G.R. No.

175490 September 17, 2009

ILEANA DR. MACALINAO, Petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

DECISION

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to reverse and set
aside the June 30, 2006 Decision1 of the Court of Appeals (CA) and its November 21, 2006
Resolution2 denying petitioner’s motion for reconsideration.

The Facts

Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of the credit card facilities of
respondent Bank of the Philippine Islands (BPI).3 Petitioner Macalinao made some purchases through the
use of the said credit card and defaulted in paying for said purchases. She subsequently received a letter
dated January 5, 2004 from respondent BPI, demanding payment of the amount of one hundred forty-one
thousand five hundred eighteen pesos and thirty-four centavos (PhP 141,518.34), as follows:

Statement Previous Purchases Penalty Finance Balance

Date Balance (Payments) Interest Charges Due

10/27/2002 94,843.70 559.72 3,061.99 98,456.41

11/27/2002 98,465.41 (15,000) 0 2,885.61 86,351.02

12/31/2002 86,351.02 30,308.80 259.05 2,806.41 119,752.28

1/27/2003 119,752.28 618.23 3,891.07 124,234.58

2/27/2003 124,234.58 990.93 4,037.62 129,263.13

3/27/2003 129,263.13 (18,000.00) 298.72 3,616.05 115,177.90

4/27/2003 115,177.90 644.26 3,743.28 119,565.44

5/27/2003 119,565.44 (10,000.00) 402.95 3,571.71 113,540.10

8,362.50
6/29/2003 113,540.10 323.57 3,607.32 118,833.49
(7,000.00)

7/27/2003 118,833.49 608.07 3,862.09 123,375.65

8/27/2003 123,375.65 1,050.20 4,009.71 128,435.56

9/28/2003 128,435.56 1,435.51 4,174.16 134,045.23

10/28/2003

11/28/2003

12/28/2003

1/27/2004 141,518.34 8,491.10 4,599.34 154,608.78

Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI Mastercard, the
charges or balance thereof remaining unpaid after the payment due date indicated on the monthly Statement
of Accounts shall bear interest at the rate of 3% per month and an additional penalty fee equivalent to another
3% per month. Particularly:

8. PAYMENT OF CHARGES – BCC shall furnish the Cardholder a monthly Statement of Account (SOA) and
the Cardholder agrees that all charges made through the use of the CARD shall be paid by the Cardholder as
stated in the SOA on or before the last day for payment, which is twenty (20) days from the date of the said
SOA, and such payment due date may be changed to an earlier date if the Cardholder’s account is
considered overdue and/or with balances in excess of the approved credit limit, or to such other date as may
be deemed proper by the CARD issuer with notice to the Cardholder on the same monthly SOA. If the last day
fall on a Saturday, Sunday or a holiday, the last day for the payment automatically becomes the last working
day prior to said payment date. However, notwithstanding the absence or lack of proof of service of the SOA
of the Cardholder, the latter shall pay any and all charges made through the use of the CARD within thirty (30)
days from date or dates thereof. Failure of the Cardholder to pay the charges made through the CARD within
the payment period as stated in the SOA or within thirty (30) days from actual date or dates of purchase
whichever occur earlier, shall render him in default without the necessity of demand from BCC, which the
Cardholder expressly waives. The charges or balance thereof remaining unpaid after the payment due date
indicated on the monthly Statement of Accounts shall bear interest at the rate of 3% per month for BPI
Express Credit, BPI Gold Mastercard and an additional penalty fee equivalent to another 3% of the amount
due for every month or a fraction of a month’s delay. PROVIDED that if there occurs any change on the
prevailing market rates, BCC shall have the option to adjust the rate of interest and/or penalty fee due on the
outstanding obligation with prior notice to the cardholder. The Cardholder hereby authorizes BCC to
correspondingly increase the rate of such interest [in] the event of changes in the prevailing market rates, and
to charge additional service fees as may be deemed necessary in order to maintain its service to the
Cardholder. A CARD with outstanding balance unpaid after thirty (30) days from original billing statement
date shall automatically be suspended, and those with accounts unpaid after ninety (90) days from said
original billing/statement date shall automatically be cancel (sic), without prejudice to BCC’s right to suspend
or cancel any card anytime and for whatever reason. In case of default in his obligation as provided herein,
Cardholder shall surrender his/her card to BCC and in addition to the interest and penalty charges
aforementioned , pay the following liquidated damages and/or fees (a) a collection fee of 25% of the amount
due if the account is referred to a collection agency or attorney; (b) service fee for every dishonored check
issued by the cardholder in payment of his account without prejudice, however, to BCC’s right of considering
Cardholder’s account, and (c) a final fee equivalent to 25% of the unpaid balance, exclusive of litigation
expenses and judicial cost, if the payment of the account is enforced though court action. Venue of all civil
suits to enforce this Agreement or any other suit directly or indirectly arising from the relationship between the
parties as established herein, whether arising from crimes, negligence or breach thereof, shall be in the
process of courts of the City of Makati or in other courts at the option of BCC.4 (Emphasis supplied.) 1avvphi1

For failure of petitioner Macalinao to settle her obligations, respondent BPI filed with the Metropolitan Trial
Court (MeTC) of Makati City a complaint for a sum of money against her and her husband, Danilo SJ.
Macalinao. This was raffled to Branch 66 of the MeTC and was docketed as Civil Case No. 84462 entitled
Bank of the Philippine Islands vs. Spouses Ileana Dr. Macalinao and Danilo SJ. Macalinao.5

In said complaint, respondent BPI prayed for the payment of the amount of one hundred fifty-four thousand
six hundred eight pesos and seventy-eight centavos (PhP 154,608.78) plus 3.25% finance charges and late
payment charges equivalent to 6% of the amount due from February 29, 2004 and an amount equivalent to
25% of the total amount due as attorney’s fees, and of the cost of suit.6

After the summons and a copy of the complaint were served upon petitioner Macalinao and her husband,
they failed to file their Answer.7 Thus, respondent BPI moved that judgment be rendered in accordance with
Section 6 of the Rule on Summary Procedure.8 This was granted in an Order dated June 16,
2004.9 Thereafter, respondent BPI submitted its documentary evidence.10 1avvphi1

In its Decision dated August 2, 2004, the MeTC ruled in favor of respondent BPI and ordered petitioner
Macalinao and her husband to pay the amount of PhP 141,518.34 plus interest and penalty charges of 2%
per month, to wit:

WHEREFORE, finding merit in the allegations of the complaint supported by documentary evidence,
judgment is hereby rendered in favor of the plaintiff, Bank of the Philippine Islands and against
defendant-spouses Ileana DR Macalinao and Danilo SJ Macalinao by ordering the latter to pay the former
jointly and severally the following:

1. The amount of PESOS: ONE HUNDRED FORTY ONE THOUSAND FIVE HUNDRED EIGHTEEN AND
34/100 (P141,518.34) plus interest and penalty charges of 2% per month from January 05, 2004 until fully
paid;

2. P10,000.00 as and by way of attorney’s fees; and

3. Cost of suit.
SO ORDERED.11

Only petitioner Macalinao and her husband appealed to the Regional Trial Court (RTC) of Makati City, their
recourse docketed as Civil Case No. 04-1153. In its Decision dated October 14, 2004, the RTC affirmed in
toto the decision of the MeTC and held:

In any event, the sum of P141,518.34 adjudged by the trial court appeared to be the result of a recomputation
at the reduced rate of 2% per month. Note that the total amount sought by the plaintiff-appellee was
P154,608.75 exclusive of finance charge of 3.25% per month and late payment charge of 6% per month.

WHEREFORE, the appealed decision is hereby affirmed in toto.

No pronouncement as to costs.

SO ORDERED.12

Unconvinced, petitioner Macalinao filed a petition for review with the CA, which was docketed as CA-G.R. SP
No. 92031. The CA affirmed with modification the Decision of the RTC:

WHEREFORE, the appealed decision is AFFIRMED but MODIFIED with respect to the total amount due and
interest rate. Accordingly, petitioners are jointly and severally ordered to pay respondent Bank of the
Philippine Islands the following:

1. The amount of One Hundred Twenty Six Thousand Seven Hundred Six Pesos and Seventy Centavos plus
interest and penalty charges of 3% per month from January 5, 2004 until fully paid;

2. P10,000.00 as and by way of attorney’s fees; and

3. Cost of Suit.

SO ORDERED.13

Although sued jointly with her husband, petitioner Macalinao was the only one who filed the petition before
the CA since her husband already passed away on October 18, 2005.14

In its assailed decision, the CA held that the amount of PhP 141,518.34 (the amount sought to be satisfied in
the demand letter of respondent BPI) is clearly not the result of the re-computation at the reduced interest rate
as previous higher interest rates were already incorporated in the said amount. Thus, the said amount should
not be made as basis in computing the total obligation of petitioner Macalinao. Further, the CA also
emphasized that respondent BPI should not compound the interest in the instant case absent a stipulation to
that effect. The CA also held, however, that the MeTC erred in modifying the amount of interest rate from 3%
monthly to only 2% considering that petitioner Macalinao freely availed herself of the credit card facility
offered by respondent BPI to the general public. It explained that contracts of adhesion are not invalid per se
and are not entirely prohibited.

Petitioner Macalinao’s motion for reconsideration was denied by the CA in its Resolution dated November 21,
2006. Hence, petitioner Macalinao is now before this Court with the following assigned errors:

I.

THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD BE UPHELD

SINCE THE STIPULATED RATE OF INTEREST WAS UNCONSCIONABLE AND
INIQUITOUS, AND THUS ILLEGAL.

II.

THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED RATE OF

INTEREST FROM 2% TO 3%, CONTRARY TO THE TENOR OF ITS OWN DECISION.

III.

THE COURT A QUO, INSTEAD OF PROCEEDING WITH A RECOMPUTATION, SHOULD

HAVE DISMISSED THE CASE FOR FAILURE OF RESPONDENT BPI TO PROVE THE
CORRECT AMOUNT OF PETITIONER’S OBLIGATION, OR IN THE ALTERNATIVE,
REMANDED THE CASE TO THE LOWER COURT FOR RESPONDENT BPI TO PRESENT
PROOF OF THE CORRECT AMOUNT THEREOF.

Our Ruling
The petition is partly meritorious.

The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be Reduced to 2%
Per Month or 24% Per Annum

In its Complaint, respondent BPI originally imposed the interest and penalty charges at the rate of 9.25% per
month or 111% per annum. This was declared as unconscionable by the lower courts for being clearly
excessive, and was thus reduced to 2% per month or 24% per annum. On appeal, the CA modified the rate of
interest and penalty charge and increased them to 3% per month or 36% per annum based on the Terms and
Conditions Governing the Issuance and Use of the BPI Credit Card, which governs the transaction between
petitioner Macalinao and respondent BPI.

In the instant petition, Macalinao claims that the interest rate and penalty charge of 3% per month imposed by
the CA is iniquitous as the same translates to 36% per annum or thrice the legal rate of interest. 15 On the
other hand, respondent BPI asserts that said interest rate and penalty charge are reasonable as the same are
based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card.16

We find for petitioner. We are of the opinion that the interest rate and penalty charge of 3% per month should
be equitably reduced to 2% per month or 24% per annum.

Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, there was a
stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first time that this Court
has considered the interest rate of 36% per annum as excessive and unconscionable. We held in Chua vs.
Timan:17

The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be equitably
reduced to 1% per month or 12% per annum. We need not unsettle the principle we had affirmed in a plethora
of cases that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable
and exorbitant. Such stipulations are void for being contrary to morals, if not against the law. While C.B.
Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for
both secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read
as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their
borrowers or lead to a hemorrhaging of their assets. (Emphasis supplied.)

Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence,
courts may reduce the interest rate as reason and equity demand.18

The same is true with respect to the penalty charge. Notably, under the Terms and Conditions Governing the
Issuance and Use of the BPI Credit Card, it was also stated therein that respondent BPI shall impose an
additional penalty charge of 3% per month. Pertinently, Article 1229 of the Civil Code states:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable.

In exercising this power to determine what is iniquitous and unconscionable, courts must consider the
circumstances of each case since what may be iniquitous and unconscionable in one may be totally just and
equitable in another.19

In the instant case, the records would reveal that petitioner Macalinao made partial payments to respondent
BPI, as indicated in her Billing Statements.20 Further, the stipulated penalty charge of 3% per month or 36%
per annum, in addition to regular interests, is indeed iniquitous and unconscionable.

Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by the CA at
1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1% monthly or a total of
2% per month or 24% per annum in line with the prevailing jurisprudence and in accordance with Art. 1229 of
the Civil Code.

There Is No Basis for the Dismissal of the Case,

Much Less a Remand of the Same for Further Reception of Evidence

Petitioner Macalinao claims that the basis of the re-computation of the CA, that is, the amount of PhP
94,843.70 stated on the October 27, 2002 Statement of Account, was not the amount of the principal
obligation. Thus, this allegedly necessitates a re-examination of the evidence presented by the parties. For
this reason, petitioner Macalinao further contends that the dismissal of the case or its remand to the lower
court would be a more appropriate disposition of the case.
Such contention is untenable. Based on the records, the summons and a copy of the complaint were served
upon petitioner Macalinao and her husband on May 4, 2004. Nevertheless, they failed to file their Answer
despite such service. Thus, respondent BPI moved that judgment be rendered accordingly.21 Consequently,
a decision was rendered by the MeTC on the basis of the evidence submitted by respondent BPI. This is in
consonance with Sec. 6 of the Revised Rule on Summary Procedure, which states:

Sec. 6. Effect of failure to answer. — Should the defendant fail to answer the complaint within the period
above provided, the court, motu proprio, or on motion of the plaintiff, shall render judgment as may be
warranted by the facts alleged in the complaint and limited to what is prayed for therein: Provided, however,
that the court may in its discretion reduce the amount of damages and attorney’s fees claimed for being
excessive or otherwise unconscionable. This is without prejudice to the applicability of Section 3(c), Rule 10
of the Rules of Court, if there are two or more defendants. (As amended by the 1997 Rules of Civil Procedure;
emphasis supplied.)

Considering the foregoing rule, respondent BPI should not be made to suffer for petitioner Macalinao’s failure
to file an answer and concomitantly, to allow the latter to submit additional evidence by dismissing or
remanding the case for further reception of evidence. Significantly, petitioner Macalinao herself admitted the
existence of her obligation to respondent BPI, albeit with reservation as to the principal amount. Thus, a
dismissal of the case would cause great injustice to respondent BPI. Similarly, a remand of the case for
further reception of evidence would unduly prolong the proceedings of the instant case and render inutile the
proceedings conducted before the lower courts.

Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis for the re-computation
of the interest considering that this was the first amount which appeared on the Statement of Account of
petitioner Macalinao. There is no other amount on which the re-computation could be based, as can be
gathered from the evidence on record. Furthermore, barring a showing that the factual findings complained of
are totally devoid of support in the record or that they are so glaringly erroneous as to constitute serious
abuse of discretion, such findings must stand, for this Court is not expected or required to examine or contrast
the evidence submitted by the parties.22

In view of the ruling that only 1% monthly interest and 1% penalty charge can be applied to the beginning
balance of PhP 94,843.70, this Court finds the following computation more appropriate:

Penalty Total Amount

Statement Previous Purchases Interest
Balance Charge Due for the
Date Balance (Payments) (1%)
(1%) Month

10/27/2002 94,843.70 94,843.70 948.44 948.44 96,740.58

11/27/2002 94,843.70 (15,000) 79,843.70 798.44 798.44 81,440.58

12/31/2002 79,843.70 30,308.80 110,152.50 1,101.53 1,101.53 112,355.56

1/27/2003 110,152.50 110,152.50 1,101.53 1,101.53 112,355.56

2/27/2003 110,152.50 110,152.50 1,101.53 1,101.53 112,355.56

3/27/2003 110,152.50 (18,000.00) 92,152.50 921.53 921.53 93,995.56

4/27/2003 92,152.50 92,152.50 921.53 921.53 93,995.56

5/27/2003 92,152.50 (10,000.00) 82,152.50 821.53 821.53 83,795.56

8,362.50
6/29/2003 82,152.50 83,515.00 835.15 835.15 85,185.30
(7,000.00)

7/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30

8/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30

9/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30

10/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30

11/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30

12/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30

1/27/2004 83,515.00 83,515.00 835.15 835.15 85,185.30

TOTAL 83,515.00 14,397.26 14,397.26 112,309.52

WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated June 30, 2006 in CA-G.R. SP
No. 92031 is hereby MODIFIED with respect to the total amount due, interest rate, and penalty charge.
Accordingly, petitioner Macalinao is ordered to pay respondent BPI the following:

(1) The amount of one hundred twelve thousand three hundred nine pesos and fifty-two centavos (PhP
112,309.52) plus interest and penalty charges of 2% per month from January 5, 2004 until fully paid;

(2) PhP 10,000 as and by way of attorney’s fees; and

(3) Cost of suit.

SO ORDERED.

G.R. No. 194366 October 10, 2012

NAPOLEON D. NERI, ALICIA D. NERI-MONDEJAR, VISMINDA D. NERI-CHAMBERS, ROSA D.

NERI-MILLAN, DOUGLAS D. NERI, EUTROPIA D. ILLUT-COCKINOS AND VICTORIA D.
ILLUT-PIALA, Petitioners,
vs.
HEIRS OF HADJI YUSOP UY AND JULPHA IBRAHIM UY, Respondents.
*

DECISION

PERLAS-BERNABE, J.:

In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, petitioners Napoleon D. Neri
1

(Napoleon), Alicia D. Neri-Mondejar (Alicia), Visminda D. Neri-Chambers (Visminda), Rosa D. Neri-Millan

(Rosa), Douglas D. Neri (Douglas), Eutropia D. Illut-Cockinos (Eutropia), and Victoria D. Illut-Piala (Victoria)
seek to reverse and set aside the April 27, 2010 Decision and October 18, 2010 Resolution of the Court of
2 3

Appeals (CA) in CA-G.R. CV No. 01031-MIN which annulled the October 25, 2004 Decision of the Regional
4

Trial Court (RTC) of Panabo City, Davao del Norte and instead, entered a new one dismissing petitioners’
complaint for annulment of sale, damages and attorney’s feesagainst herein respondents heirs of spouses
Hadji Yusop Uy and Julpha Ibrahim Uy (heirs of Uy).

The Facts

During her lifetime, Anunciacion Neri (Anunciacion) had seven children, two (2) from her first marriage with
Gonzalo Illut (Gonzalo), namely: Eutropia and Victoria, and five (5) from her second marriage with Enrique
Neri (Enrique), namely: Napoleon, Alicia, Visminda, Douglas and Rosa. Throughout the marriage of spouses
Enrique and Anunciacion, they acquired several homestead properties with a total area of 296,555 square
meters located in Samal, Davao del Norte, embraced by Original Certificate of Title (OCT) Nos. (P-7998)
P-2128 , (P-14608) P-5153 and P-20551 (P-8348) issued on February 15, 1957, August 27, 1962 and July
5 6 7

7, 1967, respectively.

On September 21, 1977, Anunciacion died intestate. Her husband, Enrique, in his personal capacity and as
natural guardian of his minor children Rosa and Douglas, together with Napoleon, Alicia, and
Vismindaexecuted an Extra-Judicial Settlement of the Estate with Absolute Deed of Sale on July 7, 1979,
8

adjudicating among themselves the said homestead properties, and thereafter, conveying themto the late
spouses Hadji Yusop Uy and Julpha Ibrahim Uy (spouses Uy)for a consideration of ₱ 80,000.00.

On June 11, 1996, the children of Enrique filed a complaint for annulment of saleof the said homestead
properties against spouses Uy (later substituted by their heirs)before the RTC, docketed as Civil Case
No.96-28, assailing the validity of the sale for having been sold within the prohibited period. Thecomplaint
was later amended to include Eutropia and Victoriaas additional plaintiffs for having been excluded and
deprived of their legitimes as childrenof Anunciacion from her first marriage.

In their amended answer with counterclaim, the heirs of Uy countered that the sale took place beyond the
5-year prohibitory period from the issuance of the homestead patents. They also denied knowledge of
Eutropia and Victoria’s exclusionfrom the extrajudicial settlement and sale of the subject properties, and
interposed further the defenses of prescription and laches.

The RTC Ruling

On October 25, 2004, the RTC rendered a decision ordering, among others, the annulment of the
Extra-Judicial Settlement of the Estate with Absolute Deed of Sale. It ruled that while the sale occurred
beyond the 5-year prohibitory period, the sale is still void because Eutropia and Victoria were deprived of their
hereditary rights and that Enrique had no judicial authority to sell the shares of his minor children, Rosa and
Douglas.

Consequently, it rejected the defenses of laches and prescription raised by spouses Uy, who claimed
possession of the subject properties for 17 years, holding that co-ownership rights are imprescriptible.

The CA Ruling

On appeal, the CAreversed and set aside the ruling of the RTC in its April 27, 2010 Decision and dismissed
the complaint of the petitioners. It held that, while Eutropia and Victoria had no knowledge of the extrajudicial
settlement and sale of the subject properties and as such, were not bound by it, the CA found it
unconscionable to permit the annulment of the sale considering spouses Uy’s possession thereof for 17
years, and thatEutropia and Victoriabelatedlyfiled their actionin 1997, ormore than two years fromknowledge
of their exclusion as heirs in 1994 when their stepfather died. It, however, did not preclude the excluded heirs
from recovering their legitimes from their co-heirs.

Similarly, the CA declared the extrajudicial settlement and the subsequent saleas valid and binding with
respect to Enrique and hischildren, holding that as co-owners, they have the right to dispose of their
respective shares as they consider necessary or fit.While recognizing Rosa and Douglas to be minors at that
time, they were deemed to have ratified the sale whenthey failed to question it upon reaching the age of
majority.Italso found laches to have set in because of their inaction for a long period of time.

The Issues

In this petition, petitioners imputeto the CA the following errors:

I. WHEN IT UPHELDTHE VALIDITY OF THE "EXTRA JUDICIAL

SETTLEMENT OF THE ESTATE WITH ABSOLUTE DEED OF SALE" AS
FAR AS THE SHARES OF EUTROPIA AND VICTORIA WERE
CONCERNED, THEREBY DEPRIVING THEM OF THEIR INHERITANCE;

II. WHEN IT DID NOT NULLIFY OR ANNUL THE "EXTRA JUDICIAL

SETTLEMENT OF THE ESTATE WITH ABSOLUTE DEED OF SALE" WITH
RESPECT TO THE SHARESOF ROSA AND DOUGLAS, THEREBY
DEPRIVING THEM OF THEIR INHERITANCE; and

III. WHEN IT FOUND THAT LACHES OR PRESCRIPTION HAS SET IN.

The Ruling of the Court

The petitionis meritorious.

It bears to stress that all the petitioners herein are indisputably legitimate children of Anunciacion from her
first and second marriages with Gonzalo and Enrique, respectively, and consequently, are entitled to inherit
from her in equal shares, pursuant to Articles 979 and 980 of the Civil Code which read:

ART. 979. Legitimate children and their descendants succeed the parents and other
ascendants, without distinction as to sex or age, and even if they should come from different
marriages.

xxx

ART. 980. The children of the deceased shall always inherit from him in their own right,
dividing the inheritance in equal shares.
As such, upon the death of Anunciacion on September 21, 1977, her children and Enrique acquired their
respective inheritances, entitling them to their pro indiviso shares in her whole estate, as follows:
9

Enrique 9/16 (1/2 of the conjugal assets + 1/16)

Eutropia 1/16

Victoria 1/16

Napoleon 1/16

Alicia 1/16

Visminda 1/16

Rosa 1/16

Douglas 1/16

Hence, in the execution of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale in favor of
spouses Uy, all the heirs of Anunciacionshould have participated. Considering that Eutropia and Victoria
were admittedly excluded and that then minors Rosa and Douglas were not properly represented therein, the
settlement was not valid and binding uponthem and consequently, a total nullity.

Section 1, Rule 74 of the Rules of Court provides:

SECTION 1. Extrajudicial settlement by agreement between heirs. – x x x

The fact of the extrajudicial settlement or administration shall be published in a newspaper of

general circulation in the manner provided in the next succeeding section; but no
extrajudicial settlement shall be binding upon any person who has not participated therein or
had no notice thereof. (Underscoring added)

The effect of excluding the heirs in the settlement of estate was further elucidated in Segura v. Segura, thus:
10

It is clear that Section 1 of Rule 74 does not apply to the partition in question which was null
and void as far as the plaintiffs were concerned. The rule covers only valid partitions. The
partition in the present case was invalid because it excluded six of the nine heirs who were
entitled to equal shares in the partitioned property. Under the rule "no extrajudicial settlement
shall be binding upon any person who has not participated therein or had no notice thereof."
As the partition was a total nullity and did not affect the excluded heirs, it was not correct for
the trial court to hold that their right to challenge the partition had prescribed after two years
from its execution…

However, while the settlement of the estate is null and void, the subsequent sale of the subject
propertiesmade by Enrique and his children, Napoleon, Alicia and Visminda, in favor of the respondents
isvalid but only with respect to their proportionate shares therein.It cannot be denied that these heirs have
acquired their respective shares in the properties of Anunciacion from the moment of her death and that, as
11

owners thereof, they can very well sell their undivided share in the estate. 12

With respect to Rosa and Douglas who were minors at the time of the execution of the settlement and sale,
their natural guardian and father, Enrique, represented them in the transaction. However, on the basis of the
laws prevailing at that time, Enrique was merely clothed with powers of administration and bereft of any
authority to dispose of their 2/16 shares in the estate of their mother, Anunciacion.

Articles 320 and 326 of the Civil Code, the laws in force at the time of the execution of the settlement and sale,
provide:

ART. 320. The father, or in his absence the mother, is the legal administrator of the property
pertaining to the child under parental authority. If the property is worth more than two
thousand pesos, the father or mother shall give a bond subject to the approval of the Court of
First Instance.

ART. 326. When the property of the child is worth more than two thousand pesos, the father
or mother shall be considered a guardian of the child’s property, subject to the duties and
obligations of guardians under the Rules of Court.
Corollarily, Section 7, Rule 93 of the Rules of Court also provides:

SEC. 7. Parents as Guardians. – When the property of the child under parental authority is
worth two thousand pesos or less, the father or the mother, without the necessity of court
appointment, shall be his legal guardian. When the property of the child is worth more than
two thousand pesos, the father or the mother shall be considered guardian of the child’s
property, with the duties and obligations of guardians under these Rules, and shall file the
petition required by Section 2 hereof. For good reasons, the court may, however, appoint
another suitable persons.

Administration includes all acts for the preservation of the property and the receipt of fruits according to the
natural purpose of the thing. Any act of disposition or alienation, or any reduction in the substance of the
patrimony of child, exceeds the limits of administration. Thus, a father or mother, as the natural guardian of
13

the minor under parental authority, does not have the power to dispose or encumber the property of the latter.
Such power is granted by law only to a judicial guardian of the ward’s property and even then only with courts’
prior approval secured in accordance with the proceedings set forth by the Rules of Court. 14

Consequently, the disputed sale entered into by Enrique in behalf of his minor children without the proper
judicial authority, unless ratified by them upon reaching the age of majority, is unenforceable in accordance
15

with Articles 1317 and 1403(1) of the Civil Code which provide:

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.

ART. 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into the name of another person by one who has been given no authority
or legal representation, or who has acted beyond his powers;

xxx

Ratification means that one under no disability voluntarily adopts and gives sanction to some unauthorized
act or defective proceeding, which without his sanction would not be binding on him. It is this voluntary choice,
knowingly made, which amounts to a ratification of what was theretofore unauthorized, and becomes the
authorized act of the party so making the ratification. Once ratified, expressly or impliedly such as when the
16

person knowingly received benefits from it, the contract is cleansed from all its defects from the moment it
was constituted, as it has a retroactive effect.
17

Records, however, show that Rosa had ratified the extrajudicial settlement of the estate with absolute deed of
sale. In Napoleon and Rosa’s Manifestation before the RTC dated July 11, 1997,they stated:
18

"Concerning the sale of our parcel of land executed by our father, Enrique Neri concurred in
and conformed to by us and our other two sisters and brother (the other plaintiffs), in favor of
Hadji Yusop Uy and his spouse Hadja Julpa Uy on July 7, 1979, we both confirmed that the
same was voluntary and freely made by all of us and therefore the sale was absolutely valid
and enforceable as far as we all plaintiffs in this case are concerned;" (Underscoring
supplied)

In their June 30, 1997 Joint-Affidavit, Napoleon and Rosa also alleged:
19

"That we are surprised that our names are included in this case since we do not have any
intention to file a case against Hadji Yusop Uy and Julpha Ibrahim Uy and their family
and we respect and acknowledge the validity of the Extra-Judicial Settlement of the Estate
with Absolute Deed of Sale dated July 7, 1979;" (Underscoring supplied)

Clearly, the foregoing statements constitutedratification of the settlement of the estate and the subsequent
sale, thus, purging all the defects existing at the time of its execution and legitimizing the conveyance of
Rosa’s 1/16 share in the estate of Anunciacion to spouses Uy. The same, however, is not true with respect to
Douglas for lack of evidence showing ratification.

Considering, thus, that the extrajudicial settlement with sale is invalid and therefore, not binding on Eutropia,
Victoria and Douglas, only the shares ofEnrique, Napoleon, Alicia, Visminda and Rosa in the homestead
properties have effectivelybeen disposed in favor of spouses Uy. "A person can only sell what he owns, or is
authorized to sell and the buyer can as a consequence acquire no more than what the sellercan legally
transfer." On this score, Article 493 of the Civil Codeis relevant, which provides:
20

Each co-owner shall have the full ownership of his part and of the fruits and benefits
pertaining thereto, and he may therefore alienate, assign or mortgage it, and even substitute
another person in its enjoyment, except when personal rights are involved. But the effect of
the alienation or the mortgage, with respect to the co-owners, shall be limited to the portion
which may be allotted to him in the division upon the termination of the co-ownership.

Consequently, spouses Uy or their substituted heirs became pro indiviso co-owners of the homestead
properties with Eutropia, Victoria and Douglas, who retained title to their respective 1/16 shares. They were
deemed to be holding the 3/16 shares of Eutropia, Victoria and Douglas under an implied constructive trust
for the latter’s benefit, conformably with Article 1456 of the Civil Code which states:"if property is acquired
through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for
the benefit of the person from whom the property comes." As such, it is only fair, just and equitable that the
amount paid for their shares equivalent to ₱ 5,000.00 each or a total of ₱ 15,000.00 be returned to spouses
21

Uy with legal interest.

On the issue of prescription, the Court agrees with petitioners that the present action has not prescribed in so
far as it seeks to annul the extrajudicial settlement of the estate. Contrary to the ruling of the CA, the
prescriptive period of 2 years provided in Section 1 Rule 74 of the Rules of

Court reckoned from the execution of the extrajudicial settlement finds no application to petitioners Eutropia,
Victoria and Douglas, who were deprived of their lawful participation in the subject estate. Besides, an "action
or defense for the declaration of the inexistence of a contract does not prescribe" in accordance with Article
1410 of the Civil Code.

However, the action to recover property held in trust prescribes after 10 years from the time the cause of
action accrues, which is from the time of actual notice in case of unregistered deed. In this case, Eutropia,
22 23

Victoria and Douglas claimed to have knowledge of the extrajudicial settlement with sale after the death of
their father, Enrique, in 1994 which spouses Uy failed to refute. Hence, the complaint filed in 1997 was well
within the prescriptive period of 10 years.

WHEREFORE, the instant petition is GRANTED. The April 27, 2010 Decision and October 18, 2010
Resolution of the Court of Appeals are REVERSED and SET ASIDE and a new judgment is entered:

1. Declaring the Extra-Judicial Settlement of the Estate of Anunciacion Neri NULL and VOID;

2. Declaring the Absolute Deed of Sale in favor of the late spouses Hadji Yusop Uy and Julpha Ibrahim Uy as
regards the 13/16 total shares of the late Enrique Neri, Napoleon Neri, Alicia D. Neri-Mondejar, Visminda D.
Neri-Chambers and Rosa D. Neri-Millan VALID;

3. Declaring Eutropia D. Illut-Cockinos, Victoria D. Illut-Piala and Douglas D. Neri as the LAWFUL
OWNERS of the 3/16 portions of the subject homestead properties, covered by Original Certificate of Title
Nos. (P-7998) P-2128, (P-14608) P-5153 and P-20551 (P-8348); and

4. Ordering the estate of the late Enrique Neri, as well as Napoleon Neri, Alicia D. Neri-Mondejar, Visminda D.
Neri-Chambers and Rosa D. Neri-Millan to return to the respondents jointly and solidarily the amount paid
corresponding to the 3/16 shares of Eutropia, Victoria and Douglas in the total amount of ₱ 15,000.00, with
legal interest at 6% per annum computed from the time of payment until finality of this decision and 12% per
annum thereafter until fully paid.

No pronouncement as to costs.

SO ORDERED.