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
between Sanchez and Sulit, was absolutely simulated; hence, null and void. On the other hand, echoing
the appellate court, respondent contends that petitioners intended to be bound by those Deeds, and that
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
On the other hand, simulation takes place when the parties do not really want the contract they have
executed to produce the legal effects expressed by its wordings. 11 Simulation or vices of declaration may
be either absolute or relative. Article 1345 of the Civil Code distinguishes an absolute simulation from a
relative one while Article 1346 discusses their effects, as follows:
"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.
"Art. 1346. An absolutely simulated contract is void. A relative simulation, when it does not prejudice a
third person and is not intended for any purpose contrary to law, morals, good customs, public order or
public policy binds the parties to their agreement."
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
"a contract of purchase and sale is null and void and produces no effect whatsoever where it appears that
[the] same is without cause or consideration which should have been the motive thereof, or the purchase
price which appears thereon as paid but which in fact has never been paid by the purchaser to the
vendor."
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
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?
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.
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
receive the ₱150,000.00?
ATTY. AGRAVANTE: Objection, your Honor, the document is the best evidence.
ATTY. CABRERA: This is an action to annul a certain contract.
COURT: He received the consideration stated in the contract. The witness may answer.
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
receive the said amount from Norma Sulit or anybody else for that matter?
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
consideration was only for the purpose of placing the title to the property in the latter’s name. She testified as follows:
"Q And so you transferred the property in favor of Norma Sulit?
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
documents before the court as Exhibit "C", is this that document that you executed transferring the property in the name of Norma Sulit?
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
Exhibit "C"?
ATTY BUYCO: The question is leading, Your Honor.
COURT: Witness may answer.
A No amount was given, sir. We prepared this document to transfer the title [to] her name only." 17
Respondent never offered any evidence to refute the foregoing testimonies. 18 On the contrary, it even
admitted that the stipulated consideration of ₱150,000 in the two Deeds of Sale had never been actually
paid by Sanchez to petitioners; 19 neither by Sulit to the former.20
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
the same date, June 21, 1978. Six days thereafter, on June 27, 1978, it was mortgaged by Sulit to
Federal Insurance Company for ₱500,000. The mortgage was cancelled when she again mortgaged the
property to respondent for ₱569,000 on August 22, 1979. It is also undisputed that petitioners did not
receive any portion of the proceeds of the loan.
Clearly, the Deeds of Sale were executed merely to facilitate the use of the property as collateral to
secure a loan from a bank. 23 Being merely a subterfuge, these agreements could not have been the
source of any consideration for the supposed sales. 24 Indeed, the execution of the two documents on the
same day sustains the position of petitioners that the Contracts of Sale were absolutely simulated, and
that they received no consideration therefor.25
The failure of Sulit to take possession of the property purportedly sold to her was a clear badge of
simulation that rendered the whole transaction void and without force and effect, pursuant to Article
140926 of the Civil Code.27 The fact that she was able to secure a Certificate of Title to the subject property
in her name did not vest her with ownership over it. 28 A simulated deed of sale has no legal effect;
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
Second Issue: Good Faith of Mortgagee
Petitioners argue that respondent was not a mortgagee in good faith because, at the time it registered
the real estate mortgage over the subject property, their adverse claim and notice of lis pendens  had
already been annotated on the TCT (on October 30, 1979 and December 10, 1979, respectively). On the
other hand, respondent maintains that petitioners were the ones in bad faith, because they already had
knowledge of the existence of the mortgage over the property when they caused the annotation of their
adverse claim and notice of lis pendens.
As a general rule, every person dealing with registered land may safely rely on the correctness of the
certificate of title and is no longer required to look behind the certificate in order to determine the actual
owner.31 To do so would be contrary to the evident purpose of Section 39 of Act 496 which we quote
hereunder:
"Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration, and every
subsequent purchaser of registered land who takes a certificate of title for value in good faith shall hold
the same free of all encumbrances except those noted on said certificate, and any of the following
encumbrances which may be subsisting, namely:
"First. Liens, claims, or rights arising or existing under the laws or Constitution of the United States or
of the Philippine Islands which the statutes of the Philippine Islands cannot require to appear of
record in the Registry.
"Second. Taxes within two years after the same became due and payable.
"Third. Any public highway, way, private way established by law, or any Government irrigation canal
or lateral thereof, where the certificate of title does not state that the boundaries of such highway,
way, or irrigation canal or lateral thereof, have been determined.
"But if there are easements or other rights appurtenant to a parcel of registered land which for any
reason have failed to be registered, such easements or rights shall remain so appurtenant
notwithstanding such failure, and shall be held to pass with the land until cut off or extinguished by the
registration of the servient estate, or in any other manner."
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 50 dated April 1, 2004. Then on
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.
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.
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
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.