G.R. No.

125055 October 30, 1998 On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive portion of which
A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P.
JAVILLONAR, respondents.
Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to private
respondents, the spouses Romulo and Erlinda Javillonar, in consideration of which the latter executed the
following documents: (a) a promissory note, dated November 27, 1991, stating an interest charge of 4%
per month for six months; (b) a deed of mortgage over realty covered by TCT No. 58748, together with
the improvements thereon; and (c) an undated deed of sale of the mortgaged property in favor of the
mortgagee, petitioner A. Francisco Realty. 2
The interest on the said loan was to be paid in four installments: half of the total amount agreed upon
(P900,000.00) to be paid in advance through a deduction from the proceeds of the loan, while the
balance to be paid monthly by means of checks post-dated March 27, April 27, and May 27, 1992. The
promissory note expressly provided that upon "failure of the MORTGAGOR (private respondents) to pay
the interest without prior arrangement with the MORTGAGEE (petitioner), full possession of the property
will be transferred and the deed of sale will be registered. 3 For this purpose, the owner's duplicate of TCT
No. 58748 was delivered to petitioner A. Francisco Realty.
reads as follows:
WHEREFORE, prescinding from the foregoing considerations, judgment is hereby rendered declaring as
legal and valid, the right of ownership of A. Francisco Realty Find Development Corporation, over the
property subject of this case and now registered in its name as owner thereof, under TCT No. 85569 of
the Register of Deeds of Rizal, situated at No. 56 Dragonfly Street, Valle Verde VI, Pasig, Metro Manila.
Consequently, defendants are hereby ordered to cease and desist from further committing acts of
dispossession or from withholding possession from plaintiff of the said property as herein described and
specified.
Claim for damages in all its forms, however, including attorney's fees, are hereby denied, no competent
proofs having been adduced on record, in support thereof.8
Respondent spouses appealed to the Court of Appeals which reversed the decision of the trial court and
dismissed the complaint against them. The appellate court ruled that the Regional Trial Court had no
jurisdiction over the case because it was actually an action for unlawful detainer which is exclusively
cognizable by municipal trial courts. Furthermore, it ruled that, even presuming jurisdiction of the trial
court, the deed of sale was void for being in fact a pactum commissorium which is prohibited by Art. 2088
of the Civil Code.
Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of Appeals denied the
motion in its resolution, dated May 7, 1996. Hence, this petition for review on certiorari raising the
following issues:

Petitioner claims that private respondents failed to pay the interest and, as a consequence, it registered
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL TRIAL COURT HAD
the sale of the land in its favor on February 21, 1992. As a result, TCT No. 58748 was cancelled and in
NO JURISDICTION OVER THE COMPLAINT FILED BY THE PETITIONER.
lieu thereof TCT No. PT-85569 was issued in the name of petitioner A. Francisco Realty. 4

Private respondents subsequently obtained an additional loan of P2.5 Million from petitioner on March 13,
1992 for which they signed a promissory note which reads:
PROMISSORY NOTE
For value received I promise to pay A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, the
additional sum of Two Million Five Hundred Thousand Pesos (P2,500,000.00) on or before April 27,
1992, with interest at the rate of four percent (4%) a month until fully paid and if after the said date
this note and/or the other promissory note of P7.5 Million remains unpaid and/or unsettled, without
any need for prior demand or notification, I promise to vacate voluntarily and willfully and/or allow
A.FRANCISCO REALTY AND DEVELOPMENT CORPORATION to appropriate and occupy for their
exclusive use the real property located at 56 Dragonfly, Valle Verde VI, Pasig, Metro Manila. 5
Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly interest from
May 1992, plus surcharges. As respondent spouses refused to vacate, petitioner filed the present action
for possession before the Regional Trial Court in Pasig City.6
In their answer, respondents admitted liability on the loan but alleged that it was not their intent to sell
the realty as the undated deed of sale was executed by them merely as an additional security for the
payment of their loan. Furthermore, they claimed that they were not notified of the registration of the
sale in favor of petitioner A. Francisco Realty and that there was no interest then unpaid as they had in
fact been paying interest even subsequent to the registration of the sale. As an alternative defense,
respondents contended that the complaint was actually for ejectment and, therefore, the Regional Trial
Court had no jurisdiction to try the case. As counterclaim, respondents sought the cancellation of TCT No.
PT-85569 as secured by petitioner and the issuance of a new title evidencing their ownership of the
property.7
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE CONTRACTUAL DOCUMENTS
SUBJECT OF THE INSTANT CASE ARE CONSTITUTIVE OF PACTUM COMMISSORIUM AS DEFINED UNDER
ARTICLE 2088 OF THE CIVIL CODE OF THE PHILIPPINES.
On the first issue, the appellate court stated:
Ostensibly, the cause of action in the complaint indicates a case for unlawful detainer, as contra-
distinguished from accion publiciana. As contemplated by Rule 70 of the Rules of Court, an action for
unlawful detainer which falls under the exclusive jurisdiction of the Metropolitan or Municipal Trial
Courts, is defined as withholding from by a person from another for not more than one year, the
possession of the land or building to which the latter is entitled after the expiration or termination of
the supposed rights to hold possession by virtue of a contract, express or implied. If no action is
initiated for forcible entry or unlawful detainer within the expiration of the 1 year period, the case may
still be filed under the plenary action to recover possession by accion publiciana before the Court of
First Instance (now the Regional Trial Court) (Medina vs. Valdellon, 63 SCRA 278). In plain language,
the case at bar is a legitimate ejectment case filed within the 1 year period from the jurisdictional
demand to vacate. Thus, the Regional Trial Court has no jurisdiction over the case. Accordingly, under
Section 33 of B.P. Blg. 129 Municipal Trial Courts are vested with the exclusive original jurisdiction over
forcible entry and unlawful detainer case.
We think the appellate court is in error. What really distinguishes an action for unlawful detainer from a
possessory action (accion publiciana) and from a reivindicatory action (accion reivindicatoria) is that the
first is limited to the question of possession de facto.
An unlawful detainer suit (accion interdictal) together with forcible entry are the two forms of an
ejectment suit that may be filed to recover possession of real property. Aside from the summary action
 of ejectment, accion publiciana or the plenary action to recover the right of possession and accion
reivindicatoria or the action to recover ownership which includes recovery of possession, make up the
three kinds of actions to judicially recover possession.
Illegal detainer consists in withholding by a person from another of the possession of a land or building
to which the latter is entitled after the expiration or termination of the former's right to hold possession
by virtue of a contract, express or implied. An ejectment suit is brought before the proper inferior court
to recover physical possession only or possession de facto and not possession de jure, where
dispossession has lasted for not more than one year. Forcible entry and unlawful detainer are quieting
processes and the one-year time bar to the suit is in pursuance of the summary nature of the action.
The use of summary procedure in ejectment cases is intended to provide an expeditious means of
protecting actual possession or right to possession of the property. They are not processes to determine
the actual title to an estate. If at all, inferior courts are empowered to rule on the question of ownership
raised by the defendant in such suits, only to resolve the issue of possession. Its determination on the
ownership issue is, however, not conclusive.10
The allegations in both the original and the amended complaints of petitioner before the trial court clearly
raise issues involving more than the question of possession, to wit: (a) the validity of the Transfer of
ownership to petitioner; (b) the alleged new liability of private respondents for P400,000.00 a month
from the time petitioner made its demand on them to vacate; and (c) the alleged continuing liability of
private respondents under both loans to pay interest and surcharges on such. As petitioner A. Francisco
Realty alleged in its amended complaint:
5. To secure the payment of the sum of 7.5 Million together with the monthly interest, the defendant
spouses agreed to execute a Deed of Mortgage over the property with the express condition that if and
when they fail to pay monthly interest or any infringement thereof they agreed to convert the mortgage
into a Deed of Absolute Sale in favor of the plaintiff by executing Deed of Sale thereto, copy of which is
hereto attached and incorporated herein as Annex "A";
6. That in order to authorize the Register of Deeds into registering the Absolute Sale and transfer to the
plaintiff, defendant delivered unto the plaintiff the said Deed of Sale together with the original owner's
copy of Transfer Certificate of Title No. 58748 of the Registry of Rizal, copy of which is hereto attached
and made an integral part herein as Annex "B";
7. That defendant spouses later secured from the plaintiff an additional loan of P2.5 Million with the
same condition as aforementioned with 4% monthly interest;
8. That defendants spouses failed to pay the stipulated monthly interest and as per agreement of the
parties, plaintiff recorded and registered the Absolute Deed of Sale in its favor on and was issued
Transfer Certificate of Title No. PT-85569, copy of which is hereto attached and incorporated herein as
Annex "C";
9. That upon registration and transfer of the Transfer Certificate of Title in the name of the plaintiff,
copy of which is hereto attached and incorporated herein as Annex "C", plaintiff demanded the
surrender of the possession of the above-described parcel of land together with the improvements
thereon, but defendants failed and refused to surrender the same to the plaintiff without justifiable
reasons thereto; Neither did the defendants pay the interest of 4% a month from May, 1992 plus
surcharges up to the present;
10. That it was the understanding of the parties that if and when the defendants shall fail to pay the
interest due and that the Deed of Sale be registered in favor of plaintiff, the defendants shall pay a
monthly rental of P400,000.00 a month until they vacate the premises, and that if they still fail to pay
as they are still failing to pay the amount of P400,000.00 a month as rentals and/or interest, the
plaintiff shall take physical possession of the said property; 11
It is therefore clear from the foregoing that petitioner A. Francisco Realty raised issues which involved
more than a simple claim for the immediate possession of the subject property. Such issues range across
the full scope of rights of the respective parties under their contractual arrangements. As held in an
analogous case:
The disagreement of the parties in Civil Case No. 96 of the Justice of the Peace of Hagonoy, Bulacan
extended far beyond the issues generally involved in unlawful detainer suits. The litigants therein did
not raise merely the question of who among them was entitled to the possession of the fishpond of
Federico Suntay. For all judicial purposes, they likewise prayed of the court to rule on their respective
rights under the various contractual documents — their respective deeds of lease, the deed of
assignment and the promissory note — upon which they predicate their claims to the possession of the
said fishpond. In other words, they gave the court no alternative but to rule on the validity or nullity of
the above documents. Clearly, the case was converted into the determination of the nature of the
proceedings from a mere detainer suit to one that is "incapable of pecuniary estimation" and thus
beyond the legitimate authority of the Justice of the Peace Court to rule on. 12
Nor can it be said that the compulsory counterclaim filed by respondent spouses challenging the title of
petitioner A. Francisco Realty was merely a collateral attack which would bar a ruling here on the validity
of the said title.
A counterclaim is considered a complaint, only this time, it is the original defendant who becomes the
plaintiff (Valisno v. Plan, 143 SCRA 502 (1986). It stands on the same footing and is to be tested by
the same rules as if it were an independent action. Hence, the same rules on jurisdiction in an
independent action apply to a counterclaim.
On the second issue, the Court of Appeals held that, even "on the assumption that the trial court has
jurisdiction over the instant case," petitioner's action could not succeed because the deed of sale on
which it was based was void, being in the nature of a  pactum commissorium prohibited by Art. 2088 of
the Civil Code which provides:
Art. 2088. The creditor cannot appropriate the things given by way to pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void.
With respect to this question, the ruling of the appellate court should be affirmed. Petitioner denies,
however, that the promissory notes contain a pactum commissorium. It contends that —
What is envisioned by Article 2088 of the Civil Code of the Philippines is a provision in the deed of
mortgage providing for the automatic conveyance of the mortgaged property in case of the failure of
the debtor to pay the loan. A  pactum commissorium is a forfeiture clause in a deed of mortgage.
Thus, before Article 2088 can find application herein, the subject deed of mortgage must be scrutinized
to determine if it contains such a provision giving the creditor the right "to appropriate the things given
by way of mortgage without following the procedure prescribed by law for the foreclosure of the
mortgage" (Ranjo v. Salmon, 15 Phil. 436). IN SHORT, THE PROSCRIBED STIPULATION SHOULD BE
FOUND IN THE MORTGAGE DEED ITSELF.14
The contention is patently without merit. To sustain the theory of petitioner would be to allow a
subversion of the prohibition in Art. 2088.
In Nakpil v. Intermediate Appellate Court, 15 which involved the violation of a constructive trust, no deed The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code:
of mortgage was expressly executed between the parties in that case: Nevertheless, this Court ruled that Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgagee, or
an agreement whereby property held in trust was ceded to the trustee upon failure of the beneficiary to dispose of the same. Any stipulation to the contrary is null and void.
pay his debt to the former as secured by the said property was void for being a  pactum commissorium.
Itwas there held:
The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there
The arrangement entered into between the parties, whereby Pulong Maulap was to be "considered sold
should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the
to him (respondent) . . ." in case petitioner fails to reimburse Valdes, must then be construed as
payment of the principal obligation; and (2) that there should be a stipulation for an automatic
tantamount to a pactum commissorium which is expressly prohibited by Art. 2088 of the Civil Code.
appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the
For, there was to be automatic appropriation of the property by Valdez in the event of failure of
principal obligation within the stipulated period.21
petitioner to pay the value of the advances. Thus, contrary to respondent's manifestations, all the
elements of a pactum commissorium were present: there was a creditor-debtor relationship between
the parties; the property was used as security for the loan; and, there was automatic appropriation by The subject transaction being void, the registration of the deed of sale, by virtue of which petitioner A.
respondent of Pulong Maulap in case of default of petitioner.16 Francisco Realty was able to obtain TCT No. PT-85569 covering the subject lot, must also be declared
void, as prayed for by respondents in their counterclaim.

Similarly, the Court has struck down such stipulations as contained in deeds of sale purporting to
be pacto de retro sales but found actually to be equitable mortgages. WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it dismissed petitioner's
complaint against respondent spouses on the ground that the stipulations in the promissory notes are
void for being a  pactum commissorium, but REVERSED insofar as it ruled that the trial court had no
It has been consistently held that the presence of even one of the circumstances enumerated in Art.
jurisdiction over this case. The Register of Deeds of Pasig City is hereby ORDERED to CANCEL TCT No. PT-
1602 of the New Civil Code is sufficient to declare a contract of sale with right to repurchase an
85569 issued to petitioner and ISSUE a new one in the name of respondent spouses.
equitable mortgage. This is so because pacto de retro sales with the stringent and onerous effects that
accompany them are not favored. In case of doubt, a contract purporting to be a sale with the right to
repurchase shall be construed as an equitable mortgage.

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

Indeed, in Reyes v. Sierra 18 this Court categorically ruled that a mortgagee's mere act of registering the
mortgaged property in his own name upon the mortgagor's failure to redeem the property amounted to
the exercise of the privilege of a mortgagee in a pactum commissorium.
Obviously, from the nature of the transaction, applicant's a predecessor-in-interest is a mere
mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran, the mortgagor. The
mortgagee, however, may recover the loan, although the mortgage document evidencing the loan was
nonregistrable being a purely private instrument. Failure of mortgagor to redeem the property does not
automatically vest ownership of the property to the mortgagee, which would grant the latter the right
to appropriate the thing mortgaged or dispose of it. This violates the provision of Article 2088 of the
New Civil Code, which reads:
The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose by them.
Any stipulation to the contrary is null and void.
The act of applicant in registering the property in his own name upon mortgagor's failure to redeem
the property would to a  pactum commissorium which is against good morals and public policy. 19

Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of
respondent spouses to pay interest, ownership of the property would be automatically transferred to
petitioner A. Francisco Realty and the deed of sale in its favor would be registered, are in substance
a pactum commissorium. They embody the two elements of pactum commissorium as laid down in Uy
Tong v. Court of Appeals,20 to wit:

G.R. No. 126800 November 29, 1999
NATALIA P. BUSTAMANTE, petitioner,
vs.
SPOUSES RODITO F. ROSEL and NORMA A. ROSEL, respondents.
On March 8, 1987, at Quezon City, Norma Rosel entered into a loan agreement with petitioner Natalia
Bustamante and her late husband Ismael C. Bustamante, under the following terms and conditions:
1. That the borrowers are the registered owners of a parcel of land, evidenced by TRANSFER
CERTIFICATE OF TITLE No. 80667, containing an area of FOUR HUNDRED TWENTY THREE (423)
SQUARE Meters, more or less, situated along Congressional Avenue.
2. That the borrowers were desirous to borrow the sum of ONE HUNDRED THOUSAND (P100,000.00)
PESOS from the LENDER, for a period of two (2) years, counted from March 1, 1987, with an interest of
EIGHTEEN (18%) PERCENT per annum, and to guaranty the payment thereof, they are putting as a
collateral SEVENTY (70) SQUARE METERS portion, inclusive of the apartment therein, of the aforestated
parcel of land, however, in the event the borrowers fail to pay, the lender has the option to buy or
purchase the collateral for a total consideration of TWO HUNDRED THOUSAND (P200,000.00) PESOS,
inclusive of the borrowed amount and interest therein;
3. That the lender do hereby manifest her agreement and conformity to the preceding paragraph, while
the borrowers do hereby confess receipt of the borrowed amount. 4
When the loan was about to mature on March 1, 1989, respondents proposed to buy at the pre-set price
of P200,000.00, the seventy (70) square meters parcel of land covered by TCT No. 80667, given as
collateral to guarantee payment of the loan. Petitioner, however, refused to sell and requested for
extension of time to pay the loan and offered to sell to respondents another residential lot located at
Road 20, Project 8, Quezon City, with the principal loan plus interest to be used as down payment.
Respondents refused to extend the payment of the loan and to accept the lot in Road 20 as it was
occupied by squatters and petitioner and her husband were not the owners thereof but were mere land
developers entitled to subdivision shares or commission if and when they developed at least one half of
the subdivision area. 5
Hence, on March 1, 1989, petitioner tendered payment of the loan to respondents which the latter
refused to accept, insisting on petitioner's signing a prepared deed of absolute sale of the collateral.
On February 28, 1990, respondents filed with the Regional Trial Court, Quezon City, Branch 84, a
complaint for specific performance with consignation against petitioner and her spouse. 6
Nevertheless, on March 4, 1990, respondents sent a demand letter asking petitioner to sell the collateral
pursuant to the option to buy embodied in the loan agreement.
On the other hand, on March 5, 1990, petitioner filed in the Regional Trial Court, Quezon City a petition
for consignation, and deposited the amount of P153,000.00 with the City Treasurer of Quezon City on
August 10, 1990. 7
When petitioner refused to sell the collateral and barangay conciliation failed, respondents consigned the
amount of P47,500.00 with the trial court. 8 In arriving at the amount deposited, respondents considered
the principal loan of P100,000.00 and 18% interest  per annum thereon, which amounted to
P52,500.00. 9 The principal loan and the interest taken together amounted to P152,500.00, leaving a
balance of P 47,500.00. 10
After due trial, on November 10, 1992, the trial court rendered decision holding:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Denying the plaintiff's prayer for the defendants' execution of the Deed of Sale to Convey the collateral in plaintiffs'
favor;
2. Ordering the defendants to pay the loan of P100,000.00 with interest thereon at 18%  per annum commencing on
March 2, 1989, up to and until August 10, 1990, when defendants deposited the amount with the Office of the City
Treasurer under Official Receipt No. 0116548 (Exhibit "2"); and
3. To pay Attorney's Fees in the amount of P5,000.00, plus costs of suit.
On November 16, 1992, respondents appealed from the decision to the Court of Appeals.  12 On July 8, 1996, the Court of
Appeals rendered decision reversing the ruling of the Regional Trial Court. The dispositive portion of the Court of Appeals'
decision reads:
IN VIEW OF THE FOREGOING, the judgment appeal (sic) from is REVERSED and SET ASIDE and a new one entered in
favor of the plaintiffs ordering the defendants to accept the amount of P47,000.00 deposited with the Clerk of Court of
Regional Trial Court of Quezon City under Official Receipt No. 0719847, and for defendants to execute the necessary
Deed of Sale in favor of the plaintiffs over the 70 SQUARE METER portion and the apartment standing thereon being
occupied by the plaintiffs and covered by TCT No. 80667 within fifteen (15) days from finality hereof. Defendants, in
turn, are allowed to withdraw the amount of P153,000.00 deposited by them under Official Receipt No. 0116548 of the
City Treasurer's Office of Quezon City. All other claims and counterclaims are DISMISSED, for lack of sufficient basis. No
costs.
Hence, this petition. 14
On January 20, 1997, we required respondents to comment on the petition within ten (10) days from
notice. 15 On February 27, 1997, respondents filed their comment. 16
On February 9, 1998, we resolved to deny the petition on the ground that there was no reversible error
on the part of respondent court in ordering the execution of the necessary deed of sale in conformity the
with the parties' stipulated agreement. The contract is the law between the parties thereof.
On March 17, 1998, petitioner filed with this Court a motion for reconsideration of the denial alleging that
the real intention of the parties to the loan was to put up the collateral as guarantee similar to an
equitable mortgage according to Article 1602 of the Civil Code. 18
On April 21, 1998, respondents filed an opposition to petitioner's motion for reconsideration. They
contend that the agreement between the parties was not a sale with right of re-purchase, but a loan with
interest at 18% per annum for a period of two years and if petitioner fails to pay, the respondent was
given the right to purchase the property or apartment for P200,000.00, which is not contrary to law,
morals, good customs, public order or public policy. 19
Upon due consideration of petitioner's motion, we now resolve to grant the motion for reconsideration.
The questions presented are whether petitioner failed to pay the loan at its maturity date and whether
the stipulation in the loan contract was valid and enforceable.
We rule that petitioner did not fail to pay the loan.
The loan was due for payment on March 1, 1989. On said date, petitioner tendered payment to settle the
loan which respondents refused to accept, insisting that petitioner sell to them the collateral of the loan.
When respondents refused to accept payment, petitioner consigned the amount with the trial court.
We note the eagerness of respondents to acquire the property given as collateral to guarantee the loan. G.R. No. L-17072            October 31, 1961
The sale of the collateral is an obligation with a suspensive condition. 20 It is dependent upon the
happening of an event, without which the obligation to sell does not arise. Since the event did not occur,
CRISTINA MARCELO VDA. DE BAUTISTA, plaintiff-appellee,
respondents do not have the right to demand fulfillment of petitioner's obligation, especially where the
vs.
same would not only be disadvantageous to petitioner but would also unjustly enrich respondents
BRIGIDA MARCOS, ET AL., defendants-appellants.
considering the inadequate consideration (P200,000.00) for a 70 square meter property situated at
Congressional Avenue, Quezon City.
The main question in this appeal is whether or not a mortgagee may foreclose a mortgage on a piece of
land covered by a free patent where the mortgage was executed before the patent was issued and is
Respondents argue that contracts have the force of law between the contracting parties and must be
sought to be foreclosed within five years from its issuance.
complied with in good faith. 21 There are, however, certain exceptions to the rule, specifically Article 1306
of the Civil Code, which provides:
Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of P2,000 from plaintiff
they may deem convenient, provided they are not contrary to law, morals, good customs, public order, Cristina Marcel Vda. de Bautista and to secure payment thereof conveyed to the latter by way of
or public policy. mortgage a two (2)-hectare portion of an unregistered parcel of land situated in Sta. Ignacia, Tarlac. The
deed of mortgage, Exhibit "A", provided that it was to last for three years, that possession of the land
mortgaged was to be turned over to the mortgagee by way of usufruct, but with no obligation on her part
A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the property
to apply the harvests to the principal obligation; that said mortgage would be released only upon
given as security for the loan. This is embraced in the concept of  pactum commissorium, which is
payment of the principal loan of P2,000 without any interest; and that the mortgagor promised to defend
proscribed by law. 22
and warrant the mortgagee's rights over the land mortgaged.

The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way
of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation
within the stipulated period. 23
In Nakpil vs.  Intermediate Appellate Court, 24 we said:
The arrangement entered into between the parties, whereby Pulong Maulap was to be "considered sold
to him (respondent) . . . in case petitioner fails to reimburse Valdes, must then be construed as
tantamount to pactum commissorium which is expressly prohibited by Art. 2088 of the Civil Code. For,
there was to be automatic appropriation of the property by Valdes in the event of failure of petitioner to
pay the value of the advances. Thus, contrary to respondent's manifestation, all the elements of
a  pactum commissorium were present: there was a creditor-debtor relationship between the parties;
the property was used as security for the loan; and there was automatic appropriation by respondent
of Pulong Maulap in case of default of petitioner.
A significant task in contract interpretation is the ascertainment of the intention of the parties and looking
into the words used by the parties to project that intention. In this case, the intent to appropriate the
property given as collateral in favor of the creditor appears to be evident, for the debtor is obliged to
dispose of the collateral at the pre-agreed consideration amounting to practically the same amount as the
loan. In effect, the creditor acquires the collateral in the event of non payment of the loan. This is within
the concept of pactum commissorium. Such stipulation is void. 25
All persons in need of money are liable to enter into contractual relationships whatever the condition if
only to alleviate their financial burden albeit temporarily. Hence, courts are duty bound to exercise
caution in the interpretation and resolution of contracts lest the lenders devour the borrowers like
vultures do with their prey.
Subsequently, or in July, 1956, mortgagor Brigida Marcos filed in behalf of the heirs of her deceased
mother Victoriana Cainglet (who are Brigida herself and her three sisters), an application for the issuance
of a free patent over the land in question, on the strength of the cultivation and occupation of said land
by them and their predecessor since July, 1915. As a result, Free Patent No. V-64358 was issued to the
applicants on January 25, 1957, and on February 22, 1957, it was registered in their names under
Original Certificate of Title No. P-888 of the office of Register of Deeds for the province of Tarlac.
Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff having remained unpaid up to 1959, the
latter, on March 4, 1959, filed the present action against Brigida and her husband (Civil Case No. 3382) in
the court below for the payment thereof, or in default of the debtors to pay, for the foreclosure of her
mortgage on the land give as security. Defendants moved to dismiss the action, pointing out that the land
in question is covered by a free patent and could not, therefore, under the Public Land Law, be taken
within five years from the issuance of the patent for the payment of any debts of the patentees
contracted prior to the expiration of said five-year period; but the lower court denied the motion to
dismiss on the ground that the law cited does not apply because the mortgage sought to be foreclosed
was executed before the patent was issued. Defendants then filed their answer, reiterating the defense
invoked in their motion to dismiss, and alleging as well that the real contract between the parties was an
antichresis and not a mortgage. Pre-trial of the case followed, after which the lower court rendered
judgment finding the mortgage valid to the extent of the mortgagor's pro-indiviso share of 15,333 square
meters in the land in question, on the theory that the Public Land Law does not apply in this case because
the mortgage in question was executed before a patent was issued over the land in question; that the
agreement of the parties could not be antichresis because the deed Exhibit "A" clearly shows a mortgage
with usufruct in favor of the mortgagee; and ordered the payment of the mortgage loan of P2,000 to
plaintiff or, upon defendant's failure to do so, the foreclosure of plaintiff's mortgage on defendant Brigida
Marcos' undivided share in the land in question. From this judgment, defendants Brigida Marcos and her
husband Osmondo Apolocio appealed to this Court.

There is merit in the appeal.

WHEREFORE, we GRANT petitioner's motion for reconsideration and SET ASIDE the Court's resolution of
February 9, 1998. We REVERSE the decision of the Court of Appeals in CA-G.R. CV No. 40193. In lieu
thereof, we hereby DISMISS the complaint in Civil Case No. Q-90-4813.
The right of plaintiff-appellee to foreclose her mortgage on the land in question depends not so much on
whether she could take said land within the prohibitive period of five years from the issuance of
defendants' patent for the satisfaction of the indebtedness in question, but on whether the deed of
mortgage Exhibit "A" is at all valid and enforceable, since the land mortgaged was apparently still part of
the public domain when the deed of mortgage was constituted. As it is an essential requisite for the
validity of a mortgage that the mortgagor be the absolute owner of the thing mortgaged (Art. 2085), the
mortgage here in question is void and ineffective because at the time it was constituted, the mortgagor
was not yet the owner of the land mortgaged and could not, for that reason, encumber the same to the
plaintiff-appellee. Nor could the subsequent acquisition by the mortgagor of title over said land through
the issuance of a free patent validate and legalize the deed of mortgage under the doctrine of estoppel
(cf. Art. 1434, New Civil Code,1 since upon the issuance of said patient, the land in question was thereby
brought under the operation of the Public Land Law that prohibits the taking of said land for the
satisfaction of debts contracted prior to the expiration of five years from the date of the issuance of the
patent (sec. 118, C.A. No. 141). This prohibition should include not only debts contracted during the five-
year period immediately preceding the issuance of the patent but also those contracted before such
issuance, if the purpose and policy of the law, which is "to preserve and keep in the family of the
homesteader that portion of public land which the State has gratuitously given to him”, is to be upheld.
The invalidity of the mortgage Exhibit "A" does not, however, imply the concomitant invalidity of the
collate agreement in the same deed of mortgage whereby possession of the land mortgaged was
transferred to plaintiff-appellee in usufruct, without any obligation on her part to account for its harvests
or deduct them from defendants' indebtedness of P2,000. Defendant Brigida Marcos, who, together with
her sisters, was in possession of said land by herself and through her deceased mother before her since
1915, had possessory rights over the same even before title vested in her as co-owner by the issuance of
the free patent to her and her sisters, and these possessory right she could validly transfer and convey to
plaintiff-appellee, as she did in the deed of mortgage Exhibit "A". The latter, upon the other hand,
believing her mortgagor to be the owner of the land mortgaged and not being aware of any flaw which
invalidated her mode of acquisition, was a possessor in good faith (Art. 526, N.C.C.), and as such had the
right to all the fruits received during the entire period of her possession in good faith (Art. 544, N.C.C.).
She is, therefore, entitled to the full payment of her credit of P2,000 from defendants, without any
obligation to account for the fruits or benefits obtained by her from the land in question.
WHEREFORE, the judgment appealed from is reversed insofar as it orders the foreclosure of the mortgage
in question, but affirmed in all other respects. Costs again defendants-appellants.
G.R. No. 115548 March 5, 1996
STATE INVESTMENT HOUSE INC., petitioner,
vs.
COURT OF APPEALS, ET AL., respondents.
Records show that, on October 15, 1969, Contract to Sell No. 36 was executed by the Spouses Canuto
and Ma. Aranzazu Oreta, and the Solid Homes, Inc. (SOLID), involving a parcel of land identified as Block
No. 8, Lot No. 1, Phase of the Capitol Park Homes Subdivision, Quezon City, containing 511 square
meters for a consideration of P39,347.00. Upon signing of the contract, the spouses Oreta made payment
amounting to P7,869.40, with the agreement that the balance shall be payable in monthly installments of
P451.70, at 12% interest  per annum.
On November 4, 1976, SOLID executed several real estate mortgage contracts in favor of State
Investment Homes, (sic) Inc. (STATE) over its subdivided parcels of land, one of which is the subject lot
covered by Transfer Certificate of Title No. 209642.
For Failure of SOLID to comply with its mortgage obligations contract, STATE extrajudicially foreclosed
the mortgaged properties including the subject lot on April 6, 1983, with the corresponding certificate of
sale issued therefor to STATE annotated at the back of the titles covering the said properties on October
13, 1983.
On June 23, 1984; SOLID thru a Memorandum of Agreement negotiated for the deferment of
consolidation of ownership over the foreclosed properties by committing to redeem the properties from
STATE.
On August 15, 1988, the spouses filed a complaint before the Housing and Land Use Regulatory Board,
HLRB, against the developer SOLID and STATE for failure on the part of SOLID "to execute
the necessary absolute deed of sale as well as to deliver title to said property . . . in violation of the
contract to sell . . .," despite full payment of the purchase price as of January 7, 1981. In its Answer,
SOLID, by way of alternative defense, alleged that the obligations under the Contract to Sell has become
so difficult . . . the herein respondents be partially released from said obligation by substituting subject
lot with another suitable residential lot from another subdivision which respondents own/operates". Upon
the other hand, STATE, to which the subject lot was mortgaged, averred that unless SOLID pays the
redemption price of P125,1955.00, (sic) it has "a right to hold on and not release the foreclosed
properties.
On May 23, 1989, the Office of Appeals, Adjudication and Legal Affairs (OAALA) rendered a decision the
decretal portion of which reads:
1. Ordering respondent, State Investment House, Inc. to execute a Deed of Conveyance of Lot 1, Block
8, in Capital Park Homes Subdivision in favor of complainants and to deliver to the latter the
corresponding certificate of title;
2. Ordering respondent, Solid Homes, Inc. to pay State Investment House, Inc. that portion of its loan
which corresponds to the value of the lot as collateral;
3. Ordering respondent, Solid Homes, Inc. to pay to this Board the amount of Six Thousand Pesos
(P6,000.00) as administrative fine in accordance with Section 25 in relation to Section 38 of P.D. 957.
Both the STATE and SOLID appealed to the Board of Commissioners, HLRB, which affirmed on June 5,
1990 the OAALA's decision (Annex "C" of the Petition; ibid, p. 34). Again, both STATE and SOLID
appealed the decision of the Board of Commissioners, HLRB, to the Office of the President which
dismissed the twin appeals on February 26, 1993.
Petitioner filed with the Supreme Court this petition for review of decision of the Office of the President It might be easily inundated. It might be an interior lot, without convenient access. These and other
where it was docketed as G.R. No. 109364. However, in a resolution dated May 13, 1993, the Supreme similar factors determine the value of the property and so should be of practical concern to the
Court referred this case to this Court for proper disposition. On the other hand, SOLID does not appear to petitioner.
have joined herein petitioner in this petition for review. 2

In a decision dated May 19, 1994, respondent court sustained the judgment of the Office of the President.
Hence, this petition substantially anchored on these two alleged errors, namely: (1) error in ruling that
private respondent spouses Oreta's unregistered rights over the subject property are superior to the
registered mortgage rights of petitioner State Investment House, Inc. (STATE); and (2) error in not
applying the settled rule that persons dealing with property covered by torrens certificate of title are not
required to go beyond what appears on the face of the title.
Our conclusion might have been different if the mortgagee were an ordinary individual or company
without the expertise of the petitioner in the mortgage and sale of registered land or if the land
mortgaged were some distance from the mortgagee and could not be conveniently inspected. But there
were no such impediments in this case. The facilities of the petitioner were not so limited as to prevent
it from making a more careful examination of the land to assure itself that there were no unauthorized
persons in possession.10

At the outset, we note that herein petitioner argues more extensively on the second assigned issue, than
on the first. In fact, petitioner admits the superior rights of respondents-spouses Oreta over the subject
property as it did not pray for the nullification of the contract between respondents-spouses and SOLID,
but instead asked for the payment of the release value of the property in question, plus interest,
attorney's fees and costs of suit against SOLID or, in case of the latter's inability to pay, against
respondents-spouses before it can be required to release the title of the subject property in favor of the
respondent spouses. 3 And even if we were to pass upon the first assigned error, we find respondent
court's ruling on the matter to be well-founded. STATE's registered mortgage right over the property is
inferior to that of respondents-spouses' unregistered right. The unrecorded sale between respondents-
spouses and SOLID is preferred for the reason that if the original owner (SOLID, in this case) had parted
with his ownership of the thing sold then he no longer had ownership and free disposal of that thing so as
to be able to mortgage it again. 4 Registration of the mortgage is of no moment since it is understood to
be without prejudice to the better right of third parties. 5
The above-enunciated rule should apply in this case as petitioner admits of being a financing
institution.11 We take judicial notice of the uniform practice of financing institutions to investigate,
examine and assess the real property offered as security for any loan application especially where, as in
this case, the subject property is a subdivision lot located at Quezon City, M.M. It is a settled rule that a
purchaser or mortgagee cannot close its 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 or mortgagor.12 Petitioner's constructive knowledge of the defect in the title of the subject
property, or lack of such knowledge due to its negligence, takes the place of registration of the rights of
respondents-spouses. Respondent Court thus correctly ruled that petitioner was not a purchaser or
mortgagee in good faith; hence petitioner can not solely rely on what merely appears on the face of the
Torrens Title.
ACCORDINGLY, finding no reversible error in the assailed judgment, the same is hereby AFFIRMED.

Anent the second issue, petitioner asserts that a purchaser or mortgagee of land/s covered under the
Torrens System "is not required to do more than rely upon the certificate of title [for] it is enough that
the (purchaser or mortgagee] examines the pertinent certificate of title [without] need [of] look[ing]
beyond such title."6

As a general rule, where there is nothing in the certificate of title to indicate any cloud or vice in the
ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further
than what the Torrens Title upon its face indicates in quest for any hidden defect or inchoate right that
may subsequently defeat his right thereto. This rule, however, admits of an exception as where the
purchaser or mortgagee, has knowledge of a defect or lack of title in his vendor, or that he was aware of
sufficient facts to induce a reasonably prudent man to inquire into the status of the title of the property in
litigation.7 In this case, petitioner was well aware that it was dealing with SOLID, a business entity
engaged in the business of selling subdivision lots. In fact, the OAALA found that at the time the lot was
mortgaged, respondent State Investment House Inc., [now petitioner] had been aware of the lot's
location and that the said lot formed part of Capital Park/Homes Subdivision." 8 In Sunshine Finance and
Investment Corp. v. Intermediate Appellate Court,9 the Court noting petitioner therein to be a financing
corporation, deviated from the general rule that a purchaser or mortgagee of a land is not required to
look further that what appears on the face of the Torrens Title. Thus:

Nevertheless, we have to deviate from the general rule because of the failure of the petitioner in this
case to take the necessary precautions to ascertain if there was any flaw in the title of the mortgage.
The petitioner is an investment and financing corporation. We presume it is experienced in its business.
Ascertainment of the status and condition of properties offerred to it as security for the loans it extends
must be a standard and indispensable part of its operations. Surely, it cannot simply rely on an
examination of a Torrens certificate to determine what the subject property looks like as its condition is
not apparent in the document. The land might be in a depressed area. There might be squatters on it.
 "On January 25, 1996, the trial court rendered the herein assailed Decision in favor of the plaintiffs. It
ruled that the contract of sale between plaintiffs and Candelaria was absolutely simulated. Consequently,
G.R. No. 147788               March 19, 2002 the second contract of sale, that is, between Candelaria and Norma, produced no legal effect. As for
Bancom, the trial court held that the Bank was not a mortgagee in good faith thus it can not claim priority
EDILBERTO CRUZ and SIMPLICIO CRUZ, petitioners, of rights over plaintiffs’ property." 3
vs.
BANCOM FINANCE CORPORATION (NOW UNION BANK OF THE PHILIPPINES), respondent. Ruling of the Court of Appeals

An absolutely simulated contract of sale is void ab initio and transfers no ownership right. The purported In reversing the RTC, the CA held that the Deeds of Sale were valid and binding, not simulated. Thus, the
buyer, not being the owner, cannot validly mortgage the subject property. Consequently, neither does the Contract of Mortgage between Sulit and respondent was likewise valid.
buyer at the foreclosure sale acquire any title thereto.

Petitioners, the CA ruled, intended to be bound by the Contracts of Sale and Mortgage, because they "did
The Facts not seek to annul the same but instead executed a special agreement to enforce payment of the balance
of the price in the amount of ₱665,000.00." 4
"Brothers Rev. Fr. Edilberto Cruz and Simplicio Cruz, plaintiffs herein, were the registered owners of a
339,335 square meter or 33.9335 hectare parcel of agricultural land together with improvements located Furthermore, it upheld respondent as a "mortgagee in good faith;" ergo, it had a preferential right to the
in Barangay Pulang Yantoc, Angat, Bulacan covered by TCT No. 19587. Sometime in May 1978, defendant land.
Norma Sulit, after being introduced by Candelaria Sanchez to Fr. Cruz, offered to purchase the land.
Plaintiffs’ asking price for the land was ₱700,000.00, but Norma only had ₱25,000.00 which Fr. Cruz
Hence, this Petition.5
accepted as earnest money with the agreement that titles would be transferred to Norma upon payment
of the balance of ₱675,000.00. Norma failed to pay the balance and proposed [to] Fr. Cruz to transfer the
property to her but the latter refused, obviously because he had no reason to trust Norma. But Issues
capitalizing on the close relationship of Candelaria Sanchez with the plaintiffs, Norma succeeded in having
the plaintiffs execute a document of sale of the land in favor of Candelaria who would then obtain a bank
In their Memorandum, petitioners raise the following issues for this Court’s consideration:
loan in her name using the plaintiffs’ land as collateral. On the same day, Candelaria executed another
I. "Whether or not the Honorable Court of Appeals seriously erred when it held that the petitioners
Deed of Absolute Sale over the land in favor of Norma. In both documents, it appeared that the
intended to enter into a sale of the property in question and that the declarations of Petitioner Fr.
consideration for the sale of the land was only ₱150,000.00. Pursuant to the sale, Norma was able to
Edilberto Cruz in Court belied the court a quo’s finding that the Deeds of Sale in question were absolute
effect the transfer of the title to the land in her name under TCT No. T-248262.
simulations.
II. "Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank
"Evidence shows that aside from the ₱150,000.00, Candelaria undertook to pay the plaintiffs the amount was a mortgagee in good faith, despite the fact that respondent Bancom was in truth and in fact a
of ₱655,000.00 representing the balance of the actual price of the land. In a Special Agreement dated mortgagee in bad faith over the subject property.
September 1, 1978, Norma assumed Candelaria’s obligation, stipulating to pay the plaintiffs the said III. "Whether or not the Honorable Court of Appeals seriously erred when it ruled that the face of the
amount within six months on pain of fine or penalty in case of non-fulfillment. Unknown to the plaintiffs, title [to] the property did not disclose any irregularity that would arouse suspicion by respondent bank
Norma managed to obtain a loan from Bancom in the amount of ₱569,000.00 secured by a mortgage as to the condition of the subject land despite the fact that questions and circumstances abound which
over the land now titled in her name. would render respondent bank not a mortgagee in good faith, and that the case of  Sunshine Finance
Investment Corporation vs. Intermediate Appellate Court  applies to the instant case.
IV. "Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank
"On account of Norma’s failure to pay the amount stipulated in the Special Agreement and her
possesses a preferential right over petitioners on the subject land as a mortgagee in good faith." 6
subsequent disappearance from her usual address, plaintiffs were prompted to file the herein complaint
for the reconveyance of the land.
The above issues can be summed up into two: (1) the validity of the Deeds of Sale and Mortgage and (2)
the good faith of the mortgagee.
"Norma filed an Answer on February 11, 1980 but failed to appear in court and was eventually declared in
default. On May 20, 1980, Bancom filed a motion for leave to intervene which was granted by the trial
court. In its Answer in Intervention, Bancom claimed priority as mortgagee in good faith; and that its This Court’s Ruling
contract of mortgage with Norma had been executed before the annotation of plaintiffs’ interest in the
title.
The Petition is meritorious.

"Meanwhile in the middle of 1980, Norma defaulted in her payment to the Bank and her mortgage was
First Issue: Validity of the Sale and the Mortgage
foreclosed. At the subsequent auction sale, Bancom was declared the highest bidder and was issued the
corresponding certificate of sale over the land.
Petitioners claim that the Deed of Sale 7 they executed with Sanchez, as well as the Deed of Sale 8 executed Respondent never offered any evidence to refute the foregoing testimonies. 18 On the contrary, it even
between Sanchez and Sulit, was absolutely simulated; hence, null and void. On the other hand, echoing admitted that the stipulated consideration of ₱150,000 in the two Deeds of Sale had never been actually
the appellate court, respondent contends that petitioners intended to be bound by those Deeds, and that paid by Sanchez to petitioners; 19 neither by Sulit to the former.20
the real estate mortgage over the subject property was valid.

As a general rule, when the terms of a contract are clear and unambiguous about the intention of the
contracting parties, the literal meaning of its stipulations shall control. But if the words appear to
contravene the evident intention of the parties, the latter shall prevail over the former. 9 The real nature of
a contract may be determined from the express terms of the agreement, as well as from the
contemporaneous and subsequent acts of the parties thereto. 10
Another telling sign of simulation was the complete absence of any attempt on the part of the buyers --
Sanchez and Sulit -- to assert their alleged rights of ownership over the subject property. 21 This fact was
confirmed by respondent which, however, tried to justify the non-occupancy of the land by Sanchez and
Sulit. Supposedly, because the two failed to pay the purchase price of the land, they could not force
petitioners to vacate it.22

The records clearly show that the two Deeds of Absolute Sale were executed over the same property on
On the other hand, simulation takes place when the parties do not really want the contract they have the same date, June 21, 1978. Six days thereafter, on June 27, 1978, it was mortgaged by Sulit to
executed to produce the legal effects expressed by its wordings. 11 Simulation or vices of declaration may Federal Insurance Company for ₱500,000. The mortgage was cancelled when she again mortgaged the
be either absolute or relative. Article 1345 of the Civil Code distinguishes an absolute simulation from a property to respondent for ₱569,000 on August 22, 1979. It is also undisputed that petitioners did not
relative one while Article 1346 discusses their effects, as follows: receive any portion of the proceeds of the loan.
"Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the
parties do not intend to be bound at all; the latter when the parties conceal their true agreement.
Clearly, the Deeds of Sale were executed merely to facilitate the use of the property as collateral to
"Art. 1346. An absolutely simulated contract is void. A relative simulation, when it does not prejudice a
secure a loan from a bank. 23 Being merely a subterfuge, these agreements could not have been the
third person and is not intended for any purpose contrary to law, morals, good customs, public order or
source of any consideration for the supposed sales. 24 Indeed, the execution of the two documents on the
public policy binds the parties to their agreement."
same day sustains the position of petitioners that the Contracts of Sale were absolutely simulated, and
that they received no consideration therefor.25
In Rongavilla v. Court of Appeals,12 we held that a deed of sale, in which the stated consideration had not
in fact been paid, was "a false contract"; that is "void ab initio." Furthermore, Ocejo v. Flores,13 ruled that
The failure of Sulit to take possession of the property purportedly sold to her was a clear badge of
"a contract of purchase and sale is null and void and produces no effect whatsoever where it appears that
simulation that rendered the whole transaction void and without force and effect, pursuant to Article
[the] same is without cause or consideration which should have been the motive thereof, or the purchase
140926 of the Civil Code.27 The fact that she was able to secure a Certificate of Title to the subject property
price which appears thereon as paid but which in fact has never been paid by the purchaser to the
in her name did not vest her with ownership over it. 28 A simulated deed of sale has no legal effect;
vendor."
consequently any transfer certificate of title (TCT) issued in consequence thereof should be cancelled. 29 A
simulated contract is not a recognized mode of acquiring ownership. 30
Although the Deed of Sale 14 between petitioners and Sanchez stipulated a consideration of ₱150,000,
there was actually no exchange of money between them. Petitioner Edilberto Cruz narrated how the
Second Issue: Good Faith of Mortgagee
transaction came about:
"ATTY. CABRERA:
Q Why did you execute the deed of sale in favor of Candelaria Sanchez since it was Norma Sulit with whom you are transacting?
Petitioners argue that respondent was not a mortgagee in good faith because, at the time it registered
A Because Norma Sulit made the promise to Mrs. Candelaria Sanchez that upon acquiring the title from us, they can borrow money from the
Bank. So it is a way of acquiring the title from us, sir. the real estate mortgage over the subject property, their adverse claim and notice of lis pendens  had
Q. This deed of sale marked Exhibit ‘D’ which you just identified, stipulates a consideration of ₱150,000.00. The question, Father, is - did you already been annotated on the TCT (on October 30, 1979 and December 10, 1979, respectively). On the
receive the ₱150,000.00?
ATTY. AGRAVANTE: Objection, your Honor, the document is the best evidence. other hand, respondent maintains that petitioners were the ones in bad faith, because they already had
ATTY. CABRERA: This is an action to annul a certain contract. knowledge of the existence of the mortgage over the property when they caused the annotation of their
COURT: He received the consideration stated in the contract. The witness may answer.
adverse claim and notice of lis pendens.
WITNESS
A Not a single centavo we received from Candelaria Sanchez as if it is nominal, sir.
ATTY. CABRERA
Q If you did not receive this ₱150,000.00 stated in this deed of sale that you and your brother executed from Candelaria Sanchez, did you As a general rule, every person dealing with registered land may safely rely on the correctness of the
receive the said amount from Norma Sulit or anybody else for that matter? certificate of title and is no longer required to look behind the certificate in order to determine the actual
A Not a single centavo, sir."15
His claim was corroborated by Sanchez. She likewise said that the Deed of Sale 16 she executed with Sulit, for which she did not receive any owner.31 To do so would be contrary to the evident purpose of Section 39 of Act 496 which we quote
consideration was only for the purpose of placing the title to the property in the latter’s name. She testified as follows: hereunder:
"Q And so you transferred the property in favor of Norma Sulit?
"Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration, and every
A Yes, sir.
Q I am showing to you this document which has already been marked when the representative of the Register of Deeds produced the pertinent subsequent purchaser of registered land who takes a certificate of title for value in good faith shall hold
documents before the court as Exhibit "C", is this that document that you executed transferring the property in the name of Norma Sulit? the same free of all encumbrances except those noted on said certificate, and any of the following
A Yes, sir, this is it.
Q There is a consideration of ₱150,000.00 stated in this Exhibit "C", were you paid by Norma Sulit the amount of ₱150,000.00 appearing in this
encumbrances which may be subsisting, namely:
Exhibit "C"? "First. Liens, claims, or rights arising or existing under the laws or Constitution of the United States or
ATTY BUYCO: The question is leading, Your Honor.
of the Philippine Islands which the statutes of the Philippine Islands cannot require to appear of
COURT: Witness may answer.
A No amount was given, sir. We prepared this document to transfer the title [to] her name only." 17 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."
This rule is, however, subject to the right of a person deprived of land through fraud to bring an action for
reconveyance, provided the rights of innocent purchasers for value and in good faith are not prejudiced.
An innocent purchaser for value or any equivalent phrase shall be deemed, under Section 38 of the same
Act,32 to include an innocent lessee, mortgagee or any other encumbrancer for value. 33
Respondent claims that, being an innocent mortgagee, it should not be required to conduct an exhaustive
investigation on the history of the mortgagor’s title before it could extend a loan. 34
Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private
individuals, it is expected to exercise greater care and prudence in its dealings, including those involving
registered lands.35 A banking institution is expected to exercise due diligence before entering into a
mortgage contract.36 The ascertainment of the status or condition of a property offered to it as security for
a loan must be a standard and indispensable part of its operations. 37
In Rural Bank of Compostela v. CA,38 we held that a bank that failed to observe due diligence was not a
mortgagee in good faith. In the words of the ponencia:
"x x x [T]he rule that persons dealing with registered lands can rely solely on the certificate of title does
not apply to banks.
"Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than
private individuals, for their business is one affected with public interest, keeping in trust money
belonging to their depositors, which they should guard against loss by not committing any act of
negligence which amounts to lack of good faith by which they would be denied the protective mantle of
the land registration statute, Act [No.] 496, extended only to purchasers for value and in good faith, as
well as to mortgagees of the same character and description." (Citations omitted)
Recently, in Adriano v. Pangilinan,39 we said that the due diligence required of banks extended even to
persons regularly engaged in the business of lending money secured by real estate mortgages.
The evidence before us indicates that respondent bank was not a mortgagee in good faith. 40 First, at the
time the property was mortgaged to it, it failed to conduct an ocular inspection. 41 Judicial notice is taken
of the standard practice for banks before they approve a loan: to send representatives to the premises of
the land offered as collateral and to investigate the ownership thereof. 42 As correctly observed by the RTC,
respondent, before constituting the mortgage over the subject property, should have taken into
consideration the following questions:
"1) Was the price of ₱150,000.00 for a 33.9 hectare agricultural parcel of land not too cheap even in
1978?
"2) Why did Candelaria Sanchez sell the property at the same price of P150,000.00 to Norma Sulit on
the same date, June 21, 1978 when she supposedly acquired it from the plaintiffs?
"3) Being agricultural land, didn’t it occur to the intervenors that there would be tenants to be
compensated or who might pose as obstacles to the mortgagee’s exercise of acts of dominion?
"4) In an area as big as that property, [why] did they not verify if there were squatters?
"5) What benefits or prospects thereof could the ultimate owner expect out of the property?
"Verily, the foregoing circumstances should have been looked into, for if either or both companies did,
they could have discovered that possession of the land was neither with Candelaria nor with Norma." 43
Respondent was clearly wanting in the observance of the necessary precautions to ascertain the flaws in
the title of Sulit and to examine the condition of the property she sought to mortgage. 44 It should not
have simply relied on the face of the Certificate of Title to the property, as its ancillary function of
investing funds required a greater degree of diligence. 45 Considering the substantial loan involved at the
time, it should have exercised more caution. 46
Moreover, the subject property, being situated in Bulacan, could have been easily and conveniently
inspected by respondent. A person who deliberately ignores a significant fact that would create suspicion
in an otherwise reasonable person is not an innocent purchaser for value. 47
Second,  respondent was already aware that there was an adverse claim and notice of lis
pendens annotated on the Certificate of Title when it registered the mortgage on March 14, 1980. Unless
duly registered, a mortgage does not affect third parties like herein petitioners, as provided under Section
51 of PD NO. 1529,48 which we reproduce hereunder:
"SEC. 51. Conveyance and other dealings by registered owner. - An owner of registered land may
convey, mortgage, lease, charge or otherwise deal with the same in accordance with existing laws. He
may use such forms of deeds, mortgages, leases or other voluntary instruments [as] are sufficient in
law. But no deed, mortgage, lease, or other voluntary instrument except a will, purporting to convey or
affect registered land, shall take effect as a conveyance or bind the land, but shall operate only as a
contract between the parties and as evidence of authority to the clerk or register of deeds to make
registration.
"The act of registration shall be the operative act to convey and affect the land, and in all cases under
this Act the registration shall be made in the office of the register of deeds for the province or city,
where the land lies."
True, registration is not the operative act for a mortgage to be binding between the parties. 1âwphi1 But
to third persons, it is indispensible. 49 In the present case, the adverse claim and the notice of lis
pendens were annotated on the title on October 30, 1979 and December 10, 1979, respectively; the real
estate mortgage over the subject property was registered by respondent only on March 14, 1980. Settled
in this jurisdiction is the doctrine that a prior registration of a lien creates a preference. 50 Even a
subsequent registration of the prior mortgage will not diminish this preference, which retroacts to the
date of the annotation of the notice of lis pendens and the adverse claim. 51 Thus, respondent’s failure to
register the real estate mortgage 52 prior to these annotations, resulted in the mortgage being binding only
between it and the mortgagor, Sulit. Petitioners, being third parties to the mortgage, were not bound by
it.53 Contrary to respondent’s claim that petitioners were in bad faith because they already had knowledge
of the existence of the mortgage in favor of respondent when they caused the aforesaid annotations,
petitioner Edilberto Cruz said that they only knew of this mortgage when respondent intervened in the
RTC proceedings.54
On the question of who has a preferential right over the property, the long-standing rule, as provided by
Article 208555 of the Civil Code,56 is that only the absolute owner of the property can constitute a valid
mortgage on it. In case of foreclosure, a sale would result in the transmission only of whatever rights the
seller had over of the thing sold.57
In the instant case, the two Deeds of Sale were absolutely simulated; hence, null and void. 58 Thus, they
did not convey any rights that could ripen into valid titles. 59 Necessarily, the subsequent real estate
mortgage constituted by Sulit in favor of respondent was also null and void, because the former was not
the owner thereof. There being no valid real estate mortgage, there could also be no valid foreclosure or
valid auction sale, either. At bottom, respondent cannot be considered either as a mortgagee or as a
purchaser in good faith. This being so, petitioners would be in the same position as they were before they
executed the simulated Deed of Sale in favor of Sanchez. They are still the owners of the property. 60
WHEREFORE, the Petition is GRANTED and  the assailed Decision SET ASIDE. The Decision of the RTC of
Bulacan, (Branch 21) dated January 25, 1996 is REINSTATED. No costs.
G.R. No. 167174               September 23, 2013
SPOUSES CARMELITO and ANTONIA ALDOVER, Petitioners,
vs.
THE COURT OF APPEALS,
Siblings Tomas M. Reyes and Sidra M. Reyes and their father Alfredo Reyes (the Reyeses) were the
registered owners of a 4.044-square meter lot, (TCT) No. PT-107508. 40 On August 12, 1999, they
obtained a loan from AntoniaB. Aldover (Aldover) secured by a Real Estate Mortgage (REM) 41 over the
said property.
When the Reyeses failed to pay, Aldover caused the extrajudicial foreclosure of mortgage. At the
foreclosure sale conducted, Aldover emerged as the winning bidder. A Certificate of Sale was issued in
her favor which was annotated at the back of TCT No. PT-107508 on September 2, 2002.42
Thereafter, Aldover filed with the RTC of Pasig City a verified Petition for the Issuance of a Writ of
Possession docketed as LRC Case No. R-6203. 43 On August 26, 2003, Branch 71 of the RTC of Pasig City
issued a Decision44 granting Aldover’s Petition for Issuance of a Writ of Possession subject to the posting
of a bond.
On December 12, 2003, the Reyeses filed a Motion to Recall and Lift Issuance of Writ of
Possession45 claiming, among others, that the mortgage and the auction sale of property are both null
and void as the mortgagee (Aldover) was not armed with a special power of attorney to foreclose the
mortgaged property extrajudicially. This drew Aldover’s Opposition 46 where she also prayed for the
issuance of the writ sans the requisite bond as the property was not redeemed within the one-year
redemption period.
In the meantime, Aldover also caused the consolidation of title over the foreclosed property in her name.
On December 17, 2003, TCT No. PT-107508was cancelled and, in lieu thereof, TCT No. PT-122311 47 was
issued in Aldover’s name.
On March 17, 2004, Branch 71 issued an Order 48 denying the Reyeses’ Motion to Recall and granting
Aldover’s motion to dispense with the posting of a bond. On the same date, a Writ of Possession 49 was
issued directing the Branch Sheriff to place Aldover in possession of subject lot.
In compliance with the writ, the Branch Sheriff issued a Notice to Vacate  dated April 1, 2004. Then on
50
April 23, 2004, he issued a Sheriff’s Partial Report 51 informing the court that he cannot fully implement
the writ because there are several other persons who occupy portions of subject lot claiming to be the
owners thereof.
On May 17, 2004, respondents filed before the RTC of Pasig City a Complaint for Declaration of Nullity of
Documents and Title, Reconveyance and Damages with Prayer for Temporary Restraining Order and/or
Preliminary Injunction 52 against Aldover and her husband Carmelito (petitioners), the Reyeses, the Branch
Sheriff, and the Registrar of Deeds of Pasig City. In said Complaint docketed as Civil Case No. 69979 and
raffled to Branch 268 of said court, respondents alleged that they have been residing in the same lot
subject of LRC Case No. R-6203 since the 1960’s by virtue of lease contracts wherein they were allowed
by the Reyeses to build their houses. Subsequently, their occupation became in the concept of owners
after the Reyeses sold to them portions of the lot they respectively occupy. Respondents insisted that
petitioners were aware of the lease and subsequent sale. Respondents also claimed that the REM is a
fictitious transaction because at the time of its execution the Reyeses were no longer the owners of the
entire property subject thereof. Hence, the mortgage as well as the subsequent foreclosure sale is null
and void.
Respondents sought the issuance of a Temporary Restraining Order (TRO)and/or Writ of Preliminary
Injunction to immediately restrain petitioners from further committing acts of dispossession and prayed
for the cancellation of TCT No. PT-122311. On July 5, 2004, however, they filed a Motion to Admit
Attached Amended Complaint as a matter of right (with prayer for withdrawal of TRO and injunction). 53
On July 26, 2004, Branch 268 issued an Order 54 denying respondents’ prayer for TRO on the ground that
it cannot interfere with the order of a coordinate court. This was followed by an Order 55 dated August 27,
2004 granting respondents’ Motion to Admit and admitting respondents’ Amended Complaint where they
withdrew their ancillary prayer for injunctive relief.
Meanwhile, in LRC Case No. R-6203, in view of the Sheriff’s Partial Report, Aldover filed a Motion for
Special Order of Demolition.56 Branch 71granted the Motion in an Order57 dated August 9, 2004, thus:
WHEREFORE, in view of the foregoing, the Motion for Special Order of Demolition is hereby GRANTED.
Let a writ issue.
The respondents and all other persons deriving rights from them are given sixty (60) days from receipt
of this Order to vacate the premises.
On September 14, 2004, respondents filed before the CA a Petition for Certiorari, Prohibition, Injunction
with prayer for the issuance of a Temporary Restraining Order (TRO) and/or Writ of Preliminary
Injunction59 against the petitioners and the Reyeses, which they later on amended. 60 Respondents alleged
that on August 23, 2004 they were surprised to receive the August 9, 2004 Order of demolition directing
them to vacate the premises within 60 days from notice since they were neither impleaded nor notified of
the proceedings conducted in LRC Case No. R-6203, as well as in the foreclosure sale. Respondents
postulated that they are not, therefore, bound by the August 9, 2004 Order of Branch 71 for want of
jurisdiction over their persons. Respondents reiterated their claim in Civil Case No. 69979 that they own
the portions of subject lot which they respectively occupy. Thus, the implementation of said Order would
deprive them of their property without due process of law and would render Civil Case No. 69979 pending
before Branch 268 moot.
Respondents also asserted that the right they sought to be protected in their Petition is clear and
unmistakable and that the invasion of such right is material and substantial. They thus prayed for the
issuance of a TRO and/or Writ of Preliminary Injunction to enjoin the implementation of Branch 71’s
Order of demolition.61
On September 23, 2004, the CA issued a Resolution 62 outrightly dismissing the Petition on procedural
grounds.
Invoking substantial justice and great and irreparable damage that may be caused by the impending
demolition of their homes, respondents filed an Omnibus Motion for Reconsideration and Motion to Admit
Attached Amended Petition. 63 This was followed by an Extremely Urgent Omnibus Motion for Re-Raffle
and for Early Resolution64 since the Justice to whom the case was assigned was then on official leave.
In a Resolution 65 dated October 22, 2004, the CA reconsidered its resolution of dismissal and granted
respondents’ prayer for the issuance of a TRO. It restrained the implementation of the Order of
demolition as well as of the Notice to Vacate. In the same Resolution, the CA required petitioners to file
their comment to the Petition.
Branch 71 from implementing its Order of demolition and dispossessing them of the disputed property.
However, since Branch 268 did not favorably act on their prayer for such provisional remedy, respondents
withdrew the same by amending their Complaint, only to later on file an original action for certiorari,
prohibition and injunction before the CA practically raising the same issues, same cause of action, and the
very same prayer to temporarily and then permanently restrain Branch 71 from implementing its Order of
demolition. Petitioners assert that what respondents actually did was to split a single cause of action as
they could have pursued their prayer for injunction in CA-G.R. SP No. 86363 as a mere ancillary relief in
Civil Case No. 69979 pending before Branch 268. Petitioners also accuse respondents of misleading the
CA by concealing the fact that their Complaint in Civil Case No. 69979 included an ancillary relief for
injunction and by not attaching a copy thereof to their Petition filed with the CA.

After the parties’ filing of pleadings 66 and upon respondents’ motion,67 the CA set for hearing on January
Petitioners likewise contend that respondents’ recourse to the CA was premature because they did not
4, 2005 the propriety of issuing a Writ of Preliminary Injunction. This hearing, however, did not push
give Branch 71 an opportunity to correct its alleged errors. Petitioners point out that before resorting to a
through since the CA already issued the challenged January 3, 2005 Resolution 68 granting respondents’
special civil action for certiorari before the CA, respondents should have first appealed or filed the
ancillary prayer for injunctive relief. It disposed thus:
appropriate motion or pleading before Branch 71 so that said court could correct any of its perceived
WHEREFORE, we resolve to:
errors. But they did not. Hence, no error or grave abuse of discretion can be attributed to Branch 71. And
1. GRANT respondents’ prayer for the issuance of a writ of preliminary injunction enjoining petitioners
even assuming that respondents’ Petition before the CA is not premature, petitioners assert that the
from enforcing the Notice to Vacate and Order of Demolition.
same was filed out of time. Respondents received the Notice to Vacate on April 1, 2004 and, therefore,
2. ORDER the respondents to file a bond in the amount of Three Hundred Thousand (₱300,000.00)
had only until May 31, 2004 within which to file a petition for certiorari. However, it was only on
Pesos within five (5) days from notice hereof, which shall answer for whatever damages petitioners
September 14, 2004 when they invoked the certiorari jurisdiction of the CA. Petitioners maintain that
may sustain by reason of the injunction in the event that we finally decide that respondents were not
respondents erroneously reckoned the 60-day period for filing a petition for certiorari on the date they
entitled thereto.
received the Order of demolition because the same was a mere off shoot of the Writ of Possession and
3. CANCEL the hearing set on January 4, 2005.
Notice to Vacate issued by Branch 71.
4. CONSIDER the main petition submitted for decision.

Petitioners further argue that the pendency of Civil Case No. 69979 will not bar the issuance and
On January 12, 2005, petitioners filed a Motion for Reconsideration 70 which was denied by the CA in its
implementation of the Writ of Possession in LRC Case No.R-6203.
January 24, 2005 Resolution.71 Then on February 8, 2005, respondents posted the required injunction
bond72 and the CA accordingly issued the Writ of Preliminary Injunction 73 on February 10, 2005.
Lastly, petitioners asseverate that respondents’ ancillary prayer for injunctive relief lacked basis as they
have no clear and unmistakable right that must be protected. Only 15 out of the 315 respondents are
Petitioners subsequently filed a Motion for Inhibition of the CA Sixth (6th) Division  which the CA granted
74

in a Resolution 75 dated March 28, 2005. Thereafter, petitioners sought recourse before us via this Petition
for Certiorari ascribing grave abuse of discretion on the part of the CA for the following reasons:
Issues
I. THE COURT OF APPEALS, IN EFFECT, GAVE ITS IMPRIMATUR ONTHE VERY CLEAR ACT OF FORUM
SHOPPING DONE BY THEPRIVATE RESPONDENTS.
II. THE PETITION FOR CERTIORARI FILED BY PRIVATE RESPONDENTSBEFORE THE COURT OF APPEALS
WAS AN IMPROPER REMEDY.
III. IN ANY CASE, EVEN ASSUMING THE PETITION FOR CERTIORARIWAS A PROPER REMEDY THE
SAME, HOWEVER, WAS CLEARLYFILED OUT OF TIME.
IV. THE WRIT OF PRELIMINARY INJUNCTION THE COURT OF APPEALSISSUED GOES AGAINST
ESTABLISHED JURISPRUDENCE ON THEMATTER.VPRIVATE RESPONDENTS, EVEN ASSUMING THEIR
FACTUALCLAIMS TO BE TRUE, CANNOT HAVE A BETTER RIGHT OVER THESUBJECT PROPERTY THAN
HEREIN PETITIONERS.76
Petitioners’ Arguments
armed with proof of ownership. 77 And of these 15, only five have deeds of absolute sale; the remaining 10
have only contracts to sell containing incomplete details of payment. In addition, the alleged proofs of
ownership do not bear the signatures of all the co-owners and some of those proofs are not even
notarized. And assuming further that the titles of these 15 respondents are true, their collective rights
over the subject lot cannot prevail over the rights of the petitioners. The total area they occupy constitute
only about 1,371.66 square meters, or a little over 30% of the disputed 4,432-square meter lot. 78 Above
all, petitioners registered their claim as early as January 3, 2000 while none of respondents’ alleged
proofs of ownership were ever registered.79
Respondents’ Arguments
Respondents, on the other hand, deny having misled the CA. They claim that on July 5, 2004 they filed
their Motion to Admit Attached Amended Complaint as a matter of right seeking the withdrawal of their
prayer for TRO and on August 27, 2004 Branch 268 issued its Order admitting their Amended Complaint.
Thus, when they filed their Petition in CA-G.R. SP No. 86363 on September 14, 2004, they found it
unnecessary to state that, previously, their Complaint in Civil Case No. 69979 contained a prayer for the
issuance of a TRO.

Petitioners contend that the CA gravely abused its discretion in issuing the assailed January 3, 2005
With regard to the second and third assigned errors, respondents assert that the instant Petition for
Resolution and the Writ of Preliminary Injunction. They maintain that the CA did not only condone
Certiorari assails only the propriety of the CA’s January 3,2005 Resolution and February 10, 2005 Writ of
respondents’ clear and blatant act of forum shopping; it actually rewarded them for pursuing the same.
Preliminary Injunction. This Court cannot thus pass upon the correctness of respondents’ recourse to the
According to the petitioners, respondents’ Complaint in Civil Case No. 69979 pending before Branch 268
CA as well as the prematurity and timeliness of such legal remedy, as the same is still pending with said
already included an ancillary relief for TRO and/or Preliminary Injunction for the purpose of stopping
court.
Respondents further assert that the issue of who have a better right over the property in question is an
extraneous matter that is totally irrelevant in the present controversy. They emphasize that the issue to
be resolved in this Petition for Certiorari is whether the CA committed grave abuse of discretion
amounting to lack or excess of jurisdiction in granting their ancillary prayer for injunction. They claim that
the points raised by the petitioners in support of their contention should be threshed out in Civil Case No.
69979 (declaration of nullity of documents and title, reconveyance, and damages) pending before Branch
268.
Our Ruling
The review we are bound to undertake in this Petition for Certiorari is limited to the determination of
whether the CA committed grave abuse of discretion in granting respondents’ ancillary prayer for
preliminary injunction.
We stress at the outset that this Petition for Certiorari merely assails the CA’s interlocutory resolutions
granting respondents’ ancillary prayer for injunctive relief. This does not pertain to the main action for
certiorari , prohibition and injunction in CA-G.R. SP No. 86363, which is still pending before the CA. We
will thus limit ourselves to the determination of whether the CA gravely abused its discretion in issuing
the questioned Resolutions and avoid matters that will preempt or render moot whatever final decision it
may render in CA-G.R. SP No. 86363. More specifically, we will not touch on petitioners’ contentions that
respondents are guilty of forum shopping and that the latter’s filing of a Petition for Certiorari before the
CA was premature and out of time for the assailed CA Resolutions pertained only to the propriety of the
issuance of the Writ of Preliminary Injunction.
A Petition for Certiorari lies only to correct acts rendered without or in excess of jurisdiction or with grave
abuse of discretion. "Its principal office is only to keep the inferior court within the parameters of its
jurisdiction or to prevent it from committing such a grave abuse of discretion amounting to lack or excess
of jurisdiction."80 "Grave abuse of discretion in the issuance of writs of preliminary injunction implies a
capricious and whimsical exercise of judgment that is equivalent to lack of jurisdiction, or where the
power is exercised in an arbitrary or despotic manner by reason of passion, prejudice or personal
aversion amounting to an evasion of positive duty or to a virtual refusal to perform the duty enjoined, or
to act at all in contemplation of law." 81
A Petition for Certiorari is not the proper remedy to review the intrinsic correctness of the public
respondent’s ruling. It is settled that as long as a court or quasi-judicial body acts within its jurisdiction,
any alleged errors committed in the exercise of its jurisdiction will amount to nothing more than errors of
judgment which are not reviewable in a special civil action of certiorari. Thus, whether the CA committed
errors in proceedings, misappreciated the facts, or misapplied the law is beyond our power of review in
this Petition for Certiorari for it cannot be used for any purpose except to limit the action of the
respondent court within the bounds of its jurisdiction. 82
CA did not commit grave abuse of discretion
From our review of the case, nothing indicates that the CA acted without or in excess of jurisdiction or
with grave abuse of discretion in ordering the issuance of the Writ of Preliminary Injunction. Measured
against jurisprudentially established parameters, its disposition to grant the writ was not without basis
and, hence, could not have been arrived at capriciously, whimsically, arbitrarily or despotically.
Respondents amply justified the grant of the provisional relief they prayed for. A Writ of Preliminary
Injunction is issued at any stage of an action prior to judgment or final order to prevent threatened or
continuous irremediable injury to some of the parties before their claims can be thoroughly studied or
adjudicated. To justify its issuance, the applicants must prove the following requisites: (1) that they have
a clear and unmistakable right to be protected, that is a right in esse; (2) there is a material and
substantial invasion of such right; (3)there is an urgent need for the writ to prevent irreparable injury to
the applicants; and, (4) there is no other ordinary, speedy, and adequate remedy to prevent the infliction
of irreparable injury.83
It is true that the buyer in a foreclosure sale becomes the absolute owner of the property if it is not
redeemed within one year from registration of the sale and title is consolidated in his name. "As the
confirmed owner, the purchaser’s right to possession becomes absolute. There is even no need for him to
post a bond, and it becomes the ministerial duty of the courts," upon application and proof of title, to
issue a Writ of Possession to place him in possession. 84 This rule is clear from the language of Section 33,
Rule 39 of the Rules of Court. The same provision of the Rules, however, provides as an exception that
when a third party is actually holding the property adversely to the judgment debtor, the duty of the
court to issue a Writ of Possession ceases to be ministerial. Thus:
SEC. 33. Deed and possession to be given at expiration of redemption period; by whom executed or
given. – If no redemption be made within one (1) year from the date of the registration of the
certificate of sale, the purchaser is entitled to a conveyance and possession of the property; or, if so
redeemed whenever sixty (60) days have elapsed and no other redemption has been made, and notice
thereof given, and the time for redemption has expired, the last redemptioner is entitled to the
conveyance and possession; but in all cases the judgment obligor shall have the entire period of one
(1) year from the date of the registration of the sale to redeem the property. The deed shall be
executed by the officer making the sale or by his successor in office, and in the latter case shall have
the same validity as though the officer making the sale had continued in office and executed it.
Upon the expiration of the right of redemption, the purchaser or redemptioner shall be substituted to
and acquire all the rights, title, interest and claim of the judgment obligor to the property as of the time
of the levy. The possession of the property shall be given to the purchaser or last redemptioner by the
same officer unless a third party is actually holding the property adversely to the judgment obligor.
(Emphasis supplied)
Jurisprudence abounds applying this exception to the ministerial duty of the court in issuing the Writ of
Possession.85
Here, respondents alleged in their CA Petition that they possess and own portions of the property subject
of the Writ of Demolition.1âwphi1 In support thereof, they annexed to their Petition and Reply deeds of
conveyances, contracts to sell, receipts, etc. showing that the Reyeses already sold to them the portions
of the subject lot they respectively occupy. A number of these documents predate the REM which the
Reyeses executed in favor of Aldover while others were executed subsequent thereto. Respondents’
allegation of actual possession is likewise confirmed by the Sheriff’s Partial Report 86 which states that
there are several other persons who occupy portions of subject lot and claim to be the owners thereof. In
fine, respondents have indubitably shown that they are in actual possession of the disputed portions of
subject property. Their possession, under Article 433 of the Civil Code, raises a disputable presumption
that they are the owners thereof.87 Thus, petitioners cannot resort to procedural shortcut in ousting them
by the simple expedient of filing a Motion for Special Order of Demolition in LRC Case No. R-6203 for
under the same Article 433 petitioners have to file the appropriate judicial process to recover the property
from the respondents. This "judicial process," as elucidated in Villanueva v. Cherdan Lending Investors
Corporation,88 "could mean no less than an ejectment suit or a reinvindicatory action, in which the
ownership claims of the contending parties may be properly heard and adjudicated." Moreover, to
dispossess the respondents based on the proceedings taken in LRC Case No. R-6203 where they were not
impleaded and did not take part would be tantamount to taking of real property without due process of
law.89
But petitioners downplayed respondents’ documentary evidence as unreliable for being unnotarized and
unregistered compared to their TCT No. PT-122311 which was duly issued after the Reyeses failed to
redeem the property and they (petitioners) consolidated their title thereto. However, "between an
unrecorded sale of a prior date and a recorded mortgage of a later date the former is preferred to the
latter for the reason that if the original owner had parted with his ownership of the thing sold then he no
longer had the ownership and free disposal of that thing so as to be able to mortgage it again." 90

In fine, the CA cannot be said to have acted capriciously, whimsically, arbitrarily or despotically in issuing
its January 3, 2005 Resolution and February10, 2005 Writ of Preliminary Injunction to prevent a
threatened or continuous irremediable injury. There is preliminary showing that respondents have clear
and unmistakable right over the disputed portions of the property which must be protected during the
pendency of CA-G.R. SP No. 86363. Indeed, the precipitate demolition of their houses would constitute
material and substantial invasion of their right which cannot be remedied under any standard
compensation. Hence, the need for a Writ of Preliminary Injunction.

Besides, it has been held that the trial court (or the CA in this case) has a wide latitude in determining
the propriety of issuing a Writ of Preliminary Injunction. The assessment and evaluation of evidence in
the issuance of a Writ of Preliminary Injunction involve findings of facts ordinarily left to it for its
determination. Hence, absent a clear showing of grave abuse of discretion, the trial court’s disposition in
injunctive matters is not generally interfered with by the appellate courts. 91
G.R. No. 201264, January 11, 2016
Furthermore, we note that although the scheduled January 4, 2005 hearing on the propriety of issuing a
Writ of Preliminary Injunction did not push through, the parties were nonetheless amply heard thru their FLORANTE VITUG, Petitioner, v. EVANGELINE A. ABUDA, Respondent.
pleadings. At the time the CA issued its challenged January 3, 2005 Resolution, petitioners had already
Parties who have validly executed a contract and have availed themselves of its benefits may not, to
filed their Comment 92 and Rejoinder93 where they argued at length why no injunctive relief should be
escape their contractual obligations, invoke irregularities in its execution to seek its invalidation.
granted in favor of the respondents. In Land Bank of the Phils. v. Continental Watchman Agency,
Inc,94 we reiterated our ruling that there can be no grave abuse of discretion on the part of the On March 17, 1997, Abuda loaned P250,000.00 to Vitug and his wife, Narcisa Vitug.1 As security for the
respondent court in issuing a Writ of Preliminary Injunction when the parties were amply heard thereon. loan, Vitug mortgaged to Abuda his property in Tondo Foreshore along R-10, Block A-50-3, Del Pan to
Thus: Kagitingan Streets, Tondo, Manila.2 The property was then subject of a conditional Contract to Sell
We have consistently held that there is no grave abuse of discretion in the issuance of a Writ of between the National Housing Authority and Vitug. Pertinent portions of the mortgage deed reads:
Preliminary Injunction where a party was not deprived of its day in court, as it was heard and had
exhaustively presented all its arguments and defenses. Hence, when contending parties were both That, Mortgagor, is the owner, holder of a Conditional Contract to Sell of the National Housing Authority
given ample time and opportunity to present their respective evidence and arguments in support of (NHA) over a piece of property located at the Tondo Foreshore along R-10, Block "A-50-3, Delpan to
their opposing contentions, no grave abuse of discretion can be attributed to the x x x court which Kagitingan Streets in the district of Tondo, Manila;
issued the Writ of Preliminary Injunction, as it is given a generous latitude in this regard, pursuant to
Section 4, Rule 58 of the 1997 Rules of Civil Procedure, as amended. That, with the full consent of wife Narcisa Vitug, hereby mortgage to Evangeline A. Abuda, with full
consent of husband Paulino Abuda, said property for TWO HUNDRED FIFTY THOUSAND PESOS ONLY
(P250,000.00), in hand paid by Mortgagee and in hand received to full satisfaction by Mortgagor, for
We emphasize though that the evidence upon which the CA based its January 3, 2005 Resolution is not
SIX MONTHS (6) within which to pay back the full amount plus TEN PERCENT (10%) agreed interest
conclusive as to result in the automatic issuance of a final injunction. "The evidence submitted for
per month counted from the date stated hereon;
purposes of issuing a Writ of Preliminary Injunction is not conclusive or complete for only a ‘sampling’ is
needed to give the x x x court an idea of the justification for the preliminary injunction pending the
That, upon consummation and completion of the sale by the NHA of said property, the title-award
decision of the case on the merits." 95 In the same vein, our Decision in this case is without prejudice to
thereof, shall be received by the Mortgagee by virtue of a Special Power of Attorney, executed by
whatever final resolution the CA and Branch 268 may arrive at in CA-G.R. SP No. 86363 and Civil Case
Mortgagor in her favor, authorizing Mortgagee to expedite, follow-up, cause the release and to received
Nos. 69979 and 69949, respectively.
[sic] and take possession of the title award of the said property from the NHA, until the mortgage
amount is fully paid for and settled[.]
WHEREFORE, the instant Petition for Certiorari is DISMISSED. The Resolutions dated January 3, 2005 and
January 24, 2005 of the Court of Appeals in CA-G.R. SP No. 86363 are AFFIRMED. This case is On November 17, 1997, the parties executed a "restructured"4 mortgage contract on the property to
REMANDED to the Court of Appeals for the immediate resolution of the main petition in CA-G.R. SP No. secure the amount of P600,000.00 representing the original P250,000.00 loan, additional loans,5 and
86363. subsequent credit accommodations6 given by Abuda to Vitug with an interest of five (5) percent per
month.7 By then, the property was covered by Transfer Certificate of Title No. 234246 under Vitug's
name.8

Spouses Vitug failed to pay their loans despite Abuda's demands.9

On November 21, 2003, Abuda filed a Complaint for Foreclosure of Property before the Regional Trial
Court of Manila.10
On December 19, 2008, the Regional Trial Court promulgated a Decision in favor of Abuda.11The In the Resolution promulgated on March 8, 2012,29 the Court of Appeals denied Vitug's Motion for
dispositive portion of the Decision reads: Reconsideration.
WHEREFORE, judgment is rendered in favor of the plaintiffs [sic] and against the defendant:
1. Ordering the defendant to pay unto the court and/or to the judgment debtor within the Vitug filed this Petition for Review on Certiorari under Rule 45 to assail the Court of Appeals' October 26,
reglementary period of Ninety (90) days the principal sum of P600,000.00 with interest at 5% per 2011 Decision and its March 8, 2012 Resolution.
month from May 31, 2002 to actual date of payment plus P20,000.00 as and for attorney's fees;
Vitug raises the following issues:
2. Upon default of the defendant to fully pay the aforesaid sums, the subject mortgaged property
First, whether petitioner Florante Vitug may raise in this Petition issues regarding the National Housing
shall be sold at public auction to pay off the mortgage debt and its accumulated interest plus
Authority's alleged lack of consent to the mortgage, as well as the exemption of his property from
attorney's fees, expenses and costs; and
execution;
3. After the confirmation of the sale, ordering the defendant and all persons claiming rights under her
Second, whether the restriction clause in petitioner's title rendered invalid the real estate mortgage he
[sic] to immediately vacate the subject premises.
and respondent Evangeline Abuda executed; and
Vitug appealed the December 19, 2008 Regional Trial Court Decision before the Court of Appeals.13 He Lastly, whether petitioner's property is a family home that is free from execution, forced sale, or
contended that the real estate mortgage contract he and Abuda entered into was void on the grounds of attachment under the Family Code.30
fraud and lack of consent under Articles 1318, 1319, and 1332 of the Civil Code.14 He alleged that he
We deny the Petition.
was only tricked into signing the mortgage contract, whose terms he did not really understand. Hence,
his consent to the mortgage contract was vitiated.15
Petitioner argues that not all the requisites of a valid mortgage are present.31 A mortgagor must have
free disposal of the mortgaged property.32 The existence of a restriction clause33 in his title means that
On October 26, 2011, the Court of Appeals promulgated a Decision,16 the dispositive portion of which
he does not have free disposal of his property.34 The restriction clause does not allow him to mortgage
reads:
the property without the National Housing Authority's approval.35 Since the National Housing Authority
WHEREFORE, the instant appeal is PARTIALLY GRANTED. The Decision of the RTC dated December 19,
never gave its consent to the mortgage,36 the mortgage contract between him and respondent is
2008 in Civil Case No. 03-108470 in favor of the appellee and against the appellant is AFFIRMED with
invalid.37
the MODIFICATION that an interest rate of 1% per month or 12% per annum shall be applied to the
principal loan of P600,000.00, computed from the date of judicial demand, i.e., November 21, 2003;
On the other hand, respondent argues that the only issue in this case should be the validity of the real
and 12% interest per annum on the amount due from the date of the finality of the Decision until fully
estate mortgage executed by petitioner in her favor.38 Petitioner raised other issues, such as the alleged
paid.
lack of written consent by the National Housing Authority (and the property's exemption from execution),
only in his Motion for Reconsideration before the Court of Appeals.39
The Court of Appeals found that Vitug failed to pay his obligation within the stipulated six-month period
under the March 17, 1997 mortgage contract.18 As a result of this failure, the parties entered into a
Respondent also argues that the National Housing Authority issued a Permit to Mortgage the property.
restructured mortgage contract on November 17, 1997.19 The new mortgage contract was signed before
This was formally offered in evidence before the Regional Trial Court as Exhibit "E."40 The National
a notary public by Vitug, his wife Narcisa, and witnesses Rolando Vitug, Ferdinand Vitug, and Emily
Housing Authority even accepted respondent's personal checks to settle petitioner's mortgage obligations
Vitug.20
to the National Housing Authority.41 The National Housing Authority would have already foreclosed
petitioner's property if not for the loan that respondent extended to petitioner.42
The Court of Appeals also found that all the elements of a valid mortgage contract were present in the
parties' mortgage contract.21 The mortgage contract was also clear in its terms—that failure to pay the
Petitioner counters that the Permit to Mortgage cited by respondent was only valid for 90 days and was
P600,000.00 loan amount, with a 5% interest rate per month from November 17, 1997 to November 17,
subject to the conditions that respondent failed to fulfill. These conditions are:
1998, shall result in the foreclosure of Vitug's mortgaged property.22 No evidence on record showed that
(1) The Mortgage Contract must provide that
Vitug was defrauded when he entered into the agreement with Abuda.23
"In the event of foreclosure, the NHA shall be notified of the date, time and place of the auction sale
so that it can participate in the foreclosure sale of the property."
However, the Court of Appeals found that the interest rates imposed on Vitug's loan were "iniquitous,
(2) The mortgage contract must be submitted to NHA for verification and final approval[.]43
unconscionable[,] and exorbitant."24 It instead ruled that a legal interest of 1% per month or 12% per
annum should apply from the judicial demand on November 21, 2003.25cralawred
Thus, according to petitioner, there was neither written consent nor approval by the National Housing
Authority of the mortgage contracts.
On November 23, 2011, Vitug moved for the reconsideration of the Court of Appeals' October 26, 2011
Decision.26 He pointed out that not all the requisites of a valid mortgage contract were present since he
Petitioner further contends that the alleged lack of NHA consent on the mortgage (and, being a family
did not have free disposal of his property when he mortgaged it to Abuda. His transfer certificate of title
home, his property's exemption from execution) was raised in his Answer to respondent's complaint for
had an annotation by the National Housing Authority, which restricted his right to dispose or encumber
foreclosure filed before the Regional Trial Court, thus:
the property.27 The restriction clause provided that the National Housing Authority's consent must first
be obtained before he may dispose or encumber his property.28 20. Similarly, defendant has constituted their family home over said mortgage property and should
that property be sold, defendant and his family will be left with no place to reside with [sic] within
Abuda, according to Vitug, failed to get the National Housing Authority's consent before the property was
Metro Manila, hence, for humanitarian reason[s], the defendant prayed that he be given ample time
mortgaged to him.
within which to settle his obligation with the plaintiff;
Vitug also argued in his Motion for Reconsideration that the property was exempt from execution because
21. Lastly, the Memorandum of Encumbrances contained at the back of defendant's title prohibits her
it was constituted as a family home before its mortgage.
from selling, encumbering, mortgaging, leasing, sub-leasing or in any manner altering or disposing
 the lot or right thereon, in whole or in part within the period often (10) years from the time of issuance
of said title without first obtaining the consent of the NHA. As reflected in the title, the same was issued
on 25 June 1997 hence, the mortgage executed even prior to the issuance of said title should be
declared void.
I
Due process46 dictates that arguments not raised in the trial court may not be considered by the
reviewing court.
Petitioner may raise in his Petition the issues of lack of the National Housing Authority's consent to the
mortgage and his property's alleged exemption from execution.
The records show that petitioner mentioned these issues as early as in his Answer to respondent's
Complaint48 and Pre-trial Brief.49 The trial court acknowledged these issues, but found that his defenses
based on these grounds could not be given credence
The defendant further stated that he is willing to pay the obligation is unconscionable. Further, the said
property constituted their family home. The defendant claimed that Memorandum of Encumbrance
prohibits her from selling, encumbering, mortgaging, leasing, subleasing or in any manner altering or
disposing the lot or right thereon in whole or in part within ten (10) years from the time of issuance of
the said title without obtaining the consent of the NHA.
. . . The court opines that the defendant has failed to raise a legitimate and lawful ground in order to bar
the herein plaintiff from asserting its lawful right under the law.
The contention of the defendant that the subject mortgaged property is their family home is irrelevant as
the debt secured by mortgages on the premises before or after the constitution of the family home does
not exempt the same from execution (Rule 106 of the Rules of Court).50cralawlawlibrary
Whether these arguments seasonably raised are valid is, however, a different matter.
II
All the elements of a valid mortgage contract were present. For a mortgage contract to be valid, the
absolute owner of a property must have free disposal of the property.51 That property must be used to
secure the fulfillment of an obligation.52 Article 2085 of the Civil Code provides:
Art. 2085. The following requisites are essential to contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their property,
and in the absence thereof, that they be legally authorized for the purpose.
Petitioner, who held under his name a transfer certificate of title to the property, mortgaged the property
to respondent to secure the payment of his loan of P600,000.00.
Petitioner claims that he only borrowed P250,000.00 and that he was only made to sign another
mortgage contract whose terms he did not agree to.
These claims were already found by the trial court and the Court of Appeals to be unsupported by
evidence. Petitioner's consent to the mortgage contract dated November 17, 1997 was not vitiated. He
voluntarily signed it in the presence of a notary public, his wife, and other witnesses.53
Further, the amount of P600,000.00 under the November 17, 1997 mortgage contract represented the
initial loan of P250,000.00 and the subsequent loan amounts, which were found to have been actually
released to petitioner. The November 17, 1997 mortgage contract reflected the changes in the parties'
obligations after they executed the March 17, 1997 mortgage contract.
This court is not a trier of facts. As a general rule, findings of fact of the lower court and of the Court of
Appeals are not reviewable and are binding upon this court54 unless the circumstances of the case are
shown to be covered by the exceptions.55 Petitioner failed to show any ground for this court to review
the trial court's and the Court of Appeals' finding that petitioner mortgaged his property in consideration
of a loan amounting to P600,000.00.
Petitioner's undisputed title to and ownership of the property is sufficient to give him free disposal of it.
As owner of the property, he has the right to enjoy all attributes of ownership including jus disponendi or
the right to encumber, alienate, or dispose his property "without other limitations than those
established by law."56
Petitioner's claim that he lacks free disposal of the property stems from the existence of the restrictions
imposed on his title by the National Housing Authority. These restrictions were annotated on his title,
thus:
Entry No. 4519/V-013/T-234246 -RESTRICTION-that the Vendee shall not sell, encumber, mortgage, lease, sub-let or in
any manner, alter or dispose the lot or right therein at any time, in whole or in part without obtaining the written
consent of the Vendor. Other restrictions set forth in Doc. No. 287; Page No. 59; Book No. 250; SERIES of 1997 of
Notary Public for Quezon City, Liberty S. Perez.
Date of instrument - June 24, 1997
Date of inscription- June 25, 1997- 11:39 a.m.
The National Housing Authority's restrictions were provisions in a contract it executed with petitioner. This
contract bound petitioner to certain conditions before transferring or encumbering the property.
Specifically, when the National Housing Authority sold the property to petitioner, petitioner became
obligated not to sell, encumber, mortgage, lease, sublease, alter, or dispose the property without the
National Housing Authority's consent.
These restrictions do not divest petitioner of his ownership rights. They are mere burdens or limitations
on petitioner's jus disponendi. Thus, petitioner may dispose or encumber his property. However, the
disposition or encumbrance of his property is subject to the limitations and to the rights that may accrue
to the National Housing Authority. When annotated to the title, these restrictions serve as notice to the
whole world that the National Housing Authority has claims over the property, which it may enforce
against others.
Contracts entered into in violation of restrictions on a property owner's rights do not always have the
effect of making them void ab initio.58 This has been clarified as early as 1956 in Municipality of Camiling
v. Lopez.59
The Municipality of Camiling sought to collect from Diego Z. Lopez payments for the lease of "certain
fisheries." As. a defense, Diego Z. Lopez invoked the alleged nullity of the lease contract he entered into
with the Municipality of Camiling.
Citing Municipality of Hagonoy v. Evangelista,60 the trial court ruled that the lease contract between the
Municipality of Camiling and Diego Z. Lopez was void since it "was not approved by the provincial
governor in violation of section 2196 of the Revised Administrative Code."61 This court reversed the trial
court's Decision and noted the incorrect interpretation in Municipality of Hagonoy of the term "nulos"
under Article 4 of the then Civil Code: "Son nulos los actos ejecutados contra lo dispuesto en la ley, salvo
los casos en que la naisma ley or dene su validez."62
In Municipality of Camiling, this court explained that void acts declared in Article 4 of the Old Civil Code63
refer to those made in violation of the law. Not all those acts are void from the beginning. Void acts may
be "those that are ipso facto void and those which are merely voidable."64
The lease contract executed by the Municipality of Camiling and Diego Z. Lopez was not treated as ipso
facto void. Section 2196 of the Administrative Code required the provincial governor's approval before the
municipal council entered into contracts. However, the same provision did not prohibit the municipal
council from entering into contracts involving the properties of the municipality.65 The municipal council's
exercise of power to enter into these contracts might have been limited, but its power was recognized.
This court found that aside from the lack of approval, the contract had no badge of illegality that would
make it ipso facto void. The execution of the contract was not tainted with violation of public order,
morality, or public policy. The contract could have been ratified. Hence, this court said that it was "merely
voidable at the option of the party who in law is granted the right to invoke its invalidity."66
The same doctrine was repeated in Sarmiento v. Salud,67 which involved a property in Kamuning,
Quezon City. The property was sold by Philippine Homesite and Housing Corp. to Spouses Francisco and
Marcelina Sarmiento. The transfer certificate of title that covered the property contained an annotation
stating that the property was sold on the condition that it could not be resold within 25 years from
contract date. Sale could be made within the period only to People's Homesite and Housing
Corporation.68 Spouses Sarmiento later mortgaged the property to Jorge Salud. Because Spouses
Sarmiento failed to redeem the property, the sheriff auctioned and sold the property to Jorge Salud, who
was issued a certificate of sale.
Spouses Sarmiento sought to prevent the foreclosure of the property by filing an action for annulment of
the foreclosure proceedings, sale, and certificate of sale on the ground that the prohibition against sale of
the property within 25 years was violated.
This court did not declare the contract void for violating the condition that the property could not be
resold within 25 years. Instead, it recognized People's Homesite and Housing Corporation's right to cause
the annulment of the contract. Since the condition was made in favor of People's Homesite and Housing
Corporation, it was the Corporation, not Spouses Sarmiento, who had a cause of action for annulment.69
In effect, this court considered the contract between Spouses Sarmiento and Jorge Salud as merely
voidable at the option of People's Homesite and Housing Corporation.
Thus, contracts that contain provisions in favor of one party may be void ab initio or voidable.70
Contracts that lack consideration,71 those that are against public order or public policy,72 and those that
are attended by illegality73 or immorality74 are void ab initio.
Contracts that only subject a property owner's property rights to conditions or limitations but otherwise
contain all the elements of a valid contract are merely voidable by the person in whose favor the
conditions or limitations are made.75
The mortgage contract entered into by petitioner and respondent contains all the elements of a valid
contract of mortgage. The trial court and the Court of Appeals found no irregularity in its execution. There
was no showing that it was attended by fraud, illegality, immorality, force or intimidation, and lack of
consideration.
At most, therefore, the restrictions made the contract entered into by the parties voidable76 by the
person in whose favor they were made—in this case, by the National Housing Authority.77 Petitioner has
no actionable right or cause of action based on those restrictions.78
Having the right to assail the validity of the mortgage contract based on violation of the restrictions, the
National Housing Authority may seek the annulment of the mortgage contract.79 Without any action from
the National Housing Authority, rights and obligations, including the right to foreclose the property in case
of non-payment of the secured loan, are still enforceable between the parties that executed the mortgage
contract.
The voidable nature of contracts entered into in violation of restrictions or conditions necessarily implies
that the person in whose favor the restrictions were made has two (2) options. It may either: (1) waive80
its rights accruing from such restrictions, in which case, the duly executed subsequent contract remains
valid; or (2) assail the subsequent contract based on the breach of restrictions imposed in its favor.
In Sarmiento, this court recognized that the right to waive follows from the right to invoke any violation
of conditions under the contract. Only the person who has the right to invoke this violation has the cause
of action for annulment of contract. The validity or invalidity of the contract on the ground of the violation
is dependent on whether that person will invoke this right. Hence, there was effectively a waiver on the
part of People's Homesite and Housing Corporation when it did not assail the validity of the mortgage in
that case:
It follows that on the assumption that the mortgage to appellee Salud and the foreclosure sale violated
the condition in the Sarmiento contract, only the PHHC was entitled to invoke the condition
aforementioned, and not the Sarmientos. The validity or invalidity of the sheriffs foreclosure sale to
appellant Salud thus depended exclusively on the PHHC; the latter could attack the sale as violative of
its right of exclusive reacquisition; but it (PHHC) also could waive the condition and treat the sale as
good, in which event, the sale can not be assailed [for] breach of the condition aforestated. Since it
does not appear anywhere in the record that the PHHC treated the mortgage and foreclosure sale as an
infringement of the condition, the validity of the mortgage, with all its consequences, including its
foreclosure and sale thereat, can not be an issue between the parties to the present case. In the last
analysis, the appellant, as purchaser at the foreclosure sale, should be regarded as the owner of the
lot, subject only to the right of PHHC to have his acquisition of the land set aside if it so desires.
There is no showing that the National Housing Authority assailed the validity of the mortgage contract on
the ground of violation of restrictions on petitioner's title. The validity of the mortgage contract based on
the restrictions is not an issue between the parties. Petitioner has no cause of action against respondent
based on those restrictions. The mortgage contract remains binding upon petitioner and respondent.
In any case, there was at least substantial compliance with the consent requirement given the National
Housing Authority's issuance of a Permit to Mortgage. The Permit reads:
PERMIT TO MORTGAGE
Dear Mr. Vitug,
Please be informed that your request dated 20 November 1997 for permission to mortgage Commercial Lot 5, Block 1,
Super Block 3, Area I, Tondo Foreshore Estate Management Project covered by TCT No. 234246 is hereby GRANTED
subject to the following terms and conditions:
1. The Mortgage Contract must provide that
"In the event of foreclosure, the NHA shall be notified of the date, time and place of the auction sale so that it can
participate in the foreclosure sale of the property."
2. The mortgage contract must be submitted to NHA for verification and final approval; and
3. This permit shall be good only for a period of ninety (90) days from date of receipt hereof.
Mariano M. Pineda
General Manager82
Petitioner insists that the Permit cannot be treated as consent by the National Housing Authority because
of respondent's failure to comply with its conditions.
However, a reading of the mortgage contract executed by the parties on November 17, 1997 shows
otherwise. The November 17, 1997 mortgage contract had references to the above conditions imposed by
the National Housing Authority, thus
It is the essence of this Contract, that if and should the Mortgagor fails to comply and pay the principal
obligations hereon within the period of the Contract, the Mortgage shall be foreclosed according to law
and in which case the NHA shall be duly notified of the matter.
That this mortgage contract shall be submitted to the NHA for verifixation [sic] and final approval in
accordance with NHA permit to mortgage the property.83(Emphasis supplied)cralawlawlibrary
Assuming there was non-compliance with the conditions set forth in the Permit, petitioner cannot blame
respondent. The restrictions were part of the contract between the National Housing Authority and
petitioner. It was petitioner, not respondent, who had the obligation to notify and obtain the National
Housing Authority's consent within the prescribed period before sale or encumbrance of the property.
Petitioner cannot invoke his own mistake to assail the validity of a contract he voluntarily entered into.84
III
Even if the mortgage contract were illegal or wrongful, neither of the parties may assail the contract's
validity as against the other because they were equally at fault.85 This is the principle of in pari delicto
(or in delicto) as embodied in Articles 1411 and 1412 of the Civil Code:
Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the
act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against
each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the
disposal of effects or instruments of a crime shall be applicable to the things or the price of the
contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what
he has given, and shall not be bound to comply with his promise.
Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal
offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover what he has given by
virtue of the contract, or demand the performance of the other's undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason
of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault,
may demand the return of what he has given without any obligation to comply his promise.
Under this principle, courts shall not aid parties in their illegal acts.86 The court shall leave them as they
are.87 It is an equitable principle that bars parties from enforcing their illegal acts, assailing the validity
of their acts, or using its invalidity as a defense.88
In the 1906 case of Batarra v. Marcos,89 this court declared that a person cannot enforce a promise to
marry based on the consideration of "carnal connection." This court ruled that whether or not such
consideration was a crime, neither of the parties can recover because the acts "were common to both
parties."90
In Bough v. Cantiveros,91 this court refused to enforce in favor of the guilty parties a contract of sale
that was not only simulated but also executed to defeat any attempt by a husband to recover properties
from his wife.
Another case, Liguez v. Court of Appeals,92 involves a party's claim over a property based on a deed of
donation executed in her favor when she was 16 years old. The heirs of the donor assailed the donation
on the ground of having an illicit causa.
The donor in that case was found to have had sexual relations with the claimant. The donation was done
to secure the claimant's continuous cohabitation with the donor, as well as to gratify the donor's sexual
impulses. At the time of the donation, the donor was married to another woman. The donated property
was part of their conjugal property.
This court held that the donation was founded on an illicit causa. While this court found the principle of in
pari delicto inapplicable in that case given the claimant's minority at the time of donation, it had the
occasion to say that the parties were barred "from pleading the illegality of the bargain either as a cause
of action or as a defense."93 The claimant was declared entitled to the donated property, without
prejudice to the share and legitimes of the donor's forced heirs.
In the later case of Villegas v. Rural Bank of Tanjay, Inc.,94 this court ruled that the petitioners in that
case were not entitled to relief because they did not come to court with clean hands.
This court found that they "readily participated in a ploy to circumvent the Rural Banks Act and offered no
objection when their original loan of P350,000.00 was divided into small separate loans not exceeding
P50,000.00 each."95 They and respondent bank were in pari delicto. They could not be given affirmative
relief against each other.96 Hence, Spouses Villegas may not seek the annulment of the loan and
mortgage contracts they voluntarily executed with respondent bank on the ground that these contracts
were simulated to make it appear that the loans were sugar crop loans, allowing respondent bank to
approve it pursuant to Republic Act No. 720, otherwise known as the Rural Banks Act.
The principle of in pari delicto admits exceptions. It does not apply when the result of its application is
clearly against statutory law, morals, good customs, and public policy.97
In Philippine Banking Corporation, representing the Estate of Justina Santos v. Lui She,98 this court
refused to apply the principle of in pari delicto. Applying the principle meant that this court had to declare
as valid between the parties a 50-year lease contract with option to buy, which was executed by a Filipino
and a Chinese citizen. This court ruled that the policy to conserve land in favor of Filipinos would be
defeated if the principle of in pari delicto was applied instead of setting aside the contracts executed by
the parties.99
Petitioner in this case did not come to this court with clean hands. He was aware of the restrictions in his
title when he executed the loan and mortgage contracts with respondent. He voluntarily executed the
contracts with respondent despite this knowledge. He also availed himself of the benefits of the loan and
mortgage contract. He cannot now assail the validity of the mortgage contract to escape the obligations
incurred because of it.100
Petitioner also failed to show that upholding the validity of the mortgage contract would be contrary to
law, morals, good customs, and public policy.
Petitioner's contract with the National Housing Authority is not a law prohibiting the transfer or
encumbrance of his property. It does not render subsequent transactions involving the property a
violation of morals, good customs, and public policy. Violation of its terms does not render subsequent
transactions involving the property void ab initio.101 It merely provides the National Housing Authority
with a cause of action to annul subsequent transactions involving the property.
IV
Petitioner argues that the property should be exempt from forced sale, attachment, and execution, based
on Article 155 of the Family Code.102 Petitioner and his family have been neighbors with respondent
since 1992, before the execution of the mortgage contract.103
Even though petitioner's property has been constituted as a family home, it is not exempt from
execution. Article 155 of the Family Code explicitly provides that debts secured by mortgages are
exempted from the rule against execution, forced sale, or attachment of family home:
Art. 155. The family home shall be exempt from execution, forced sale or attachment except:
(3) For debts secured by mortgages on the premises before or after such
constitution[.]cralawlawlibrary
Since petitioner's property was voluntarily used by him as security for a loan he obtained from
respondent, it may be subject to execution and attachment.
V
The Court of Appeals correctly found that the interest rates of 5% or 10% per month imposed on
petitioner's loan were unconscionable.
Parties are free to stipulate interest rates in their loan contracts in view of the suspension of the
implementation of the Usury Law ceiling on interest effective January 1, 1983.104
The freedom to stipulate interest rates is granted under the assumption that we have a perfectly
competitive market for loans where a borrower has many options from whom to borrow. It assumes that
parties are on equal footing during bargaining and that neither of the parties has a relatively greater
bargaining power to command a higher or lower interest rate. It assumes that the parties are equally in
control of the interest rate and equally have options to accept or deny the other party's proposals. In
other words, the freedom is granted based on the premise that parties arrive at interest rates that they
are willing but are not compelled to take either by force of another person or by force of
circumstances.105
However, the premise is not always true. There are imperfections in the loan market. One party may
have more bargaining power than the other. A borrower may be in need of funds more than a lender is in
need of lending them. In that case, the lender has more commanding power to set the price of borrowing
than the borrower has the freedom to negotiate for a lower interest rate.
Hence, there are instances when the state must step in to correct market imperfections resulting from
unequal bargaining positions of the parties.
Article 1306 of the Civil Code limits the freedom to contract to promote public morals, safety, and
welfare:
Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good customs, public order,
or public policy.cralawlawlibrary
In stipulating interest rates, parties must ensure that the rates are neither iniquitous nor unconscionable.
Iniquitous or unconscionable interest rates are illegal and, therefore, void for being against public
morals.107 The lifting of the ceiling on interest rates may not be read as "grant[ing] lenders carte
blanche [authority] to raise interest rates to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets."108
Voluntariness of stipulations on interest rates is not sufficient to make the interest rates valid.109 In
Castro v. Tan:
The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily
assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous
deprivation of property, repulsive to the common sense of man. It has no support in law, in principles
of justice, or in the human conscience nor is there any reason whatsoever which may justify such
imposition as righteous and as one that may be sustained within the sphere of public or private morals.
Thus, even if the parties voluntarily agree to an interest rate, courts are given the discretionary power to
equitably reduce it if it is later found to be iniquitous or unconscionable.112 Courts approximate what the
prevailing market rate would have been under the circumstances had the parties had equal bargaining
power.
An interest rate is not inherently conscionable or unconscionable. Interest rates become unconscionable
in light of the context in which they were imposed or applied. In Medel v. Court of Appeals,113 this Court
ruled that the stipulated interest of 5.5% or 66% per annum was unconscionable and contrary to morals.
It was declared void. This court reduced the interest rate to 1% per month or 12% per annum.114
This court also ruled that the interest rates of 3%, 5%, and 10% per month were unconscionable, thus
justifying the need to reduce the interest rates to 12% per annum.115
On the other hand, despite rulings that interest rates of 3% and 5% per month are unconscionable, this
court in Toledo v. Hydenu116 found that the interest rate of 6% to 7% per month was not
unconscionable. This court noted circumstances that differentiated that case from Medel and found that
the borrower in Toledo was not in dire need of money when she obtained a loan; this implied that the
interest rates were agreed upon by the parties on equal footing. This court also found that it was the
borrower in Toledo who was guilty of inequitable acts:
Noteworthy is the fact that in Medel, the defendant-spouses were never able to pay their indebtedness
from the very beginning and when their obligations ballooned into a staggering sum, the creditors filed
a collection case against them. In this case, there was no urgency of the need for money on the part of
Jocelyn, the debtor, which compelled her to enter into said loan transactions. She used the money from
the loans to make advance payments for prospective clients of educational plans offered by her
employer. In this way, her sales production would increase, thereby entitling her to 50% rebate on her
sales. This is the reason why she did not mind the 6% to 7% monthly interest. Notably too, a business
transaction of this nature between Jocelyn and Marilou continued for more than five years. Jocelyn
religiously paid the agreed amount of interest until she ordered for stop payment on some of the checks
issued to Marilou. The checks were in fact sufficiently funded when she ordered the stop payment and
then filed a case questioning the imposition of a 6% to 7% interest rate for being allegedly iniquitous or
unconscionable and, hence, contrary to morals.
It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same carried
with it an interest rate of 6% to 7% per month, yet she did not complain. In fact, when she availed of
said loans, an advance interest of 6% to 7% was already deducted from the loan amount, yet she never
uttered a word of protest.
After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per month
and paying for the same, Jocelyn cannot now go to court to have the said interest rate annulled on the
ground that it is excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the
conscience of man. "This is so because among the maxims of equity are (1) he who seeks equity must do
equity, and (2) he who comes into equity must come with clean hands. The latter is a frequently stated
maxim which is also expressed in the principle that he who has done inequity shall not have equity. It
signifies that a litigant may be denied relief by a court of equity on the ground that his conduct has been
inequitable, unfair and dishonest, or fraudulent, or deceitful as to the controversy in issue."
We are convinced that Jocelyn did not come to court for equitable relief with equity or with clean hands.
It is patently clear from the above summary of the facts that the conduct of Jocelyn can by no means be
characterized as nobly fair, just, and reasonable. This Court likewise notes certain acts of Jocelyn before
filing the case with the RTC. In September 1998, she requested Marilou not to deposit her checks as she
can cover the checks only the following month. On the next month, Jocelyn again requested for another
extension of one month. It turned out that she was only sweet-talking Marilou into believing that she had
no money at that time. But as testified by Serapio Romarate, an employee of the Bank of Commerce
where Jocelyn is one of their clients, there was an available balance of P276,203.03 in the latter's account
and yet she ordered for the stop payments of the seven checks which can actually be covered by the
available funds in said account. She then caught Marilou by surprise when she surreptitiously filed a case
for declaration of nullity of the document and for damages.
Under the circumstances of this case, we find no reason to uphold the stipulated interest rates of 5% to
10% per month on petitioner's loan. Petitioner obtained the loan out of extreme necessity. As pointed out
by respondent, the property would have been earlier foreclosed by the National Housing Authority if not
for the loan. Moreover, it would be unjust to impose a heavier burden upon petitioner, who would already
be losing his and his family's home. Respondent would not be unjustly deprived if the interest rate is
reduced. After all, respondent still has the right to foreclose the property. Thus, we affirm the Court of
Appeals Decision to reduce the interest rate to 1% per month or 12% per annum.
However, we modify the rates in accordance with the guidelines set forth in Nacar v. Gallery Frames:
II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
 annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to
a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein.
Thus, the interest rate for petitioner's loan should be further reduced to 6% per annum from July 1, 2013
until full satisfaction.
WHEREFORE, the Petition is DENIED. The Court of Appeals Decision dated October 26, 2011 and its
Resolution dated March 8, 2012 are AFFIRMED. The interest rate for the loan of P600,000.00 is further
reduced to 6% per annum from July 1, 2013 until fully paid.
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE
DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of
Island Savings Bank, petitioners, vs. THE HONORABLE COURT OF APPEALS and SULPICIO M.
TOLENTINO, respondents.
This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals,
in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February 15, 1972 of
the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio M. Tolentino for
injunction, specific performance or rescission, and damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves,
Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title the next
day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual
installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino
shall use the loan proceeds solely as an additional capital to develop his other property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and
Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual
interest, payable within 3 years from the date of execution of the contract at semi-annual installments of
P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-month period
amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted
interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank that
there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its
vice-president and treasurer, promised repeatedly the release of the P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued Resolution No. 1049, which provides:
In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the
Board, by unanimous vote, decided as follows:
1) To prohibit the bank from making new loans and investments [except investments in government
securities] excluding extensions or renewals of already approved loans, provided that such extensions
or renewals shall be subject to review by the Superintendent of Banks, who may impose such
limitations as may be necessary to insure correction of the bank's deficiency as soon as possible;
On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the required
capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing
business in the Philippines and instructed the Acting Superintendent of Banks to take charge of the assets
of Island Savings Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for January
22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for
injunction, specific performance or rescission and damages with preliminary injunction, alleging that since
Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled to
specific performance by ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per
annum from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate mortgage
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order
enjoining the Island Savings Bank from continuing with the foreclosure of the mortgage. On January 29, 1969, the trial
court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M. Tolentino and the setting
aside of the restraining order, filed by the Central Bank and by the Acting Superintendent of Banks.
On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the petition of
Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest and legal
charges due thereon, and lifting the restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136.
rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance
decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island
Savings Bank can neither foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be
foreclosed to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April
28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of
each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de
Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to
perform his part of the contract, the other party who has not performed or is not ready and willing to
perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the
consideration for the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M.
Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to pay the
P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan
accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a
period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14,
1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it legally
impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power
of the Monetary Board to take over insolvent banks for the protection of the public is recognized by
Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings
Bank in complying with its obligation of releasing the P63,000.00 balance because said resolution merely
prohibited the Bank from making new loans and investments, and nowhere did it prohibit island Savings
Bank from releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary
inability to fulfill an engagement does not discharge the obligation of the contract, nor does it constitute
any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190
[1918]). And, the mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an
obligation but 'instead it is taken as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken as
a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the
advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only
P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a
non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an exercise
of his right to it, which right exist independently of his right to demand the completion of the P80,000.00
loan. The exercise of one right does not affect, much less neutralize, the exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it
from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court previously
ruled that bank officials and employees are expected to exercise caution and prudence in the discharge of
their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the
bank's officials and employees that before they approve the loan application of their customers, they
must investigate the existence and evaluation of the properties being offered as a loan security. The
recent rush of events where collaterals for bank loans turn out to be non-existent or grossly over-valued
underscore the importance of this responsibility. The mere reliance by bank officials and employees on
their customer's representation regarding the loan collateral being offered as loan security is a patent
non-performance of this responsibility. If ever bank officials and employees totally reIy on the
representation of their customers as to the valuation of the loan collateral, the bank shall bear the risk in
case the collateral turn out to be over-valued. The representation made by the customer is immaterial to
the bank's responsibility to conduct its own investigation. Furthermore, the lower court, on objections of'
Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged over-valuation
because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The
lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses
and objections not pleaded either in a motion to dismiss or in the answer are deemed waived."
Petitioners, thus, cannot raise the same issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement,
Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific performance or
rescission with damages in either case. But since Island Savings Bank is now prohibited from doing
further business by Monetary Board Resolution No. 967, WE cannot grant specific performance in favor of
Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00
balance of the P80,000.00 loan, because the bank is in default only insofar as such amount is concerned,
as there is no doubt that the bank failed to give the P63,000.00. As far as the partial release of
P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note to cover it, the bank
was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan. The promissory
note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it falls due.
His failure to pay the overdue amortizations under the promissory note made him a party in default,
hence not entitled to rescission (Article 1191 of the Civil Code). If there is a right to rescind the
promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not
signed a promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled
to ask for rescission of the entire loan because he cannot possibly be in default as there was no date for
him to perform his reciprocal obligation to pay.
Since both parties were in default in the performance of their respective reciprocal obligations, that is,
Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule
that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the
liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his
overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall
not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit
for his use of the P17,000.00, it is just that he should account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to
satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as that of the principal
contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his
obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the
consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or
unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then in
existence, as there was no debt yet because Island Savings Bank had not made any release on the loan,
does not make the real estate mortgage void for lack of consideration. It is not necessary that any
consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs.
C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the consideration is
subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as
a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on
Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the mortgage becomes
unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59,
1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than
the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due
(Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1,
P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of
P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of
78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the
P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be divided among the successors in
interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several
heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a
mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM OF P17.000.00,
PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST
22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25 HECTARES SHALL
BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE AND IS HEREBY
ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.
G.R. No. 149569             May 28, 2004
PHILIPPINE NATIONAL BANK, petitioner,
vs.
RBL ENTERPRISES, INC.; RAMON B. LACSON SR.; and Spouses EDWARDO and HERMINIA
LEDESMA, respondents.
Having released fifty percent of the loan proceeds on the basis of the signed loan and mortgage
contracts, petitioner can no longer require the borrowers to secure the lessor’s conformity to the
Mortgage Contract as a condition precedent to the release of the loan balance. The conformity of the
lessor was not necessary to protect the bank’s interest, because respondents were unquestionably the
absolute owners of the mortgaged property. Furthermore, the registration of the mortgage created a real
right to the properties which, in subsequent transfers by the mortgagor, the transferees are legally bound
to respect.
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the August 22, 2001 Decision 2 of the Court of Appeals
(CA) in CA-GR CV No. 49749. The dispositive portion of the Decision reads as follows:
"WHEREFORE, premises considered[,] the judgment appealed from is hereby AFFIRMED, with x x x MODIFICATION as follows:
"1. The amount of actual damages and losses is reduced from ₱985,722.15 to merely ₱380,713.55 with legal interest from the date of the
filing of the complaint. The interest payable on the loan is ordered reduced by using the agreed interest rate of 18% per annum in the
computation[;]
"2. The amount of moral damages is reduced from ₱100,000.00 to ₱50,000.00;
"3. The amount of exemplary damages is reduced from ₱50,000.00 to ₱30,000.00; and
"4. The award of attorney’s fees is reduced from ₱200,000.00 to ₱50,000.00." 3
The Facts
"1. On April 28, 1993, [respondents] instituted an action against [Petitioner] PNB and the Provincial
Sheriff of Negros Occidental alleging among others, the following:
"(a) Sometime in 1987, [respondents] opened a prawn hatchery in San Enrique, Negros Occidental, and
for this purpose, leased from Nelly Bedrejo a parcel of land where the operations were conducted;
"(b) In order to increase productions and improve the hatchery facilities, [respondents] applied for and
was approved a loan of ₱2,000,000.00, by [Petitioner] PNB. To secure its payment, [respondents]
executed in favor of PNB, a real estate mortgage over two (2) parcels of land, located at Bago City,
Negros Occidental, covered by Transfer Certificate of Title Nos. T-13005 and T-12642 in the names of
[respondents], and another real [estate] and chattel mortgage over the buildings, culture tanks and
other hatchery facilities located in the leased property of Nelly Bedrejo;
"(c) PNB partially released to [respondents] on several dates, the total sum of ₱1,000,000.00 less the
advance interests, which amount [respondents] used for introducing improvements on the leased
property where the hatchery business was located.
"(d) During the mid-part of the construction of the improvements, PNB refused to release the balance
of ₱1,000,000.00 allegedly because [respondents] failed to comply with the bank’s requirement that
Nelly Bedrejo should execute an undertaking or a ‘lessors’ conformity’ provided in Real Estate and
Chattel Mortgage contract dated August 3, 1989, which states, ‘par. 9.07. It is a condition of this
mortgage that while the obligations remained unpaid, the acquisition by the lessor of the permanent
improvements covered by this Real Estate Mortgage as provided for in the covering Lease Contract,
shall be subject to this mortgage. For this purpose, the mortgagor hereby undertakes to secure the
lessor’s conformity hereto’.
"(e) For said alleged failure of [respondents] to comply with the additional requirement and the demand
of PNB to pay the released amount of ₱1,000,000.00, PNB foreclosed the mortgaged properties, to the
detriment of [respondents].
"(f) Due to the non-release of the remaining balance of the loan applied for and approved, the
productions-operations of the business were disrupted causing losses to [respondents], and thereafter,
to the closure of the business.
"2. On June 29, 1990, [Petitioner] PNB filed its Answer with Counterclaim alleging that the lessors’
conformity was not an additional requirement but was already part of the terms and conditions contained
in the Real Estate and Chattel Mortgage  dated August 3, 1989, executed between [respondents] and
[petitioner]; and that the release of the balance of the loan was conditioned on the compliance and
submission by the [respondents] of the required lessors’ conformity.
"3. On November 8, 1993, a writ of preliminary injunction was issued by the  court a quo  prohibiting PNB
and the Provincial Sheriff of Negros Occidental from implementing the foreclosure proceedings including
the auction sale of the properties of the [respondents] subject matter of the real [estate] and chattel
mortgages."4
The Regional Trial Court (RTC) ruled that Philippine National Bank (PNB) had breached its obligation under the Contract of
Loan and should therefore be held liable for the consequential damages suffered by respondents. The trial court held that
PNB’s refusal to release the balance of the loan was unjustified for the following reasons: 1) the bank’s partial release of
the loan of respondents had estopped it from requiring them to secure the lessor’s signature on the Real Estate and Chattel
Mortgage Contract; 2) Nelly Bedrejo, the lessor, had no interest in the property and was not in any manner connected with
respondents’ business; thus, the fulfillment of the condition was legally impossible; and 3) the interests of PNB were amply
protected, as the loan had overly been secured by collaterals with a total appraised value of ₱3,088,000.
The RTC further observed that while the loan would mature in three years, the lease contract between Bedrejo and
respondents would expire in ten years. According to a provision in the Contract, upon its expiration, all improvements
found on the leased premises would belong to the lessor. Thus, in the event of nonpayment of the loan at its maturity, PNB
could still foreclose on those improvements, the subject of the chattel mortgage.
Ruling of the Court of Appeals
Affirming the lower court, the CA held that Nelly Bedrejo, who was not a party to the Mortgage Contract, could not be
compelled to affix her signature thereto. The appellate court further ruled that the registration of the mortgage not only
revealed PNB’s intention to give full force and effect to the instrument but, more important, gave the mortgagee ample
security against subsequent owners of the chattels.
The CA, however, reduced the amount of actual damages for lack of competent proof of the lost income and the unrealized
profits of RBL, as well as for the additional expenses and liabilities incurred by respondents as a result of petitioner’s refusal
to release the balance of the loan. Moral and exemplary damages as well as attorney’s fees were likewise lessened.
Issues
"A. Whether or not the Court of Appeals committed serious error when it held that Petitioner PNB has no legal basis to
require respondents to secure the conformity of the lessor and owner of the property where their hatchery business is
being conducted notwithstanding that respondents obligated themselves in no uncertain terms to secure such conformity
pursuant to par. 9.07 of the Real Estate and Chattel Mortgage and considering further that respondents’ authority to
mortgage the lessor’s property and leasehold rights are annotated [on] the titles of the mortgage[d] properties.
"B. Whether or not the Court of Appeals erred in holding Petitioner PNB liable for actual, moral and exemplary damages as
well as attorney’s fees for the non-release of the balance of the loan applied by respondents even though there is no
evidence that such non-release was attended by malice or bad faith." 6
Simply put, the issues are as follows: 1) whether the non-release of the balance of the loan by PNB is
justified; and 2) whether it is liable for actual, moral and exemplary damages as well as attorney’s fees.
The Court’s Ruling
The Petition is partly meritorious.
First Issue: Was PNB’s Non-Release of the Loan Justified?
Petitioner maintains that the lessor’s signature in the conforme portion of the Real Estate and Chattel
Mortgage Contract was a condition precedent to the release of the balance of the loan to respondents.
Petitioner invokes paragraph 9.07 of the Contract as legal basis for insisting upon respondents’ fulfillment
of the aforesaid clause.
We are not persuaded. If the parties truly intended to suspend the release of the ₱1,000,000 balance of
the loan until the lessor’s conformity to the Mortgage Contract would have been obtained, such condition
should have been plainly stipulated either in that Contract or in the Credit Agreement. The tenor of the
language used in paragraph. 9.07, as well as its position relative to the whole Contract, negated the
supposed intention to make the release of the loan subject to the fulfillment of the clause. From a mere
reading thereof, respondents could not reasonably be expected to know that it was petitioner’s unilateral
intention to suspend the release of the ₱1,000,000 balance until the lessor’s conformity to the Mortgage
Contract would have been obtained.
Respondents had complied with all the requirements set forth in the recommendation and approval sheet
forwarded by petitioner’s main office to the Bacolod branch for implementation; and the Credit
Agreement had been executed thereafter. Naturally, respondents were led to believe and to expect the
full release of their approved loan accommodation. This belief was bolstered by the initial release of the
first ₱1,000,000 portion of the loan.
We agree with the RTC in its ruling on this point:
"x x x. In the instant case, there is a clear and categorical showing that when the parties have finally
executed the contract of loan and the Real Estate and Chattel Mortgage Contract, the applicant
complied with the terms and conditions imposed by defendant bank on the recommendation and
approval sheet, hence, defendant bank waived its right to further require the plaintiffs other conditions
not specified in the previous agreement. Should there [appear] any obscurity after such execution, the
same should not favor the party who caused such obscurity. Therefore, such obscurity must be
construed against the party who drew up the contract. Art. 1377 of the Civil Code applies x x x [even]
with greater force [to] this type of contract where the contract is already prepared by a big concern and
[the] other party merely adheres to it."7 (Citations omitted)
Conditions Precedent
Conditions precedent are not favored. Unless impelled by plain and unambiguous language or by
necessary implication, courts will not construe a stipulation as laden with such burden, particularly when
that stipulation would result in a forfeiture or in inequitable consequences. 8
Nowhere did PNB explicitly state that the release of the second half of the loan accommodation was
subject to the mortgagor’s procurement of the lessor’s conformity to the Mortgage Contract. Absent such
a condition, the efficacy of the Credit Agreement stood, and petitioner was obligated to release the
balance of the loan. Its refusal to do so constituted a breach of its reciprocal obligation under the Loan
Agreement.
Flimsy was the insistence of petitioner that the lessor should be compelled to sign the Mortgage Contract,
since she was allegedly a beneficiary thereof. The chattel mortgage was a mere accessory to the contract
of loan executed between PNB and RBL. The latter was undisputably the absolute owner of the properties
covered by the chattel mortgage. Clearly, the lessor was never a party to either the loan or the Mortgage
Contract.
The Real Nature of a Mortgage
The records show that all the real estate and chattel mortgages were registered with the Register of
Deeds of Bago City, Negros Occidental, and annotated at the back of the mortgaged titles. Thus,
petitioner had ample security to protect its interest. As correctly held by the appellate court, the lessor’s
nonconformity to the Mortgage Contract would not cause petitioner any undue prejudice or disadvantage,
because the registration and the annotation were considered sufficient notice to third parties that the
property was subject to an encumbrance.9
Article 2126 of the Civil Code describes the real nature of a mortgage: it is a real right following the
property, such that in subsequent transfers by the mortgagor, the transferee must respect the mortgage.
A registered mortgage lien is considered inseparable from the property inasmuch as it is a right in
rem.10 The mortgage creates a real right or a lien which, after being recorded, follows the chattel
wherever it goes. Under Article 2129 of the same Code, the mortgage on the property may still be
foreclosed despite the transfer.
Indeed, even if the mortgaged property is in the possession of the debtor, the creditor is still protected.
To protect the latter from the former’s possible disposal of the property, the chattel mortgage is made
effective against third persons by the process of registration.
PNB violated the Loan Agreement when it refused to release the ₱1,000,000 balance. As regards the
partial release of that amount, over which respondents executed three Promissory Notes, the bank is
deemed to have complied with its reciprocal obligation. The Promissory Notes compelled them to pay that
initial amount when it fell due. Their failure to pay any overdue amortizations under those Promissory
Notes rendered them liable thereunder.
Effect of Failure of Consideration
Since PNB failed to release the ₱1,000,000 balance of the loan, the Real Estate and Chattel Mortgage
Contract became unenforceable to that extent. Relevantly, we quote this Court’s ruling in Central Bank of
the Philippines v. Court of Appeals:11
"The consideration of the accessory contract of real estate mortgage is the same as that of the principal
contract. For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in
the accessory contract of real estate mortgage, the consideration of the debtor in furnishing the
mortgage is the existence of a valid, voidable, or unenforceable debt.
"[W]hen there is partial failure of consideration, the mortgage becomes unenforceable to the extent of
such failure. Where the indebtedness actually owing to the holder of the mortgage is less than the sum
named in the mortgage, the mortgage cannot be enforced for more than the actual sum due." 12
Second Issue: Propriety of Award for Damages and Attorney’s Fees
In reducing the award for actual damages from ₱985,722.15 to ₱380,713.55, the CA explained:
"The alleged projected cash flow and net income for the 5-year period of operations were not
substantiated by any other evidence to sufficiently establish the attainability of the projection. No
evidence was also introduced to show the accounts payable of and other expenses incurred by
[respondents]. The court a quo therefore, erred when it ruled that [respondents] incurred actual
damages and losses amounting to ₱985,722.15 from 1990 to 1992, when no evidence was presented to
establish the same.
"Compensatory or actual damages cannot be presumed. They cannot be allowed if there are no specific
facts, which should be a basis for measuring the amount. The trial court cannot rely on speculation as
to the fact and amount of damages, but must depend on actual proof that damage had been suffered.
The amount of loss must not only be capable of proof but must actually be proven with reasonable
degree of certainty, premised upon competent proof or best evidence to support his claim for actual
damages.
"At most, the court a quo may declare as lost income and unrealized profits, the amount of
₱380,713.55 for the 3-year period of business operations from 1990 when PNB refused to release the
loans until closure of business in 1992, based on the highest quarterly taxable income earned in 1989
in the amount of ₱28,754.80, with a conservative and reasonable increase of 10% per year on the net
income. The amount of actual damages is therefore, reduced from ₱985,722.15 to ₱380,713.55 x x
x."13
We see no reason to overturn these findings. True, indemnification for damages comprises not only the
loss that was actually suffered, but also the profits -- referred to as compensatory damages -- that the
obligee failed to obtain. To justify a grant of actual or compensatory damages, however, it would be
necessary to prove the amount of loss with a reasonable degree of certainty, based upon competent proof
and the best evidence obtainable by the injured party. 14 The quarterly income tax report of Respondent
RBL Enterprises, Inc., which was presented by petitioner and used by the appellate court as basis for
computing the average profits earned by respondents in their business, provided a reasonable means for
ascertaining their claims for lost profits. Thus, we believe that the assessment by the Court of Appeals
was fair and just.
On the other hand, the award for moral and exemplary damages should be deleted, because respondents
failed to prove malice or bad faith on the part of petitioner.
Moral damages are explicitly authorized in breaches of contract when the defendant has acted
fraudulently or in bad faith.15 Concededly, the bank was remiss in its obligation to release the balance of
the loan extended to respondents. Nothing in the findings of the trial and the appellate courts, however,
sufficiently indicate a deliberate intent on the part of PNB to cause harm to respondents.
Exemplary damages, in turn, are intended to serve as an example or a correction for the public good.
Courts may award them if the defendant is found to have acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.16 Given the above premises and the circumstances here obtaining, the
exemplary damages granted by the courts a quo cannot be sustained.
Finally, the award of attorney’s fees as part of the damages is just and equitable under the
circumstances.17 Such fees may be awarded when parties are compelled to litigate or to incur expenses to
protect their interest by reason of an unjustified act of the opposing party. 18 In the present case,
petitioner’s refusal to release the balance of the loan has compelled respondents to institute an action for
injunction and damages in order to protect their clear rights and interests.
WHEREFORE, the Petition is PARTLY GRANTED. The assailed Decision is hereby AFFIRMED,  with
the MODIFICATION  that the award of actual and exemplary damages is deleted. No costs.
G.R. No. 134330            March 1, 2001
SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO, petitioners,
vs.
PHILIPPINE NATIONAL BANK and SPOUSES MARCOS and ARSENIA ESLABON, respondents.
Eduarda Belo owned an agricultural land with an area of six hundred sixty one thousand two hundred
eighty eight (661,288) square meters located in Timpas, Panitan, Capiz, covered and described in
Transfer Certificate of Title (TCT for brevity) No. T-7493. She leased a portion of the said tract of land to
respondents spouses Marcos and Arsenia Eslabon in connection with the said spouses' sugar plantation
business. The lease contract was effective for a period of seven (7) years at the rental rate of Seven
Thousand Pesos (P7,000.00) per year.
To finance their business venture, respondents spouses Eslabon obtained a loan from respondent
Philippine National Bank (PNB for brevity) secured by a real estate mortgage on their own four (4)
residential houses located in Roxas City, as well as on the agricultural land owned by Eduarda Belo. The
assent of Eduarda Belo to the mortgage was acquired through a special power of attorney which she
executed in favor of respondent Marcos Eslabon on June 15, 1982.
Inasmuch as the respondents spouses Eslabon failed to pay their loan obligation, extrajudicial foreclosure
proceedings against the mortgaged properties were instituted by respondent PNB. At the auction sale on
June 10, 1991, respondent PNB was the highest bidder of the foreclosed properties at Four Hundred Forty
Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00).
In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo of the sale at public auction of
her agricultural land on June 10, 1991 as well as the registration of the Certificate of Sheriff's Sale in its
favor on July 1, 1991, and the one-year period to redeem the land.
Meanwhile, Eduarda Belo sold her right of redemption to petitioners spouses Enrique and Florencia Belo
under a deed of absolute sale of proprietary and redemption rights.
Before the expiration of the redemption period, petitioners spouses Belo tendered payment for the
redemption of the agricultural land in the amount of Four Hundred Eighty Four Thousand Four Hundred
Eighty Two Pesos and Ninety Six Centavos (P484,482.96), which includes the bid price of respondent
PNB, plus interest and expenses as provided under Act No. 3135.
However, respondent PNB rejected the tender of payment of petitioners spouses Belo. It contended that
the redemption price should be the total claim of the bank on the date of the auction sale and custody of
property plus charges accrued and interests amounting to Two Million Seven Hundred Seventy Nine
Thousand Nine Hundred Seventy Eight and Seventy Two Centavos (P2,779,978.72). 6 Petitioners spouses
disagreed and refused to pay the said total claim of respondent PNB.
On June 18, 1992, petitioners spouses Belo initiated in the Regional Trial Court of Roxas City, Civil Case
No. V-6182 which is an action for declaration of nullity of mortgage, with an alternative cause of action,
in the event that the accommodation mortgage be held to be valid, to compel respondent PNB to accept
the redemption price tendered by petitioners spouses Belo which is based on the winning bid price of
respondent PNB in the extrajudicial foreclosure in the amount of Four Hundred Forty Seven Thousand Six
Hundred Thirty Two Pesos (P447,632.00) plus interest and expenses.
In its Answer, respondent PNB raised, among others, the following defenses, to wit:
77. In all loan contracts granted and mortgage contracts executed under the 1975 Revised Charter (PD
694, as amended), the proper rate of interest to be charged during the redemption period is the rate
specified in the mortgage contract based on Sec. 25  7 of PD 694 and the mortgage contract which
incorporates by reference the provisions of the PNB Charters. Additionally, under Sec. 78 of the General
Banking Act (RA No. 337, as amended) made applicable to PNB pursuant to Sec. 38 of PD No. 694, the
rate of interest collectible during the redemption period is the rate specified in the mortgage contract.
78. Since plaintiffs failed to tender and pay the required amount for redemption of the property under
the provisions of the General Banking Act, no redemption was validly effected; 8
After trial on the merits, the trial court rendered its Decision dated April 30, 1996 granting the alternative
cause of action of spouses Belo, the decretal portion of which reads:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of plaintiffs Spouses
Enrique M. Belo and Florencia G. Belo and against defendants Philippine National Bank and Spouses
Marcos and Arsenia Eslabon:
1. Making the injunction issued by the court permanent, insofar as the property of Eduarda Belo
covered by Transfer Certificate of Title No. T-7493 is concerned;
2. Ordering defendant Philippine National Bank to allow plaintiff Enrique M. Belo to redeem only
Eduarda Belo's property situated in Brgy. Timpas, Panitan, Capiz, and covered by Transfer Certificate
of Title No. T-7493 by paying only its bid price of P447,632.00, plus interest and other charges
provided for in Section 30, Rule 39 of the Rules of Court, less the loan value, as originally appraised
by said defendant Bank, of the foreclosed four (4) residential lots of defendants Spouses Marcos and
Arsenia Eslabon; and
3. Dismissing for lack of merit the respective counterclaims of defendants Philippine National Bank
and spouses Marcos and Arsenia Eslabon.
With costs against defendants.
Dissatisfied with the foregoing judgment of the trial court, respondent PNB appealed to the Court of
Appeals. In its Decision rendered on May 21, 1998, the appellate court, while upholding the decision of
the trial court on the validity of the real estate mortgage on Eduarda Belo's property, the extrajudicial
foreclosure and the public auction sale, modified the trial court's finding on the appropriate redemption
price by ruling that the petitioners spouses Belo should pay the entire amount due to PNB under the
mortgage deed at the time of the foreclosure sale plus interest, costs and expenses.10
Petitioners spouses Belo sought reconsideration 11 of the said Decision but the same was denied by the
appellate court in its Resolution promulgated on June 29, 1998, ratiocinating, thus:
Once more, the Court shies away from declaring the nullity of the mortgage contract obligating Eduarda
Belo as co-mortgagor, considering that it has not been sufficiently established that Eduarda Belo's
assent to the special power of attorney and to the mortgage contract was tainted by any vitiating
cause. Moreover, in tendering an offer to redeem the property (Exhibit "20", p. 602 Record) after its
extrajudicial foreclosure, she has thereby admitted the validity of the mortgage, as well as the
transactions leading to its inception. Eduarda Belo, and the appellees as mere assignees of Eduarda's
right to redeem the property, are therefore estopped from questioning the efficacy of the mortgage and
its subsequent foreclosure. 12
The appellate court further declared that petitioners spouses Belo are obligated to pay the total bank's
claim representing the redemption price for the foreclosed properties, as provided by Section 25 of P.D
No. 694, holding that:
On the other hand, the court's ruling that the appellees, being the assignee of the right of repurchase of
Eduarda Belo, were bound by the redemption price as provided by Section 25 of P.D. 694, stands. The
attack on the constitutionality of Section 25 of P.D. 694 cannot be allowed, as the High Court, in
previous instances, (Dulay v. Carriaga, 123 SCRA 794 [1983]; Philippine National Bank v. Remigio, 231
SCRA 362 [1994]) has regarded the said provision of law with respect, using the same in determining
the proper redemption price in foreclosure of mortgages involving the PNB as mortgagee.
The terms of the said provision are quite clear and leave no room for qualification, as the appellees
would have us rule. The said rule, as amended, makes no specific distinction as to assignees or
transferees of the mortgagor of his redemptive right. In the absence of such distinction by the law, the
Court cannot make a distinction. As admitted assignees of Eduarda Belo's right of redemption, the
appellees succeed to the precise right of Eduarda including all conditions attendant to such right.
Moreover, the indivisible character of a contract of mortgage (Article 2089, Civil Code) will extend to
apply in the redemption stage of the mortgage.
As we have previously remarked, Section 25 of P.D. 694 is a sanctioned deviation from the rule
embodied in Rule 39, Section 30 of the Rules of Court, and is a special protection given to government
lending institutions, particularly, the Philippine National Bank. (Dulay v. Carriaga, supra)13
Hence, the instant petition.
During the oral argument, petitioners, through counsel, Atty. Enrique M. Belo, agreed to limit the
assignment of errors to the following:
II. THE COURT OF APPEALS ERRED IN NOT REVERSING THE TRIAL COURT ON THE BASIS OF THE
ASSIGNMENT OF ERRORS ALLEGED BY PETITIONERS IN THEIR BRIEF:
(1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED BY EDUARDA BELO IN FAVOR OF
RESPONDENT ESLABON WAS NULL AND VOID:
(2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY RESPONDENT MARCOS ESLABON UNDER SAID
INVALID SPECIAL POWER OF ATTORNEY IS ALSO NULL AND VOID;
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB ACTED IN BAD FAITH
AND CONNIVED WITH RESPONDENTS-DEBTORS ESLABONS TO OBTAIN THE CONSENT OF EDUARDA
BELO, PETITIONERS' PREDECESSOR, THROUGH FRAUD.
IV. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB WAS NEGLIGENT IN
THE PERFORMANCE OF ITS DUTY AS COMMERCIAL MONEY LENDER.
V. THE COURT OF APPEALS ERRED IN HOLDING THAT EDUARDA BELO, PETITIONERS' PREDECESSOR,
HAD WAIVED THE RIGHT TO QUESTION THE LEGALITY OF THE ACCOMMODATION MORTGAGE.
VI. THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURT BY HOLDING THAT ON
REDEMPTION, PETITIONERS SHOULD PAY THE ENTIRE CLAIM OF PNB AGAINST RESPONDENTS-
DEBTORS ESLABONS.
VII. THE COURT OF APPEALS ERRED IN NOT ORDERING THAT SHOULD PETITIONERS DECIDE TO PAY
THE ENTIRE CLAIM OF RESPONDENT PNB AGAINST THE RESPONDENTS-DEBTORS ESLABONS,
PETITIONERS SHALL SUCCEED TO ALL THE RIGHTS OF RESPONDENT PNB WITH THE RIGHT TO
REIMBURSEMENT BY RESPONDENTS-DEBTORS ESLABONS.
VIII. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT SHOULD PETITIONERS DECIDE NOT TO
EXERCISE THEIR RIGHT OF REDEMPTION, PETITIONERS SHALL BE ENTITLED TO THE VALUE OF THEIR
IMPROVEMENTS MADE IN GOOD FAITH AND FOR THE REAL ESTATE TAX DUE PRIOR TO THE
FORECLOSURE SALE.14
Petitioners challenge the appreciation of the facts of the appellate court, pointing out the following facts which the appellate
court allegedly failed to fully interpret and appreciate:
1. That respondent PNB in its Answer admitted that Eduarda Belo was merely an accommodation mortgagor and that she
has no personal liability to respondent PNB.
2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh. "D") used to bind Eduarda Belo as accommodation
mortgagor authorized the agent Eslabons to borrow and mortgage her agricultural land for her (Eduarda Belo) use and
benefit. Instead, said PNB SPA Form No. 74 was used by debtors Eslabons and PNB to bind Eduarda Belo as
accommodation mortgagor for the crop loan extended by PNB to the Eslabons.
3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo in blank, without specifying the amount of the loan to
be granted by respondent PNB to the respondents-debtors Eslabons upon assurance by the PNB manager that the SPA
was merely a formality and that the bank will not lend beyond the value of the four (4) [Roxas City] residential lots
located in Roxas City mortgaged by respondents-debtors Eslabons (see Exhibit "D"; Eduarda Belo's deposition, Exhibit
"V", pp. 7 to 24).
4. That PNB did not advise Eduarda Belo of the amount of the loan granted to the Eslabons, did not make demands upon
her for payment, did not advise her of Eslabons' default. The pre-auction sale notice intended for Eduarda Belo was
addressed and delivered to the address of the debtors Eslabons residence at Baybay Roxas City, not to the Belo Family
House which is the residence of Eduarda Belo located in the heart of Roxas City. The trial court stated in its Decision that
the PNB witness Miss Ignacio "admitted that through oversight, no demand letters were sent to Eduarda Belo, the
accommodation mortgagor" (see p. 7, RTC Decision).
5. As an agreed fact stated in the Pre-Trial Order of the Regional Trial Court, the loan which was unpaid at the time of
the extrajudicial foreclosure sale was only P789,897.00.
6. That herein petitioners Spouses Belo in making the tender to redeem Eduarda Belo's agricultural land expressly
reserved the right to question the legality of the accommodation mortgage in the event that said tender to redeem was
rejected by PNB (Exh. "I").15
Petitioners present basically two (2) issues before this Court. First, whether or not the Special Power of
Attorney (SPA for brevity), the real estate mortgage contract, the foreclosure proceedings and the
subsequent auction sale involving Eduarda Belo's property are valid. Second, assuming they are valid,
whether or not the petitioners are required to pay, as redemption price, the entire claim of respondent
PNB in the amount of P2,779,978.72 as of the date of the public auction sale on June 10, 1991.
On the first issue, the petitioners contend that the SPA is void for the reason that the amount for which
the spouses Eslabon are authorized to borrow from respondent bank was unlimited; and that, while the
SPA states that the amount loaned is for the benefit of Eduarda Belo, it was in fact used for the benefit of
the respondents spouses Eslabon. For the said reasons petitioners contend that the mortgage contract
lacks valid consent, object and consideration; that it violates a concept in the law of agency which
provides that the contract entered into by the agent must always be for the benefit of the principal; and,
that it does not express the true intent of the parties.
The subject SPA, the real estate mortgage contract, the foreclosure proceedings and the subsequent
auction sale of Eduarda Belo's property are valid and legal.
First, the validity of the SPA and the mortgage contract cannot anymore be assailed due to petitioners'
failure to appeal the same after the trial court rendered its decision affirming their validity. After the trial
court rendered its decision granting petitioners their alternative cause of action, i.e., that they can
redeem the subject property on the basis of the winning bid price of respondent PNB, petitioners did not
anymore bother to appeal that decision on their first cause of action. If they felt aggrieved by the trial
court's decision upholding the validity of the said two (2) documents, then they should have also partially
appealed therefrom but they did not. It is an abuse of legal remedies for petitioners to belatedly pursue a
claim that was settled with finality due to their own shortcoming. As held in  Caliguia v. National Labor
Relations Commission,16 where a party did not appeal from the Labor Arbiter's decision denying claims for
actual, moral and exemplary damages and instead moved for immediate execution, the decision then
became final as to him and by asking for its execution, he was estopped from relitigating his claims for
damages.
Second, well-entrenched is the rule that the findings of trial courts which are factual in nature, especially
when affirmed by the Court of Appeals, deserve to be respected and affirmed by the Supreme Court,
provided it is supported by substantial evidence.  17  The finding of facts of the trial court to the effect that
Eduarda Belo was not induced by the manager of respondent PNB but instead that she freely consented
to the execution of the SPA is given the highest respect as it was affirmed by the appellate court . In the
case at bar, the burden of proof was on the petitioners to prove or show that there was alleged
inducement and misrepresentation by the manager of respondent PNB and the spouses Eslabon. Their
allegation that Eduarda Belo only agreed to sign the SPA after she was assured that the spouses Eslabon
would not borrow more than the value of their own four (4) residential lots in Roxas City was properly
objected to by respondent PNB. 18 Also their contention that Eduarda Belo signed the SPA in blank was
properly objected to by respondent PNB on the ground that the best evidence was the SPA. There is also
no proof to sustain petitioners' allegation that respondent PNB acted in bad faith and connived with the
debtors, respondents spouses Eslabon, to obtain Eduarda Belo's consent to the mortgage through fraud.
Eduarda Belo very well knew that the respondents spouses Eslabon would use her property as additional
mortgage collateral for loans inasmuch as the mortgage contract states that "the consideration of this
mortgage is hereby initially fixed at P229,000.00."19 The mortgage contract sufficiently apprises Eduarda
Belo that the respondents spouses Eslabon can apply for more loans with her property as continuing
additional security. If she found the said provision questionable, she should have complained
immediately. Instead, almost ten (10) years had passed before she and the petitioners sought the
annulment of the said contracts.
Third, after having gone through the records, this Court finds that the courts  a quo did not err in holding
that the SPA executed by Eduarda Belo in favor of the respondents spouses Eslabon and the Real Estate
Mortgage executed by the respondents spouses in favor of respondent PNB are valid. It is stipulated in
paragraph three (3) of the SPA that Eduarda Belo appointed the Eslabon spouses "to make, sign, execute
and deliver any contract of mortgage or any other documents of whatever nature or kind . . . which may
be necessary or proper in connection with the loan herein mentioned, or with any loan which my
attorney-in-fact may contract personally in his own name . . . 20 This portion of the SPA is quite relevant to
the case at bar. This was the main reason why the SPA was executed in the first place inasmuch as
Eduarda Belo consented to have her land mortgaged for the benefit of the respondents spouses Eslabon.
The SPA was not meant to make her a co-obligor to the principal contract of loan between respondent
PNB, as lender, and the spouses Eslabon, as borrowers. The accommodation real estate mortgage over
her property, which was executed in favor of respondent PNB by the respondents spouses Eslabon, in
their capacity as her attorneys-in-fact by virtue of her SPA, is merely an accessory contract.
Eduarda Belo consented to be an accommodation mortgagor in the sense that she signed the SPA to
authorize respondents spouses Eslabons to execute a mortgage on her land. Petitioners themselves even
acknowledged that the relation created by the SPA and the mortgage contract was merely that of
mortgagor-mortgagee relationship. The SPA form of the PNB was utilized to authorize the spouses
Eslabon to mortgage Eduarda Belo's land as additional collateral of the Eslabon spouses' loan from
respondent PNB. Thus, the petitioners' contention that the SPA is void is untenable. Besides, Eduarda
Belo benefited, in signing the SPA, in the sense that she was able to collect the rentals on her leased
property from the Eslabons.21
An accommodation mortgage is not necessarily void simply because the accommodation mortgagor did
not benefit from the same. The validity of an accommodation mortgage is allowed under Article 2085 of
the New Civil Code which provides that "(t)hird persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their own property." An accommodation mortgagor,
ordinarily, is not himself a recipient of the loan, otherwise that would be contrary to his designation as
such. It is not always necessary that the accommodation mortgagor be appraised beforehand of the
entire amount of the loan nor should it first be determined before the execution of the SPA for it has been
held that:
"(real) mortgages given to secure future advancements are valid and legal contracts; that the amounts
named as consideration in said contract do not limit the amount for which the mortgage may stand as
security if from the four corners of the instrument the intent to secure future and other indebtedness
can be gathered. A mortgage given to secure advancements is a continuing security and is not
discharged by repayment of the amount named in the mortgage, until the full amount of the
advancements are paid."22
Fourth, the courts a quo correctly held that the letter of Eduarda Belo addressed to respondent PNB
manifesting her intent to redeem the property is a waiver of her right to question the validity of the SPA
and the mortgage contract as well as the foreclosure and the sale of her subject property. Petitioners
claim that her letter was not an offer to redeem as it was merely a declaration of her intention to redeem.
Respondent PNB's answer to her letter would have carried certain legal effects. Had respondent PNB
accepted her letter-offer, it would have surely bound the bank into accepting the redemption price offered
by Eduarda Belo. If it was her opinion that her SPA and the mortgage contract were null and void, she
would not have manifested her intent to redeem but instead questioned their validity before a court of
justice. Her offer was a recognition on her part that the said contracts are valid and produced legal
effects. Inasmuch as Eduarda Belo is estopped from questioning the validity of the contracts, her
assignees who are the petitioners in the instant case, are likewise estopped from disputing the validity of
her SPA, the accommodation real estate mortgage contract, the foreclosure proceedings, the auction sale
and the Sheriff's Certificate of Sale.
The second issue pertains to the applicable law on redemption to the case at bar. Respondent PNB
maintains that Section 25 of Presidential Decree No. 694 should apply, thus:
SECTION 25. Right of redemption of foreclosed property — Right of possession during redemption
period. — Within one year from the registration of the foreclosure sale of real estate, the mortgagor
shall have the right to redeem the property by paying all claims of the Bank against him on the date of
the sale including all the costs and other expenses incurred by reason of the foreclosure sale and
custody of the property as well as charges and accrued interests. 23
Additionally, respondent bank seeks the application to the case at bar of Section 78 of the General
Banking Act, as amended by P.D. No. 1828, which states that —
. . . In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate
which is security for any loan granted before the passage of this Act or under the provisions of this Act,
the mortgagor or debtor whose real property has been sold at public auction, judicially or
extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution,
within the purview of this Act shall have the right, within one year after the sale of the real estate as a
result of the foreclosure of the respective mortgage, to redeem the property by paying the amount
fixed by the court in the order of execution, or the amount due under the mortgage deed, as the case
may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and
other expenses incurred by the bank or institution concerned by reason of the execution and sale and
as a result of the custody of said property less the income received from the property.24
On the other hand, petitioners assert that only the amount of the winning bidder's purchase together with
the interest thereon and on all other related expenses should be paid as redemption price in accordance
with Section 6 of Act No. 3135 which provides that:
SECTION 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore
referred to, the debtor, his successor in interest or any judicial creditor or judgment creditor of said
debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under
which the property is sold, may redeem the same at any time within the term of one year from and
after the date of the sale; and such redemption shall be governed by the provisions of sections four
hundred and sixty-four to four hundred and sixty six, inclusive, of the Code of Civil Procedure 25 , in so
far as these are not inconsistent with the provisions of this Act.
Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states that:
SECTION 28. Time and manner of, and amounts payable on, successive redemptions; notice to be
given and filed. — The judgment obligor, or redemptioner, may redeem the property from the
purchaser, at any time within one (1) year from the date of the registration of the certificate of sale, by
paying the purchaser the amount of his purchase, within one per centum per month interest thereon in
addition, up to the time of redemption, together with the amount of any assessments or taxes which
the purchaser may have paid thereon after purchase, and interest on such last named amount at the
same rate; and if the purchaser be also a creditor having a prior lien to that of the redemptioner, other
than the judgment under which such purchase was made, the amount of such other lien, with interest.
(Italic supplied)
This Court finds the petitioners' position on that issue to be meritorious.
There is no doubt that Eduarda Belo, assignor of the petitioners, is an accommodation mortgagor. The
Pre-trial Order and respondent PNB's brief contain a declaration of this fact. The dispute between the
parties is whether Section 25 of P.D. No. 694 applies to an accommodation mortgagor, or her assignees.
The said legal provision does not make a distinction between a debtor-mortgagor and an accommodation
mortgagor as it uses the broad term "mortgagor". The appellate court thus ruled that the provision
applies even to an accommodation mortgagor inasmuch as the law does not make any distinction. We
disagree. Where a word used in a statute has both a restricted and a general meaning, the general must
prevail over the restricted unless the nature of the subject matter or the context in which it is employed
clearly indicates that the limited sense is intended.26 It is presumed that the legislature intended
exceptions to its language which would avoid absurd consequences of this character. 27 In the case at bar,
the qualification to the general rule applies. The same provision of Section 25 of P.D. No. 694 provides
that "the mortgagor shall have the right to redeem the property by paying  all claims of the Bank against
him". From said provision can be deduced that the mortgagor referred to by that law is one from whom
the bank has a claim in the form of outstanding or unpaid loan; he is also called a borrower or debtor-
mortgagor. On the other hand, respondent PNB has no claim against accommodation mortgagor Eduarda
Belo inasmuch as she only mortgaged her property to accommodate the Eslabon spouses who are the
loan borrowers of the PNB. The principal contract is the contract of loan between the Eslabon spouses, as
borrowers/debtors, and the PNB as lender. The accommodation real estate mortgage (which secures the
loan) is only an accessory contract. It is our view and we hold that the term "mortgagor" in Section 25 of
P.D. No. 694 pertains only to a debtor-mortgagor and not to an accommodation mortgagor.
It is well settled that courts are not to give a statute a meaning that would lead to absurdities. If the
words of a statute are susceptible of more than one meaning, the absurdity of the result of one
construction is a strong argument against its adoption, and in favor of such sensible interpretation. 28 We
test a law by its result. A law should not be interpreted so as not to cause an injustice. There are laws
which are generally valid but may seem arbitrary when applied in a particular case because of its peculiar
circumstances. We are not bound to apply them in slavish obedience to their language.29
The interpretation accorded by respondent PNB to Section 25 of P.D. No. 694 is unfair and unjust to
accommodation mortgagors and their assignees. Forcing an accommodation mortgagor like Eduarda Belo
to pay for what the principal debtors (Eslabon spouses) owe to respondent bank is to punish her for the
accommodation and generosity she accorded to the Eslabon spouses who were then hard pressed for
additional collateral needed to secure their bank loan. Respondents PNB and spouses Eslabons very well
knew that she merely consented to be a mere accommodation mortgagor.
The circumstances of the case at bar also provide for ample reason why petitioners cannot be made to
pay the entire liability of the principal debtors, Eslabon spouses, to respondent PNB.
The trial court found that respondent PNB's application for extrajudicial foreclosure and public auction sale
of Eduarda Belo's mortgaged property30 was filed under Act No. 3135, as amended by P.D. No. 385. The
notice of extrajudicial sale, the Certificate of Sheriff's Sale, and the letter it sent to Eduarda Belo did not
mention P. D. No. 694 as the basis for redemption. As aptly ruled by the trial court —
In fairness to these mortgagors, their successors-in-interest, or innocent purchasers for value of their
redemption rights, PNB should have at least advised them that redemption would be governed by its
Revised Charter or PD 69, and not by Act 3135 and the Rules of Court, as commonly practiced . . . This
practice of defendant Bank is manifestly unfair and unjust to these redemptioners who are caught by
surprise and usually taken aback by the enormous claims of the Bank not shown in the Notice of
Extrajudicial Sale or the Certificate of Sheriff's Sale as in this case. 31
Moreover, the mortgage contract explicitly provides that ". . . the mortgagee may immediately foreclose
this mortgage judicially in accordance with the Rules of Court or extrajudicially in accordance with Act No.
3135, as amended and Presidential Decree No. 385 . . . 32 Since the mortgage contract in this case is in
the nature of a contract of adhesion as it was prepared solely by respondent, it has to be interpreted in
favor of petitioners. The respondent bank however tries to renege on this contractual commitment by
seeking refuge in the 1989 case of Sy v. Court of Appeals33 wherein this Court ruled that the redemption
price is equal to the total amount of indebtedness to the bank's claim inasmuch as Section 78 of the
General Banking Act is an amendment to Section 6 of Act No. 3135, despite the fact that the extrajudicial
foreclosure procedure followed by the PNB was explicitly under or in accordance with Act No. 3135.
In the 1996 case of China Banking Corporation v. Court of Appeals,34 where the parties also stipulated
that Act No. 3135 is the controlling law in case of foreclosure, this Court ruled that;
By invoking the said Act, there is no doubt that it must "govern the manner in which the sale
and redemption shall be effected." Clearly, the fundamental principle that contracts are respected as
the law between the contracting parties finds application in the present case, specially where they are
not contrary to law, morals, good customs and public policy.35
More importantly, the ruling pronounced in Sy v. Court of Appeals and other cases, 36 that the General
Banking Act and P.D. No. 694 shall prevail over Act No. 3135 with respect to the redemption price, does
not apply here inasmuch as in the said cases the redemptioners were the debtors themselves or their
assignees, and not an accommodation mortgagor or the latter's assignees such as in the case at bar. In
the said cases, the debtor-mortgagors were required to pay as redemption price their entire liability to
the bank inasmuch as they were obligated to pay their loan which is a principal obligation in the first
place. On the other hand, accommodation mortgagors as such are not in anyway liable for the payment
of the loan or principal obligation of the debtor/borrower The liability of the accommodation mortgagors
extends only up to the loan value of their mortgaged property and not to the entire loan itself. Hence, it is
only just that they be allowed to redeem their mortgaged property by paying only the winning bid price
thereof (plus interest thereon) at the public auction sale.
One wonders why respondent PNB invokes Act No. 3135 in its contracts without qualification and yet in
the end appears to disregard the same when it finds its provisions unfavorable to it. This is unfair to the
other contracting party who in good faith believes that respondent PNB would comply with the contractual
agreement.
It is therefore our view and we hold that Section 78 of the General Banking Act, as amended by P.D. No.
1828, is inapplicable to accommodation mortgagors in the redemption of their mortgaged properties.
While the petitioners, as assignees of Eduarda Belo, are not required to pay the entire claim of
respondent PNB against the principal debtors, spouses Eslabon, they can only exercise their right of
redemption with respect to the parcel of land belonging to Eduarda Belo, the accommodation mortgagor.
Thus, they have to pay the bid price less the corresponding loan value of the foreclosed four (4)
residential lots of the spouses Eslabon.
The respondent PNB contends that to allow petitioners to redeem only the property belonging to their
assignor, Eduarda Belo, would violate the principle of indivisibility of mortgage contracts. We disagree.
Article 2089 of the Civil Code of the Philippines, provides that:
A pledge or mortgage is indivisible, even though the debt may be divided among the successors in
interest of the debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things given in mortgage or
pledge, each one of them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is specially answerable is satisfied.
There is no dispute that the mortgage on the four (4) parcels of land by the Eslabon spouses and the
other mortgage on the property of Eduarda Belo both secure the loan obligation of respondents spouses
Eslabon to respondent PNB. However, we are not persuaded by the contention of the respondent PNB that
the indivisibility concept applies to the right of redemption of an accommodation mortgagor and her
assignees. The jurisprudence in Philippine National Bank v. Agudelo 37 is enlightening to the case at bar, to
wit:
However, Paz Agudelo y Gonzaga (the principal) . . . gave her consent to the lien on lot No. 878 . . . .
This acknowledgment, however, does not extend to lots Nos. 207 and 61 . . . inasmuch as,  although it
is true that a mortgage is indivisible as to the contracting parties and as to their successors in interest
 (Article 1860, Civil code), it is not so with respect to a third person who did not take part in the
constitution thereof either personally or through an agent x x x. Therefore, the only liability of the
defendant-appellant Paz Agudelo y Gonzaga is that which arises from the aforesaid acknowledgment
but only with respect to the lien and not to the principal obligation secured by the mortgage
acknowledged by her to have been constituted on said lot No. 878 . . . . Such liability is not direct but a
subsidiary one.38
Wherefore, it is hereby held that the liability contracted by the aforesaid defendant-appellant Paz
Agudelo y Gonzaga is merely subsidiary to that of Mauro A. Garrucho (the agent), limited to lot No. 87.
From the wording of the law, indivisibility arises only when there is a debt, that is, there is a debtor-
creditor relationship. But, this relationship is wanting in the case at bar in the sense that petitioners are
assignees of an accommodation mortgagor and not of a debtor-mortgagor. Hence, it is fair and logical to
allow the petitioners to redeem only the property belonging to their assignor, Eduarda Belo.
With respect to the four (4) parcels of residential land belonging to the Eslabon spouses, petitioners —
being total strangers to said lots — lack legal personality to redeem the same. Fair play and justice
demand that the respondent PNB's interest of recovering its entire bank claim should not be at the
expense of petitioners, as assignees of Eduarda Belo, who is not indebted to it. Besides, the letter 39 sent
by respondent PNB to Eduarda Belo states that "your (Belo) mortgaged property/ies with PNB covered by
TCT # T-7493 was/were sold at public auction . . . .". It further states that "You (Belo) have, therefore,
one year from July 1, 1991 within which to redeem your mortgaged property/ies, should you desire to
redeem it." Respondent PNB never mentioned that she was bound to redeem the entire mortgaged
properties including the four (4) residential properties of the spouses Eslabon. The letter was explicit in
mentioning Eduarda Belo's property only. From the said statement, there is then an admission on the
part of respondent PNB that redemption only extends to the subject property of Eduarda Belo for the
reason that the notice of the sale limited the redemption to said property.
WHEREFORE, the petition is partially granted in that the petitioners are hereby allowed to redeem only
the property, covered and described in Transfer Certificate of Title No. T-7493-Capiz registered in the
name of Eduarda Belo, by paying only the bid price less the corresponding loan value of the foreclosed
four (4) residential lots of the respondents spouses Marcos and Arsenia Eslabon, consistent with the
Decision of the Regional Trial Court of Roxas City in Civil Case No. V-6182.
UNITED OVERSEAS BANK OF THE PHILIPPINES, INC., Petitioner, v. THE BOARD OF
COMMISSIONERS-HLURB, J.O.S. MANAGING BUILDERS, INC., AND EDUPLAN PHILS., INC.,
Respondents.
Respondent J.O.S. Managing Builders, Inc. (JOS Managing Builders) is the registered owner and
developer of the condominium project Aurora Milestone Tower. On December 16, 1997, JOS Managing
Builders and respondent EDUPLAN Philippines, Inc. (EDUPLAN) entered into a Contract to Sell covering
Condominium Unit E, 10th Floor of the Aurora Milestone Tower with an area of 149.72 square meters,
more or less. In August 1998, EDUPLAN effected full payment, and in December 1998, JOS Managing
Builders and EDUPLAN executed a Deed of Absolute Sale over the condominium unit. Notwithstanding the
execution of the deed of sale in favor of EDUPLAN, JOS Managing Builders failed to cause the issuance of
a Condominium Certificate of Title over the condominium unit in the name of EDUPLAN. EDUPLAN learned
that the lots on which the condominium building project Aurora Milestone Tower was erected had been
mortgaged by JOS Managing Builders to petitioner United Overseas Bank of the Philippines (United
Overseas Bank) without the prior written approval of the Housing and Land Use Regulatory Board
(HLURB). Due to the inability of JOS Managing Builders to deliver the condominium certificate of title
covering the unit purchased by EDUPLAN, the latter filed a complaint for specific performance and
damages against JOS Managing Builders and United Overseas Bank before the HLURB praying that: (a)
the mortgage between JOS Managing Builders and United Overseas Bank be declared null and void; (b)
JOS Managing Builders and United Overseas Bank be compelled to cause the issuance and release of the
Condominium Certificate of Title; and (c) JOS Managing Builders be ordered to provide emergency power
facilities, to refund the monthly telephone carrier charges, and to permanently cease and desist from
further collecting such charges.
In its defense, JOS Managing Builders alleged that it could not issue an individual Condominium
Certificate of Title in favor of EDUPLAN, because petitioner United Overseas Bank has custody of the
Transfer Certificates of Title covering the condominium building.
United Overseas Bank, on the other hand, alleged that JOS Managing Builders is the owner of several
parcels of land covered by Transfer Certificate of Title (TCT) Nos. N-146444, N-146445 and N-143601. On
April 3, 1997, JOS Managing Builders executed in favor of United Overseas Bank a Real Estate Mortgage3
over the said parcels of land and the improvements existing or to be erected thereon to secure the Two
Hundred Million Peso (PhP200,000,000.00)4 loan it acquired from the bank. The subject condominium
building project Aurora Milestone Tower, which is situated in the said parcels of land, are part of the
properties mortgaged to United Overseas Bank. JOS Managing Builders defaulted in the payment of its
loan obligations to United Overseas Bank. Hence, United Overseas Bank foreclosed the mortgage
constituted over properties of JOS Managing Builders and the subject properties were sold by public
auction on March 22, 1999 wherein United Overseas Bank was declared as the highest bidder.
Subsequently, a certificate of sale was issued in favor of United Overseas Bank corresponding to the
foreclosed properties, which was registered with the Register of Deeds of Quezon City on April 27, 1999.
On August 15, 2001, the HLURB Arbiter ruled,5 in favor of EDUPLAN and declared the mortgage executed
between JOS Managing Builders and United Overseas Bank as well as the foreclosure proceedings null
and void, pointing out that the mortgage was executed without the approval of the HLURB as required
under Section 18 of Presidential Decree (P.D.) No. 957.6 The Arbiter held that that since EDUPLAN has
paid the full purchase price of the condominium unit, JOS Managing Builders and United Overseas Bank
should cause the release from encumbrance of the mother titles to the condominium building project, and
issue the corresponding condominium certificate of title in favor of EDUPLAN. Further, JOS Managing
Builders should provide EDUPLAN with emergency power facilities and refund it with the monthly
telephone carrier charges it has been collecting since September 1999, and permanently cease and desist
from further imposing and collecting such fees. Moreover, JOS Managing Builders was directed to pay
EDUPLAN damages, attorney's fees and costs of suit. The dispositive portion of the decision reads:
Wherefore, the foregoing premises considered and as prayed for, judgment is hereby rendered in favor of the
Complainant and against the Respondents as follows:
1. Declaring the mortgage executed by Respondent J.O.S. Managing Builders in favor of Respondent United Overseas
Bank (Westmont) as null and void, including the foreclosure of the mortgage, for being in violation of Section 18 of
P.D. 957;
2. Ordering Respondents to cause the release from the encumbrances of the "mother titles" to the Condominium
Building Project and, issuance of the individual Condominium Certificate of Title of Complainant to its Condominium
Unit, free from any and all liens and encumbrances;
3. Ordering Respondent J.O.S. Managing Builders to provide the Complainant with emergency power facilities, strictly
as represented in its sales brochures;
4. Ordering Respondent J.O.S. Managing Builders to refund to Complainant the monthly telephone carrier charges it
has been collecting since September 1, 1999 and permanently cease and desist from further imposing and collecting
said charges;
5. Ordering Respondent J.O.S. to pay the complainant P100,000.00 by way of temperate damages, P50,000.00 by
way of exemplary damages, P40,000.00 as and by way of Attorney's Fees; and the costs of suit.
6. Ordering Respondent J.O.S. Managing Builders to pay Respondent United Overseas Bank (Westmont) the loan
release value of the subject condominium unit.
United Overseas Bank then filed a petition for review with the HLURB. On August 20, 2004, the HLURB Board of
Commissioners affirmed the Arbiter's decision, but deleted the award of emergency power facilities and refund of the
monthly telephone carrier charges. Hence, United Overseas Bank filed a petition for review under Rule 43 before the
CA.7redarclaw
On February 27, 2006, the CA dismissed the petition.8 A motion for reconsideration was filed, but it was denied for lack of
merit.9 The CA held that United Overseas Bank did not exhaust the administrative remedies available to it due to its failure
to appeal the decision of the HLURB Board of Commissioners to the Office of the President before going to the CA.
Hence, the petition assigning the lone error: THE COURT OF APPEALS ERRED IN REFUSING TO APPLY THE
EXCEPTION TO THE DOCTRINE OF EXHAUSTION OF ADMINISTRATIVE REMEDIES.10
Petitioner United Overseas Bank argues that the CA erred when it dismissed the petition due to its failure
to exhaust administrative remedies. It alleges that the question on whether the HLURB is correct in
declaring null and void the entire mortgage constituted by JOS Managing Builders in favor of United
Overseas Bank, as well as the foreclosure of the entire mortgage, is a legal question which is an
exception to the rule on exhaustion of administrative remedies.
The petition is meritorious.
The doctrine of exhaustion of administrative remedies is a cornerstone of our judicial system. The thrust
of the rule is that courts must allow administrative agencies to carry out their functions and discharge
their responsibilities within the specialized areas of their respective competence.11 It has been held,
however, that the doctrine of exhaustion of administrative remedies and the doctrine of primary
jurisdiction are not iron-clad rules. In the case of Republic v. Lacap,12 the Court enumerated the
numerous exceptions to these rules, namely: (a) where there is estoppel on the part of the party invoking
the doctrine; (b) where the challenged administrative act is patently illegal, amounting to lack of
jurisdiction; (c) where there is unreasonable delay or official inaction that will irretrievably prejudice the
complainant; (d) where the amount involved is relatively so small as to make the rule impractical and
oppressive; (e) where the question involved is purely legal and will ultimately have to be decided by the
courts of justice; (f) where judicial intervention is urgent; (g) where the application of the doctrine may
cause great and irreparable damage; (h) where the controverted acts violate due process; (i) where the
issue of non-exhaustion of administrative remedies has been rendered moot; (j) where there is no other
plain, speedy and adequate remedy; (k) where strong public interest is involved; and (1) in quo warranto
proceedings.13redarclaw
The situation in paragraph (e) of the foregoing enumeration obtains in this case.
The issue on whether non-compliance with the clearance requirement with the HLURB would result to the
nullification of the entire mortgage contract or only a part of it is purely legal which will have to be
decided ultimately by a regular court of law. It does not involve an examination of the probative value of
the evidence presented by the parties. There is a question of law when the doubt or difference arises as
to what the law is on a certain state of facts, and not as to the truth or the falsehood of alleged facts.
Said question at best could be resolved only tentatively by the administrative authorities. The final
decision on the matter rests not with them but with the courts of justice. Exhaustion of administrative
remedies does not apply, because nothing of an administrative nature is to be or can be done. The issue
does not require technical knowledge and experience, but one that would involve the interpretation and
application of law.14 There is, thus, no need to exhaust administrative remedies, under the premises.
The Court will now proceed to the legal issue on hand.
Petitioner United Overseas Bank alleges that the HLURB erred in declaring null and void the entire
mortgage constituted by JOS Managing Builders in its favor, as EDUPLAN does not claim ownership over
all the properties mortgaged by JOS Managing Builders in favor of United Overseas Bank, but only over a
single condominium unit, i.e., Unit E, 10th Floor of the Aurora Milestone Tower.
We agree with petitioner.
The HLURB erred in declaring null and void the entire mortgage executed between JOS Managing Builders
and United Overseas Bank.
At the onset, it is worthy to note that jurisprudence have varying conclusions of the issue at hand. In Far
East Bank & Trust Co. v Marquez,15 the Court sustained the HLURB when it declared the mortgage
entered into between the subdivision developer and the bank as unenforceable against the lot buyer for
failure of the developer to obtain the prior written approval of the HLURB. However, we were categorical
that the HLURB acted beyond bounds when it nullified the mortgage covering the entire parcel of land, of
which the lot subject of the buyer's complaint is merely a part of.
In Far East Bank, the Court held that:
Acts executed against the provisions of mandatory or prohibitory laws shall be void. Hence, the
mortgage over the lot is null and void insofar as private respondent is concerned.
The remedy granted by the HLURB and sustained by the Office of the President is proper only insofar as
it refers to the lot of respondent. In short, the mortgage contract is void as against him. Since there is
no law stating the specifics of what should be done under the circumstances, that which is in accord
with equity, should be ordered. The remedy granted by the HLURB in the first and the second
paragraphs of the dispositive portion of its Decision insofar as it referred to respondent's lot is in accord
with equity.
The HLURB, however, went overboard in its disposition in paragraphs 3 and 4, which pertained not only
to the lot but to the entire parcel of land mortgaged. Such ruling was improper. The subject of this
litigation is limited only to the lot that respondent is buying, not to the entire parcel of land. He has no
personality or standing to bring suit on the whole property, as he has actionable interest over the
subject lot only. (Citations omitted and underscoring ours)16
In Metropolitan Bank and Trust Co., Inc. v. SLGT Holdings, Inc.,17 however, the Court nullified the entire
mortgage contract executed between the subdivision developer and the bank albeit the fact that only two
units or lot buyer/s filed a case for declaration of nullity of mortgage. In the said case, the entire
mortgage contract was nullified on the basis of the principle of indivisibility of mortgage as provided in
Article 208918 of the New Civil Code.
This notwithstanding, in the fairly recent case of Philippine National Bank v. Lim,19 the Court reverted to
our previous ruling in Far East Bank that a unit buyer has no standing to seek for the complete
nullification of the entire mortgage, because he has an actionable interest only over the unit he has
bought. Hence, in the said case, the mortgage was nullified only insofar as it affected the unit buyer.
We find the recent view espoused in Philippine National Bank to be in accord with law and equity. While a
mortgage may be nullified if it was in violation of Section 18 of P.D. No. 957, such nullification applies
only to the interest of the complaining buyer. It cannot extend to the entire mortgage. A buyer of a
particular unit or lot has no standing to ask for the nullification of the entire mortgage.
Since EDUPLAN has an actionable interest only over Unit E, 10th Floor, Aurora Milestone Tower, it is but
logical to conclude that it has no standing to seek for the complete nullification of the subject mortgage
and the HLURB was incorrect when it voided the whole mortgage between JOS Managing Builders and
United Overseas Bank.
Considering that EDUPLAN had already paid the full purchase price of the subject unit, the latter is
entitled to the transfer of ownership of the subject property in its favor. This right is provided for in
Section 25 of P.D. No. 957, 50 wit:
Issuance of Title. The owner or development shall deliver the title of the lot or unit to the buyer upon
full payment of the lot or unit, x x x.
Verily, JOS Managing Builders has the obligation to cause the delivery of the Title to the subject
condominium unit in favor of EDUPALN.
Nevertheless, despite the fact that the mortgage constituted between JOS Managing Builders and United
Overseas Bank cannot bind EDUPLAN, because of the non-observance of the provision of P.D. No. 957 by
JOS managing Builders, the mortgage between the former and United Overseas Bank is still valid.
In the present case, it is undisputed that JOS Managing Builders mortgaged several parcels of land,
including all the buildings and improvements therein covered by TCT Nos. N-146444, N-146445 and N-
143601 to United Overseas Bank without prior clearance from the HLURB. The said omission clearly
violates Section 18 of P.D. No. 957 (The Subdivision and condominium Buyers' Protective Decree), which
provides as follows:
Section 18. Mortgages. - No mortgage on any unit or lot shall be made by the owner or developer
without prior written approval of the [HLURB]. xxx (Word in bracket added)
It should be noted, however, that the failure of JOS Managing Builders to secure prior approval of the
mortgage from the HLURB and United Overseas Bank's failure to inquire on the status of the property
offered for mortgage placed the condominium developer and the creditor Bank in pari delicto.20 Hence,
they cannot ask the courts for relief for such parties should be left where they are found for being equally
at fault.
More importantly, it should be understood that the prior approval requirement is intended to protect
buyers of condominium units from fraudulent manipulations perpetrated by unscrupulous condominium
sellers and operators, such as their failure to deliver titles to the buyer or titles free from lien and
encumbrances.21 This is pursuant to the intent of P.D. No. 957 to protect hapless buyers from the unjust
practices of unscrupulous developers which may constitute mortgages over condominium projects sans
the knowledge of the former and the consent of the HLURB.
Thus, failure to secure the HLURB'S prior written approval as required by P.D. No. 957 will not annul the
entire mortgage between the condominium developer and the creditor bank, otherwise the protection
intended for condominium buyers will inadvertently be extended to the condominium developer even
though, by failing to secure the government's prior approval, it is the party at fault.
To rule otherwise would certainly affect the stability of large-scale mortgages, which is prevalent in the
real estate industry. To be sure, mortgagee banks would be indubitably placed at risk if condominium
developers are empowered to unilaterally invalidate mortgage contracts based on their mere failure to
secure prior written approval of the mortgage by the HLURB, which could be easily caused by
inadvertence or by deliberate intent.
From all the foregoing, the HLURB erred when it declared the entire mortgage constituted by JOS
Managing Builders, Inc. in favor of United Overseas Bank null and void based solely on the complaint of
EDUPLAN which was only claiming ownership over a single condominium unit of Aurora Milestone Tower.
Accordingly, the mortgage executed between JOS Managing Builders and United Overseas Bank is valid.
WHEREFORE, the petition is GRANTED. The Decision and Resolution of the Court of Appeals, dated February 27, 2006 and
March 5, 2008, respectively, in CA-G.R. SP No. 86401, are REVERSED and SET ASIDE. The Decision of the HLURB, dated
August 20, 2004, is AFFIRMED with MODIFICATION. The mortgage executed and the succeeding foreclosure proceedings
between respondent J.O.S. Managing Builders, Inc. and petitioner United Overseas Bank of the Philippines, Inc., with
respect to respondent EDUPLAN Philippines, Inc.'s unit E., 10TH Floor, Aurora Milestone Tower, is declared null and void.
G.R. No. L-23663             October 17, 1925
JOSEFA LAPLANA, as administratrix of the estate of Ana Maria Alcantara, plaintiff-appellant,
vs.
MARIANO GARCHITORENA CHEREAU and ANDREE GARCHITORENA CHEREAU, defendants-
appellants.
This action was instituted on December 27, 1921, in the Court of First Instance of Camarines Sur by
Josefa Laplana, as administratrix of the estate of Ana Maria Alcantara, against Mariano Garchitorena
Chereau and Andree Garchitorena Chereau, for the purpose of compelling them to execute a mortgage on
certain real property and to recover the indebtedness secured by said mortgage. In connection with this
complaint the plaintiff asked for an order for the preventive annotation of her right to be secured by said
mortgage, in the registry of titles, for the purpose of securing the benefit of lis pendens, contingent upon
the outcome of the litigation. This order was granted. Upon hearing the cause the trial judge ignored the
prayer for the creation of a formal mortgage but gave judgment for the plaintiff to recover the amount
sued for, consisting of the sum of P24,902.86, with interest from July 2, 1921, and an additional sum of
P2,000 to cover expenses of litigation and attorneys' fees. From this judgment the plaintiff appealed in
respect to the action of the court in refusing to require the defendants to execute the mortgage, and the
defendants appealed in respect to the order requiring them to pay to the plaintiff the amounts stated.
Omitting a long series of historical antecedents not necessary to the determination of the case, the facts
are briefly these: On July 2, 1921, the defendant Mariano Garchitorena, acting under competent power of
attorney from his sister, Andree Garchitorena, executed a public document in the City of Manila, on behalf
both of himself and his said sister, admitting that the two were indebted to the plaintiff, Josefa Laplana as
administratrix of Ana Maria Alcantara in the amount of P24,902.86 as of the date of June 30, immediately
preceding. In the same document the said Mariano Garchitorena obligated himself and sister to pay said
sum within one year from July 1, of the same year with interest at the rate of one per centum per month,
payable within the first fifteen days of each month beginning with the succeeding August.
In the same document it was declared that the obligors in this contract, Mariano and Andree
Garchitorena, were the owners of a large estate, known as the Hacienda Salvacion, located in the barrio
of Hignaroy, municipality of Tigaon, Ambos Camarines, for the registration of which proceedings were
then pending in the Court of First Instance of said province; and it was agreed that as soon as they
should obtain a Torrens title to the said hacienda a second mortgage upon the same would be executed
by Mariano Garchitorena, acting in his own behalf and as attorney in fact of his sister, to secure said debt.
Finally, it was declared that the mortgage to be executed should respond not only for capital and interest
of said debt but furthermore for the sum of P2,000 agreed upon for costs and expenses, including the
attorney's fees of the creditor in case of litigation.
It appears that in the official survey made for the purposes of the registration proceedings the Hacienda
Salvacion was divided into three parcels, consisting, respectively, of about 452.81, 176, and 103.52
hectares all of which were subject to a first mortgage in favor of the Philippine National Bank for the sum
of P15,000. Of these three parcels the lot No. 2 was the first to be registered, and when the certificate of
title issued, the defendant, Mariano Garchitorena, instead of constituting a second mortgage thereon in
favor of the estate of Ana Maria Alcantara, mortgaged the lot on November 28, 1921, to one Bartolome
M. Martin, to secure a loan for the sum of P11,000, received on that date by said Garchitorena. Three
days thereafter the plaintiff instituted the present action for the purpose, as already stated, of compelling
the defendants to execute a mortgage and to recover the amount claimed in the complaint. It will be
noted that the action was brought before the date of the maturity of the debt as fixed in the contract, but
the plaintiff insists that the act of Mariano Garchitorena in mortgaging lot No. 2 to a stranger constitutes
a diminution of the value of the security which he had contracted to give to the plaintiff and, under No. 3
of article 1129 of the Civil Code, confers on the creditor the right to treat the whole debt as due. The trial
court considered this contention to be well founded, a conclusion in which we agree. The contention of the
defendants that the action was prematurely brought is therefore not well founded.
By the terms of the contract of July 2, 1921, it was explicitly agreed that a mortgage should be created in
favor of the plaintiff upon the Hacienda Salvacion as soon as a Torrens title should be secured, and the
defendants were obligated to execute a mortgage in favor of the plaintiff immediately upon obtaining a
title to any part thereof, in preference to any creditor other than the Philippine National Bank which had a
first mortgage for P15,000 on the estate. It is pretended by the defendants that the intention was that
the mortgage should be created when a Torrens title should be obtained to the whole hacienda, and that
the obligation to execute a mortgage did not arise when a certificate of title had been obtained to one lot
only of the three constituting the hacienda. We consider this suggestion an untenable evasion of the spirit
of the agreement, and it is obvious that the creation of a second mortgage in favor of Martin was in For the reasons states the decision which is the subject of appeal will be affirmed in so far as it requires
violation of the stipulation to execute a second mortgage on the property to the plaintiff. the defendants jointly and severally to pay to the present plaintiff, Carmen Garchitorena Alcantara, the
sum of P24,902.86, with yearly interest at twelve per centum from July 2, 1921 until paid plus the further
sum of P2,000 as costs, expenses and attorney's fees, and said decision will be modified by adding
As already stated, while giving judgment for the debt, the trial court at first failed to make any
thereto a pronouncement that the aforesaid indebtedness constitutes a lien upon the Hacienda
pronouncement with reference to the right of the plaintiff to have said mortgage executed. In the motion
Salvacion consisting of the three lots described in the complaint, and a duly certified copy of the
dated September 13, 1924, the attorney for the plaintiff asked the court to make a proper provision in
dispositive part of this decision will be certified to the register of deeds of Camarines Sur, in order that
the judgment for the execution by the defendants of the second mortgage in favor of the plaintiff on the
the existence of this lien may be noted in the proper certificates of title, to which end the defendants are
hacienda. In reply to this motion the trial judge made its order of December 24, 1924, in which said
enjoined to produce before said register the owner's duplicates. No express pronouncement will be made
motion was denied on the ground that the two causes of action, namely, to enforce the execution of the
as to costs.
mortgage; and to recover judgment for the indebtedness, were mutually inconsistent and that both
species of relief could not properly be granted. We are of the opinion that this ruling was erroneous. It is
true that a promise to constitute a mortgage gives rise only to a personal obligation between the
contracting parties (art. 1862, Civ. Code) and creates no real right in the property, but the agreement to
constitute the mortgage is lawful and such stipulation can be enforced by the creditor, being in no wise
inconsistent with the right to recover the indebtedness. But a court of equity never requires an
unnecessary thing and in this case all of the rights if the creditor will be adequately protected by declaring
that the indebtedness recognized by Mariano Garchitorena in the document of July 2, 1921, constitutes a
lien in the nature of a mortgage upon the Hacienda Salvacion, it appearing that the registration of the
whole has been effected. It is a maxim of jurisprudence that "equity regards that as done which ought to
be done," and in obedience to this precept, as between the parties to this record, the property must be
considered to be subject to the same lien as if the mortgage which had been agreed to be made had been
actually executed. (1 Pom., Eq. Jur., secs. 363-377.) It is our opinion, therefore that there is merit in the
plaintiff's appeal, though the remedy to be conceded is not precisely the compelling of the defendants to
execute the mortgage a declaration of the existence of the lien being sufficient.

We note the in the brief of the defendants, as appellees, it is insisted the plaintiff's appeal was not
perfected in time, with the result that this court has no jurisdiction to entertain the appeal. This
contention is not well founded. In this connection we note that the original judgment was rendered by the
trial court on August 27, 1924, and notice of this decision was served on the attorney for the appellant on
September 5, 1924. On September 13 said attorney presented his motion, asking the court to amplify the
judgment and in particular to pass upon the rights of the plaintiff to compel the defendants to execute a
mortgage in favor of the plaintiff. The court kept this motion under consideration until December 24,
1924, when the motion was overruled. The submission of this petition to the court had the effect of
suspending the running of the time for the taking of the necessary steps for appeal; and if this period be
deducted, it will be found that all of the steps looking towards the perfection of the appeal were taken
within due time and in the manner necessary to give this court jurisdiction over the cause. The contention
of the defendant-appellees that the appeal of the plaintiff should not be entertained is therefore ill-
founded. 1awph!l.net

In the third fourth and fifth errors assigned in the brief of the defendants, as appellants, an effort is made
to demonstrates that the true amount of the defendants indebtedness to the plaintiff is not more than
P8,000, with interest at twelve per centum per annum from October 20, 1920, and that the document of
July 2, 1921 admitting indebtedness to the extent of P24,902.86 was obtained from Mariano Garchitorena G. R. No. 147074 July 15, 2005
by fraud and deceit. We have examined the considerations in support of this contention and find the same
to have been so completely refuted in the able opinion of the trial court that we find it unnecessary to Spouses RODRIGO PADERES and SONIA PADERES , Petitioners,
comment further, adopting the conclusion of the appealed decision upon this point. vs.
The Hon. COURT OF APPEALS,1 Hon. CARLOTA P. VALENZUELA, in her capacity as the Liquidator
We note that during the pendency of this litigation Carmen Garchitorena Alcantara was declared, in the of Banco Filipino Savings and Mortgage Bank, 2 Respondents.
proceedings over the estate of her mother, Ana Maria Alcantara, to be the latter's heir and entitled to
succeed to the right of action in this case, for which reason the said Carmen Garchitorena Alcantara was On September 14, 1982, Manila International Construction Corporation (MICC) executed a real estate
substituted as party plaintiff by order of the court of August 2, 1922, since which date the litigation has mortgage4 over 21 registered parcels of land including the improvements thereon in favor of Banco
proceeded in her own name and right. Filipino Savings and Mortgage Bank (Banco Filipino) in order to secure a loan of ₱1,885,000.00. The
mortgage was registered with the Registry of Deeds of Pasay City and annotated on the corresponding
transfer certificates of title (TCTs) covering the properties on December 17, 1982.5
The 21 mortgaged properties included two lots, one with an area of 264 square meters, and the other
with an area of 263, both located in the then Municipality of Parañaque (now Parañaque City) covered by
TCT Nos. 610626 and 61078,7 respectively.
Subsequently or in August 1983, MICC sold the lot 8 covered by TCT No. 61078, together with the
house 9 thereon, to the petitioners in the first case, the Paderes spouses. And on January 9, 1984, MICC
sold the house 10 built on the lot covered by TCT No. 61062 to the petitioners in the second case, the
Bergado spouses. Neither sale was registered, however. 11
On January 25, 1985, for failure of MICC to settle its obligations, Banco Filipino filed a verified
Petition12 for the extrajudicial foreclosure of MICC’s mortgage. At the auction sale of the foreclosed
properties on March 25, 1985, Banco Filipino submitted a bid of ₱3,092,547.82 and was declared the
highest bidder. A Certificate of Sale 13 was issued in its favor which was registered with the Registry of
Deeds and annotated on the corresponding TCTs covering the mortgaged properties on July 29, 1985.
No redemption of the foreclosed mortgage having been made within the reglementary period, Carlota P.
Valenzuela, the then Liquidator of Banco Filipino, filed on October 16, 1987 an ex parte Petition14 for the
issuance of a Writ of Possession of the foreclosed properties with the Regional Trial Court (RTC) of Makati.
After hearing, the Petition was granted by Order dated September 8, 1988 15 of Branch 59 of the RTC.
On November 7, 1996, copies of the Writ of Possession dated November 5, 1996, together with a notice
addressed to MICC "and/or All persons claiming rights under them" to voluntarily vacate the premises
within 7 days from receipt thereof, were served on petitioners. 16
Instead of vacating the two lots, however, petitioners filed separate petitions before the Court of Appeals,
docketed as C.A. G.R. Numbers 42470 and 42471 which were later consolidated, 17 assailing the validity of
the Writ of Possession.
On September 20, 2000, the Court of Appeals promulgated its questioned Decision 18 dismissing the
consolidated petitions for lack of merit and upholding the validity of the Writ of Possession.
Petitioners’ Motion for Reconsideration of the appellate court’s decision having been denied by Resolution
of February 16, 2001, they jointly come before this Court arguing that: (1) having purchased their
respective properties in good faith from MICC, they are third parties whose right thereto are superior to
that of Banco Filipino; (2) they are still entitled to redeem the properties and in fact a binding agreement
between them and the bank had been reached; (3) their respective houses should not have been included
in the auction sale of the mortgaged properties; (4) on the contrary, as builders in good faith, they are
entitled to the benefits of Article 448 of the Civil Code; and (5) the writ of possession issued by the RTC
in 1996 had already lost its validity and efficacy.
The petition must be denied.
In extra-judicial foreclosures of real estate mortgages, the issuance of a writ of possession, which is an
order commanding the sheriff to place a person in possession of the foreclosed property, 19 is governed by
Section 7 of Act No. 3135 (an act to regulate the sale of property under special powers inserted in or
annexed to real estate mortgages), as amended:
Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First
Instance of the province or place where the property or any part thereof is situated, to give him
possession thereof during the redemption period, furnishing bond in an amount equivalent to the use of
the property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was
made without violating the mortgage or without complying with the requirements of this Act. Such
petition shall be made under oath and filed in form of an ex parte motion in the registration or cadastral
proceedings if the property is registered, or in special proceedings in the case of property registered
under the Mortgage Law or under section one hundred and ninety-four of the Administrative Code, or of
any other real property encumbered with a mortgage duly registered in the office of any register of deeds
in accordance with any existing law, and in each case the clerk of the court shall, upon the filing of such
petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act
Numbered Four hundred and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-
six, and the court shall, upon approval of the bond, order that a writ of possession issue, addressed to
the sheriff of the province in which the property is situated, who shall execute said order immediately.
That petitioners purchased their properties from MICC in good faith is of no moment. The purchases took
place after MICC’s mortgage to Banco Filipino had been registered in accordance with Article 2125 20 of the
Civil Code and the provisions of P.D. 1529 (property registry decree). 21 As such, under Articles 131222 and
212623 of the Civil Code, a real right or lien in favor of Banco Filipino had already been established,
subsisting over the properties until the discharge of the principal obligation, whoever the possessor(s) of
the land might be.
In rejecting a similar argument, this Court, in Philippine National Bank v. Mallorca,24 ratiocinated:
1. Appellant’s stand is that her undivided interest consisting of 20,000 square meters of the mortgaged
lot, remained unaffected by the foreclosure and subsequent sale to PNB, and she "neither secured nor
contracted a loan" with said bank. What PNB foreclosed, she maintains, "was that portion belonging to
Ruperta Lavilles only," not the part belonging to her.
Appellant’s position clashes with precepts well-entrenched in law. By Article 2126 of the Civil Code, a
"mortgage directly and immediately subjects the property on which it is imposed, whoever the possessor
may be, to the fulfillment of the obligation for whose security it was constituted." Sale or transfer
cannot affect or release the mortgage. A purchaser is necessarily bound to acknowledge and
respect the encumbrance to which is subjected the purchased thing and which is at the
disposal of the creditor "in order that he, under the terms of the contract, may recover the
amount of his credit therefrom." For, a recorded real estate mortgage is a right  in rem, a lien
on the property whoever its owner may be. Because the personality of the owner is
disregarded; the mortgage subsists notwithstanding changes of ownership; the last transferee
is just as much of a debtor as the first one; and this, independent of whether the transferee
knows or not the person of the mortgagee. So it is, that a mortgage lien is  inseperable from
the property mortgaged. All subsequent purchasers thereof must respect the mortgage,
whether the transfer to them be with or without the consent of the mortgagee. For, the
mortgage, until discharge, follows the property.25 (Emphasis and underscoring supplied; italics in
the original; citations omitted)
And in Roxas v. Buan26 this Court held:
Contending that petitioner Roxas is a party actually holding the property adversely to the debtor,
Arcadio Valentin, petitioners argue that under the provisions of Act No. 3135 they cannot be ordered to
vacate the property. Hence, the question of whether, under the circumstances, petitioner Roxas indeed
is a party actually holding the property adversely to Valentin.
It will be recalled that Roxas' possession of the property was premised on its alleged sale to
him by Valentin for the amount of ₱100,000.00. Assuming this to be true, it is readily apparent
that Roxas holds title to and possesses the property as Valentin's transferee. Any right he has
to the property is necessarily derived from that of Valentin. As transferee, he steps into the
latter's shoes. Thus, in the instant case, considering that the property had already been sold at public
auction pursuant to an extrajudicial foreclosure, the only interest that may be transferred by Valentin to
Roxas is the right to redeem it within the period prescribed by law. Roxas is therefore the successor-
in-interest of Valentin, to whom the latter had conveyed his interest in the property for the
purpose of redemption [Rule 39, Sec. 29 (a) of the Revised Rules of Court; Magno v. Viola, 61 Phil. 80
(1934); Rosete v. Prov. Sheriff of Zambales, 95 Phil. 560 (1954).] Consequently, Roxas' occupancy of
the property cannot be considered adverse to Valentin.
Thus, in Belleza v. Zandaga [98 Phil. 702 (1956)], the Court held that where the purchaser in an
execution sale has already received the definitive deed of sale, he becomes the owner of the property
bought and, as absolute owner, he is entitled to its possession and cannot be excluded therefrom by one
who merely claims to be a "successor-in-interest of the judgment debtor," unless it is adjudged that the
alleged successor has a better right to the property than the purchaser at the execution sale. Stated
differently, the purchaser's right of possession is recognized only as against the judgment
debtor and his successor-in-interest but not against persons whose right of possession is
adverse to the latter. The rule was reiterated in Guevara v. Ramos [G.R. No. L-24358, March 31, 1971,
38 SCRA 194].
The rule in Belleza, although relating to the possession of property sold in execution sales under what is
now Sec. 35, Rule 39 of the Revised Rules of Court, is also applicable to the possession of property sold
at extrajudicial foreclosure sales pursuant to Sec. 6 of Act No. 3135 [see IFC Service Leasing and
Acceptance Corp. v. Nera, supra]. Thus, as petitioner Roxas is not a party holding the property
adversely to Valentin, being the latter's successor-in-interest, there was no bar to the
respondent trial court's issuance of a writ of possession upon private respondent Buan's
application.
It does not matter that petitioner Roxas was not specifically named in the writ of possession, as he
merely stepped into the shoes of Valentin, being the latter's successor-in-interest. On the other hand,
petitioner de Guia was occupying the house as Roxas' alleged tenant [Rollo, p. 24]. Moreover, respondent
court's decision granting private respondent Buan's petition for the issuance of a writ of possession
ordered the Provincial Sheriff of Zambales or any of his deputies to remove Valentin "or any person
claiming interest under him" from the property [Rollo, p. 16]. Undeniably, petitioners fell under this
category.
As transferees of mortgagor MICC, petitioners merely stepped into its shoes and are necessarily bound to
acknowledge and respect the mortgage it had earlier executed in favor of Banco Filipino.
As for petitioners’ argument that they are still entitled to redeem the foreclosed properties, it must be
rejected too.
The debtor in extra-judicial foreclosures under Act No. 3135, or his successor-in-interest, has, one year
from the date of registration of the Certificate of Sale with the Registry of Deeds, a right to redeem the
foreclosed mortgage,28 hence, petitioners, as MICC’s successors-in-interest, had one year from the
registration of the Certificate of Sale on July 29, 1985 or until July 29, 1986 for the purpose.
Petitioners, however, failed to do so. Ownership of the subject properties was thus consolidated in favor
of Banco Filipino, 29 and TCT Nos. 112352 (in lieu of TCT No. 61078) and 112353 (in lieu of TCT No.
61062) were issued in its name.
As this Court held in F. David Enterprises v. Insular Bank of Asia and America:30
It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property
purchased if it is not redeemed during the period of one year after the registration of the
sale. As such, he is entitled to the possession of the said property and can demand it at any
time following the consolidation of ownership in his name and the issuance to him of a new
transfer certificate of title. The buyer can in fact demand possession of the land even during the
redemption period except that he has to post a bond in accordance with Section 7 of Act No. 3135 as
amended. No such bond is required after the redemption period if the property is not
redeemed. Possession of the land then becomes an absolute right of the purchaser as
confirmed owner. Upon proper application and proof of title, the issuance of the writ of
possession becomes a ministerial duty of the court.31 (Emphasis supplied)
Petitioners assert, however, that a binding agreement for the repurchase of the subject properties was
reached with Banco Filipino as, so they claim, reflected in the following exchange of communications:
October 17, 1996
Mrs. Luz B. Dacasin
Asst. Vice-President
Real Estate Dept.
Banco Filipino Savings and Mortgage Bank
101 Paseo De Roxas cro. [sic] Dela Rosa Sts.
Makati City
Dear Madam:
I am writing to you, on behalf of spouses Sonia and Rodrigo Paderes re: TCT No. 61078 formerly owned by Manila
International Construction Corporation (MICC for short) now TCT No. 112352, registered in the name of Banco Filipino
Savings and Mortgage Bank in July 30, 1996 at the Register of Deeds of Parañaque, Metro Manila. Incidentally, the
property is denominated as Block 48, Lot 5 located at Leon Florentino St., BF Executive , Parañaque, Metro Manila.
The background facts of TCT No. 61078 are as follows:
In August 1983, the MICC executed a Deed of Absolute Sale of that lot covered by TCT No. 61078 in
favor of spouses Sonia and Rodrigo Paderes which was acknowledged before a Notary Public on
October 1, 1983. The value of the lot was ₱115,720.00. In the same year, the parties executed an
addendum to the said deed of absolute sale which covered a house valued at ₱242,874.45. The net
package price of the house and lot was fixed at ₱329,405.75. From this amount, the spouses Sonia
and Rodrigo Paderes paid MICC inclusive of equity the amount of ₱125,437.35 leaving a balance of
₱212,985.60. The spouses moved in the house in November 1983.
Unknown to the spouses, MICC mortgaged TCT No. 61078 in favor of Banco Filipino Savings and
Mortgage Bank for ₱1,885.00 duly inscribed in TCT No. 112352 on December 12, 1982. It was
foreclosed by the bank for ₱3,092,547.82 pursuant to the certificate of sale executed by the sheriff as
inscribed on TCT No. 112352 [should be TCT No. 61078] on July 29, 1985 . . .
Then came the news that Banco Filipino Savings and Mortgage Bank was under conservatorship by
the Board of Liquidators. On the other hand, MICC became bankrupt and closed shop. The spouses
were [sic] nowhere to go to then at the time to get the title of the property they purchased from
MICC.
Until, the spouses received a letter dated April 6, 1987 from the Board of Liquidators via Alberto
Reyes, Deputy Liquidator, informing the spouses that the property they purchased from MICC was
already foreclosed by the bank. The spouses answered the letter and disclaimed any knowledge of the
foreclosure. In their answer to the said letter, they emphasized that their unpaid balance with MICC
was ₱188,985.60.
We are addressing your goodself [sic] to inform the bank that the spouses Sonia and Rodrigo
Paderes are exercising their right of redemption as subrogees of the defunct MICC under
special laws.
 From reliable information, the bank had already made appraisal of the property and from Asst. Vice-President
that end, may we be informed [at] the soonest possible time the value of the property to Real Estate Department
Banco Filipino Savings & Mortgage Bank
enable the spouses to prepare for such eventuality. And, upon receipt of the said appraisal
Makati City
value we shall immediately inform you [of] our position on the matter. Re: Lot 18, Block 48 Gamboa St.
BF Homes, Parañaque, MM (264 SQ.M.)
Thank you very much. Occupied by Sps. Isabelo Bergado &
Very truly yours, Juana Herminia Bergado
[SGD.] Lot 5, Block 48, L. Florentino St.
LUCIANO D. VALENCIA BF Homes, Parañaque, MM (263 SQ.M.)
Counsel for Spouses Paderes Occupied by Sps. Rodrigo Paderes &
JPA Subdivision, City of Muntinlupa 32 Sonia Paderes
Dear Madam Asst. Vice-President:
Pursuant to our conference this morning November 8, 1996, regarding our desire to redeem the properties above-
October 25, 1996 captioned, which your good office accommodated, and per your advi[c]e, we submit the following facts taken out and our
proposals:
1. Regarding the lot, you mentioned that, the cost per square meter was ₱7,500.00. To this price we are
Mr. Luciano D. Valencia no-committal for the said price is high. Although, we are still to have the amount re-negotiated.
2. We appreciate very much your having excluded the house built in the said lot for purposes of fixing the redemption
price.
Counsel for Sps. Paderes 3. Your advi[c]e to subject the properties (house and lot) to a real-estate mortgage with the bank so that
the amount to be loaned will be used as payment of the properties to be redeemed is accepted, and we are
committed to it.
JPA Subdivision, Muntinlupa Thank you very much
Very truly yours,
[SGD.]
Dear Sir:
SPS. SONIA &
This is with regard to your letter dated October 17, 1996 concerning the property formerly owned by Manila
RODRIGO PADERES
International Construction Corporation (MICC) foreclosed by the Bank.
[SGD.]
Please inform Sps. Rodrigo and Sonia Paderes to come to the bank to discuss said foreclosed property
SPS. ISABELO &
directly with the bank.
JUANA HERMINIA BERGADO35
Thank you.
Very truly yours,
[SGD.] Petitioners’ assertion does not pass muster.
LUZ B. DACASIN
Assistant Vice-President
Real Estate Department33 Under Article 1318 of the Civil Code, there are three essential requisites which must concur in order to
give rise to a binding contract: (1) consent of the contracting parties; (2) object certain which is the
November 4, 1996 subject matter of the contract; and (3) cause of the obligation which is established. "Consent" is further
Mrs. Luz B. Dacasin defined in Article 1319 of the Code as follows:
Asst. Vice-President
Real Estate Dept., Banco Filipino
Makati City Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing
Dear Madam: and the cause which are to constitute the contract. The offer must be certain and the
Thank you very much for your letter dated October 25, 1996, which was received on October 31, 1996, the contents of acceptance absolute. A qualified acceptance constitutes a counter-offer.
which had been duly noted. Pursuant thereto I advised my clients – spouses Rodrigo and Sonia Paderes to see [you].
With your indulgence, I also advised my other clients – spouses Isabelo and Juana Herminia Bergado to go along with
the spouses Paderes, who are similarly situated with spouses Paderes property. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his
Incidentally, on October 28, 1996, I also wrote your goodself another letter at the behest of spouses Isabelo and Juana knowledge. The contract, in such a case, is presumed to have been entered into in the place where the
Herminia Bergado whose property is equally footed with spouses Paderes. offer was made. (Emphasis supplied)
It is hoped that, out of that conference per your invitation my clients above-named be informed formally the total
amounts due the bank as a consequence of the right of redemption extended to them. Of course, whatever appraised
value arrived at by the bank on the properties subject of redemption the same shall not be construed as my By "offer" is meant a unilateral proposition which one party makes to the other for the celebration of the
clients’ committed liability. contract. There is an "offer" in the context of Article 1319 only if the contract can come into existence by
Thank you very much.
the mere acceptance of the offeree, without any further act on the part of the offeror. Hence, the "offer"
Very truly yours,
must be definite, complete and intentional. 36
[SGD.]
LUCIANO D. VALENCIA
Counsel for Spouses Paderes
With regard to the "acceptance," a learned authority notes that:
JPA Subdivision, City of Muntinlupa 34
To produce a contract, the acceptance must not qualify the terms of the offer. There is no
acceptance sufficient to produce consent, when a condition in the offer is removed, or a pure offer is
November 8, 1996 accepted with a condition, or when a term is established, or changed, in the acceptance, or when a
Mrs. Luz B. Dacasin
 simple obligation is converted by the acceptance into an alternative one; in other words, when
something is desired which is not exactly what is proposed in the offer. It is necessary that the
acceptance be unequivocal and unconditional, and the acceptance and the proposition shall
be without any variation whatsoever; and any modification or variation from the terms of the
offer annuls the latter and frees the offeror. 37 (Emphasis supplied)
A reading of the above-quoted correspondence reveals the absence of both a definite offer and an
absolute acceptance of any definite offer by any of the parties.
The letters dated October 17, 1996 and November 4, 1996, signed by petitioners’ counsel, while
ostensibly proposing to redeem the foreclosed properties and requesting Banco Filipino to suggest a price
for their repurchase, made it clear that any proposal by the bank would be subject to further action on
the part of petitioners.
The letter dated October 25, 1996 signed by Luz Dacasin, Assistant Vice-President of Banco Filipino,
merely invited petitioners to engage in further negotiations and does not contain a recognition of
petitioners’ claimed right of redemption or a definite offer to sell the subject properties back to them.
Petitioners emphasize that in item no. 3 of their letter dated November 8, 1996 they committed to
"subject the properties (house and lot) to a real-estate mortgage with the bank so that the amount to be
loaned will be used as payment of the properties to be redeemed." It is clear from item no. 1 of the same
letter, however, that petitioners did not accept Banco Filipino’s valuation of the properties at ₱7,500.00
per square meter and intended to "have the amount [renegotiated]."
Moreover, while purporting to be a memorandum of the matters taken up in the conference between
petitioners and Banco Filipino Vice-President Dacasin, petitioners’ letter of November 8, 1996 does not
contain the concurrence of Ms. Dacasin or any other authorized agent of Banco Filipino. Where the alleged
contract document was signed by only one party and the record shows that the other party did not
execute or sign the same, there is no perfected contract. 38
The Court of Appeals, therefore, committed no error in concluding that "nothing concrete came out of the
meeting" between petitioners and Banco Filipino.
Respecting petitioners’ claim that their houses should have been excluded from the auction sale of the
mortgaged properties, it does not lie. The provision of Article 448 39 of the Civil Code, cited by petitioners,
which pertain to those who, in good faith, mistakenly build, plant or sow on the land of another, has no
application to the case at bar.
Here, the record clearly shows that petitioners purchased their respective houses from MICC, as
evidenced by the Addendum to Deed of Sale dated October 1, 1983 and the Deed of Absolute Sale dated
January 9, 1984.
Being improvements on the subject properties constructed by mortgagor MICC, there is no question that
they were also covered by MICC’s real estate mortgage following the terms of its contract with Banco
Filipino and Article 2127 of the Civil Code:
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and
the rents or income not yet received when the obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue
of expropriation for public use, with the declarations, amplifications and limitations established by law,
whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third
person. (Underscoring supplied).
The early case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.40 is illustrative. In that case, this Court held:
. . . (1) That a mortgage constituted on a sugar central includes not only the land on which it is
built but also the buildings, machinery, and accessories installed at the time the mortgage
was constituted as well as all the buildings, machinery and accessories belonging to the
mortgagor, installed after the constitution thereof (Bischoff vs. Pomar and Compañia General de
Tabacos, 12 Phil. 690); (2) that the notice announcing the sale at public auction of all the properties of
a sugar central extends to the machinery and accessories acquired and installed in its mill after the
constitution of the mortgage; (3) that the court, that has ordered the placing of the mortgaged
properties in the hands of a receiver in a foreclosure suit, has jurisdiction to order the sale at public
auction of the said mortgaged properties even before the termination of the receivership; and (4) that
the fact that the price at which the mortgaged properties were sold at public auction is inadequate, is
not in itself sufficient to justify the annulment of the sale.41 (Emphasis supplied)
Petitioners finally proffer that the issuance, on Banco Filipino’s mere motion, of the Writ of Possession on
November 5, 1996, more than 8 years since the promulgation of the RTC Order granting its petition on
September 8, 1988, violated Section 6, Rule 39 of the Rules of Court, viz:
Sec. 6. Execution by motion or by independent action. – A final and executory judgment or order may
be executed on motion within five (5) years from the date of its entry. After the lapse of such time, and
before it is barred by the statute of limitations, a judgment may be enforced by action. The revived
judgment may also be enforced by motion within five (5) years from the date of its entry and thereafter
by action before it is barred by the statute of limitations.
Hence, petitioners argue, the writ of possession had lost its validity and efficacy and should therefore be
declared null and void.
Petitioners’ ultimate argument fails too. In Rodil vs. Benedicto,42 this Court categorically held that the
right of the applicant or a subsequent purchaser to request for the issuance of a writ of possession of the
land never prescribes:
The respondents claim that the petition for the issuance of a writ of possession was filed out of time,
the said petition having been filed more than five years after the issuance of the final decree of
registration. In support of their contention, the respondents cite the case of Soroñgon vs.
Makalintal [80 Phil. 259 (1948)], wherein the following was stated:
"It is the law and well settled doctrine in this jurisdiction that a writ of possession must be issued
within the same period of time in which a judgment in ordinary civil actions may be summarily
executed (section 17, Act 496, as amended), upon the petition of the registered owner or his
successors in interest and against all parties who claim a right to or interest in the land registered
prior to the registration proceeding."
The better rule, however, is that enunciated in the case of Manlapas and Tolentino vs. Lorente [48
Phil. 298 (1925)], which has not yet been abandoned, that the right of the applicant or a
subsequent purchaser to ask for the issuance of a writ of possession of the land never
prescribes. . .
In a later case [Sta. Ana v. Menla, 111 Phil. 947 (1961)], the Court also ruled that the provision in the
Rules of Court to the effect that judgment may be enforced within five years by motion, and
after five years but within ten years by an action (Section 6, Rule 39) refers to civil actions and
is not applicable to special proceedings, such as land registration cases. The Court said:
"The second assignment of error is as follows:
 'That the lower court erred in ordering that the decision rendered in this land registration case on
November 28, 1931 or twenty six years ago, has not yet become final and unenforceable.
We fail to understand the arguments of the appellant in support of the above assignment, except in so far
as it supports his theory that after a decision in a land registration case has become final, it may not be
enforced after the lapse of a period of 10 years, except by another proceeding to enforce the judgment or
decision. Authority for this theory is the provision in the Rules of Court to the effect that judgment may
be enforced within 5 years by motion, and after five years but within 10 years, by an action (Sec. 6, Rule
39). This provision of the Rules refers to civil actions and is not applicable to special
proceedings, such as a land registration case. This is so because a party in a civil action must
immediately enforce a judgment that is secured as against the adverse party, and his failure to
act to enforce the same within a reasonable time as provided in the Rules makes the decision
unenforceable against the losing party. In special proceedings the purpose is to establish a
status, condition or fact; in land registration proceedings, the ownership by a person or a
parcel of land is sought to be established. After the ownership has been proved and confirmed
by judicial declaration, no further proceeding to enforce said ownership is necessary, except
when the adverse or losing party had been in possession of the land and the winning party
desires to oust him therefrom.43 (Emphasis and underscoring supplied)
Petitioners have not supplied any cogent reason for this Court to deviate from the foregoing ruling.
The established doctrine that the issuance of a writ of possession is a ministerial function whereby the
issuing court exercises neither discretion nor judgment bears reiterating. The writ issues as a matter of
course upon the filing of the proper motion and, if filed before the lapse of the redemption period, the
approval of the corresponding bond.44
Petitioners, however, are not without remedy. As reflected in the challenged Court of Appeals decision,
under Section 845 of Act No. 3135, as amended, petitioners, as successors-in-interest of mortgagor MICC,
have 30 days from the time Banco Filipino is given possession of the subject properties to question the
validity of the auction sale under any of the two grounds therein stated by filing a petition to set aside the
same and cancel the writ of possession.
WHEREFORE, the petition is hereby DENIED.
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
COURT OF APPEALS and THE SPOUSES ALEJANDRO and AMPARO CASAFRANCA, respondents.
The sole issue in this case is whether, in the foreclosure of a real estate mortgage, the penalties
stipulated in two promissory notes secured by the mortgage may be charged against the mortgagors as
part of the sums secured, although the mortgage contract does not mention the said penalties.
The following antecedental facts are supported by the pleadings and evidence on record: Plaintiff spouses
Alejandro and Amparo Casafranca, used to be the owners of Lot 802-B-2-B-2-F-1 of the subdivision plan
Psd-698545, located in Cebu City and covered by TCT No. 32769 (Exh A). On 3 December 1976 they sold
the lot to Carlos Po who paid part of the agreed price. The latter, after securing a title in his name (TCT
No. 66446), mortgaged the lot to the Philippine Bank of Communications (PBCom for short) to secure a
loan of P330,000 (Exh B). It appears that in a civil action that ensued between them, plaintiff spouses
obtained a favorable judgment against Carlos Po (Exh C). Later, in an auction sale to satisfy Carlos Po's
judgment obligation, plaintiff spouses acquired the aforesaid lot and a Certificate of Sale was executed in
their favor (Exh D).
Meanwhile, under date of 9 September 1980 PBCom applied for extrajudicial foreclosure of the mortgage
executed by Carlos Po (Exh E), and in the succeeding auction sale held on 4 November 1980, it acquired
the lot at its winning bid of P1,006,540.56. The corresponding Certificate of Sale was then executed in its
favor (Exh F). It appears further that sometime in 1981 plaintiff Amparo Casafranca who had stepped into
the shoes of mortgagor Carlos Po by virtue of the auction sale in her favor (Exh D) offered to redeem the
property from PBCom by tendering to its manager, Isidore Falek, a check in the amount of P500,000
which, in her estimate, would be sufficient to settle the account of Carlos Po. PBCom did not accept the
check as it insisted that any such redemption should be at the price it acquired the lot in the auction sale.
In reaction, plaintiffs filed against PBCom Civil Case No. R-21700 in the RTC of Cebu for nullification of
the foreclosure and auction sale (Exh M). In a judgment which became final and executory on 17
September 1986 (Exh H) the Court set aside the extrajudicial foreclosure and auction sale and declared
that the obligation secured by the mortgage executed by Carlos Po was only P330,000 plus stipulated
interest and charges (Exh G). Subsequently, in a letter dated 4 December 1986 PBCom advised plaintiff
spouses to pay the sum of P884,281.38 purportedly representing Carlos Po's principal account of
P330,000, interest and charges thereon, attorney's fee[s] and realty taxes which it paid for the lot (Exh
I). Plaintiffs, however, did not agree with said Statement of Account and since the account remained
unpaid, PBCom again applied for extrajudicial foreclosure of mortgage (Exh J), which culminated in an
auction sale of the lot on 2 April 1987, during which it was sold to Natalie Limchio for P1,184,000 (Exh L).
On 6 April 1988 plaintiffs commenced the present action to nullify the auction sale in favor of Natalie
Limchio. It is alleged in the complaint that the second foreclosure was void as it was based on a bloated
account. Plaintiffs further alleged that PBCom refused to turn over the correct amount of residue after
paying off the mortgage and costs of the sale. Upon plaintiffs' application, the Court issued on 7 April
1988 a TRO enjoining defendant sheriffs from transferring the title of the lot in favor of defendant Natalie
Limchio and the latter, from taking possession of the lot. This was followed by a preliminary injunctive
writ which was issued after hearing and upon plaintiffs' filing of a bond. However, before the pre-trial
conference could be held, plaintiffs signified their intention to pursue only their alternative demand for the
residue or balance of the proceeds of the auction sale less the correct outstanding account which was
secured by the mortgage. For this purpose they filed an amended complaint only against PBCom (pp.
296-305, rollo) which was admitted, in which they pray for recovery of the sum of P625,724.90 as
residue after paying off the outstanding account [to] the tune of P558,275.00, realty taxes paid by
PBCom and costs of the foreclosure proceeding. Hence, what is left for the Court to ascertain is the true
or correct account of Carlos Po as of the auction sale on 2 April 1987 after which, the determination of the
residue would follow. . . .5
As to the amounts due the parties, the trial court computed them as follows:
The mortgage contract (Exh B) explicitly provides for interest of "Twelve per cent (12%) per annum or at
such other higher rate or rates as may be fixed by the MORTGAGEE from time to time, and shall be
payable at the end of every month or otherwise, as the MORTGAGEE may elect and, if not so paid, shall
be added to, and become part of, the principal and shall earn interest at the same rate as the principal."
It is then evident that the parties agreed to capitalize the interest due and unpaid, which as added
principal, shall earn new interest. Herein lies the discrepancy in the computation respectively submitted
by plaintiffs (pp. 190-191; 204-209, rollo) and PBCom (pp. 181-183, rollo), for while the former assessed
only conventional or simple interest, the latter computed compound interest conformable to the mortgage
contract. In this connection, the Court finds PBCom's computation of interest to be in accordance with the
contractual stipulations of the parties. It may be stressed that the increase in the rate of interest from
12% to 14% as of 1 December 1979 is authorized in the mortgage contract itself as sanctioned by CB
Circular No. 705 dated 1 December 1979. PBCom is further entitled to reimbursement for realty taxes it
paid for the lot. But of course, penalties and charges are not due for want of stipulation in the mortgage
contract.
To recapitulate, the principal loan obtained by Carlos Po (now succeeded by plaintiffs) on 15 December
1976 was P330,000. Interest thereon for the first year at 12% per annum was retained or deducted from
the proceeds of the loan. For the next two (2) years or from 25 December 1977 to 30 November 1979,
compound interests earned at the same rate reached P77,660. And then from 1 December 1979 to 2 April
1987 (date of auction sale) the rate of interest was raised to 14% per annum, as authorized in the
mortgage contract. At such rate, compound interests for said period would be in the sum of P343,805.
Adding both interest earnings to the principal obligation, the total account would then be P751,465.
Additionally, the mortgage contract provides for attorney's fee[s] equivalent to 10% of the amounts due.
Hence, the sum of P75,146.50 in the concept of attorney's fee[s] would raise the account to P826,611.50.
Finally, the amount of P83,028.18 representing realty taxes paid by PBCom for the lot, inclusive of
interest, which must be reimbursed, will bring the grand total of the account to P909,639.68.
On the other hand, the publication and other expenses incurred in the foreclosure and auction sale [to]
the tune of P707 should be deducted from the amount of P1,184,000 which Natalie Limchio paid for the
lot, leaving net proceeds of P1,183,293. Subtracting therefrom the total account due to PBCom, the
residue would be P273,653.32, which must be delivered to plaintiffs. 6
In the light of the above, the trial court thus ruled:
WHEREFORE, foregoing premises considered, judgment is hereby rendered in favor of plaintiffs Alejandro and Amparo
Casafranca for the sum of P273,653.32 representing the residue or balance of the proceeds of the auction sale conducted
on 2 April 1987 after deducting therefrom publication expenses and paying off the total account due to defendant
Philippine Bank of Communications, and ordering the latter to pay unto plaintiffs the aforesaid amount.
Both parties appealed from the above judgment to the Court of Appeals. The petitioner questioned the
lower court's failure to include in its computation the penalty stipulated in the aforementioned promissory
notes. On the other hand, the private respondents advanced that: (1) the interest on the sum due to the
petitioner should have stopped running on 31 July 1981; (2) the lower court should have allowed twelve
percent (12%) interest per annum on the amount awarded to the private respondents from 3 April 1987
until the obligation was fully paid; and (3) the lower court should have awarded the private respondents
moral and exemplary damages, attorney's fees, and litigation expenses.
The Court of Appeals affirmed the decision of the trial court in toto and subsequently denied the parties'
separate motions for reconsideration.
The petitioner and the private respondents then instituted with this Court separate petitions
for certiorari  under Rule 45 of the Rules of Court. While that of the petitioner was docketed as G.R. No.
118552 (this case), that of the private respondents was docketed as G.R. No. 118809 and assigned to the
Second Division. However, the two actions were not consolidated.
The private respondents in this case filed their Comment 8 to the petition as required in the resolution of 8
February 1995.9
On 13 March 1995, the Second Division issued a resolution which dismissed G.R. No. 118809, thus:
[F]or failure to persuasively demonstrate any reversible error in the challenged judgment of the Fourth Division of the
Court of Appeals promulgated on April 29, 1994 - affirming in toto that of the Regional Trial Court of Cebu rendered by
Judge (now Court of Appeals Justice) Godardo A. Jacinto on April 20, 1992 (Civil Case No. CEB-6779) - it appearing on
the contrary, that both judgments correctly appreciated the evidence and applied the relevant legal provisions in ruling,
essentially, that there had been no valid tender of payment by petitioners of the amount of the mortgage liability
burdening the property in question, and that the computation of the amount rightly due said petitioners had been
correctly made in accordance with the law applicable to the case (Act No. 3135, as amended). Moreover, the record
discloses no important and special reason for the exercise by this Court of its discretionary power of review in this case. 10
On 9 May 1995, this Court received the private respondents' Manifestation 11 drawing our attention to this
resolution.
On 23 August 1995, we gave due course to the petition 12 and required the parties to submit their
respective memoranda, which they subsequently did. The private respondents contended that "[a]ctually
there are no more issues left for this Honorable Court to decide because all the issues in controversy in
this case has [sic] already been decided with finality by the Second Division of the Supreme Court in G.R.
No. 118809."13 To which, the petitioner replied14 that the G.R. No. 118809 resolution dispensed with only
those issues raised therein by the private respondents and did not touch on the questions raised in this
case.
The petition is not impressed with merit.
The two promissory notes in question, signed by Carlos Po, 15 are similarly worded and their pertinent
provisions read:
For value received, I/we jointly and severally, promise to pay the Philippine Bank of Communications,
at its office in the City of Cebu, Philippines the sum of THREE HUNDRED THOUSAND PESOS
(P300,000.00), Philippine Currency, together with interest thereon at the rate of TWELVE % per annum
until paid, which interest rate the Bank may at any time without notice, raise within the limits allowed
by law, and I/we also agree to pay, jointly and solidarily 12% per annum penalty charge, by way of
liquidated damages should this note be unpaid or is not renewed on due date.
Should it become necessary to collect this note through an attorney-at-law, I/we hereby expressly
agree to pay, jointly and severally, ten per cent (10%) of the total amount due on this note as
attorney's fees which in no case shall be less than P100.00 exclusive of all costs and fees allowed by
law stipulated in the contract of real estate mortgage if any there be.
while the mortgage contract provides in part:16
This mortgage is given as security for the payment to the MORTGAGEE on demand or at maturity, as
the case may be, of all promissory notes, letters of credit, trust receipts, bills of exchange, drafts,
overdrafts and all other obligations of every kind already incurred or which hereafter may be incurred
by the MORTGAGOR(S) and Po's All Electrical Supply either as principal debtor(s) or as surety(ies) or in
 any other capacity, including discounts of Chinese and other drafts, bills of exchange, promissory notes,
even without any further endorsements by the Mortgagor(s), said property or properties to stand
security for the payment of the said obligations to the fullest extent and for all that it is (or they are)
worth, to the extent of THREE HUNDRED THIRTY THOUSAND PESOS (P330,000.00) Philippine Currency.
This mortgage shall be subject to the following conditions, to wit:
FIRST: The interest on the obligations secured by this mortgage shall be computed at the rate of
Twelve per cent (12%) per annum or at such other or higher rate or rates as may be fixed by the
MORTGAGEE from time to time, and shall be payable at the end of every month or otherwise, as the
MORTGAGEE may elect and if not so paid, shall be added to, and become part of, the principal and shall
earn interest at the same rate as the principal.
EIGHT: The MORTGAGOR(S) shall, during the existence of this mortgage, promptly pay when due all
taxes or assessments of every kind that may be levied upon the property or properties hereby
mortgaged and deliver the corresponding tax receipts to the MORTGAGEE, . . . In case of failure on the
part of the MORTGAGOR(S) to comply with the provisions of this condition, the MORTGAGEE may and is
hereby authorized to pay such taxes or assessments and to have the buildings insured; and any sum or
sums so spent by the MORTGAGEE shall be fully secured hereby and be subject to the terms
hereof. . . .
ELEVENTH: The expenses incurred in the drafting, acknowledgement and the registration of this
mortgage and of its cancellation, shall be for the account of, and shall be paid by, the MORTGAGOR(S).
TWELFTH: Should the MORTGAGEE find it necessary to resort to the courts in order to collect any
amount which may be due, the interest thereon or the expenses incurred on account of the matters
enumerated in the previous paragraphs, or should the MORTGAGEE in any manner and for any reason
be involved in litigation on account of the property or properties mortgaged, or should foreclosure
proceedings be instituted in accordance with the fourth condition hereof or should the MORTGAGOR(S)
encumber the property or properties hereby mortgaged with a second mortgage without the written
consent of the MORTGAGEE, the MORTGAGEE shall be allowed a sum equivalent to Ten Per Centum
(10%) of all the amounts due, but in no case less than THIRTY THREE THOUSAND PESOS as attorney's
fees, said amount to be considered part of the principal sum hereby secured, this mortgage answering
for its payment accordingly.
We immediately discern that the mortgage contract does not at all mention the penalties stipulated in the
promissory notes. However, the petitioner insists that the penalties are covered by the following provision
of the mortgage contract:
This mortgage is given as security for the payment to the MORTGAGEE on demand or at maturity, as
the case may be, of all promissory notes, letters of credit, trust receipts, bills of exchange, drafts,
overdrafts and all other obligations of every kind already incurred or which hereafter may be incurred. .
..
The petitioner's insistence is based on the supposed rule:
[T]hat the determination of the mortgage debt would not be limited on the mortgage contract itself if
from the face thereof, it is apparent that other obligations are also intended to be secured.
To bolster its argument, the petitioner relies on the cases represented by Mojica vs. Court of
Appeals 17 which held:
It has long been settled by a long line of decisions that mortgages to secure future advancements are
valid and legal contracts; that the amounts named as consideration in said contract do not limit the
amount for which the mortgage may stand as security if from the four corners of the instrument the
intent to secure future and other indebtedness can be gathered.18
The Court is unconvinced for the cases relied upon by the petitioner are inapplicable. The doctrine first
laid down in Lim Julian vs. Lutero19 pertains only to mortgages securing future advancements. The
petitioner would not have been misled into thinking otherwise had it properly quoted Mojica in its petition.
The following explanation is helpful to distinguish future advancements from the loan in the case at
bench:
It is not uncommon that persons enter into a contract whereby they draw sums of money from their
creditors, usually banks, from time to time, and as security therefor execute a mortgage on their
property. Such contracts are sometimes executed for an account smaller or larger than that actually
borrowed. Thus, it may appear in the contract that the loan secured by the mortgage is only for
P10,000 when by reason of advancements made by the creditor to the debtor the amount ultimately
drawn and borrowed is P20,000. Under these circumstances it is inequitable to consider that the
mortgage can be foreclosed only for the amount of P10,000. Indeed, no bank or creditor would be
willing to make such advancements which are in excess of the amount stipulated if the payment thereof
is not secured. . . .20
The obligation in this case was not a series of indeterminate sums incurred over a period of time, but two
specific amounts procured in a single instance. Thus, the inapplicability of Lim Julian. Instead, what
applies here is the general rule that "an action to foreclose a mortgage must be limited to the amount
mentioned in the mortgage."21
Aside from the foregoing, other factors militate against the petitioner's stance.
The mortgage provision relied upon by the petitioner is known in American jurisprudence as a "dragnet"
clause, which is specifically phrased to subsume all debts of past or future origin. Such clauses are
"carefully scrutinized and strictly construed." 22
The mortgage contract is also one of adhesion as it was prepared solely by the petitioner and the only
participation of the other party was the affixing of his signature or "adhesion" thereto. Being a contract of
adhesion, the mortgage is to be strictly construed against the petitioner, the party which prepared the
agreement.23
A reading, not only of the earlier quoted provision, but of the entire mortgage contract yields no mention
of penalty charges.24 Construing this silence strictly against the petitioner, it can fairly be concluded that
the petitioner did not intend to include the penalties on the promissory notes in the secured amount. This
explains the finding by the trial court, as affirmed by the Court of Appeals, that "penalties and charges
are not due for want of stipulation in the mortgage contract." 25
Indeed, a mortgage must sufficiently describe the debt sought to be secured, which description must not
be such as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly
within the terms of the mortgage.26 In this case, the mortgage contract provides that it secures notes and
other evidences of indebtedness. Under the rule of ejusdem generis, 27 where a description of things of a
particular class or kind is "accompanied by words of a generic character, the generic words will usually be
limited to things of a kindred nature with those particularly enumerated. . . ." 28 A penalty charge does not
belong to the species of obligations enumerated in the mortgage, hence, the said contract cannot be
understood to secure the penalty.
There is also sufficient authority to declare that any ambiguity in a contract whose terms are susceptible
of different interpretations must be read against the party who drafted it. 29
A mortgage and a note secured by it are deemed parts of one transaction and are construed
together,30 thus, an ambiguity is created when the notes provide for the payment of a penalty but the
mortgage contract does not. Construing the ambiguity against the petitioner, it follows that no penalty
was intended to be covered by the mortgage. The mortgage contract consisted of three pages with no
less than seventeen conditions in fine print; it included provisions for interest and attorney's fees similar
to those in the promissory notes; and it even provided for the payment of taxes and insurance charges.
Plainly, the petitioner can be as specific as it wants to be, yet it simply did not specify nor even allude to,
that the penalty in the promissory notes would be secured by the mortgage. This can then only be
interpreted to mean that the petitioner had no design of including the penalty in the amount secured.
It should also be noted that the private respondents consistently excluded penalty charges in their
computation of the amount due to the petitioner, 31 while the petitioner seemed indecisive in including the
said charges.
In its Manifestation 32 of 14 May 1988 before the trial court, the petitioner computed the penalty charge as
follows:
Penalty charge on the principal amount of P330,000,00
from Dec. 25, 1977 to April 2, 1987 at the rate of 8% per
annum (P) 248,233.33
The promissory notes provided for a 12% per annum penalty, 33 not eight percent (8%). The petitioner
explained this discrepancy in its Memorandum 34 submitted to the trial court, claiming:
On the contrary, the bank's computation of the actual amount of the mortgage debt should be upheld.
In fact, the bank was lenient on the spouses in computing the amount of the debt. For instance, the
rate of charges stipulated is 12% per annum . . . Yet the bank computed the charges at a much lesser
rate . . . thereby lessening the actual amount of the mortgage debt. 35
The petitioner, however, included in its Offer of Exhibits: 36
14. EXHIBIT "14" - Promissory Note No. 3838
dated 25 October 1977.
"14-A" - Stipulation on penalty/bank charges.
PURPOSE:
. . . 3) It is stipulated that PBCom could impose penalty charges of 12% per annum; and 4) PBCom
was liberal on plaintiffs as it did not impose the full extent of the stipulated charges.
Far then from being a display of lenience or liberality, the above circumstances evince the petitioner's
uncertainty as to whether penalty charges were actually due it. In fact, in a statement of
account 37 signed by the petitioner's Senior Vice-President, Isidore Falek, there was no mention of a
penalty charge, although there was an entry stating:
Interest:
8% Bank charges P248,233.33
Furthermore, the promissory notes are clear that the penalty shall be at 12%  per annum, neither more
nor less. Thus, when the petitioner claims that under the same notes it could impose, as in fact it did, the
lower penalty of 8% - contrary to what was covenanted - the petitioner only reveals that it is wont to
stipulate what it does not mean. The private respondent then should not be faulted for the petitioner's
imperfection, and the latter must bear the consequences of its failings.
It is interesting to note that the petition in this case did not include a computation of the sum due as
penalty which is the very matter in dispute. The petitioner merely pegged its claim at "12% per annum on
the principal amount of P330,000.00 computed from 1977," 38 which was likewise a departure from the 8%
interest rate which it insisted upon during trial.
After interpreting the mortgage contract strictly against the petitioner, considering the intention of the
parties as evidenced by their various pleadings and assertions, the inescapable conclusion is that the
mortgage contract did not authorize the petitioner to include in the secured amount the penalty stipulated
in the promissory notes. The mortgage contract did not contain a trace of the said penalty and,
proceeding by the rule that "an action to foreclose a mortgage must be limited to the amount mentioned
in the mortgage," such penalty can not be recovered on the foreclosure of the mortgage.
WHEREFORE, finding no reversible error on the part of respondent Court of Appeals, its challenged
decision of 29 April 1994 in CA-G.R. CV No. 38332 is hereby AFFIRMED in toto.
G.R. No. 150197 July 28, 2005
PRUDENTIAL BANK, Petitioner,
vs.
DON A. ALVIAR and GEORGIA B. ALVIAR, Respondents.
Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a parcel of land in
San Juan, Metro Manila, covered by Transfer Certificate of Title (TCT) No. 438157 of the Register of
Deeds of Rizal. On 10 July 1975, they executed a deed of real estate mortgage in favor of petitioner
Prudential Bank to secure the payment of a loan worth ₱250,000.00.2 This mortgage was annotated at
the back of TCT No. 438157. On 4 August 1975, respondents executed the corresponding promissory
note, PN BD#75/C-252, covering the said loan, which provides that the loan matured on 4 August 1976
at an interest rate of 12% per annum with a 2% service charge, and that the note is secured by a real
estate mortgage as aforementioned.3 Significantly, the real estate mortgage contained the following
clause:
That for and in consideration of certain loans, overdraft and other credit accommodations obtained from
the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of
number, as DEBTOR, and to secure the payment of the same and those that may hereafter be obtained,
the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (₱250,000.00) Pesos,
Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR,
including interest and expenses or any other obligation owing to the Mortgagee, whether direct or
indirect, principal or secondary as appears in the accounts, books and records of the Mortgagee, the
Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or
assigns, the parcels of land which are described in the list inserted on the back of this document, and/or
appended hereto, together with all the buildings and improvements now existing or which may hereafter
be erected or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free
from all liens and incumbrances. . . .4
On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345 for ₱2,640,000.00,
secured by D/A SFDX #129, signifying that the loan was secured by a "hold-out" on the mortgagor’s
foreign currency savings account with the bank under Account No. 129, and that the mortgagor’s
passbook is to be surrendered to the bank until the amount secured by the "hold-out" is settled. 5
On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the husband and
wife were President and Chairman of the Board and Vice President, 6 respectively, PN BD#76/C-430
covering ₱545,000.000. As provided in the note, the loan is secured by "Clean-Phase out TOD CA 3923,"
which means that the temporary overdraft incurred by Donalco Trading, Inc. with petitioner is to be
converted into an ordinary loan in compliance with a Central Bank circular directing the discontinuance of
overdrafts.7
On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a
straight loan of ₱545,000.00, the proceeds of which shall be used to liquidate the outstanding loan of
₱545,000.00 TOD. The letter likewise mentioned that the securities for the loan were the deed of
assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in
favor of A.U. Valencia and Co. and the chattel mortgage on various heavy and transportation equipment. 8
On 06 March 1979, respondents paid petitioner ₱2,000,000.00, to be applied to the obligations of G.B.
Alviar Realty and Development, Inc. and for the release of the real estate mortgage for the ₱450,000.00
loan covering the two (2) lots located at Vam Buren and Madison Streets, North Greenhills, San Juan,
Metro Manila. The payment was acknowledged by petitioner who accordingly released the mortgage over
the two properties.9
On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the property
covered by TCT No. 438157. Per petitioner’s computation, respondents had the total obligation of
₱1,608,256.68, covering the three (3) promissory notes, to wit: PN BD#75/C-252 for ₱250,000.00, PN
BD#76/C-345 for ₱382,680.83, and PN BD#76/C-340 for ₱545,000.00, plus assessed past due interests
and penalty charges. The public auction sale of the mortgaged property was set on 15 January 1980. 10
Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary
injunction with the RTC of Pasig, 11 claiming that they have paid their principal loan secured by the
mortgaged property, and thus the mortgage should not be foreclosed. For its part, petitioner averred that
the payment of ₱2,000,000.00 made on 6 March 1979 was not a payment made by respondents, but by
G.B. Alviar Realty and Development Inc., which has a separate loan with the bank secured by a separate
mortgage.12
On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to proceed with the
extra-judicial foreclosure.13 Respondents sought reconsideration of the decision. 14 On 24 August 1994, the
trial court issued an Order setting aside its earlier decision and awarded attorney’s fees to
respondents.15 It found that only the ₱250,000.00 loan is secured by the mortgage on the land covered
by TCT No. 438157. On the other hand, the ₱382,680.83 loan is secured by the foreign currency deposit
account of Don A. Alviar, while the ₱545,000.00 obligation was an unsecured loan, being a mere
conversion of the temporary overdraft of Donalco Trading, Inc. in compliance with a Central Bank circular.
According to the trial court, the "blanket mortgage clause" relied upon by petitioner applies only to future
loans obtained by the mortgagors, and not by parties other than the said mortgagors, such as Donalco
Trading, Inc., for which respondents merely signed as officers thereof.
On appeal to the Court of Appeals, petitioner made the following assignment of errors:
I. The trial court erred in holding that the real estate mortgage covers only the promissory note
BD#75/C-252 for the sum of ₱250,000.00.
II. The trial court erred in holding that the promissory note BD#76/C-345 for ₱2,640,000.00
(₱382,680.83 outstanding principal balance) is not covered by the real estate mortgage by expressed
agreement.
III. The trial court erred in holding that Promissory Note BD#76/C-430 for ₱545,000.00 is not covered
by the real estate mortgage.
IV. The trial court erred in holding that the real estate mortgage is a contract of adhesion.
V. The trial court erred in holding defendant-appellant liable to pay plaintiffs-appellees attorney’s fees
for ₱20,000.00.16
The Court of Appeals affirmed the Order of the trial court but deleted the award of attorney’s fees. 17 It
ruled that while a continuing loan or credit accommodation based on only one security or mortgage is a
common practice in financial and commercial institutions, such agreement must be clear and unequivocal.
In the instant case, the parties executed different promissory notes agreeing to a particular security for
each loan. Thus, the appellate court ruled that the extrajudicial foreclosure sale of the property for the
three loans is improper.18
The Court of Appeals, however, found that respondents have not yet paid the ₱250,000.00 covered by PN
BD#75/C-252 since the payment of ₱2,000,000.00 adverted to by respondents was issued for the
obligations of G.B. Alviar Realty and Development, Inc. 19
Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors raised in the Court of
Appeals as grounds herein.
Petitioner maintains that the "blanket mortgage clause" or the "dragnet clause" in the real estate
mortgage expressly covers not only the ₱250,000.00 under PN BD#75/C-252, but also the two other
promissory notes included in the application for extrajudicial foreclosure of real estate mortgage. 20 Thus,
it claims that it acted within the terms of the mortgage contract when it filed its petition for extrajudicial
foreclosure of real estate mortgage. Petitioner relies on the cases of Lim Julian v. Lutero, 21 Tad-Y v.
Philippine National Bank,22 Quimson v. Philippine National Bank,23 C & C Commercial v. Philippine National
Bank,24 Mojica v. Court of Appeals, 25 and  China Banking Corporation v. Court of Appeals, 26 all of which
upheld the validity of mortgage contracts securing future advancements.
Anent the Court of Appeals’ conclusion that the parties did not intend to include PN BD#76/C-345 in the
real estate mortgage because the same was specifically secured by a foreign currency deposit account,
petitioner states that there is no law or rule which prohibits an obligation from being covered by more
than one security.27 Besides, respondents even continued to withdraw from the same foreign currency
account even while the promissory note was still outstanding, strengthening the belief that it was the real
estate mortgage that principally secured all of respondents’ promissory notes. 28 As for PN BD#76/C-345,
which the Court of Appeals found to be exclusively secured by the Clean-Phase out TOD 3923, petitioner
posits that such security is not exclusive, as the "dragnet clause" of the real estate mortgage covers all
the obligations of the respondents.29
Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency of stating
that the promissory notes were executed by them not in their personal capacity but as corporate officers.
It claims that PN BD#76/C-430 was in fact for home construction and personal consumption of
respondents. Thus, it states that there is a need to pierce the veil of corporate fiction. 30
Finally, petitioner alleges that the mortgage contract was executed by respondents with knowledge and
understanding of the "dragnet clause," being highly educated individuals, seasoned businesspersons, and
political personalities. 31 There was no oppressive use of superior bargaining power in the execution of the
promissory notes and the real estate mortgage. 32
For their part, respondents claim that the "dragnet clause" cannot be applied to the subsequent loans
extended to Don Alviar and Donalco Trading, Inc. since these loans are covered by separate promissory
notes that expressly provide for a different form of security. 33 They reiterate the holding of the trial court
that the "blanket mortgage clause" would apply only to loans obtained jointly by respondents, and not to
loans obtained by other parties.34 Respondents also place a premium on the finding of the lower courts
that the real estate mortgage clause is a contract of adhesion and must be strictly construed against
petitioner bank.35
The instant case thus poses the following issues pertaining to: (i) the validity of the "blanket mortgage
clause" or the "dragnet clause"; (ii) the coverage of the "blanket mortgage clause"; and consequently,
(iii) the propriety of seeking foreclosure of the mortgaged property for the non-payment of the three
loans.
At this point, it is important to note that one of the loans sought to be included in the "blanket mortgage
clause" was obtained by respondents for Donalco Trading, Inc. Indeed, PN BD#76/C-430 was executed
by respondents on behalf of Donalco Trading, Inc. and not in their personal capacity. Petitioner asks the
Court to pierce the veil of corporate fiction and hold respondents liable even for obligations they incurred
for the corporation. The mortgage contract states that the mortgage covers "as well as those that the
Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or indirect, principal or secondary." Well-settled is the
rule that a corporation has a personality separate and distinct from that of its officers and stockholders.
Officers of a corporation are not personally liable for their acts as such officers unless it is shown that
they have exceeded their authority. 36 However, the legal fiction that a corporation has a personality
separate and distinct from stockholders and members may be disregarded if it is used as a means to
perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues. 37 PN BD#76/C-430, being an obligation of
Donalco Trading, Inc., and not of the respondents, is not within the contemplation of the "blanket
mortgage clause." Moreover, petitioner is unable to show that respondents are hiding behind the
corporate structure to evade payment of their obligations. Save for the notation in the promissory note
that the loan was for house construction and personal consumption, there is no proof showing that the
loan was indeed for respondents’ personal consumption. Besides, petitioner agreed to the terms of the
promissory note. If respondents were indeed the real parties to the loan, petitioner, a big, well-
established institution of long standing that it is, should have insisted that the note be made in the name
of respondents themselves, and not to Donalco Trading Inc., and that they sign the note in their personal
capacity and not as officers of the corporation.
Now on the main issues.
A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one which is
specifically phrased to subsume all debts of past or future origins. Such clauses are "carefully scrutinized
and strictly construed."38 Mortgages of this character enable the parties to provide continuous dealings,
the nature or extent of which may not be known or anticipated at the time, and they avoid the expense
and inconvenience of executing a new security on each new transaction. 39 A "dragnet clause" operates as
a convenience and accommodation to the borrowers as it makes available additional funds without their
having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of
extra legal services, recording fees, et cetera.40 Indeed, it has been settled in a long line of decisions that
mortgages given to secure future advancements are valid and legal contracts, 41 and the amounts named
as consideration in said contracts do not limit the amount for which the mortgage may stand as security if
from the four corners of the instrument the intent to secure future and other indebtedness can be
gathered.42
The "blanket mortgage clause" in the instant case states:
That for and in consideration of certain loans, overdraft and other credit accommodations obtained from
the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of
number, as DEBTOR, and to secure the payment of the same and those that may hereafter be
obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (₱250,000.00)
Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor
and/or DEBTOR, including interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books
and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage
unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list
inserted on the back of this document, and/or appended hereto, together with all the buildings and
improvements now existing or which may hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .
43
 (Emphasis supplied.)
Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real estate
mortgage to secure not only the ₱250,000.00 loan from the petitioner, but also future credit facilities and
advancements that may be obtained by the respondents. The terms of the above provision being clear
and unambiguous, there is neither need nor excuse to construe it otherwise.
The cases cited by petitioner, while affirming the validity of "dragnet clauses" or "blanket mortgage
clauses," are of a different factual milieu from the instant case. There, the subsequent loans were not
covered by any security other than that for the mortgage deeds which uniformly contained the "dragnet
clause."
In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus:
PN BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on his foreign currency savings
account, while PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was secured by
"Clean-Phase out TOD CA 3923" and eventually by a deed of assignment on two promissory notes
executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co., and by
a chattel mortgage on various heavy and transportation equipment. The matter of PN BD#76/C-430 has
already been discussed. Thus, the critical issue is whether the "blanket mortgage" clause applies even to
subsequent advancements for which other securities were intended, or particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged on this question. One school
advocates that a "dragnet clause" so worded as to be broad enough to cover all other debts in addition to
the one specifically secured will be construed to cover a different debt, although such other debt is
secured by another mortgage.44 The contrary thinking maintains that a mortgage with such a clause will
not secure a note that expresses on its face that it is otherwise secured as to its entirety, at least to
anything other than a deficiency after exhausting the security specified therein, 45 such deficiency being an
indebtedness within the meaning of the mortgage, in the absence of a special contract excluding it from
the arrangement.46
The latter school represents the better position. The parties having conformed to the "blanket mortgage
clause" or "dragnet clause," it is reasonable to conclude that they also agreed to an implied
understanding that subsequent loans need not be secured by other securities, as the subsequent loans
will be secured by the first mortgage. In other words, the sufficiency of the first security is a corollary
component of the "dragnet clause." But of course, there is no prohibition, as in the mortgage contract in
issue, against contractually requiring other securities for the subsequent loans. Thus, when the mortgagor
takes another loan for which another security was given it could not be inferred that such loan was made
in reliance solely on the original security with the "dragnet clause," but rather, on the new security given.
This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the California court in the cited case made an inquiry
whether the second loan was made in reliance on the original security containing a "dragnet clause."
Accordingly, finding a different security was taken for the second loan no intent that the parties relied on
the security of the first loan could be inferred, so it was held. The rationale involved, the court said, was
that the "dragnet clause" in the first security instrument constituted a continuing offer by the borrower to
secure further loans under the security of the first security instrument, and that when the lender accepted
a different security he did not accept the offer.47
In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the mortgagor to the for any deficiency after D/A SFDX#129, security for PN BD#76/C-345, has been exhausted, subject of
bank to provide the security of the mortgage for advances of and when they were made. Thus, it was course to defenses which are available to respondents.
concluded that the "offer" was not accepted by the bank when a subsequent advance was made because
(1) the second note was secured by a chattel mortgage on certain vehicles, and the clause therein stated
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 59543 is
that the note was secured by such chattel mortgage; (2) there was no reference in the second note or
AFFIRMED.
chattel mortgage indicating a connection between the real estate mortgage and the advance; (3) the
mortgagor signed the real estate mortgage by her name alone, whereas the second note and chattel
mortgage were signed by the mortgagor doing business under an assumed name; and (4) there was no
allegation by the bank, and apparently no proof, that it relied on the security of the real estate mortgage
in making the advance. 48

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

It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property
because of non-payment of all the three promissory notes. While the existence and validity of the
"dragnet clause" cannot be denied, there is a need to respect the existence of the other security given for
PN BD#76/C-345. The foreclosure of the mortgaged property should only be for the ₱250,000.00 loan
covered by PN BD#75/C-252, and for any amount not covered by the security for the second promissory
G.R. No. 97401 December 6, 1995
note. As held in one case, where deeds absolute in form were executed to secure any and all kinds of
indebtedness that might subsequently become due, a balance due on a note, after exhausting the special
security given for the payment of such note, was in the absence of a special agreement to the contrary, LUIS CASTRO, JR., MARISSA CASTRO, RAMON CASTRO, MARY ANN CASTRO, CATHERINE
within the protection of the mortgage, notwithstanding the giving of the special security. 50 This is CASTRO and ANTONIO CASTRO, petitioners,
recognition that while the "dragnet clause" subsists, the security specifically executed for subsequent vs.
loans must first be exhausted before the mortgaged property can be resorted to. HON. COURT OF APPEALS and UNION BANK OF THE PHILIPPINES, respondents.

One other crucial point. The mortgage contract, as well as the promissory notes subject of this case, is a
contract of adhesion, to which respondents’ only participation was the affixing of their signatures or
"adhesion" thereto.51 A contract of adhesion is one in which a party imposes a ready-made form of
contract which the other party may accept or reject, but which the latter cannot modify. 52
The real estate mortgage in issue appears in a standard form, drafted and prepared solely by petitioner,
and which, according to jurisprudence must be strictly construed against the party responsible for its
preparation.53 If the parties intended that the "blanket mortgage clause" shall cover subsequent
advancement secured by separate securities, then the same should have been indicated in the mortgage
contract. Consequently, any ambiguity is to be taken contra proferentum, that is, construed against the
party who caused the ambiguity which could have avoided it by the exercise of a little more care. 54 To be
more emphatic, any ambiguity in a contract whose terms are susceptible of different interpretations must
be read against the party who drafted it,55 which is the petitioner in this case.
The instant petition for review on certiorari of the decision, 1 dated 11 October 1990, of the Court of
Appeals is focused on the issue of whether or not a residential house, which was constructed by a
lessee on a portion of the leased property theretofore encumbered under a real estate mortgage by the
lessor, can be rightly covered by a writ of possession following the foreclosure sale of the mortgaged
land.
On 15 August 1974, Cabanatuan City Colleges obtained a loan from the Bancom Development
Corporation. In order to secure the indebtedness, the college mortgaged to Bancom two parcels of land
covered by TCT No. T-45816 and No. T-45817 located in Cabanatuan City. The parcels were both within
the school site. While the mortgage was subsisting, the college board of directors agreed to lease to
petitioners a 1,000-square-meter portion of the encumbered property on which the latter, eventually,
built a residential house. Bancom, the mortgagee, was duly advised of the matter.

Even the promissory notes in issue were made on standard forms prepared by petitioner, and as such are
likewise contracts of adhesion. Being of such nature, the same should be interpreted strictly against
petitioner and with even more reason since having been accomplished by respondents in the presence of
petitioner’s personnel and approved by its manager, they could not have been unaware of the import and
extent of such contracts.
The school defaulted in the due payment of the loan. In time, Bancom extrajudicially foreclosed on the
mortgage, and the mortgaged property was sold at public auction on 22 August 1979 with Bancom
coming out to be the only bidder. A certificate of sale was accordingly executed by the provincial sheriff in
favor of Bancom. Subsequently, the latter assigned its credit to herein private respondent Union Bank of
the Philippines.

Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that
respondents have not yet paid the ₱250,000.00, and gave no credence to their claim that they paid the
said amount when they paid petitioner ₱2,000,000.00. Thus, the mortgaged property could still be
properly subjected to foreclosure proceedings for the unpaid ₱250,000.00 loan, and as mentioned earlier,
On 10 October 1984, following the expiration of the redemption period without the college having
exercised its right of redemption, private respondent consolidated title to the property.
On 08 May 1985, private respondent filed with the Regional Trial Court of Nueva Ecija, Branch XXVIII in
Cabanatuan City, an ex-parte motion for the issuance of a writ of possession not only over the land and
 school buildings but also the residential house constructed by petitioners. 2 On 10 May 1985, the lower rule that can hardly be debated since a contract of security, whether, real or personal, needs as an
court granted the motion and directed the issuance of the corresponding writ. indispensable element thereof the ownership by the pledgor or mortgagor of the property pledged or
mortgaged. 13 The rationale should be clear enough — in the event of default on the secured obligation,
the foreclosure sale of the property would naturally be the next step that can expectedly follow. A sale
The ex-officio provincial sheriff, in implementing the writ, thereby also sought the vacation of the
would result in the transmission of title to the buyer which is feasible only if the seller can be in a
premises by petitioners. When the latter refused, private respondent filed an  ex-parte motion for a
position to convey ownership of the thing sold (Article 1458, Civil Code). It is to say, in the instant
special order directing the physical ouster of the occupants.
case, that a foreclosure would be ineffective unless the mortgagor has title to the property to be
foreclosed. 14
On 23 May 1986, petitioners formally entered their appearance in the proceedings to oppose the ex-
parte motion. Petitioners averred that, being the owners of the residential house which they themselves
It may not be amiss to state, in passing, that in respect of the lease on the foreclosed property, the buyer
had built on the foreclosed property with the prior knowledge of the mortgagee, they could not be ousted
at the foreclosure sale merely succeeds to the rights and obligations of the pledgor-mortgagor subject,
simply on the basis of a petition for a writ of possession under Act No. 3135.
however, to the provisions of Article 1676 of the Civil Code on its possible termination. 15

On 27 May 1986, the lower court, 3 nevertheless, issued an order granting private respondent's motion,
WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE, and a new one is entered
and it directed Atty. Luis T. Castro, in representation of petitioners, to deliver "all the keys to all the
declaring the residential house owned by petitioners to have been improperly included in the writ of
rooms and premises" found on the property foreclosed and authorized, in the event petitioners would
possession issued by the court a quo. No costs.
refuse to surrender the keys, private respondent "to enter the premises in question and do what is best
for the preservation of the properties belonging to the Cabanatuan City Colleges." 4

Petitioners sought reconsideration of the order but the lower court denied the motion on 13 June 1986. 5 It
ruled that the residential building was included in the writ of possession pursuant to Article 2127 of the
Civil Code. Private respondent still sought clarification of the Order, praying that the court issue another
order specifically mentioning the residential house to be among the property which the sheriff should
deliver to it.6 Although the court found no need to clarify its previous ruling, "in the interest of justice and
to obviate any possible misunderstanding between the parties, however, it issued its order of 18 June
1986 stating: PHILIPPINE NATIONAL BANK, Petitioner,
WHEREFORE, the Ex-Officio Provincial Sheriff, Atty. Numeriano Y. Galang should implement the order vs.
of May 27, 1986 to include therein the residential house being the subject of dispute between the SPOUSES BERNARD and CRESENCIA MARANON, Respondents.
parties hereto there being no compelling reasons to exclude it.
The controversy at bar involves a 152-square meter parcel of land located at Cuadra-Smith Streets,
Petitioners elevated the case to the Court of Appeals, assailing the orders of the court  a quo  of 27 May Downtown, Bacolod (subject lot) erected with a building leased by various tenants. The subject lot was
1986, 13 June 1986 and 18 June 1986. On 11 October 1990, the appellate court rendered decision among the properties mortgaged by Spouses Rodolfo and Emilie Montealegre (Spouses Montealegre) to
affirming the questioned orders.8 PNB as a security for a loan. In their transactions with PNB, Spouses Montealegre used Transfer
Certificate of Title (TCT) No. T-156512 over the subject lot purportedly registered in the name of Emilie
Montealegre (Emilie).6
There is merit in the instant petition for review on certiorari.

When Spouses Montealegre failed to pay the loan, PNB initiated foreclosure proceedings on the
Shorn of unrelated matters, 9 the basic question raised in the petition relates to the proper application of
mortgaged properties, including the subject lot. In the auction sale held on August 16, 1991, PNB
Article 2127 of the Civil Code. The law reads:
emerged as the highest bidder. It was issued the corresponding Certificate of Sale dated December 17,
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and
19917 which was subsequently registered on February 4, 1992.8
the rents or income not yet received when the obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in
virtue of expropriation for public use, with the declarations, amplifications and limitations established Before the expiration of the redemption period or on July 29, 1992, Spouses Marañon filed before the RTC
by law, whether the estate remains in the possession of the mortgagor, or passes into the hands of a a complaint for Annulment of Title, Reconveyance and Damages 9 against Spouses Montealegre, PNB, the
third person. Register of Deeds of Bacolod City and the Ex-Officio Provincial Sheriff of Negros Occidental. The
complaint, docketed as Civil Case No. 7213, alleged that Spouses Marañon are the true registered owners
of the subject lot by virtue of TCT No. T-129577 which was illegally cancelled by TCT No. T-156512 under
This article extends the effects of the real estate mortgage to accessions and accessories found on the
the name of Emilie who used a falsified Deed of Sale bearing the forged signatures of Spouse
hypothecated property when the secured obligation becomes due. The law is predicated on an
Marañon10 to effect the transfer of title to the property in her name.
assumption that the ownership of such accessions and accessories also belongs to the mortgagor as the
owner of the principal. 10 The provision 11 has thus been seen by the Court, in a long line of cases
beginning in 1909 with Bischoff vs. Pomar, 12 to mean that all improvements subsequently introduced In its Answer,11 PNB averred that it is a mortgagee in good faith and for value and that its mortgage lien
or owned by the mortgagor on the encumbered property are deemed to form part of the mortgage. on the property was registered thus valid and binding against the whole world.
That the improvements are to be considered so incorporated only if so owned by the mortgagor is a
As reflected in the Pre-trial Order 12 dated March 12, 1996, the parties stipulated, among others, that the
period for legal redemption of the subject lot has already expired.
While the trial proceedings were ongoing, Paterio Tolete (Tolete), one of the tenants of the building
erected on the subject lot deposited his rental payments with the Clerk of Court of Bacolod City which, as
of October 24, 2002, amounted to ₱144,000.00.
On June 2, 2006, the RTC rendered its Decision 13 in favor of the respondents after finding, based on the
expert testimony of Colonel Rodolfo Castillo, Head of the Forensic Technology Section of Bacolod City
Philippine National Police, that the signatures of Spouses Marañon in the Deed of Sale presented by
Spouses Montealegre before the Register of Deeds to cause the cancellation of TCT No. T-129577 were
forged. Hence, the RTC concluded the sale to be null and void and as such it did not transfer any right or
title in law. PNB was adjudged to be a mortgagee in good faith whose lien on the subject lot must be
respected. Accordingly, the Decision disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs herein respondents:
1. The cancellation of TCT No. 129577 over Lot 177-A-1 Bacolod Cadastre in the name of Bernard Marañon and the
issuance of new TCT No. 156512 in the name of defendant Emilie Montealegre are hereby declared null and void;
2. The defendant Emilie Montealegre is ordered to reconvey the title over Lot No. 177-A-1, Bacolod Cadastre back to
the plaintiffs Marañon herein respondents;
3. The Real Estate Mortgage lien of the Philippine National Bank registered on the title of Lot No. 177-A-1 Bacolod
Cadastre shall stay and be respected; and
4. The defendants - Emilie Montealegre and spouse are ordered to pay attorney’s fees in the sum of Php50,000.00,
and to pay the costs of the suit.
Neither of the parties sought a reconsideration of the above decision or any portion thereof nor did they
elevate the same for appellate review.
What precipitated the controversy at hand were the subsequent motions filed by Spouses Marañon for
release of the rental payments deposited with the Clerk of Court and paid to PNB by Tolete.
On June 13, 2006, Spouses Marañon filed an Urgent Motion for the Withdrawal of Deposited
Rentals15 praying that the ₱144,000.00 rental fees deposited by Tolete with the Clerk of Court be released
in their favor for having been adjudged as the real owner of the subject lot. The RTC granted the motion
in its Order16 dated June 28, 2006.
On September 5, 2006, Spouses Marañon again filed with the RTC an Urgent Ex-Parte Motion for
Withdrawal of Deposited Rentals 17 praying that the ₱30,000.00 rental fees paid to PNB by Tolete on
December 12, 1999 be released in their favor. The said lease payments were for the five (5)-month
period from August 1999 to December 1999 at the monthly lease rate of ₱6,000.00.
The RTC granted the motion in its Order 18 dated September 8, 2006 reasoning that pursuant to its
Decision dated June 2, 2006 declaring Spouses Marañon to be the true registered owners of the subject
lot, they are entitled to its fruits.
The PNB differed with the RTC’s ruling and moved for reconsideration averring that as declared by the
RTC in its Decision dated June 2, 2006, its mortgage lien should be carried over to the new title
reconveying the lot to Spouses Marañon. PNB further argued that with the expiration of the redemption
period on February 4, 1993, or one (1) year from the registration of the certificate of sale, PNB is now the
owner of the subject lot hence, entitled to its fruits. PNB prayed that (1) the Order dated September 8,
2006 be set aside, and (2) an order be issued directing Spouses Marañon to turn over to PNB the amount
of ₱144,000.00 released in their favor by the Clerk of Court. 19
On November 20, 2006, the RTC issued an Order again directing PNB to release to Spouses Marañon the
₱30,000.00 rental payments considering that they were adjudged to have retained ownership over the
property.20
On December 6, 2006, the RTC issued another Order denying PNB’s motion for reconsideration and
reiterating the directives in its Order dated September 8, 2006.21
Aggrieved, PNB sought recourse with the CA via a petition for certiorari and mandamus 22 claiming that as
the lawful owner of the subject lot per the RTC’s judgment dated June 2, 2006, it is entitled to the fruits
of the same such as rentals paid by tenants hence, the ruling that "the real estate mortgage lien of the
PNB registered on the title of Lot No. 177-A-1 Bacolod Cadastre shall stay and be respected." PNB also
contended that it is an innocent mortgagee.
In its Decision 23 dated June 18, 2008, the CA denied the petition and affirmed the RTC’s judgment
ratiocinating that not being parties to the mortgage transaction between PNB and Spouses Montealegre,
Spouses Marañon cannot be deprived of the fruits of the subject lot as the same will amount to
deprivation of property without due process of law. The RTC further held that PNB is not a mortgagee in
good faith because as a financial institution imbued with public interest, it should have looked beyond the
certificate of title presented by Spouses Montealegre and conducted an inspection on the circumstances
surrounding the transfer to Spouses Montealegre. The decretal portion of the Decision thus read:
WHEREFORE, in view of the foregoing, the petition is hereby DISMISSED. The Orders dated September
8, 2006 and December 6, 2006, rendered by the respondent Presiding Judge of the Regional Trial
Court, Branch 54, Bacolod City, in Civil Case NO. 7213 directing the release of the deposited rental in
the amount of THIRTY THOUSAND PESOS ([P]30,000.00) to private respondents are hereby AFFIRMED.
PNB moved for reconsideration 25 but the motion was denied in the CA Resolution dated August 10,
2009.26 Hence, the present recourse whereby PNB argues that the RTC Decision dated June 2, 2006
lapsed into finality when it was not appealed or submitted for reconsideration. As such, all conclusions
therein are immutable and can no longer be modified by any court even by the RTC that rendered the
same. The CA however erroneously altered the RTC Decision by reversing the pronouncement that PNB is
a mortgagee-in-good-faith.
PNB further asseverates that its mortgage lien was carried over to the new title issued to Spouses
Marañon and thus it retained the right to foreclose the subject lot upon non-payment of the secured debt.
PNB asserts that it is entitled to the rent because it became the subject lot’s new owner when the
redemption period expired without the property being redeemed.
Ruling of the Court
We deny the petition.
It is readily apparent from the facts at hand that the status of PNB’s lien on the subject lot has already
been settled by the RTC in its Decision dated June 2, 2006 where it was adjudged as a mortgagee in good
faith whose lien shall subsist and be respected. The decision lapsed into finality when neither of the
parties moved for its reconsideration or appealed.
Being a final judgment, the dispositions and conclusions therein have become immutable and unalterable
not only as against the parties but even the courts. This is known as the doctrine of immutability of
judgments which espouses that a judgment that has acquired finality becomes immutable and
unalterable, and may no longer be modified in any respect even if the modification is meant to correct
erroneous conclusions of fact or law and whether it will be made by the court that rendered it or by the whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third
highest court of the land. 27 The significance of this rule was emphasized in Apo Fruits Corporation v. Court person.
of Appeals,28 to wit:
The reason for the rule is that if, on the application of one party, the court could change its judgment to
Consequently, in case of non-payment of the secured debt, foreclosure proceedings shall cover not only
the prejudice of the other, it could thereafter, on application of the latter, again change the judgment
the hypothecated property but all its accessions and accessories as well. This was illustrated in the early
and continue this practice indefinitely. The equity of a particular case must yield to the overmastering
case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.38 where the Court held:
need of certainty and unalterability of judicial pronouncements.
That a mortgage constituted on a sugar central includes not only the land on which it is built but also
the buildings, machinery, and accessories installed at the time the mortgage was constituted as well as
The doctrine of immutability and inalterability of a final judgment has a two-fold purpose: (1) to avoid the buildings, machinery and accessories belonging to the mortgagor, installed after the constitution
delay in the administration of justice and thus, procedurally, to make orderly the discharge of judicial thereof
business and (2) to put an end to judicial controversies, at the risk of occasional errors, which is precisely
why courts exist. Controversies cannot drag on indefinitely. The rights and obligations of every litigant
Applying such pronouncement in the subsequent case of Spouses Paderes v. Court of Appeals, 40 the Court
must not hang in suspense for an indefinite period of time. The doctrine is not a mere technicality to be
declared that the improvements constructed by the mortgagor on the subject lot are covered by the real
easily brushed aside, but a matter of public policy as well as a time-honored principle of procedural
estate mortgage contract with the mortgagee bank and thus included in the foreclosure proceedings
law.29 (Citations omitted)
instituted by the latter.41

Hence, as correctly argued by PNB, the issue on its status as a mortgagee in good faith have been
However, the rule is not without qualifications. In Castro, Jr. v. CA 42 the Court explained that Article 2127
adjudged with finality and it was error for the CA to still delve into and, worse, overturn, the same. The
is predicated on the presumption that the ownership of accessions and accessories also belongs to the
CA had no other recourse but to uphold the status of PNB as a mortgagee in good faith regardless of its
mortgagor as the owner of the principal. After all, it is an indispensable requisite of a valid real estate
defects for the sake of maintaining stability of judicial pronouncements. "The main role of the courts of
mortgage that the mortgagor be the absolute owner of the encumbered property, thus:
justice is to assist in the enforcement of the law and in the maintenance of peace and order by putting an
All improvements subsequently introduced or owned by the mortgagor on the encumbered property are
end to judiciable controversies with finality. Nothing better serves this role than the long established
deemed to form part of the mortgage. That the improvements are to be considered so incorporated
doctrine of immutability of judgments."30
only if so owned by the mortgagor is a rule that can hardly be debated since a contract of security,
whether, real or personal, needs as an indispensable element thereof the ownership by the pledgor or
Further, it must be remembered that what reached the CA on certiorari were RTC resolutions issued long mortgagor of the property pledged or mortgaged. x x x. 43 (Citation omitted)
after the finality of the Decision dated June 2, 2006. The RTC Orders dated September 8, 2006 and
December 6, 2006 were implements of the pronouncement that Spouses Marañon are still the rightful
Otherwise stated, absent an adverse claimant or any evidence to the contrary, all accessories and
owners of the subject lot, a matter that has been settled with finality as well. This notwithstanding, the
accessions accruing or attached to the mortgaged property are included in the mortgage contract and
Court agrees with the ultimate outcome of the CA’s assailed resolutions.
may thus also be foreclosed together with the principal property in case of non-payment of the debt
secured.
Rent is a civil fruit31 that belongs to the owner of the property 32 producing it by right of accession 33.34 The
rightful recipient of the disputed rent in this case should thus be the owner of the subject lot at the time
Corollary, any evidence sufficiently overthrowing the presumption that the mortgagor owns the
the rent accrued. It is beyond question that Spouses Marañon never lost ownership over the subject lot.
mortgaged property precludes the application of Article 2127. Otherwise stated, the provision is irrelevant
This is the precise consequence of the final and executory judgment in Civil Case No. 7213 rendered by
and inapplicable to mortgages and their resultant foreclosures if the mortgagor is later on found or
the RTC on June 3, 2006 whereby the title to the subject lot was reconveyed to them and the cloud
declared to be not the true owner of the property, as in the instant case.1âwphi1
thereon consisting of Emilie’s fraudulently obtained title was removed. Ideally, the present dispute can be
simply resolved on the basis of such pronouncement. However, the application of related legal principles
ought to be clarified in order to settle the intervening right of PNB as a mortgagee in good faith. It is beyond question that PNB’s mortgagors, Spouses Montealegre, are not the true owners of the
subject lot much less of the building which produced the disputed rent. The foreclosure proceedings on
August 16, 1991 caused by PNB could not have, thus, included the building found on the subject lot and
The protection afforded to PNB as a mortgagee in good faith refers to the right to have its mortgage lien
the rent it yields. PNB’s lien as a mortgagee in good faith pertains to the subject lot alone because the
carried over and annotated on the new certificate of title issued to Spouses Marañon 35 as so adjudged by
rule that improvements shall follow the principal in a mortgage under Article 2127 of the Civil Code does
the RTC. Thereafter, to enforce such lien thru foreclosure proceedings in case of non-payment of the
not apply under the premises. Accordingly, since the building was not foreclosed, it remains a property of
secured debt,36 as PNB did so pursue. The principle, however, is not the singular rule that governs real
Spouses Marañon; it is not affected by non-redemption and is excluded from any consolidation of title
estate mortgages and foreclosures attended by fraudulent transfers to the mortgagor.
made by PNB over the subject lot. Thus, PNB’s claim for the rent paid by Tolete has no basis.

Rent, as an accessory follow the principal. 37 In fact, when the principal property is mortgaged, the
It must be remembered that there is technically no juridical tie created by a valid mortgage contract that
mortgage shall include all natural or civil fruits and improvements found thereon when the secured
binds PNB to the subject lot because its mortgagor was not the true owner. But by virtue of the
obligation becomes due as provided in Article 2127 of the Civil Code, viz:
mortgagee in good faith principle, the law allows PNB to enforce its lien. We cannot, however, extend
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and
such principle so as to create a juridical tie between PNB and the improvements attached to the subject
the rents or income not yet received when the obligation becomes due, and to the amount of the
lot despite clear and undeniable evidence showing that no such juridical tie exists.
indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue
of expropriation for public use, with the declarations, amplifications and limitations established by law,
Lastly, it is worthy to note that the effects of the foreclosure of the subject lot is in fact still contentious
considering that as a purchaser in the public sale, PNB was only substituted to and acquired the right,
title, interest and claim of the mortgagor to the property as of the time of the levy. 44 There being already
a final judgment reconveying the subject lot to Spouses Marañon and declaring as null and void Emilie's
purported claim of ownership, the legal consequences of the foreclosure sale, expiration of the
redemption period and even the consolidation of the subject lot's title in PNB's name shall be subjected to
such final judgment. This is the clear import of the ruling in Unionbank of the Philippines v. Court of
Appeals:45
This is because as purchaser at a public auction, UNIONBANK is only substituted to and acquires the
right, title, interest and claim of the judgment debtors or mortgagors to the property at the time of
levy. Perforce, the judgment in the main action for reconveyance will not be rendered ineffectual by the
consolidation of ownership and the issuance of title in the name of UNIONBANK. 46 (Citation omitted)
Nonetheless, since the present recourse stemmed from a mere motion claiming ownership of rent and not
from a main action for annulment of the foreclosure sale or of its succeeding incidents, the Court cannot
proceed to make a ruling on the bearing of the CA's Decision dated June 18, 2008 to PNB's standing as a
purchaser in the public auction. Such matter will have to be threshed out in the proper forum.
All told, albeit the dispositive portions of the assailed CA decision and resolution are differently premised,
they ought to be upheld as they convey the similar conclusion that Spouses Marañon are the rightful
owners of the rent earned by the building on the subject lot.
WHEREFORE, foregoing considered, the petition is hereby DENIED. The Decision dated June 18, 2008 and
Resolution dated August 10, 2009 of the Court of Appeals in CA-G.R. SP No. 02513 are AFFIRMED.
G.R. No. 183987               July 25, 2012
ASIA TRUST DEVELOPMENT BANK, Petitioner,
vs.
CARMELO H. TUBLE, Respondent.
Respondent Carmelo H. Tuble, who served as the vice-president of petitioner Asiatrust Development
Bank, availed himself of the car incentive plan and loan privileges offered by the bank. He was also
entitled to the bank’s Senior Managers Deferred Incentive Plan (DIP).
Respondent acquired a Nissan Vanette through the company’s car incentive plan. The arrangement was
made to appear as a lease agreement requiring only the payment of monthly rentals. Accordingly, the
lease would be terminated in case of the employee’s resignation or retirement prior to full payment of the
price.
As regards the loan privileges, Tuble obtained three separate loans. The first, a real estate loan
evidenced by the 18 January 1993 Promissory Note No. 0142 3 with maturity date of 1 January 1999, was
secured by a mortgage over his property covered by Transfer Certificate of Title No. T 145794. No
interest on this loan was indicated.
The second was a consumption loan, evidenced by the 10 January 1994 Promissory Note No. 0143 4 with
the maturity date of 31 January 1995 and interest at 18% per annum. Aside from the said indebtedness,
Tuble allegedly obtained a salary loan, his third loan.
On 30 March 1995, he resigned. Subsequently, he was given the option to either return the vehicle
without any further obligation or retain the unit and pay its remaining book value.
Respondent had the following obligations to the bank after his retirement: (1) the purchase or return of
the Nissan Vanette; (2) ₱100,000 as consumption loan; (3) ₱421,800 as real estate loan; and (4)
₱16,250 as salary loan.5
In turn, petitioner owed Tuble (1) his pro-rata share in the DIP, which was to be issued after the bank
had given the resigned employee’s clearance; and (2) ₱25,797.35 representing his final salary and
corresponding 13th month pay.
Respondent claimed that since he and the bank were debtors and creditors of each other, the offsetting of
loans could legally take place. He then asked the bank to simply compute his DIP and apply his
receivables to his outstanding loans. 6 However, instead of heeding his request, the bank sent him a 1
June 1995 demand letter7 obliging him to pay his debts. The bank also required him to return the Nissan
Vanette. Despite this demand, the vehicle was not surrendered.
On 14 August 1995, Tuble wrote the bank again to follow up his request to offset the loans. This letter
was not immediately acted upon. It was only on 13 October 1995 that the bank finally allowed the
offsetting of his various claims and liabilities. As a result, his liabilities were reduced to ₱970,691.46 plus
the unreturned value of the vehicle.
In order to recover the Nissan Vanette, the bank filed a Complaint for replevin against Tuble. Petitioner
obtained a favorable judgment. Then, to collect the liabilities of respondent, it also filed a Petition for
Extra-judicial Foreclosure of real estate mortgage over his property. The Petition was based only on his
real estate loan, which at that time amounted to ₱421,800. His other liabilities to the bank were
excluded. The foreclosure proceedings terminated, with the bank emerging as the purchaser of the
secured property.
Thereafter, Tuble timely redeemed the property on 17 March 1997 for ₱1,318,401.91. 8 Notably, the
redemption price increased to this figure, because the bank had unilaterally imposed additional interest
and other charges.
With the payment of ₱1,318,401.91, Tuble was deemed to have fully paid his accountabilities. Thus, three
years after his payment, the bank issued him a Clearance necessary for the release of his DIP share.
Subsequently, he received a Manager’s Check in the amount of ₱166,049.73 representing his share in the
DIP funds.
Despite his payment of the redemption price, Tuble questioned how the foreclosure basis of ₱421,800
ballooned to ₱1,318,401.91 in a matter of one year. Belatedly, the bank explained that this redemption
price included the Nissan Vanette’s book value, the salary loan, car insurance, 18% annual interest on the
bank’s redemption price of ₱421,800, penalty and interest charges on Promissory Note No. 0142, and
litigation expenses. 9 By way of note, from these items, the amounts that remained to be collected as
stated in the Petition before us, are (1) the 18% annual interest on the redemption price and (2) the
interest charge on Promissory Note No. 0142.
Because Tuble disputed the redemption price, he filed a Complaint for recovery of a sum of money and
damages before the RTC. He specifically sought to collect ₱896,602.02 10 representing the excess charges
on the redemption price. Additionally, he prayed for moral and exemplary damages.
The RTC ruled in favor of Tuble. The trial court characterized the redemption price as excessive and
arbitrary, because the correct redemption price should not have included the above-mentioned charges.
Moral and exemplary damages were also awarded to him.
According to the trial court, 11 the value of the car should not have been included, considering that the
bank had already recovered the Nissan Vanette. The obligations arising from the salary loan and car
insurance should have also been excluded, for there was no proof that these debts existed. The interest
and penalty charges should have been deleted, too, because Promissory Note No. 0142 did not indicate
any interest or penalty charges. Neither should litigation expenses have been added, since there was no
proof that the bank incurred those expenses.
As for the 18% annual interest on the bid price of ₱421,800, the RTC agreed with Tuble that this charge
was unlawful. Act 313512 as amended, in relation to Section 28 of Rule 39 of the Rules of Court, 13 only
allows the mortgagee to charge an interest of 1% per month if the foreclosed property is redeemed.
Ultimately, under the principle of solutio indebiti, the trial court required the refund of these amounts
charged in excess of the correct redemption price.
On appeal, the CA affirmed the findings of the RTC. 14 The appellate court only expounded the rule that, at
the time of redemption, the one who redeemed is liable to pay only 1% monthly interest plus taxes.
Thus, the CA also concluded that there was practically no basis to impose the additional charges.
Before this Court, petitioner reiterates its claims regarding the inclusion in the redemption price of the
18% annual interest on the bid price of ₱421,800 and the interest charges on Promissory Note No. 0142.
Petitioner emphasizes that an 18% interest rate allegedly referred to in the mortgage deed is the proper
basis of the interest. Pointing to the Real Estate Mortgage Contract, the bank highlights the blanket
security clause or "dragnet clause" that purports to cover all obligations owed by Tuble: 15
All obligations of the Borrower and/or Mortgagor, its renewal, extension, amendment or novation
irrespective of whether such obligations as renewed, extended, amended or novated are in the nature
of new, separate or additional obligations;
All other obligations of the Borrower and/or Mortgagor in favor of the Mortgagee, executed before or
after the execution of this document whether presently owing or hereinafter incurred and whether or
not arising from or connection with the aforesaid loan/Credit accommodation; x x x.
Tuble’s obligations are defined in Promissory Note Nos. 0142 and 0143. By way of recap, Promissory Note
No. 0142 refers to the real estate loan; it does not contain any stipulation on interest. On the other hand,
Promissory Note No. 0143 refers to the consumption loan; it charges an 18% annual interest rate.
Petitioner uses this latter rate to impose an interest over the bid price of ₱421,800.
Further, the bank sees the inclusion in the redemption price of an addition 12% annual interest on Tuble’s
real estate loan.
On top of these claims, the bank raises a new item – the car’s rental fee – to be included in the
redemption price. In dealing with this argument raised for the first time on certiorari, this Court dismisses
the contention based on the well-entrenched prohibition on raising new issues, especially factual ones, on
appeal.16
Thus, the pertinent issue in the instant appeal is whether or not the bank is entitled to include these
items in the redemption price: (1) the interest charges on Promissory Note No. 0142; and (2) the 18%
annual interest on the bid price of P421,800.
RULING OF THE COURT
The 18% Annual Interest on the Bid Price of ₱421,800
The Applicable Law
The bank argues that instead of referring to the Rules of Court to compute the redemption price, the
courts a quo should have applied the General Banking Law, 17 considering that petitioner is a banking
institution.
The statute referred to requires that in the event of judicial or extrajudicial foreclosure of any mortgage
on real estate that is used as security for an obligation to any bank, banking institution, or credit
institution, the mortgagor can redeem the property by paying the amount fixed by the court in the order
of execution, with interest thereon at the rate specified in the mortgage. 18
Petitioner is correct. We have already established in Union Bank of the Philippines v. Court of
Appeals,19 citing Ponce de Leon v. Rehabilitation Finance Corporation 20 and Sy v. Court of Appeals, 21 that
the General Banking Act – being a special and subsequent legislation – has the effect of amending
Section 6 of Act No. 3135, insofar as the redemption price is concerned, when the mortgagee is a bank.
Thus, the amount to be paid in redeeming the property is determined by the General Banking Act, and
not by the Rules of Court in Relation to Act 3135.
The Remedy of Foreclosure
In reviewing the bank’s additional charges on the redemption price as a result of the foreclosure, this
Court will first clarify certain vital points of fact and law that both parties and the courts a quo seem to
have missed.
Firstly, at the time respondent resigned, which was chronologically before the foreclosure proceedings, he
had several liabilities to the bank. Secondly, when the bank later on instituted the foreclosure
proceedings, it foreclosed only the mortgage secured by the real estate loan of ₱421,800. 22 It did not seek
to include, in the foreclosure, the consumption loan under Promissory Note No. 0143 or the other alleged
obligations of respondent. Thirdly, on 28 February 1996, the bank availed itself of the remedy of
foreclosure and, in doing so, effectively gained the property.
As a result of these established facts, one evident conclusion surfaces: the Real Estate Mortgage Contract
on the secured property is already extinguished.
In foreclosures, the mortgaged property is subjected to the proceedings for the satisfaction of the
obligation.23 As a result, payment is effected by abnormal means whereby the debtor is forced by a
judicial proceeding to comply with the presentation or to pay indemnity. 24
Once the proceeds from the sale of the property are applied to the payment of the obligation, the
obligation is already extinguished. 25 Thus, in Spouses Romero v. Court of Appeals, 26 we held that the
mortgage indebtedness was extinguished with the foreclosure and sale of the mortgaged property, and
that what remained was the right of redemption granted by law.
Consequently, since the Real Estate Mortgage Contract is already extinguished, petitioner can no longer
rely on it or invoke its provisions, including the dragnet clause stipulated therein. It follows that the bank
cannot refer to the 18% annual interest charged in Promissory Note No. 0143, an obligation allegedly
covered by the terms of the Contract.
Neither can the bank use the consummated contract to collect on the rest of the obligations, which were
not included when it earlier instituted the foreclosure proceedings. It cannot be allowed to use the same
security to collect on the other loans. To do so would be akin to foreclosing an already foreclosed
property.
Rather than relying on an expired contract, the bank should have collected on the excluded loans by
instituting the proper actions for recovery of sums of money. Simply put, petitioner should have run after
Tuble separately, instead of hostaging the same property to cover all of his liabilities.
The Right of Redemption
Despite the extinguishment of the Real Estate Mortgage Contract, Tuble had the right to redeem the
security by paying the redemption price.
The right of redemption of foreclosed properties was a statutory privilege 27 he enjoyed. Redemption is by
force of law, and the purchaser at public auction is bound to accept it. 28 Thus, it is the law that provides
the terms of the right; the mortgagee cannot dictate them. The terms of this right, based on Section 47
of the General Banking Law, are as follows:
1. The redemptioner shall have the right within one year after the sale of the real estate, to redeem the
property.
2. The redemptioner shall pay the amount due under the mortgage deed, with interest thereon at rate
specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the
sale and custody of said property less the income derived therefrom.
3. In case of redemptioners who are considered by law as juridical persons, they shall have the right to
redeem not after the registration of the certificate of foreclosure sale with the applicable Register of
Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier.
Consequently, the bank cannot alter that right by imposing additional charges and including other loans.
Verily, the freedom to stipulate the terms and conditions of an agreement is limited by law. 29
Thus, we held in Rural Bank of San Mateo, Inc. v. Intermediate Appellate Court 30 that the power to decide
whether or not to foreclose is the prerogative of the mortgagee; however, once it has made the decision
by filing a petition with the sheriff, the acts of the latter shall thereafter be governed by the provisions of
the mortgage laws, and not by the instructions of the mortgagee. In direct contravention of this ruling,
though, the bank included numerous charges and loans in the redemption price, which inexplicably
ballooned to ₱1,318,401.91. On this error alone, the claims of petitioner covering all the additional
charges should be denied. Thus, considering the undue inclusions of the additional charges, the bank
cannot impose the 18% annual interest on the redemption price.
The Dragnet Clause
In any event, assuming that the Real Estate Mortgage Contract subsists, we rule that the dragnet clause
therein does not justify the imposition of an 18% annual interest on the redemption price.
This Court has recognized that, through a dragnet clause, a real estate mortgage contract may
exceptionally secure future loans or advancements. 31 But an obligation is not secured by a mortgage,
unless, that mortgage comes fairly within the terms of the mortgage contract. 32
We have also emphasized that the mortgage agreement, being a contract of adhesion, is to be carefully
scrutinized and strictly construed against the bank, the party that prepared the agreement. 33
Here, after reviewing the entire deed, this Court finds that there is no specific mention of interest to be
added in case of either default or redemption. The Real Estate Mortgage Contract itself is silent on the
computation of the redemption price. Although it refers to the Promissory Notes as constitutive of Tuble’s
secured obligations, the said contract does not state that the interest to be charged in case of redemption
should be what is specified in the Promissory Notes.
In Philippine Banking Communications v. Court of Appeals, 34 we have construed such silence or omission
of additional charges strictly against the bank. In that case, we affirmed the findings of the courts a quo
that penalties and charges are not due for want of stipulation in the mortgage contract.
Worse, when petitioner invites us to look at the Promissory Notes in determining the interest, these loan
agreements offer different interest charges: Promissory Note No. 0142, which corresponds exactly to the
real estate loan, contains no stipulation on interest; while Promissory Note No. 0143, which in turn
corresponds to the consumption loan, provides a charge of 18% interest per annum.
Thus, an ambiguity results as to which interest shall be applied, for to apply an 18% interest per annum
based on Promissory Note No. 0143 will negate the existence of the 0% interest charged by Promissory
Note No. 0142. Notably, it is this latter Promissory Note that refers to the principal agreement to which
the security attaches.
In resolving this ambiguity, we refer to a basic principle in the law of contracts: "Any ambiguity is to be
taken contra proferentem, that is, construed against the party who caused the ambiguity which could
have avoided it by the exercise of a little more care." 35 Therefore, the ambiguity in the mortgage deed
whose terms are susceptible of different interpretations must be read against the bank that drafted it.
Consequently, we cannot impute grave error on the part of the courts a quo for not appreciating a charge
of 18% interest per annum.
Furthermore, this Court refuses to be blindsided by the dragnet clause in the Real Estate Mortgage
Contract to automatically include the consumption loan, and its corresponding interest, in computing the
redemption price.
As we have held in Prudential Bank v. Alviar,36 in the absence of clear and supportive evidence of a
contrary intention, a mortgage containing a dragnet clause will not be extended to cover future advances,
unless the document evidencing the subsequent advance refers to the mortgage as providing security
therefor.
In this regard, this Court adopted the "reliance on the security test" used in the above-mentioned cases,
Prudential Bank37 and Philippine Bank of Communications.38 In these Decisions, we elucidated the test as
follows:
x x x A mortgage with a "dragnet clause" is an "offer" by the mortgagor to the bank to provide the
security of the mortgage for advances of and when they were made. Thus, it was concluded that the
"offer" was not accepted by the bank when a subsequent advance was made because (1) the second
note was secured by a chattel mortgage on certain vehicles, and the clause therein stated that the note
was secured by such chattel mortgage; (2) there was no reference in the second note or chattel
mortgage indicating a connection between the real estate mortgage and the advance; (3) the
mortgagor signed the real estate mortgage by her name alone, whereas the second note and chattel
mortgage were signed by the mortgagor doing business under an assumed name; and (4) there was no
 allegation by the bank, and apparently no proof, that it relied on the security of the real estate
mortgage in making the advance.39 (Emphasis supplied)
Here, the second loan agreement, or Promissory Note No. 0143, referring to the consumption loan makes
no reference to the earlier loan with a real estate mortgage. Neither does the bank make any allegation
that it relied on the security of the real estate mortgage in issuing the consumption loan to Tuble.
It must be remembered that Tuble was petitioner’s previous vice-president. Hence, as one of the senior
officers, the consumption loan was given to him not as an ordinary loan, but as a form of accommodation
or privilege.40 The bank’s grant of the salary loan to Tuble was apparently not motivated by the creation of
a security in favor of the bank, but by the fact the he was a top executive of petitioner.
Thus, the bank cannot claim that it relied on the previous security in granting the consumption loan to
Tuble. For this reason, the dragnet clause will not be extended to cover the consumption loan. It follows,
therefore, that its corresponding interest – 18% per annum – is inapplicable. Consequently, the courts a
quo did not gravely abuse their discretion in refusing to apply an annual interest of 18% in computing the
redemption price. A finding of grave abuse of discretion necessitates that the judgment must have been
exercised arbitrarily and without basis in fact and in law. 41
The Interest Charges on Promissory Note No. 0142
In addition to the 18% annual interest, the bank also claims a 12% interest per annum on the
consumption loan. Notwithstanding that Promissory Note No. 0142 contains no stipulation on interest
payments, the bank still claims that Tuble is liable to pay the legal interest. This interest is currently at
12% per annum, pursuant to Central Bank Circular No. 416 and Article 2209 of the Civil Code, which
provides:
If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.
(Emphasis supplied)
While Article 2209 allows the recovery of interest sans stipulation, this charge is provided not as a form of
monetary interest, but as one of compensatory interest. 42
Monetary interest refers to the compensation set by the parties for the use or forbearance of money. 43 On
the other hand, compensatory interest refers to the penalty or indemnity for damages imposed by law or
by the courts. 44 Compensatory interest, as a form of damages, is due only if the obligor is proven to have
defaulted in paying the loan. 45
Thus, a default must exist before the bank can collect the compensatory legal interest of 12% per annum.
In this regard, Tuble denies being in default since, by way of legal compensation, he effectively paid his
liabilities on time.
This argument is flawed. The bank correctly explains in its Petition that in order for legal compensation to
take effect, Article 1279 of the Civil Code requires that the debts be liquidated and demandable. This
provision reads:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor. (Emphasis supplied)
Liquidated debts are those whose exact amount has already been determined. 46 In this case, the
receivable of Tuble, including his DIP share, was not yet determined; it was the petitioner’s policy to
compute and issue the computation only after the retired employee had been cleared by the bank. Thus,
Tuble incorrectly invoked legal compensation in addressing this issue of default.
Nevertheless, based on the findings of the RTC and the CA, the obligation of Tuble as evidenced by
Promissory Note No. 0142, was set to mature on 1 January 1999. But then, he had already settled his
liabilities on 17 March 1997 by paying ₱1,318,401.91 as redemption price. Then, in 1999, the bank issued
his Clearance and share in the DIP in view of the full settlement of his obligations. Thus, there being no
substantial delay on his part, the CA did not grievously err in not declaring him to be in default.
The Award of Moral and Exemplary Damages
The courts a quo awarded Tuble ₱200,000 as moral damages and ₱50,000 as exemplary
damages.1âwphi1 As appreciated by the RTC, which had the opportunity to examine the parties, 47 the
bank treated Tuble unfairly and unreasonably by refusing to lend even a little charity and human
consideration when it immediately foreclosed the loans of its previous vice-president instead of heeding
his request to make a straightforward calculation of his receivables and offset them against his
liabilities.48
To the mind of the trial court, this was such a simple request within the control of the bank to grant; and
if petitioner had only acceded, the troubles of the lawsuit would have been avoided.1âwphi1
Moreover, the RTC found that the bank caused Tuble severe humiliation when the Nissan Vannette was
seized from his new office at Kuok Properties Philippines. The trial court also highlighted the fact that
respondent as the previous vice-president of petitioner was no ordinary employee – he was a man of
good professional standing, and one who actively participated in civic organizations. The RTC then
concluded that a man of his standing deserved fair treatment from his employer, especially since they
served common goals.
This Court affirms the dispositions of the RTC and the CA. They correctly ruled that the award of moral
damages also includes cases of besmirched reputation, moral shock, social humiliation and similar injury.
In this regard, the social and financial standings of the parties are additional elements that should be
taken into account in the determination of the amount of moral damages. 49 Based on their findings that
Tuble suffered undue embarrassment, given his social standing, the courts a quo had factual Basis 50 to
justify the award of moral damages and, consequently, exemplary damages 51 in his favor.
From all the foregoing, we rule that the appellate court correctly deleted the 18% annual interest
charges, albeit for different reasons. First, the interest cannot be imposed, because any reference to it
under the Real Estate Mortgage Contract is misplaced, as the contract is already extinguished. Second,
the said interest cannot be collected without any basis in terms of Tuble's redemption rights. Third,
assuming that the Real Estate Mortgage Contract subsists, the bank cannot collect the interest because of
the contract's ambiguity. Fourth, the dragnet clause referred to in the contract cannot be presumed to
include the 18% annual interest specified in the consumption loan. Fifth, with respect to the
compensatory interest claimed by the bank, we hold that neither is the interest due, because Tuble
cannot be deemed to be in default of his obligations.
IN VIEW THEREOF, the assailed 28 March 2008 Decision and 30 July 2008 Resolution of the Court of
Appeals in CA-G.R. CV No. 87410 are hereby AFFIRMED.
G.R. No. 130722 December 9, 1999
SPS. REYNALDO K. LITONJUA and ERLINDA P. LITONJUA and PHIL. WHITE HOUSE AUTO
SUPPLY, INC., petitioners,
vs.
L & R CORPORATION, VICENTE M. COLOYAN in his capacity as Acting Registrar of the Register
of Deeds of Quezon City thru Deputy Sheriff ROBERTO R. GARCIA, respondents.
May a mortgage contract provide: (a) that the mortgagor cannot sell the mortgaged property without first
obtaining the consent of the mortgagee and that, otherwise, the sale made without the mortgagee's
consent shall be invalid; and (b) for a right of first refusal in favor of the mortgagee?
The controversy stems from loans obtained by the spouses Litonjua from L & R Corporation in the
aggregate sum of P400,000.00; P200,000.00 of which was obtained on August 6, 1974 and the remaining
P200,000.00 obtained on March 27, 1978. The loans were secured by a mortgage  1 constituted by the
spouses upon their two parcels of land and the improvements thereon located in Cubao, Quezon City
covered by Transfer Certificates of Title No. 197232 and 197233, with an area of 599 and 1,436 square
meters, respectively. The mortgage was duly registered with the Register of Deeds of Quezon City.
On July 14, 1979, the spouses Litonjua sold to Philippine White House Auto Supply, Inc. (PWHAS) the
parcels of land they had previously mortgaged to L & R Corporation for the sum of P430,000.00. 2 The
sale was annotated at the back of the respective certificates of title of the properties. 3
Meanwhile, with the spouses Litonjua having defaulted in the payment of their loans, L & R Corporation
initiated extrajudicial foreclosure proceedings with the Ex-Oficio Sheriff of Quezon City. On July 23, 1980,
the mortgaged properties were sold at public auction to L & R Corporation as the only bidder for the
amount of P221,624.58. 4 When L & R Corporation presented its corresponding Certificate of Sale issued
by Deputy Sheriff Roberto B. Garcia, to the Quezon City Register of Deeds for registration on August 15,
1980, it learned for the first time of the prior sale of the properties made by the spouses Litonjua to
PWHAS upon seeing the inscription at the back of the certificates of title. Thus, on August 20, 1980, it
wrote a letter 5 to the Register of Deeds of Quezon City requesting for the cancellation of the annotation
regarding the sale to PWHAS. L & R Corporation invoked a provision in its mortgage contract with the
spouses Litonjua stating that the mortgagee's prior written consent was necessary in case of subsequent
encumbrance or alienation of the subject properties. Thus, it argued that since the sale to PWHAS was
made without its prior written consent, the same should not have been registered and/or annotated.
On March 10, 1981, or seven months after the foreclosure sale, PWHAS, for the account of the spouses
Litonjua, tendered payment of the full redemption price to L & R Corporation in the form of China Bank
Manager's Check No. HOF-M O12623 in the amount of P238,468.04. 6 L & R Corporation, however,
refused to accept the payment, hence, PWHAS was compelled to redeem the mortgaged properties
through the Ex-Oficio Sheriff of Quezon City. On March 31, 1981, it tendered payment of the redemption
price to the Deputy Sheriff through China Bank Manager's Check No. HOF-O14750 in the amount of
P240,798.94. 7 The check was deposited with the Branch Clerk of Court who issued Receipt No.
7522484 8 for the full redemption price of the mortgaged properties. Accordingly, the Deputy Sheriff
issued a Certificate of Redemption in favor of the spouses Litonjua dated March 31, 1981. 9
In a letter of the same date, the Deputy Sheriff informed L & R Corporation of the payment by PWHAS of
the full redemption price and advised it that it can claim the payment upon surrender of its owner's
duplicate certificates of title. 10
On April 2, 1981, the spouses Litonjua presented for registration the Certificate of Redemption issued in
their favor to the Register of Deeds of Quezon City. The Certificate also informed L & R Corporation of the
fact of redemption and directed the latter to surrender the owner's duplicate certificates of title within five
days. 11
On April 22, 1981, L & R Corporation wrote a letter to the Sheriff, copy furnished to the Register of
Deeds, stating: (1) that the sale of the mortgaged properties to PWHAS was without its consent, in
contravention of paragraphs 8 and 9 of their Deed of Real Estate Mortgage; and (2) that it was not the
spouses Litonjua, but PWHAS, who was seeking to redeem the foreclosed properties, when under Articles
1236 and 1237 of the New Civil Code, the latter had no legal personality or capacity to redeem the
same. 12
On the other hand, on May 8 and June 8, 1981, the spouses Litonjua asked the Register of Deeds to
annotate their Certificate of Redemption as an adverse claim on the titles of the subject properties on
account of the refusal of L & R Corporation to surrender the owner's duplicate copies of the titles to the
subject properties. With the refusal of the Register of Deeds to annotate their Certificate of Redemption,
the Litonjua spouses filed a Petition 13 on July 17, 1981 against L & R Corporation for the surrender of the
owner's duplicate of Transfer Certificates of Title No. 197232 and 197233 before the then Court of First
Instance of Quezon City, Branch IV, docketed as Civil Case No. 32905.
On August 15, 1981, while the said case was pending, L & R Corporation executed an Affidavit of
Consolidation of Ownership. 14 Thereafter, on August 20, 1981, the Register of Deeds cancelled Transfer
Certificates of Title No. 197232 and 197233 and in lieu thereof, issued Transfer Certificates of Title No.
280054 15 and 28055 16 in favor of L & R Corporation, free of any lien or encumbrance.
With titles issued in its name, L & R Corporation advised the tenants of the apartments situated in the
subject parcels of land that being the new owner, the rental payments should be made to them, and that
new lease contracts will be executed with interested tenants before the end of August, 1981. 17 Upon
learning of this incident from their tenants, the spouses Litonjua filed an adverse claim  18 and a notice
of lis pendens 19 with the Register of Deeds. In the process, they learned that the prior sale of the
properties in favor of PWHAS was not annotated on the titles issued to L & R.
A complaint for Quieting of Title, Annulment of Title and Damages with preliminary injunction was filed by
the spouses Litonjua and PWHAS against herein respondents before the then Court of First Instance of
Quezon City, Branch 9, docketed as Civil Case No. Q-33362. 20 On February 10, 1987, the lower court
rendered its Decision 21 dismissing the Complaint upon its finding that the sale between the spouses
Litonjua and PWHAS was null and void and unenforceable against L & R Corporation and that the
redemption made was also null and void.
On appeal, the decision of the trial court was set aside by the Court of Appeals in its Decision dated June
22, 1994, 22 on the ground that the sale made to PWHAS as well as the redemption effected by the
spouses Litonjua were valid. However, the same was subsequently reconsidered and set aside in an
Amended Decision dated September 11, 1997. 23
Hence, the instant Petition on the following issues:
(1) whether or not paragraphs 8 and 9 of the Real Estate Mortgage are valid and enforceable;
(2) whether or not the sale of the mortgaged properties by the spouses Litonjua to PWHAS, without the
knowledge and consent of L & R Corporation, is valid and enforceable;
(3) whether or not PWHAS had the right to redeem the foreclosed properties on the account of the
spouses Litonjua; and
(4) whether or not there was a valid redemption.
Paragraphs 8 and 9 of the subject Deed of Real Estate Mortgage read as follows —
8. That the MORTGAGORS shall not sell, dispose of, mortgage, nor in any other manner encumber the
real property/properties subject of this mortgage without the prior written consent of the MORTGAGEE;
9. That should the MORTGAGORS decide to sell the real property/properties subject of this mortgage,
the MORTGAGEE shall be duly notified thereof by the MORTGAGORS, and should the MORTGAGEE be
interested to purchase the same, the latter shall be given priority over all the other prospective
buyers; 24
There is no question that the spouses Litonjua violated both the aforesaid provisions, selling the
mortgaged properties to PWHAS without the prior written consent of L & R Corporation and without giving
the latter notice of such sale nor priority over PWHAS.
Re: Validity of prohibition against subsequent sale of mortgaged property without prior written consent
of mortgagee and validity of subsequent sale to PWHAS
Petitioners defend the validity of the sale between them by arguing that paragraph 8 violates Article 2130
of the New Civil Code which provides that "(A) stipulation forbidding the owner from alienating the
immovable mortgaged shall be void."
In the case of Philippine Industrial Co. v. El Hogar Filipino and Vallejo, 25 a stipulation prohibiting the
mortgagor from entering into second or subsequent mortgages was held valid. This is clearly not the
same as that contained in paragraph 8 of the subject Deed of Real Estate Mortgage which also forbids any
subsequent sale without the written consent of the mortgagee. Yet, in  Arancillo v. Rehabilitation Finance
Corporation, 26 the case of Philippine Industrial Co., supra, was erroneously cited to have held a mortgage
contract against the encumbrance, sale or disposal of the property mortgaged without the consent of the
mortgagee is valid. No similar prohibition forbidding the owner of mortgaged property from
(subsequently) mortgaging the immovable mortgaged is found in our laws, making the ruling in Philippine
Industrial Co., supra, perfectly valid. On the other hand, to extend such a ruling to include subsequent
sales or alienation runs counter not only to Philippine Industrial Co., itself, but also to Article 2130 of the
New Civil Code.
Meanwhile in De la Paz v. Macondray &; Co., Inc.,  27 it was held that while an agreement of such nature
does not nullify the subsequent sale made by the mortgagor, the mortgagee is authorized to bring the
foreclosure suit against the mortgagor without the necessity of either notifying the purchaser or including
him as a defendant. At the same time, the purchaser of the mortgaged property was deemed not to have
lost his equitable right of redemption.
In Bonnevie v. Court of Appeals, 28 where a similar provision appeared in the subject contract of
mortgage, the petitioners therein, to whom the mortgaged property were sold without the written
consent of the mortgagee, were held as without the right to redeem the said property. No consent having
been secured from the mortgagee to the sale with assumption of mortgage by petitioners therein, the
latter were not validly substituted as debtors. It was further held that since their rights were never
recorded, the mortgagee was charged with the obligation to recognize the right of redemption only of the
original mortgagors-vendors. Without discussing the validity of the stipulation in question, the same was,
in effect, upheld.
Again, in Cruz v. Court of Appeals, 29 while a similar provision was recognized and applied, no discussion
as to its validity was made since the same was not raised as an issue.
On the other hand, in Tambunting v. Rehabilitation Finance Corporation, 30 the validity of a similar
provision was specifically raised and discussed and found as invalid. It was there ratiocinated that —
To be sure, the deed of second mortgage executed by the Escuetas in favor of Aurora Tambunting,
married to Antonio L. Tambunting, does contain a provision that "the property mortgaged shall not
be . . . the subject of any new or subsequent contracts of agreements, saving and excepting those
having connection with the first mortgage with the RFC, without first securing the written permission
and consent of MORTGAGEE". But the provision can only be construed as directed against subsequent
mortgages or encumbrance, not to an alienation of the immovable itself. For while covenants
prohibiting the owner from constituting a later mortgage over property registered under the Torrens Act
have been held to be legally permissible (Phil. Industrial Co. v. El Hogar Filipino, et al., 45 Phil. 336,
341-342; Bank of the Philippines v. Ty Camco Sobrino, 57 Phil. 801), stipulations "forbidding the owner
from alienating the immovable mortgaged" are expressly declared void by law (Art. 2130, Civil
Code). It is clear that the stipulation against "subsequent agreements" above mentioned had not been
breached by the assignment by the Escuetas (to the Hernandezes) of their right of redemption in
connection with the mortgage constituted if favor of the R.F.C. The assignment was not subsequent
mortgage or encumbrance, licitly comprehended by the prohibitory stipulation, but was actually a sale
or conveyance of all their rights in the encumbered real property — in truth, an alienation of the
immovable — which could not lawfully be forbidden. Moreover, since the subject of the assignment to
the Hernandezes had "connection with the first assignment with the R.F.C.", it did not fall within, but
was explicitly excepted from, the prohibitory stipulation in question. Finally, it should not be forgotten
that since the Tambuntings, in their own deed of conditional sale with the R.F.C., had accepted without
demur the provision that said contract could be revoked within one (1) year from September 16, 1955
at the option of the RFC, as vendor, should the former owner (Escueta) exercise his right to redeem the
property; and that the redemption of the property within said period by "the former owner or his
successor-in-interest" would render their instrument of conditional sale "automatically null and void and
without effect", they cannot now assume a position inconsistent with said provision.
Earlier, in PNB v. Mallorca, 31 it was reiterated that a real mortgage is merely an encumbrance; it does not
extinguish the title of the debtor, whose right to dispose — a principal attribute of ownership — is not
thereby lost. Thus, a mortgagor had every right to sell his mortgaged property, which right the
mortgagee cannot oppose.
In upholding the validity of the stipulation in question, the amended Decision relied on the cases of  Cruz
v. Court of Appeals, supra, and Medida v. Court of Appeals. 32 According to the Court of Appeals, said
cases, are not only more recent that of Tambunting, supra, but are also more applicable to the issue at
bar.
We are not convinced.
As we have mentioned, although a similar provision was recognized and applied in Cruz v. Court of
Appeals, supra, no discussion as to its validity was made since the same was not raised as an issue.
Thus, it cannot be said that the specific pronouncement in the Tambunting case that such a stipulation
can only be construed as against subsequent mortgages or encumbrances but not to an alienation of the
immovable itself, which is prohibited under Article 2130, was abandoned thereby. On the other hand, the
facts in the case of Medida v. Court of Appeals, are different from those in the present case for what was
in issue in the said case was a second mortgage over a foreclosed property during the period of
redemption. Thus, the ruling in Medida  quoted in the Amended Decision that "what is delimited is not the
mortgagor's  jus dispodendi, as an attribute of ownership, but merely the rights conferred by such act of
disposal which may correspondingly be restricted," actually refers to the fact that the only rights which a
mortgagor can legally transfer, cede and convey after the foreclosure of his properties are the right to
redeem the land, and the possession use and enjoyment of the same during the period of redemption. It
has no connection or reference to the right of a mortgagor to sell his mortgaged property without the
required consent of the mortgagee. To be sure, there is absolutely nothing in Medida that upholds the
validity of the stipulation in controversy.
Coming now to the issue of whether the redemption offered by PWHAS on account of the spouses
Litonjua is valid, we rule in the affirmative. The sale by the spouses Litonjua of the mortgaged properties
to PWHAS is valid. Therefore, PWHAS stepped into the shoes of the spouses Litonjua on account of such
sale and was in effect, their successor-in-interest. As such, it had the right to redeem the property
foreclosed by L & R Corporation. Again, Tambunting, supra, clarifies that —
. . .. The acquisition by the Hernandezes of the Escuetas' rights over the property carried with it the
assumption of the obligations burdening the property, as recorded in the Registry of Property,  i.e., the
mortgage debts in favor of the RFC (DBP) and the Tambuntings. The Hernandezes, by stepping into the
Escuetas' shoes as assignees, had the obligation to pay the mortgage debts, otherwise, these debts
would and could be enforced against the property subject of the assignment. Stated otherwise, the
Hernandezes, by the assignment, obtained the right to remove the burdens on the property subject
thereof by paying the obligations thereby secured; that is to say, they had the right of redemption as
regards the first mortgage, to be exercised within the time and in the manner prescribed by law and the
mortgage deed; and as regards the second mortgage, sought to be judicially foreclosed but yet
unforeclosed, they had the so-called equity of redemption.
The right of PWHAS to redeem the subject properties finds support in Section 6 of Act 3135 itself which
gives not only the mortgagor-debtor the right to redeem, but also his successors-in-interest. As vendee
of the subject properties, PWHAS qualifies as such a successor-in-interest of the spouses Litonjua.
Re: Validity of redemption made
It is clear from the records that PWHAS offered to redeem the subject properties seven (7) months after
the date of registration of the foreclosure sale, well within the one year period of redemption.
Re: Validity and enforceability of stipulation granting the mortgagee the right of first refusal

While petitioners question the validity of paragraph 8 of their mortgage contract, they appear to be silent
Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling his mortgaged
insofar as paragraph 9 thereof is concerned. Said paragraph 9 grants upon L & R Corporation the right of
property without the consent of the mortgagee is concerned, therefore, the ruling in the  Tambunting  case
first refusal over the mortgaged property in the event the mortgagor decides to sell the same. We see
is still the controlling law. Indeed, we are fully in accord with the pronouncement therein that such a
nothing wrong in this provision. The right of first refusal has long been recognized as valid in our
stipulation violates Article 2130 of the New Civil Code. Both the lower court and the Court of Appeals in
jurisdiction. The consideration for the loan-mortgage includes the consideration for the right of first
its Amended Decision rationalize that since paragraph 8 of the subject Deed of Real Estate Mortgage
refusal. L & R Corporation is in effect stating that it consents to lend out money to the spouses Litonjua
contains no absolute prohibition against the sale of the property mortgaged but only requires the
provided that in case they decide to sell the property mortgaged to it, then L & R Corporation shall be
mortgagor to obtain the prior written consent of the mortgagee before any such sale, Article 2130 is not
given the right to match the offered purchase price and to buy the property at that price. Thus, while the
violated thereby. This observation takes a narrow and technical view of the stipulation in question without
spouses Litonjua had every right to sell their mortgaged property to PWHAS without securing the prior
taking into consideration the end result of requiring such prior written consent. True, the provision does
written consent of L & R Corporation, they had the obligation under paragraph 9, which is a perfectly valid
not absolutely prohibit the mortgagor from selling his mortgaged property; but what it does not outrightly
provision, to notify the latter of their intention to sell the property and give it priority over other buyers.
prohibit, it nevertheless achieves. For all intents and purposes, the stipulation practically gives the
It is only upon failure of L & R Corporation to exercise its right of first refusal could the spouses Litonjua
mortgagee the sole prerogative to prevent any sale of the mortgaged property to a third party. The
validly sell the subject properties to others, under the same terms and conditions offered to L & R
mortgagee can simply withhold its consent and thereby, prevent the mortgagor from selling the property.
Corporation.
This creates an unconscionable advantage for the mortgagee and amounts to a virtual prohibition on the
owner to sell his mortgaged property. In other words, stipulations like those covered by paragraph 8 of
the subject Deed of Real Estate Mortgage circumvent the law, specifically, Article 2130 of the New Civil What then is the status of the sale made to PWHAS in violation of L & R Corporation's contractual right of
Code. first refusal? On this score, we agree with the Amended Decision of the Court of Appeals that the sale
made to PWHAS is rescissible. The case of Guzman, Bocaling & Co. v. Bonnevie 33 is instructive on this
point —
Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not binding upon the
parties. Accordingly, the sale made by the spouses Litonjua to PWHAS, notwithstanding the lack of prior
written consent of L & R Corporation, is valid. The respondent court correctly held that the Contract of Sale was not voidable but rescissible. Under
Article 1380 to 1381(3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently
rescinded by reason of injury to third persons, like creditors. The status of creditors could be validly
Re: Validity of redemption effected by PWHAS on the account of the spouses Litonjua
 accorded by the Bonnevies for they had substantial interest that were prejudiced by the sale of the (d) Allowing respondent L & R Corporation to retain its consolidated titles to the foreclosed properties
subject property to the Contract of Lease. but ordering it to pay to the Litonjua spouses the additional sum of P189,201.96 representing the
difference from the purchase price of P430,000.00 in the rescinded sale;
(e) Deleting the awards for moral and exemplary damages and attorney's fees to the respondents.
According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to
third persons, to secure reparation for damages caused to them by a contract, even if this should be
valid, by means of the restoration of things to their condition at the moment prior to the celebration of
said contract. It is a relief allowed for one of the contracting parties and even third persons from all
injury and damage the contract may cause, or to protect some incompatible and preferential right
created by the contract. Rescission implies a contract which, even if initially valid, produces a lesion or
pecuniary damage to someone that justifies its invalidation for reasons of equity.

It was then held that the Contract of Sale there, which violated the right of first refusal, was rescissible.

In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to L & R Corporation
over the subject properties since the Deed of Real Estate Mortgage containing such a provision was duly
registered with the Register of Deeds. As such, PWHAS is presumed to have been notified thereof by
registration, which equates to notice to the whole world.

We note that L & R Corporation had always expressed its willingness to buy the mortgaged properties on
equal terms as PWHAS. Indeed, in its Answer to the Complaint filed, L & R Corporation expressed that it
was ready, willing and able to purchase the subject properties at the same purchase price of
P430,000.00, and was agreeable to pay the difference between such purchase price and the redemption
price of P249,918.77, computed as of August 13, 1981, the expiration of the one-year period to redeem.
That it did not duly exercise its right of first refusal at the opportune time cannot be taken against it,
precisely because it was not notified by the spouses Litonjua of their intention to sell the subject property
and thereby, to give it priority over other buyers.

All things considered, what then are the relative rights and obligations of the parties? To recapitulate:,
the sale between the spouses Litonjua and PWHAS is valid, notwithstanding the absence of L & R
Corporation's prior written consent thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem
and its tender of the redemption price, as successor-in-interest of the spouses Litonjua, within the one-
year period should have been accepted as valid by the L & R Corporation. However, while the sale is,
indeed, valid, the same is rescissible because it ignored L & R Corporation's right of first refusal.

Foreseeing a possible rescission of the sale, the spouses Litonjua contend that with the restoration of the
original status quo, with no sale having been made, they should now be allowed to redeem the subject
properties, the period of redemption having been suspended during the period of litigation. In effect, the
spouses Litonjua want to retain ownership of the same. We cannot, however, sanction this belated
reversal of the spouses Litonjua's decision to sell. To do so would afford them undue advantage on
account of the appreciation of the value of the subject properties in the intervening years when they
precisely were the ones who violated and ignored the right of first refusal of L & R Corporation over the
same. Moreover, it must be stressed that in rescinding the sale made to PWHAS, the purpose is to uphold
and enforce the right of first refusal of L &R Corporation.

WHEREFORE, the Decision appealed from is hereby AFFIRMED with the following MODIFICATIONS:
(a) Ordering the rescission of the sale of the mortgaged properties between petitioners spouses
Reynaldo and Erlinda Litonjua and Philippine White House Auto Supply, Inc. and ordering said spouses
to return to Philippine White House Auto Supply, Inc. the purchase price of P430,000.00;
(c) Disallowing, due to the rescission of the sale made in its favor, the redemption made by Philippine
White House Auto Supply, Inc. and ordering Quezon City Sheriff Roberto Garcia to return to it the
"redemption" check of P240,798.94;