, Jose Alvarez succeeded in obtaining the
registration of a parcel of land with an area of 1,512,468.00 square meters, 10 in his
name for which he was issued OCT No. 546 on June 16, 1969. 11 The parcel of land
included the 19.4 hectares occupied by private respondent. Alvarez never occupied nor
introduced improvements on said land. 12
In 1972, Alvarez sold the land to the spouses Gaudencio and Rosario Beduya to whom
TCT No. 10101 was issued. 13 That same year, the spouses Beduya obtained a loan
from petitioner Development Bank of the Philippines for P526,000.00 and, as security,
mortgaged the land covered by TCT No. 10101 to the bank. 14 In 1978, the SAAD
Investment Corp., and the SAAD Agro-Industries, Inc., represented by Gaudencio
Beduya, and the spouses Beduya personally executed another mortgage over the land
in favor of petitioner to secure a loan of P1,430,000.00. 15
The spouses Beduya later failed to pay their loans, as a result of which, the mortgage
on the property was foreclosed. 16 In the resulting foreclosure sale held on January 31,
1985, petitioner was the highest bidder. 17 As the spouses Beduya failed to redeem the
property, petitioner consolidated its ownership. 18
It appears that private respondent had also applied for a loan from petitioner in 1978,
offering his 19.4 hectare property under Tax Declaration No. D-2247 as security for the
loan. As part of the processing of the application, a representative of petitioner, Patton
R. Olano, inspected the land and appraised its value.
Private respondent's loan application was later approved by petitioner. 19 However after
releasing the amount of the loan to private respondent, petitioner found that the land
mortgaged by private respondent was included in the land covered by TCT No. 10101
in the name of the spouses Beduya. Petitioner, therefore, cancelled the loan and
demanded immediate payment of the amount. 20 Private respondent paid the loan to
petitioner for which the former was issued a Cancellation of Mortgage, dated March 18,
1981, releasing the property in question from encumbrance. 21
Sometime in April of 1986, more than a year after the foreclosure sale, a re-appraisal of
the property covered by TCT No. 10101 was conducted by petitioner's representatives.
It was then discovered that private respondent was occupying a portion of said land.
Private respondent was informed that petitioner had become the owner of the land he
was occupying, and he was asked to vacate the property. As private respondent
refused to do so, 22 petitioner filed a complaint for recovery of possession with damages
against him. The case was assigned to Branch 1 of the Regional Trial Court, Tagbilaran
City, 23 which after trial, rendered a decision, dated August 22, 1989, declaring petitioner
the lawful owner of the entire land covered by TCT No. 10101 on the ground that the
decree of registration was binding upon the land. 24 The dispositive portion of the
decision reads:
WHEREFORE, foregoing considered, the court renders judgment:
1 Declaring plaintiff bank Development Bank of the Philippines the true and legal owner
of the land in question covered by TCT No. 10101 farm of Gaudencio Beduya;
2 Dismissing defendant's counterclaim;
3 Ordering defendant to vacate from the land in question; the portion of which he claims
to belong to him for without basis in fact and law;
4 Ordering defendant, his agents or any person representing him or those who may
claim substantial rights on the land to vacate therefrom, cease and desist from
disturbing, molesting and interfering plaintiff's possession of the land in question, and
from committing any such act as would tend to mitigate, deny or deprive plaintiff of its
ownership and possession over said land.
SO ORDERED.
On appeal, the Court of Appeals reversed and gave judgment for private respondent,
declaring him the owner of the 19.4 hectares of land erroneously included in TCT No.
10101. The dispositive portion of the appellate court's decision reads:
WHEREFORE, the appealed decision is hereby REVERSED AND SET ASIDE. A new
decision is hereby rendered:
1. Dismissing the complaint.
2. Declaring the disputed 19.4000 hectares of land embraced in TCT 10101 as
exclusively belonging to defendant-appellant, ordering its segregation from plaintiff-
appellee's title and its reconveyance to appellant.
No pronouncement as to costs.
SO ORDERED. 25
Petitioner moved for a reconsideration but its motion was denied in a resolution dated
April 23, 1997. 26 Hence this petition.
Petitioner contends that:
I. THE DECISION OF THE RESPONDENT COURT IS NOT IN ACCORD WITH THE
APPLICABLE PROVISIONS OF LAW (Sections 38 and 46 of ACT 496) AND THE
APPLICABLE DECISIONS OF THE SUPREME COURT, PARTICULARLY IN THE
CASE OF BENIN VS. TUASON, 57 SCRA 531.
II. THE RESPONDENT COURT OVERLOOKED THE ISSUES ABOUT THE DBP
BEING AN INNOCENT MORTGAGEE FOR VALUE OF THE LAND IN QUESTION
AND OF HAVING PURCHASED LATER THE SAME DURING A PUBLIC AUCTION
SALE.
III. THE RESPONDENT COURT'S RULING DECLARING DBP IN ESTOPPEL IS
ILLOGICAL. 27
First. Petitioner invokes the ruling of this Court in Benin v. Tuason 28 in support of its
claim that its predecessor-in-interest, Jose Alvarez, became the owner of the land by
virtue of the decree of registration issued in his name. In Benin, three sets of plaintiffs
filed separate complaints against Mariano Severo Tuason and J.M. Tuason & Co., Inc.,
praying for the cancellation of OCT No. 735 covering two parcels of land called the Sta.
Mesa Estate, or Parcel 1, with an area of 8,798,617.00 square meters, and the Diliman
Estate, or Parcel 2, with an area of 15,961,246.00 square meters. They asked that they
be declared the owners and lawful possessors of said lands.
Benin is distinguished from this case. In the first place, Benin involved vast tracts of
lands which had already been subdivided and bought by innocent purchasers for value
and in good faith at the time the claimants obtained registration. Secondly, when the
claimants' ancestors occupied the lands in question and declared them for tax purposes
in 1944, the lands were already covered by the tax declarations in the name of J. M.
Tuason & Co., Inc. In 1914, OCT No. 735 was issued in the name of Tuason so that,
from that time on, no possession could defeat the title of the registered owners of the
land. Thirdly, the validity of OCT No. 735 had already been recognized by this Court in
several cases 29 and, as a result thereof, the transfer certificates of title acquired by the
innocent purchasers for value were also declared valid. It was held that neither could
the claimants file an action to annul these titles for not only had these actions
prescribed, but the fact was that the claimants were also barred from doing so by
laches, having filed the complaint only in 1955, or 41 years after the issuance of OCT
No. 735 to J.M. Tuason & Co., Inc. Thus, it was not solely the decree of registration
which was considered in resolving the Benin case. What was considered decisive was
the valid title or right of ownership of J. M. Tuason & Co., Inc. and that of the other
innocent purchasers for value and in good faith compared to the failure of the claimants
to show their right to own or possess the questioned properties.1âwphi1.nêt
Petitioner maintains that the possession by private respondent and his predecessor-in-
interest of the 19.4 hectares of land for more than 30 years cannot overcome the
decree of registration issued in favor of its predecessor-in-interest Jose Alvarez.
Petitioner quotes the following statement in the Benin case:
It follows also that the allegation of prescriptive title in favor of plaintiffs does not suffice
to establish a cause of action. If such prescription was completed before the registration
of the land in favor of the Tuasons, the resulting prescriptive title was cut off and
extinguished by the decree of registration. If, on the contrary, the prescription was either
begun or completed after the decree of registration, it conferred no title because, by
express provision of law, prescription can not operate against the registered owner (Act
496). 30
Petitioner would thus insist that, by virtue of the decree of registration, Jose Alvarez and
those claiming title from him (i.e., the spouses Beduya) acquired ownership of the 19.4
hectares of land, despite the fact that they neither possessed nor occupied these lands.
This view is mistaken. A consideration of the cases shows that a decree of registration
cut off or extinguished a right acquired by a person when such right refers to a lien or
encumbrance on the land — not to the right of ownership thereof — which was not
annotated on the certificate of title issued thereon. Thus, Act No. 496 provides:
Sec. 39. Every person receiving a certificate of title in pursuance of a decree of
registration, and every subsequent purchaser of registered land who takes a certificate
of title for value in good faith shall hold the same free of all encumbrances except those
noted on said certificate, and any of the following encumbrances which may be
subsisting, namely:
First. Liens, claims, or rights arising or existing under the laws of Constitution of the
United States or of the Philippine Islands which the statutes of the Philippine Islands
cannot require to appear of record in the Registry.
Second. Taxes within two years after the same became due and payable.
Third. Any public highway, way, private way established by law, or any Government
irrigation canal or lateral thereof, where the certificate of title does not state that the
boundaries of such highway, way, or irrigation canal or lateral thereof, have been
determined.
But if there are easements or other rights appurtenant to a parcel of registered land
which for any reason have failed to be registered, such easements or rights shall
remain so appurtenant notwithstanding such failure, and shall be held to pass with the
land until cut off or extinguished by the registration of the servient estate, or in any other
manner.
Hence, in Cid v. Javier, 31 it was held:
. . . Consequently, even conceding arguendo that such an easement has been
acquired, it had been cut off and extinguished by the registration of the servient estate
under the Torrens system without the easement being annotated on the corresponding
certificate of title, pursuant to Section 39 of the Land Registration Act.
This principle was reiterated in Purugganan v. Paredes 32 which also involved an
easement of light and view that was not annotated on the certificate of title of the
servient estate.
But to make this principle applicable to a situation wherein title acquired by a person
through acquisitive prescription would be considered cut off and extinguished by a
decree of registration would run counter to established jurisprudence before and after
the ruling in Benin. Indeed, registration has never been a mode of acquiring ownership
over immovable property. As early as 1911, in the case of City of Manila v. Lack, 33 the
Court already ruled on the purpose of registration of lands, viz.:
The Court of Land Registration was created for a single purpose. The Act is entitled "An
Act to provide for the adjudication and registration of titles to lands in the Philippine
Islands." The sole purpose of the Legislature in its creation was to bring the land titles
of the Philippine Islands under one comprehensive and harmonious system, the
cardinal features of which are indefeasibility of title and the intervention of the State as
a prerequisite to the creation and transfer of titles and interest, with the resultant
increase in the use of land as a business asset by reason of the greater certainty and
security of title. It does not create a title nor vest one. It simply confirms a title already
created and already vested, rendering it forever indefeasible. . .
Again, in the case of Angeles v. Samia 34 where land was erroneously registered in
favor of persons who neither possessed nor occupied the same, to the prejudice of the
actual occupant, the Court held:
. . . The purpose of the Land Registration Act, as this court has had occasion to so state
more than once, is not to create or vest title, but to confirm and register title already
created and already vested, and of course, said original certificate of title No. 8995
could not have vested in the defendant more title than what was rightfully due her and
her coowners. It appearing that said certificate granted her much more than she
expected, naturally to the prejudice of another, it is but just that the error, which gave
rise to said anomaly, be corrected (City of Manila vs. Lack, 19 Phil., 324). The
defendant and her coowners knew or, at least, came to know that it was through error
that the original certificate of title in question was issued by the court which heard
cadastral case No. 11 of Bacolor, not only in or prior to March, 1933, but from the time
said certificate was issued in their favor, that is, from December 15, 1921. This is
evidenced by the fact that, ever since, they remained passive without even attempting
to make the least showing of ownership over the land in question until after the lapse of
more than eleven years. The Land Registration Act as well as the Cadastral Act
protects only the holders of a title in good faith and does not permit its provisions to be
used as a shield for the commission of fraud, or that one should enrich himself at the
expense of another (Gustilo vs. Maravilla, 48 Phil., 442; Angelo vs. Director of Lands,
49 Phil., 838). The above-stated Acts do not give anybody, who resorts to the
provisions thereof, a better title than he really and lawfully has. If he happened to obtain
it by mistake or to secure, to the prejudice of his neighbor, more land than he really
owns, with or without bad faith on his part, the certificate of title, which may have been
issued to him under the circumstances, may and should be cancelled or corrected
(Legarda and Prieto vs. Saleeby, 31 Phil., 590). This is permitted by section 112 of Act
No. 496, which is applicable to the Cadastral Act because it is so provided expressly by
the provisions of section 11 of the latter Act. It cannot be otherwise because, as stated
in the case of Domingo vs.Santos, Ongsiako, Lim y Cia. (55 Phil., 361), errors in the
plans of lands sought to be registered in the registry and reproduced in the certificate of
title issued later, do not annul the decree of registration on the ground that it is not the
plan but the land itself which is registered in the registry. In other words, if the plan of an
applicant for registration or claimant in a cadastral case alleges that the land referred to
in said plan is 100 or 1,000 hectares, and the land which he really owns and desires to
register in the registry is only 80 ares, he cannot claim to be the owner of the existing
difference if afterwards he is issued a certificate of title granting him said area of 100 or
1,000 hectares. 35
The principle laid down in this 1938 case remains the prevailing doctrine, its latest
application being in the case of Reyes v. Court of Appeals 36 wherein we ruled that the
fact that a party was able to secure a title in his favor did not operate to vest ownership
upon her of the property.
In the present case, private respondent has been in actual, open, peaceful and
continuous possession of the property since 1950. This fact was corroborated by the
testimony of Eleuterio Cambangay who personally knew that Ulpiano Mumar
transferred the land covered by Tax Declaration No. 3840 37 in favor of private
respondent in 1950. 38Private respondent's claim based on actual occupation of the
land is bolstered by Tax Declaration Nos. R-1475, R-799 and D-2247 39 which were
issued in his name in 1950, 1961 and 1974, respectively. Together with his actual
possession of the land, these tax declarations constitute strong evidence of ownership
of the land occupied by him. As we said in the case of Republic vs. Court of Appeals: 40
Although tax declarations or realty tax payments of property are not conclusive
evidence of ownership, nevertheless, they are good indicia of possession in the
concept of owner for no one in his right mind would be paying taxes for a property that
is not in his actual or at least constructive possession. They constitute at least proof
that the holder has a claim of title over the property. The voluntary declaration of a
piece of property for taxation purposes manifests not only one's sincere and honest
desire to obtain title to the property and announces his adverse claim against the State
and all other interested parties, but also the intention to contribute needed revenues to
the Government. Such an act strengthens one's bona fide claim of acquisition of
ownership.
More importantly, it was established that private respondent, having been in possession
of the land since 1950, was the owner of the property when it was registered by Jose
Alvarez in 1969, his possession tacked to that of his predecessor-in-interest, Ulpiano
Mumar, which dates back to 1917. 41 Clearly, more than 30 years had elapsed before a
decree of registration was issued in favor of Jose Alvarez. This uninterrupted adverse
possession of the land for more than 30 years could only ripen into ownership of the
land through acquisitive prescription which is a mode of acquiring ownership and other
real rights over immovable property. Prescription requires public, peaceful,
uninterrupted and adverse possession of the property in the concept of an owner for ten
(10) years, in case the possession is in good faith and with a just title. Such prescription
is called ordinary prescription, as distinguished from extraordinary prescription which
requires possession for 30 years in case possession is without just title or is not in good
faith. 42
In contrast to private respondent, it has been shown that neither Jose Alvarez nor the
spouses Beduya were at any time in possession of the property in question. In fact,
despite knowledge by Gaudencio Beduya that private respondent occupied this 19.4
hectares included in the area covered by TCT No. 10101, 43 he never instituted any
action to eject or recover possession from the latter. Hence, it can be concluded that
neither Jose Alvarez nor the spouses Beduya ever exercised any right of ownership
over the land. The fact of registration in their favor never vested in them the ownership
of the land in dispute. "If a person obtains a title under the Torrens system, which
includes by mistake or oversight land which can no longer be registered under the
system, he does not, by virtue of the said certificate alone, become the owner of the
lands illegally included." 44
Considering the circumstances pertaining in this case, therefore, we hold that
ownership of the 19.4 hectares of land presently occupied by private respondent was
already vested in him and that its inclusion in OCT No. 546 and, subsequently, in TCT
No. 10101, was erroneous. Accordingly, the land in question must be reconveyed in
favor of private respondent, the true and actual owner thereof, reconveyance being
clearly the proper remedy in this case.
The true owner may bring an action to have the ownership or title to the land judicially
settled and the Court in the exercise of its equity jurisdiction, without ordering the
cancellation of the Torrens title issued upon the patent, may direct the defendants, the
registered owner to reconvey the parcel of land to the plaintiff who has been found to
be the true owner thereof." (Vital vs. Amore, 90 Phil. 955) "The reconveyance is just
and proper in order to terminate the intolerable anomaly that the patentees should have
a torrens title for the land which they and their predecessors never possessed which
has been possessed by Novo in the concept of owner." (Bustarga v. Novo, 129 SCRA
125). 45
Second. Generally, an action for reconveyance based on an implied or constructive
trust, such as the instant case, prescribes in 10 years from the date of issuance of
decree of registration. 46 However, this rule does not apply when the plaintiff is in actual
possession of the land. Thus, it has been held:
. . . [A]n action for reconveyance of a parcel of land based on implied or constructive
trust prescribes in ten years, the point of reference being the date of registration of the
deed or the date of the issuance of the certificate of title over the property, but this rule
applies only when the plaintiff or the person enforcing the trust is not in possession of
the property, since if a person claiming to be the owner thereof is in actual possession
of the property, as the defendants are in the instant case, the right to seek
reconveyance, which in effect seeks to quiet title to the property, does not prescribe.
The reason for this is that one who is in actual possession of a piece of land claiming to
be the owner thereof may wait until his possession is disturbed or his title is attacked
before taking steps to vindicate his right, the reason for the rule being, that his
undisturbed possession gives him a continuing right to seek the aid of a court of equity
to ascertain and determine the nature of the adverse claim of a third party and its effect
on his own title, which right can be claimed only by one who is in possession. 47
Having been the sole occupant of the land in question, private respondent may seek
reconveyance of his property despite the lapse of more than 10 years.
Nor is there any obstacle to the determination of the validity of TCT No. 10101. It is true
that the indefeasibility of torrens titles cannot be collaterally attacked. In the instant
case, the original complaint is for recovery of possession filed by petitioner against
private respondent, not an original action filed by the latter to question the validity of
TCT No. 10101 on which petitioner bases its right. To rule on the issue of validity in a
case for recovery of possession is tantamount to a collateral attack. However, it should
not be overlooked that private respondent filed a counterclaim against petitioner,
claiming ownership over the land and seeking damages. Hence, we could rule on the
question of the validity of TCT No. 10101 for the counterclaim can be considered a
direct attack on the same. "A counterclaim is considered a complaint, only this time, it is
the original defendant who becomes the plaintiff. . . . It stands on the same footing and
is to be tested by the same rules as if it were an independent action." 48 In an analogous
case, 49we ruled on the validity of a certificate of title despite the fact that the original
action instituted before the lower court was a case for recovery of possession. The
Court reasoned that since all the facts of the case are before it, to direct the party to
institute cancellation proceedings would be needlessly circuitous and would
unnecessarily delay the termination of the controversy which has already dragged on
for 20 years.
Third. Petitioner nonetheless contends that an action for reconveyance does not lie
against it, because it is an innocent purchaser for value in the foreclosure sale held in
1985.
This contention has no merit. Sec. 38 of Act No. 496, the Land Registration Act,
provides:
If the court after hearing finds that the applicant or adverse claimant has title as stated
in his application or adverse claim and proper for registration, a decree of confirmation
and registration shall be entered. Every decree of registration shall bind the land, and
quiet title thereto, subject only to the exceptions stated in the following section. It shall
be conclusive upon and against all persons, including the Insular Government and all
the branches thereof, whether mentioned by name in the application, notice, or citation,
or included in the general description "To all whom it may concern." Such decree shall
not be opened by reason of the absence, infancy, or other disability of any person
affected thereby, nor by any proceeding in any court for reversing judgments or
decrees; subject, however, to the right of any person deprived of land or of any estate
or interest therein by decree of registration obtained by fraud to file in the competent
Court of First Instance a petition for review within one year after entry of the decree,
provided no innocent purchaser for value has acquired an interest. Upon the expiration
of said term of one year, every decree or certificate of title issued in accordance with
this section shall be incontrovertible. If there is any such purchaser, the decree of
registration shall not be opened, but shall remain in full force and effect forever, subject
only to the right of appeal hereinbefore provided: Provided, however, That no decree or
certificate of title issued to persons not parties to the appeal shall be cancelled or
annulled. But any person aggrieved by such decree in any case may pursue his remedy
by action for damages against the applicant or any other person for fraud in procuring
the decree. Whenever the phrase "innocent purchaser for value" or an equivalent
phrase occurs in this Act, it shall be deemed to include an innocent lessee, mortgagee,
or other encumbrancer for value. (As amended by Sec. 3, Act 3621; and Sec. 1, Act No.
3630.)
Succinctly put, §38 provides that a certificate of title is conclusive and binding upon the
whole world. Consequently, a buyer need not look behind the certificate of title in order
to determine who is the actual owner of the land. However, this is subject to the right of
a person deprived of land through fraud to bring an action for reconveyance, provided
that it does not prejudice the rights of an innocent purchaser for value and in good faith.
"It is a condition sine qua non for an action for reconveyance to prosper that the
property should not have passed to the hands of an innocent purchaser for
value." 50 The same rule applies to mortgagees, like petitioner. Thus, we held:
Where the certificate of title is in the name of the mortgagor when the land is
mortgaged, the innocent mortgagee for value has the right to rely on what appears on
the certificate of title. In the absence of anything to excite suspicion, said mortgagee is
under no obligation to look beyond the certificate and investigate the title of the
mortgagor appearing on the face of said certificate. Although Article 2085 of the Civil
Code provides that absolute ownership of the mortgaged property by the mortgagor is
essential, the subsequent declaration of a title as null and void is not a ground for
nullifying the mortgage right of a mortgagee in good faith.51
The evidence before us, however, indicates that petitioner is not a mortgagee in good
faith. To be sure, an innocent mortgagee is not expected to conduct an exhaustive
investigation on the history of the mortgagor's title. Nonetheless, especially in the case
of a banking institution, a mortgagee must exercise due diligence before entering into
said contract. Judicial notice is taken of the standard practice for banks, before
approving a loan, to send representatives to the premises of the land offered as
collateral and to investigate who are the real owners thereof. Banks, their business
being impressed with public interest, are expected to exercise more care and prudence
than private individuals in their dealings, even those involving registered lands. 52
In this case, petitioner's representative, Patton R. Olano, admitted that he came to
know of the property for the first time in 1979 when he inspected it to determine
whether the portion occupied by private respondent and mortgaged by the latter to
petitioner was included in TCT No. 10101. This means that when the land was
mortgaged by the spouses Beduya in 1972, no investigation had been made by
petitioner. It is clear, therefore, that petitioner failed to exercise due care and diligence
in establishing the condition of the land as regards its actual owners and possessors
before it entered into the mortgage contract in 1972 with the Beduyas. Had it done so, it
would not have failed to discover that private respondent was occupying the disputed
portion of 19.4 hectares. For this reason, petitioner cannot be considered an innocent
purchaser for value when it bought the land covered by TCT No. 10101 in 1985 at the
foreclosure sale.
Indeed, two circumstances negate petitioner's claim that it was an innocent purchaser
for value when it bought the land in question, including the portion occupied by private
respondent: (1) petitioner was already informed by Gaudencio Beduya that private
respondent occupied a portion of the property covered by TCT No. 10101; and (2)
petitioner's representative conducted an investigation of the property in 1979 to
ascertain whether the land mortgaged by private respondent was included in TCT No.
10101. In other words, petitioner was already aware that a person other than the
registered owner was in actual possession of the land when it bought the same at the
foreclosure sale. A person who deliberately ignores a significant fact which would create
suspicion in an otherwise reasonable man is not an innocent purchaser for value. "It is
a well-settled rule that a purchaser cannot close his eyes to facts which should put a
reasonable man upon his guard, and then claim that he acted in good faith under the
belief that there was no defect in the title of the vendor." 53
Petitioner deliberately disregarded both the fact that private respondent already
occupied the property and that he was claiming ownership over the same. It cannot
feign ignorance of private respondent's claim to the land since the latter mortgaged the
same land to petitioner as security for the loan he contracted in 1978 on the strength of
the tax declarations issued under his name. Instead of inquiring into private
respondent's occupation over the land, petitioner simply proceeded with the foreclosure
sale, pretending that no doubts surround the ownership of the land covered by TCT No.
10101. Considering these circumstances, petitioner cannot be deemed an innocent
mortgagee/purchaser for value. As we ruled:
The failure of appellees to take the ordinary precautions which a prudent man would
have taken under the circumstances, specially in buying a piece of land in the actual,
visible and public possession of another person, other than the vendor, constitutes
gross negligence amounting to bad faith.
In this connection, it has been held that where, as in this case, the land sold is in the
possession of a person other than the vendor, the purchaser is required to go beyond
the certificates of title and ma[k]e inquiries concerning the rights of the actual
possessor. (Citations omitted.)
xxx xxx xxx
One who purchases real property which is in the actual possession of another should,
at least, make some inquiry concerning the right of those in possession. The actual
possession by other than the vendor should, at least put the purchaser upon inquiry. He
can scarcely, in the absence of such inquiry, be regarded as a bona fide purchaser as
against such possessors. 54
Fourth. From the foregoing, we find that the resolution of the issue of estoppel will not
affect the outcome of this case. Petitioner claims that the fact that it approved a loan in
favor of private respondent and executed a mortgage contract covering the 19.4
hectares covered by tax declarations issued under private respondent's name does not
mean that it is estopped from questioning the latter's title. Petitioner accuses private
respondent of having made misrepresentations which led it to believe in his valid title
and ownership.
The claim has no basis. Private respondent made no misrepresentation with regard to
the land occupied by him as he is actually the real owner thereof. Moreover, when
private respondent entered into a mortgage contract with petitioner, his claim of
ownership was supported not only by the tax declarations but also by a certification of
the Clerk of Court of the Court of First Instance of Bohol that no civil, land registration or
cadastral case has been filed or instituted before the court affecting the validity of Tax
Declaration No. D-2247 covering the land located in Bugang, San Miguel, Bohol and
declared in the name of Carlos Cajes. 55 These documents were relied upon by private
respondent in support of his claim of ownership. We cannot consider the submission of
these documents as misrepresentations by private respondent as to the actual
ownership of the land. Rather, private respondent believed in good faith and with good
reason that he was the owner of the 19.4 hectares occupied by him.
As to the question of estoppel, we do not find petitioner to be estopped from
questioning private respondent's title.1âwphi1"Estoppel in pais arises when one, by his
acts, representations or admission, or by his own silence when he ought to speak out,
intentionally or through culpable negligence, induces another to believe certain facts to
exist and such other rightfully relies and acts on such belief, so that he will be
prejudiced if the former is permitted to deny the existence of such facts." 56 In the case
at bar, upon learning that the land occupied by private respondent was also covered by
TCT No. 10101, petitioner immediately demanded full payment of the loan and
thereafter cancelled the mortgage contract, a fact that is admitted by private respondent
himself. 57 Indeed, nothing in record indicates that petitioner impliedly acquiesced to the
validity of private respondent's title when it found out that the latter was occupying a
portion of the land covered by TCT No. 10101.1âwphi1.nêt
However, for reasons aforestated, we uphold private respondent's ownership of 19.4
hectares occupied by him. As a necessary consequence thereof, such portion of land
included in TCT No. 10101 must be segregated and reconveyed in his favor.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.
CEBU INTERNATIONAL FINANCE CORPORATION, petitioner, vs.COURT OF
APPEALS, VICENTE ALEGRE, respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari assails respondent appellate courts Decision,
[1]dated December 8, 1995, in CA G.R. CV No. 44085, which affirmed the ruling of the
Regional Trial Court of Makati, Branch 132. The dispositive portion of the trial courts decision
reads:
WHEREFORE, judgment is hereby rendered ordering defendant [herein petitioner] to
pay plaintiff [herein private respondent]:
 (1) the principal sum of P514,390.94 with legal interest thereon computed from August
6, 1991 until fully paid; and
(2) the costs of suit.
SO ORDERED.[2]
Based on the records, the following are the pertinent facts of the case:
Cebu International Finance Corporation (CIFC), a quasi-banking institution, is engaged
in money market operations.
On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, five hundred
thousand (P500,000.00) pesos, in cash. Petitioner issued a promissory note to mature on May 27,
1991. The note for five hundred sixteen thousand, two hundred thirty-eight pesos and sixty-
seven centavos (P516,238.67) covered private respondents placement plus interest at twenty and
a half (20.5%) percent for thirty-two (32) days.
On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK) for
five hundred fourteen thousand, three hundred ninety pesos and ninety-four centavos
(P514,390.94) in favor of the private respondent as proceeds of his matured investment plus
interest. The CHECK was drawn from petitioners current account number 0011-0803-59,
maintained with the Bank of the Philippine Islands (BPI), main branch at Makati City.
On June 17, 1991, private respondents wife deposited the CHECK with Rizal
Commercial Banking Corp. (RCBC), in Puerto Princesa, Palawan. BPI dishonored the CHECK
with the annotation, that the Check (is) Subject of an Investigation. BPI took custody of the
CHECK pending an investigation of several counterfeit checks drawn against CIFCs aforestated
checking account. BPI used the check to trace the perpetrators of the forgery.
Immediately, private respondent notified CIFC of the dishonored CHECK and
demanded, on several occasions, that he be paid in cash. CIFC refused the request, and instead
instructed private respondent to wait for its ongoing bank reconciliation with BPI. Thereafter,
private respondent, through counsel, made a formal demand for the payment of his money
market placement. In turn, CIFC promised to replace the CHECK but required an impossible
condition that the original must first be surrendered.
On February 25, 1992, private respondent Alegre filed a complaint[3] for recovery of a
sum of money against the petitioner with the Regional Trial Court of Makati (RTC-Makati),
Branch 132.
On July 13, 1992, CIFC sought to recover its lost funds and formally filed against BPI, a
separate civil action[4] for collection of a sum of money with the RTC-Makati, Branch 147. The
collection suit alleged that BPI unlawfully deducted from CIFCs checking account, counterfeit
checks amounting to one million, seven hundred twenty-four thousand, three hundred sixty-four
pesos and fifty-eight centavos (P1,724,364.58). The action included the prayer to collect the
amount of the CHECK paid to Vicente Alegre but dishonored by BPI.
Meanwhile, in response to Alegres complaint with RTC-Makati, Branch 132, CIFC filed
a motion for leave of court to file a third-party complaint against BPI. BPI was impleaded by
CIFC to enforce a right, for contribution and indemnity, with respect to Alegres claim. CIFC
asserted that the CHECK it issued in favor of Alegre was genuine, valid and sufficiently funded.
On July 23, 1992, the trial court granted CIFCs motion. However, BPI moved to dismiss
the third-party complaint on the ground of pendency of another action with RTC-Makati, Branch
147. Acting on the motion, the trial court dismissed the third-party complaint on November 4,
1992, after finding that the third party complaint filed by CIFC against BPI is similar to its
ancillary claim against the bank, filed with RTC-Makati Branch 147.
Thereafter, during the hearing by RTC-Makati, Branch 132, held on May 27, and June
22, 1993, Vito Arieta, Bank Manager of BPI, testified that the bank, indeed, dishonored the
CHECK, retained the original copy and forwarded only a certified true copy to RCBC. When
Arieta was recalled on July 20, 1993, he testified that on July 16, 1993, BPI encashed and
deducted the said amount from the account of CIFC, but the proceeds, as well as the CHECK
remained in BPIs custody. The banks move was in accordance with the Compromise
Agreement[5] it entered with CIFC to end the litigation in RTC-Makati, Branch 147. The
compromise agreement, which was submitted for the approval of the said court, provided that:
1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount of P1,724,364.58 plus P
20,000 litigation expenses as full and final settlement of all of plaintiffs claims as contained in
the Amended Complaint dated September 10, 1992. The aforementioned amount shall be
credited to plaintiffs current account No. 0011-0803-59 maintained at defendants Main Branch
upon execution of this Compromise Agreement.
2. Thereupon, defendant shall debit the sum of P 514,390.94 from the aforesaid current
account representing payment/discharge of BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising
from the alleged dishonor of BPI Check No. 513397, plaintiff cannot go after the
defendant:otherwise stated, the defendant shall not be liable to the plaintiff. Plaintiff [CIFC] may
however set-up the defense of payment/discharge stipulated in par. 2 above.[6]
On July 27, 1993, BPI filed a separate collection suit[7] against Vicente Alegre with the
RTC-Makati, Branch 62. The complaint alleged that Vicente Alegre connived with certain Lina
A. Pena and Lita A. Anda and forged several checks of BPIs client, CIFC. The total amount of
counterfeit checks was P 1,724,364.58. BPI prevented the encashment of some checks
amounting to two hundred ninety five thousand, seven hundred seventy-five pesos and seven
centavos (P295,775.07). BPI admitted that the CHECK, payable to Vicente Alegre for
P514,390.94, was deducted from BPIs claim, hence, the balance of the loss incurred by BPI was
nine hundred fourteen thousand, one hundred ninety-eight pesos and fifty-seven centavos
(P914,198.57), plus costs of suit for twenty thousand (P20,000.00) pesos. The records are silent
on the outcome of this case.
On September 27, 1993, RTC-Makati, Branch 132, rendered judgment in favor of
Vicente Alegre.
CIFC appealed from the adverse decision of the trial court. The respondent court
affirmed the decision of the trial court.
Hence this appeal,[8] in which petitioner interposes the following assignments of errors:
1. The Honorable Court of Appeals erred in affirming the finding of the Honorable Trial
Court holding that petitioner was not discharged from the liability of paying the value of the
subject check to private respondent after BPI has debited the value thereof against petitioners
current account.
 2. The Honorable Court of Appeals erred in applying the provisions of paragraph 2 of
Article 1249 of the Civil Code in the instant case. The applicable law being the Negotiable
Instruments Law.
3. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts
findings that the petitioner was guilty of negligence and delay in the performance of its
obligation to the private respondent.
4. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts
decision ordering petitioner to pay legal interest and the cost of suit.
5. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts
dismissal of petitioners third-party complaint against BPI.
These issues may be synthesized into three:
1. WHETHER OR NOT ARTICLE 1249 OF THE NEW CIVIL CODE APPLIES IN
THE PRESENT CASE;
2. WHETHER OR NOT BPI CHECK NO. 513397 WAS VALIDLY DISCHARGED;
and
3. WHETHER OR NOT THE DISMISSAL OF THE THIRD PARTY COMPLAINT OF
PETITIONER AGAINST BPI BY REASON OF LIS PENDENS WAS PROPER?
On the first issue, petitioner contends that the provisions of the Negotiable Instruments
Law (NIL) are the pertinent laws to govern its money market transaction with private
respondent, and not paragraph 2 of Article 1249 of the Civil Code. Petitioner stresses that it had
already been discharged from the liability of paying the value of the CHECK due to the
following circumstances:
1) There was ACCEPTANCE of the subject check by BPI, the drawee bank, as defined
under the Negotiable Instruments Law, and therefore, BPI, the drawee bank, became primarily
liable for the payment of the check, and consequently, the drawer, herein petitioner, was
discharged from its liability thereon;
2) Moreover, BPI, the drawee bank, has not validly DISHONORED the subject check;
and,
3) The act of BPI, the drawee bank of debiting/deducting the value of the check from
petitioners account amounted to and/or constituted a discharge of the drawers (petitioners)
liability under the instrument/subject check.[9]
Petitioner cites Section 137 of the Negotiable Instruments Law, which states:
Liability of drawee retaining or destroying bill - Where a drawee to whom a bill is delivered for
acceptance destroys the same, or refuses within twenty-four hours after such delivery or such
other period as the holder may allow, to return the bill accepted or non-accepted to the Holder,
he will be deemed to have accepted the same.
Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable for
the payment of the CHECK. Consequently, when BPI offset the value of CHECK against the
losses from the forged checks allegedly committed by the private respondent, the check was
deemed paid.
Article 1249 of the New Civil Code deals with a mode of extinction of an obligation and
expressly provides for the medium in the payment of debts. It provides that:
The payment of debts in money shall be made in the currency stipulated, and if it is not possible
to deliver such currency, then in the currency, which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
Considering the nature of a money market transaction, the above-quoted provision
should be applied in the present controversy. As held in Perez vs. Court of Appeals,[10] a money
market is a market dealing in standardized short-term credit instruments (involving large
amounts) where lenders and borrowers do not deal directly with each other but through a middle
man or dealer in open market. In a money market transaction, the investor is a lender who loans
his money to a borrower through a middleman or dealer.[11]
In the case at bar, the money market transaction between the petitioner and the private
respondent is in the nature of a loan. The private respondent accepted the CHECK, instead of
requiring payment in money. Yet, when he presented it to RCBC for encashment, as early as
June 17, 1991, the same was dishonored by non-acceptance, with BPIs annotation: Check (is)
subject of an investigation. These facts were testified to by BPIs manager. Under these
circumstances, and after the notice of dishonor,[12] the holder has an immediate right of recourse
against the drawer,[13] and consequently could immediately file an action for the recovery of the
value of the check.
In a loan transaction, the obligation to pay a sum certain in money may be paid in
money, which is the legal tender or, by the use of a check. A check is not a legal tender, and
therefore cannot constitute valid tender of payment. In the case of Philippine Airlines, Inc. vs.
Court of Appeals,[14] this Court held:
Since a negotiable instrument is only a substitute for money and not money, the delivery of such
an instrument does not, by itself, operate as payment (citation omitted). A check, whether a
managers check or ordinary check, is not legal tender, and an offer of a check in payment of a
debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere
delivery of checks does not discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by commercial document is actually
realized (Art. 1249, Civil Code, par. 3.)[15]
Turning now to the second issue, when the bank deducted the amount of the CHECK
from CIFCs current account, this did not ipso facto operate as a discharge or payment of the
instrument. Although the value of the CHECK was deducted from the funds of CIFC, it was not
delivered to the payee, Vicente Alegre. Instead, BPI offset the amount against the losses it
incurred from forgeries of CIFC checks, allegedly committed by Alegre. The confiscation of the
value of the check was agreed upon by CIFC and BPI. The parties intended to amicably settle
the collection suit filed by CIFC with the RTC-Makati, Branch 147, by entering into a
compromise agreement, which reads:
xxx
2. Thereupon, defendant shall debit the sum of P 514,390.94 from the aforesaid current account
representing payment/discharge of BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the
alleged dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant; otherwise
stated, the defendant shall not be liable to the plaintiff. Plaintiff however (sic) set-up the defense
of payment/discharge stipulated in par. 2 above.[16]
A compromise is a contract whereby the parties, by making reciprocal concessions,
avoid a litigation or put an end to one already commenced.[17] It is an agreement between two or
more persons who, for preventing or putting an end to a lawsuit, adjust their difficulties by
mutual consent in the manner which they agree on, and which everyone of them prefers in the
hope of gaining, balanced by the danger of losing.[18] The compromise agreement could not bind
a party who did not sign the compromise agreement nor avail of its benefits.[19] Thus, the
stipulations in the compromise agreement is unenforceable against Vicente Alegre, not a party
thereto. His money could not be the subject of an agreement between CIFC and BPI. Although
Alegres money was in custody of the bank, the banks possession of it was not in the concept of
an owner. BPI cannot validly appropriate the money as its own. The codal admonition on this
issue is clear:
Art. 1317 -
No one may contract in the name of another without being authorized by the latter, or unless he
has by law a right to represent him.
A Contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified,
expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked
by the other contracting party.[20]
BPIs confiscation of Alegres money constitutes garnishment without the parties going
through a valid proceeding in court. Garnishment is an attachment by means of which the
plaintiff seeks to subject to his claim the property of the defendant in the hands of a third person
or money owed to such third person or a garnishee to the defendant.[21] The garnishment
procedure must be upon proper order of RTC-Makati, Branch 62, the court who had jurisdiction
over the collection suit filed by BPI against Alegre. In effect, CIFC has not yet tendered a valid
payment of its obligation to the private respondent. Tender of payment involves a positive and
unconditional act by the obligor of offering legal tender currency as payment to the obligee for
the formers obligation and demanding that the latter accept the same.[22] Tender of payment
cannot be presumed by a mere inference from surrounding circumstances.
With regard to the third issue, for litis pendentia to be a ground for the dismissal of an
action, the following requisites must concur: (a) identity of parties or at least such as to represent
the same interest in both actions; (b) identity of rights asserted and relief prayed for, the relief
being founded on the same acts; and (c) the identity in the two cases should be such that the
judgment which may be rendered in one would, regardless of which party is successful, amount
to res judicata in the other.[23]
The trial courts ruling as adopted by the respondent court states, thus:
A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu International Finance
Corporation vs. Bank of the Philippine Islands now pending before Branch 147 of this Court and
the Third Party Complaint in the instant case would readily show that the parties are not only
identical but also the cause of action being asserted, which is the recovery of the value of BPI
Check No. 513397 is the same. In Civil Case No. 92-1940 and in the Third Party Complaint the
rights asserted and relief prayed for, the reliefs being founded on the facts, are identical.
xxx
WHEREFORE, the motion to dismiss is granted and consequently, the Third Party Complaint is
hereby ordered dismissed on ground of lis pendens.[24]
We agree with the observation of the respondent court that, as between the third party
claim filed by the petitioner against BPI in Civil Case No. 92-515 and petitioners ancillary claim
against the bank in Civil Case No. 92-1940, there is identity of parties as well as identity of
rights asserted, and that any judgment that may be rendered in one case will amount to res
judicata in another.
The compromise agreement between CIFC and BPI, categorically provided that In case
plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged
dishonor of BPI Check No. 513397, plaintiff (CIFC) cannot go after the defendant (BPI);
otherwise stated, the defendant shall not be liable to the plaintiff.[25] Clearly, this stipulation
expressed that CIFC had already abandoned any further claim against BPI with respect to the
value of BPI Check No. 513397. To ask this Court to allow BPI to be a party in the case at bar,
would amount to res judicata and would violate terms of the compromise agreement between
CIFC and BPI. The general rule is that a compromise has upon the parties the effect and
authority of res judicata, with respect to the matter definitely stated therein, or which by
implication from its terms should be deemed to have been included therein.[26] This holds true
even if the agreement has not been judicially approved.[27]
WHEREFORE, the instant petition is hereby DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 44085 is AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. 126780 February 17, 2005
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM, petitioners, 

vs.THE COURT OF APPEALS and MAURICE McLOUGHLIN, respondents.
DECISION TINGA, J.:
The primary question of interest before this Court is the only legal issue in the case: It is
whether a hotel may evade liability for the loss of items left with it for safekeeping by its
guests, by having these guests execute written waivers holding the establishment or its
employees free from blame for such loss in light of Article 2003 of the Civil Code which
voids such waivers.
Before this Court is a Rule 45 petition for review of the Decision1 dated 19 October
1995 of the Court of Appeals which affirmed the Decision2 dated 16 December 1991 of
the Regional Trial Court (RTC), Branch 13, of Manila, finding YHT Realty Corporation,
Brunhilda Mata-Tan (Tan), Erlinda Lainez (Lainez) and Anicia Payam (Payam) jointly
and solidarily liable for damages in an action filed by Maurice McLoughlin (McLoughlin)
for the loss of his American and Australian dollars deposited in the safety deposit box of
Tropicana Copacabana Apartment Hotel, owned and operated by YHT Realty
Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-philanthropist, used to stay
at Sheraton Hotel during his trips to the Philippines prior to 1984 when he met Tan. Tan
befriended McLoughlin by showing him around, introducing him to important people,
accompanying him in visiting impoverished street children and assisting him in buying
gifts for the children and in distributing the same to charitable institutions for poor
children. Tan convinced McLoughlin to transfer from Sheraton Hotel to Tropicana where
Lainez, Payam and Danilo Lopez were employed. Lopez served as manager of the
hotel while Lainez and Payam had custody of the keys for the safety deposit boxes of
Tropicana. Tan took care of McLoughlin's booking at the Tropicana where he started
staying during his trips to the Philippines from December 1984 to September 1987.3
On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana.
He rented a safety deposit box as it was his practice to rent a safety deposit box every
time he registered at Tropicana in previous trips. As a tourist, McLoughlin was aware of
the procedure observed by Tropicana relative to its safety deposit boxes. The safety
deposit box could only be opened through the use of two keys, one of which is given to
the registered guest, and the other remaining in the possession of the management of
the hotel. When a registered guest wished to open his safety deposit box, he alone
could personally request the management who then would assign one of its employees
to accompany the guest and assist him in opening the safety deposit box with the two
keys.4
McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand
US Dollars (US$15,000.00) which he placed in two envelopes, one envelope containing
Ten Thousand US Dollars (US$10,000.00) and the other envelope Five Thousand US
Dollars (US$5,000.00); Ten Thousand Australian Dollars (AUS$10,000.00) which he
also placed in another envelope; two (2) other envelopes containing letters and credit
cards; two (2) bankbooks; and a checkbook, arranged side by side inside the safety
deposit box.5
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin opened
his safety deposit box with his key and with the key of the management and took
therefrom the envelope containing Five Thousand US Dollars (US$5,000.00), the
envelope containing Ten Thousand Australian Dollars (AUS$10,000.00), his passports
and his credit cards.6 McLoughlin left the other items in the box as he did not check out
of his room at the Tropicana during his short visit to Hongkong. When he arrived in
Hongkong, he opened the envelope which contained Five Thousand US Dollars
(US$5,000.00) and discovered upon counting that only Three Thousand US Dollars
(US$3,000.00) were enclosed therein.7 Since he had no idea whether somebody else
had tampered with his safety deposit box, he thought that it was just a result of bad
accounting since he did not spend anything from that envelope.8
After returning to Manila, he checked out of Tropicana on 18 December 1987 and left
for Australia. When he arrived in Australia, he discovered that the envelope with Ten
Thousand US Dollars (US$10,000.00) was short of Five Thousand US Dollars
(US$5,000). He also noticed that the jewelry which he bought in Hongkong and stored
in the safety deposit box upon his return to Tropicana was likewise missing, except for a
diamond bracelet.9
When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if
some money and/or jewelry which he had lost were found and returned to her or to the
management. However, Lainez told him that no one in the hotel found such things and
none were turned over to the management. He again registered at Tropicana and
rented a safety deposit box. He placed therein one (1) envelope containing Fifteen
Thousand US Dollars (US$15,000.00), another envelope containing Ten Thousand
Australian Dollars (AUS$10,000.00) and other envelopes containing his traveling
papers/documents. On 16 April 1988, McLoughlin requested Lainez and Payam to open
his safety deposit box. He noticed that in the envelope containing Fifteen Thousand US
Dollars (US$15,000.00), Two Thousand US Dollars (US$2,000.00) were missing and in
the envelope previously containing Ten Thousand Australian Dollars (AUS$10,000.00),
Four Thousand Five Hundred Australian Dollars (AUS$4,500.00) were missing.10
When McLoughlin discovered the loss, he immediately confronted Lainez and Payam
who admitted that Tan opened the safety deposit box with the key assigned to him.
11 McLoughlin went up to his room where Tan was staying and confronted her. Tan
admitted that she had stolen McLoughlin's key and was able to open the safety deposit
box with the assistance of Lopez, Payam and Lainez.12 Lopez also told McLoughlin that
Tan stole the key assigned to McLoughlin while the latter was asleep.13
McLoughlin requested the management for an investigation of the incident. Lopez got in
touch with Tan and arranged for a meeting with the police and McLoughlin. When the
police did not arrive, Lopez and Tan went to the room of McLoughlin at Tropicana and
thereat, Lopez wrote on a piece of paper a promissory note dated 21 April 1988. The
promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and
US$2,000.00 or its equivalent in Philippine currency on or before May 5, 1988.14
Lopez requested Tan to sign the promissory note which the latter did and Lopez also
signed as a witness. Despite the execution of promissory note by Tan, McLoughlin
insisted that it must be the hotel who must assume responsibility for the loss he
suffered. However, Lopez refused to accept the responsibility relying on the conditions
for renting the safety deposit box entitled "Undertaking For the Use Of Safety Deposit
Box,"15 specifically paragraphs (2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any
liability arising from any loss in the contents and/or use of the said deposit box for any
cause whatsoever, including but not limited to the presentation or use thereof by any
other person should the key be lost;
...
4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT
HOTEL upon giving up the use of the box.16
On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to
the validity of the abovementioned stipulations. They opined that the stipulations are
void for being violative of universal hotel practices and customs. His lawyers prepared a
letter dated 30 May 1988 which was signed by McLoughlin and sent to President
Corazon Aquino.17 The Office of the President referred the letter to the Department of
Justice (DOJ) which forwarded the same to the Western Police District (WPD).18
After receiving a copy of the indorsement in Australia, McLoughlin came to the
Philippines and registered again as a hotel guest of Tropicana. McLoughlin went to
Malacaňang to follow up on his letter but he was instructed to go to the DOJ. The DOJ
directed him to proceed to the WPD for documentation. But McLoughlin went back to
Australia as he had an urgent business matter to attend to.
For several times, McLoughlin left for Australia to attend to his business and came back
to the Philippines to follow up on his letter to the President but he failed to obtain any
concrete assistance.19
McLoughlin left again for Australia and upon his return to the Philippines on 25 August
1989 to pursue his claims against petitioners, the WPD conducted an investigation
which resulted in the preparation of an affidavit which was forwarded to the Manila City
Fiscal's Office. Said affidavit became the basis of preliminary investigation. However,
McLoughlin left again for Australia without receiving the notice of the hearing on 24
November 1989. Thus, the case at the Fiscal's Office was dismissed for failure to
prosecute. Mcloughlin requested the reinstatement of the criminal charge for theft. In
the meantime, McLoughlin and his lawyers wrote letters of demand to those having
responsibility to pay the damage. Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate,
Manila. Meetings were held between McLoughlin and his lawyer which resulted to the
filing of a complaint for damages on 3 December 1990 against YHT Realty Corporation,
Lopez, Lainez, Payam and Tan (defendants) for the loss of McLoughlin's money which
was discovered on 16 April 1988. After filing the complaint, McLoughlin left again for
Australia to attend to an urgent business matter. Tan and Lopez, however, were not
served with summons, and trial proceeded with only Lainez, Payam and YHT Realty
Corporation as defendants.
After defendants had filed their Pre-Trial Brief admitting that they had previously
allowed and assisted Tan to open the safety deposit box, McLoughlin filed an Amended/
Supplemental Complaint20 dated 10 June 1991 which included another incident of loss
of money and jewelry in the safety deposit box rented by McLoughlin in the same hotel
which took place prior to 16 April 1988.21 The trial court admitted the Amended/
Supplemental Complaint.
During the trial of the case, McLoughlin had been in and out of the country to attend to
urgent business in Australia, and while staying in the Philippines to attend the hearing,
he incurred expenses for hotel bills, airfare and other transportation expenses, long
distance calls to Australia, Meralco power expenses, and expenses for food and
maintenance, among others.22
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the dispositive
portion of which reads:
WHEREFORE, above premises considered, judgment is hereby rendered by this Court
in favor of plaintiff and against the defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff the sum of US$11,400.00
or its equivalent in Philippine Currency of ₱342,000.00, more or less, and the sum of
AUS$4,500.00 or its equivalent in Philippine Currency of ₱99,000.00, or a total of
₱441,000.00, more or less, with 12% interest from April 16 1988 until said amount has
been paid to plaintiff (Item 1, Exhibit CC);
2. Ordering defendants, jointly and severally to pay plaintiff the sum of ₱3,674,238.00
as actual and consequential damages arising from the loss of his Australian and
American dollars and jewelries complained against and in prosecuting his claim and
rights administratively and judicially (Items II, III, IV, V, VI, VII, VIII, and IX, Exh. "CC");
3. Ordering defendants, jointly and severally, to pay plaintiff the sum of ₱500,000.00 as
moral damages (Item X, Exh. "CC");
4. Ordering defendants, jointly and severally, to pay plaintiff the sum of ₱350,000.00 as
exemplary damages (Item XI, Exh. "CC");
5. And ordering defendants, jointly and severally, to pay litigation expenses in the sum
of ₱200,000.00 (Item XII, Exh. "CC");
6. Ordering defendants, jointly and severally, to pay plaintiff the sum of ₱200,000.00 as
attorney's fees, and a fee of ₱3,000.00 for every appearance; and
7. Plus costs of suit.
SO ORDERED.23
The trial court found that McLoughlin's allegations as to the fact of loss and as to the
amount of money he lost were sufficiently shown by his direct and straightforward
manner of testifying in court and found him to be credible and worthy of belief as it was
established that McLoughlin's money, kept in Tropicana's safety deposit box, was taken
by Tan without McLoughlin's consent. The taking was effected through the use of the
master key which was in the possession of the management. Payam and Lainez
allowed Tan to use the master key without authority from McLoughlin. The trial court
added that if McLoughlin had not lost his dollars, he would not have gone through the
trouble and personal inconvenience of seeking aid and assistance from the Office of the
President, DOJ, police authorities and the City Fiscal's Office in his desire to recover his
losses from the hotel management and Tan.24
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth
approximately One Thousand Two Hundred US Dollars (US$1,200.00) which allegedly
occurred during his stay at Tropicana previous to 4 April 1988, no claim was made by
McLoughlin for such losses in his complaint dated 21 November 1990 because he was
not sure how they were lost and who the responsible persons were. But considering the
admission of the defendants in their pre-trial brief that on three previous occasions they
allowed Tan to open the box, the trial court opined that it was logical and reasonable to
presume that his personal assets consisting of Seven Thousand US Dollars
(US$7,000.00) and jewelry were taken by Tan from the safety deposit box without
McLoughlin's consent through the cooperation of Payam and Lainez.25
The trial court also found that defendants acted with gross negligence in the
performance and exercise of their duties and obligations as innkeepers and were
therefore liable to answer for the losses incurred by McLoughlin.26
Moreover, the trial court ruled that paragraphs (2) and (4) of the "Undertaking For The
Use Of Safety Deposit Box" are not valid for being contrary to the express mandate of
Article 2003 of the New Civil Code and against public policy.27 Thus, there being fraud
or wanton conduct on the part of defendants, they should be responsible for all
damages which may be attributed to the non-performance of their contractual
obligations.28
The Court of Appeals affirmed the disquisitions made by the lower court except as to
the amount of damages awarded. The decretal text of the appellate court's decision
reads:
THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED but
modified as follows:
The appellants are directed jointly and severally to pay the plaintiff/appellee the
following amounts:
1) ₱153,200.00 representing the peso equivalent of US$2,000.00 and AUS$4,500.00;
2) ₱308,880.80, representing the peso value for the air fares from Sidney [sic] to Manila
and back for a total of eleven (11) trips;
3) One-half of ₱336,207.05 or ₱168,103.52 representing payment to Tropicana
Apartment Hotel;
4) One-half of ₱152,683.57 or ₱76,341.785 representing payment to Echelon Tower;
5) One-half of ₱179,863.20 or ₱89,931.60 for the taxi xxx transportation from the
residence to Sidney [sic] Airport and from MIA to the hotel here in Manila, for the eleven
(11) trips;
6) One-half of ₱7,801.94 or ₱3,900.97 representing Meralco power expenses;
7) One-half of ₱356,400.00 or ₱178,000.00 representing expenses for food and
maintenance;
8) ₱50,000.00 for moral damages;
9) ₱10,000.00 as exemplary damages; and
10) ₱200,000 representing attorney's fees.
With costs.
SO ORDERED.29
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this
appeal by certiorari.
Petitioners submit for resolution by this Court the following issues: (a) whether the
appellate court's conclusion on the alleged prior existence and subsequent loss of the
subject money and jewelry is supported by the evidence on record; (b) whether the
finding of gross negligence on the part of petitioners in the performance of their duties
as innkeepers is supported by the evidence on record; (c) whether the "Undertaking For
The Use of Safety Deposit Box" admittedly executed by private respondent is null and
void; and (d) whether the damages awarded to private respondent, as well as the
amounts thereof, are proper under the circumstances.30
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law
and any peripheral factual question addressed to this Court is beyond the bounds of
this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the fact of prior
existence of the dollars and the jewelry which had been lost while deposited in the
safety deposit boxes of Tropicana, the basis of the trial court and the appellate court
being the sole testimony of McLoughlin as to the contents thereof. Likewise, petitioners
dispute the finding of gross negligence on their part as not supported by the evidence
on record.
We are not persuaded.l^vvphi1.net We adhere to the findings of the trial court as
affirmed by the appellate court that the fact of loss was established by the credible
testimony in open court by McLoughlin. Such findings are factual and therefore beyond
the ambit of the present petition.1awphi1.nét
The trial court had the occasion to observe the demeanor of McLoughlin while testifying
which reflected the veracity of the facts testified to by him. On this score, we give full
credence to the appreciation of testimonial evidence by the trial court especially if what
is at issue is the credibility of the witness. The oft-repeated principle is that where the
credibility of a witness is an issue, the established rule is that great respect is accorded
to the evaluation of the credibility of witnesses by the trial court.31 The trial court is in the
best position to assess the credibility of witnesses and their testimonies because of its
unique opportunity to observe the witnesses firsthand and note their demeanor, conduct
and attitude under grilling examination.32
We are also not impressed by petitioners' argument that the finding of gross negligence
by the lower court as affirmed by the appellate court is not supported by evidence. The
evidence reveals that two keys are required to open the safety deposit boxes of
Tropicana. One key is assigned to the guest while the other remains in the possession
of the management. If the guest desires to open his safety deposit box, he must
request the management for the other key to open the same. In other words, the guest
alone cannot open the safety deposit box without the assistance of the management or
its employees. With more reason that access to the safety deposit box should be
denied if the one requesting for the opening of the safety deposit box is a stranger.
Thus, in case of loss of any item deposited in the safety deposit box, it is inevitable to
conclude that the management had at least a hand in the consummation of the taking,
unless the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had
custody of the master key of the management when the loss took place. In fact, they
even admitted that they assisted Tan on three separate occasions in opening
McLoughlin's safety deposit box.33 This only proves that Tropicana had prior knowledge
that a person aside from the registered guest had access to the safety deposit box. Yet
the management failed to notify McLoughlin of the incident and waited for him to
discover the taking before it disclosed the matter to him. Therefore, Tropicana should
be held responsible for the damage suffered by McLoughlin by reason of the
negligence of its employees.
The management should have guarded against the occurrence of this incident
considering that Payam admitted in open court that she assisted Tan three times in
opening the safety deposit box of McLoughlin at around 6:30 A.M. to 7:30 A.M. while
the latter was still asleep.34 In light of the circumstances surrounding this case, it is
undeniable that without the acquiescence of the employees of Tropicana to the opening
of the safety deposit box, the loss of McLoughlin's money could and should have been
avoided.
The management contends, however, that McLoughlin, by his act, made its employees
believe that Tan was his spouse for she was always with him most of the time. The
evidence on record, however, is bereft of any showing that McLoughlin introduced Tan
to the management as his wife. Such an inference from the act of McLoughlin will not
exculpate the petitioners from liability in the absence of any showing that he made the
management believe that Tan was his wife or was duly authorized to have access to the
safety deposit box. Mere close companionship and intimacy are not enough to warrant
such conclusion considering that what is involved in the instant case is the very safety
of McLoughlin's deposit. If only petitioners exercised due diligence in taking care of
McLoughlin's safety deposit box, they should have confronted him as to his relationship
with Tan considering that the latter had been observed opening McLoughlin's safety
deposit box a number of times at the early hours of the morning. Tan's acts should have
prompted the management to investigate her relationship with McLoughlin. Then,
petitioners would have exercised due diligence required of them. Failure to do so
warrants the conclusion that the management had been remiss in complying with the
obligations imposed upon hotel-keepers under the law.
Under Article 1170 of the New Civil Code, those who, in the performance of their
obligations, are guilty of negligence, are liable for damages. As to who shall bear the
burden of paying damages, Article 2180, paragraph (4) of the same Code provides that
the owners and managers of an establishment or enterprise are likewise responsible
for damages caused by their employees in the service of the branches in which the
latter are employed or on the occasion of their functions. Also, this Court has ruled that
if an employee is found negligent, it is presumed that the employer was negligent in
selecting and/or supervising him for it is hard for the victim to prove the negligence of
such employer.35 Thus, given the fact that the loss of McLoughlin's money was
consummated through the negligence of Tropicana's employees in allowing Tan to open
the safety deposit box without the guest's consent, both the assisting employees and
YHT Realty Corporation itself, as owner and operator of Tropicana, should be held
solidarily liable pursuant to Article 2193.36
The issue of whether the "Undertaking For The Use of Safety Deposit Box" executed by
McLoughlin is tainted with nullity presents a legal question appropriate for resolution in
this petition. Notably, both the trial court and the appellate court found the same to be
null and void. We find no reason to reverse their common conclusion. Article 2003 is
controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to
the effect that he is not liable for the articles brought by the guest. Any stipulation
between the hotel-keeper and the guest whereby the responsibility of the former as set
forth in Articles 1998 to 200137 is suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public policy
precisely to apply to situations such as that presented in this case. The hotel business
like the common carrier's business is imbued with public interest. Catering to the public,
hotelkeepers are bound to provide not only lodging for hotel guests and security to their
persons and belongings. The twin duty constitutes the essence of the business. The
law in turn does not allow such duty to the public to be negated or diluted by any
contrary stipulation in so-called "undertakings" that ordinarily appear in prepared forms
imposed by hotel keepers on guests for their signature.
In an early case,38 the Court of Appeals through its then Presiding Justice (later
Associate Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or
innkeeper liable for the effects of their guests, it is not necessary that they be actually
delivered to the innkeepers or their employees. It is enough that such effects are within
the hotel or inn.39 With greater reason should the liability of the hotelkeeper be enforced
when the missing items are taken without the guest's knowledge and consent from a
safety deposit box provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the
New Civil Code for they allow Tropicana to be released from liability arising from any
loss in the contents and/or use of the safety deposit box for any cause whatsoever.
40 Evidently, the undertaking was intended to bar any claim against Tropicana for any
loss of the contents of the safety deposit box whether or not negligence was incurred by
Tropicana or its employees. The New Civil Code is explicit that the responsibility of the
hotel-keeper shall extend to loss of, or injury to, the personal property of the guests
even if caused by servants or employees of the keepers of hotels or inns as well as by
strangers, except as it may proceed from any force majeure.41 It is the loss
through force majeure that may spare the hotel-keeper from liability. In the case at bar,
there is no showing that the act of the thief or robber was done with the use of arms or
through an irresistible force to qualify the same as force majeure.42
Petitioners likewise anchor their defense on Article 200243 which exempts the hotel-
keeper from liability if the loss is due to the acts of his guest, his family, or visitors. Even
a cursory reading of the provision would lead us to reject petitioners' contention. The
justification they raise would render nugatory the public interest sought to be protected
by the provision. What if the negligence of the employer or its employees facilitated the
consummation of a crime committed by the registered guest's relatives or visitor?
Should the law exculpate the hotel from liability since the loss was due to the act of the
visitor of the registered guest of the hotel? Hence, this provision presupposes that the
hotel-keeper is not guilty of concurrent negligence or has not contributed in any degree
to the occurrence of the loss. A depositary is not responsible for the loss of goods by
theft, unless his actionable negligence contributes to the loss.44
In the case at bar, the responsibility of securing the safety deposit box was shared not
only by the guest himself but also by the management since two keys are necessary to
open the safety deposit box. Without the assistance of hotel employees, the loss would
not have occurred. Thus, Tropicana was guilty of concurrent negligence in allowing Tan,
who was not the registered guest, to open the safety deposit box of McLoughlin, even
assuming that the latter was also guilty of negligence in allowing another person to use
his key. To rule otherwise would result in undermining the safety of the safety deposit
boxes in hotels for the management will be given imprimatur to allow any person, under
the pretense of being a family member or a visitor of the guest, to have access to the
safety deposit box without fear of any liability that will attach thereafter in case such
person turns out to be a complete stranger. This will allow the hotel to evade
responsibility for any liability incurred by its employees in conspiracy with the guest's
relatives and visitors.
Petitioners contend that McLoughlin's case was mounted on the theory of contract, but
the trial court and the appellate court upheld the grant of the claims of the latter on the
basis of tort.45 There is nothing anomalous in how the lower courts decided the
controversy for this Court has pronounced a jurisprudential rule that tort liability can
exist even if there are already contractual relations. The act that breaks the contract
may also be tort.46
(2) ₱308,880.80, representing the peso value for the air fares from Sydney to Manila
and back for a total of eleven (11) trips;
(3) One-half of ₱336,207.05 or ₱168,103.52 representing payment to Tropicana
Copacabana Apartment Hotel;
(4) One-half of ₱152,683.57 or ₱76,341.785 representing payment to Echelon Tower;
(5) One-half of ₱179,863.20 or ₱89,931.60 for the taxi or transportation expense from
McLoughlin's residence to Sydney Airport and from MIA to the hotel here in Manila, for
the eleven (11) trips;
(6) One-half of ₱7,801.94 or ₱3,900.97 representing Meralco power expenses;

As to damages awarded to McLoughlin, we see no reason to modify the amounts (7) One-half of ₱356,400.00 or ₱178,200.00 representing expenses for food and
awarded by the appellate court for the same were based on facts and law. It is within maintenance;
the province of lower courts to settle factual issues such as the proper amount of
damages awarded and such finding is binding upon this Court especially if sufficiently
proven by evidence and not unconscionable or excessive. Thus, the appellate court (8) ₱50,000.00 for moral damages;
correctly awarded McLoughlin Two Thousand US Dollars (US$2,000.00) and Four
Thousand Five Hundred Australian dollars (AUS$4,500.00) or their peso equivalent at (9) ₱10,000.00 as exemplary damages; and
the time of payment,47 being the amounts duly proven by evidence.48 The alleged loss
that took place prior to 16 April 1988 was not considered since the amounts alleged to (10) ₱200,000 representing attorney's fees.
have been taken were not sufficiently established by evidence. The appellate court also
correctly awarded the sum of ₱308,880.80, representing the peso value for the air fares
from Sydney to Manila and back for a total of eleven (11) trips;49 one-half of With costs.
₱336,207.05 or ₱168,103.52 representing payment to Tropicana;50 one-half of
₱152,683.57 or ₱76,341.785 representing payment to Echelon Tower;51 one-half of SO ORDERED.
₱179,863.20 or ₱89,931.60 for the taxi or transportation expenses from McLoughlin's
residence to Sydney Airport and from MIA to the hotel here in Manila, for the eleven
(11) trips;52 one-half of ₱7,801.94 or ₱3,900.97 representing Meralco power expenses;
53 one-half of ₱356,400.00 or ₱178,000.00 representing expenses for food and

maintenance.54

The amount of ₱50,000.00 for moral damages is reasonable. Although trial courts are
given discretion to determine the amount of moral damages, the appellate court may
modify or change the amount awarded when it is palpably and scandalously
excessive.l^vvphi1.net Moral damages are not intended to enrich a complainant at the
expense of a defendant.l^vvphi1.net They are awarded only to enable the injured party
to obtain means, diversion or amusements that will serve to alleviate the moral suffering
he has undergone, by reason of defendants' culpable action.55

The awards of ₱10,000.00 as exemplary damages and ₱200,000.00 representing

attorney's fees are likewise sustained.

WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals

dated 19 October 1995 is hereby AFFIRMED. Petitioners are directed, jointly and
severally, to pay private respondent the following amounts:

(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of payment;