No. 1 DAVID G. DULA vs.

 DR. RESTITUTO MARAVILLA and TERESITA

MARAVILLA
G.R. NO. 134267 : May 9, 2005

FACTS:

Sometime in November, 1993, herein respondents - the spouses Restituto Maravilla and Teresita
Maravilla - purchased a 5-door apartment building at Makati City, Unit A of which is occupied
by herein petitioner, David G. Dula, since 1968 at a monthly rental of P2,112.00 under an oral
month-to-month contract of lease with the former owner.

On January 10, 1994, respondents addressed a notice to petitioner formally informing the latter
of the termination of his lease and giving him three (3) months from January 31, 1994 within
which to vacate the unit occupied by him and to surrender the possession thereof. Petitioner
refused. Hence, on September 29, 1994 in the Metropolitan Trial Court (MeTC) of Makati City,
a complaint for ejectment was filed against him by the respondents.

In time, petitioner went on appeal to the Regional Trial Court (RTC) at Makati City, contending,
in the main, that the complaint filed against him failed to state a cause of action, and, therefore,
should have been dismissed outright by the MeTC.

After the parties have submitted their respective memoranda, the RTC came out with its decision
of August 27, 1997,4 affirming in toto the appealed decision of the MeTC.

With his motion for reconsideration having been denied by the same court in its order of January
26, 1998,5 petitioner elevated the case to the Court of Appeals. The Court of Appeals affirmed
the appealed May 24, 1995 decision of the RTC.

In the complaint6 they filed against petitioner before the MeTC of Makati City, respondents, as
plaintiffs therein, alleged, inter alia, thus:

6. That on January 10, 1994 plaintiffs through counsel made a written notice and demand that the
former is terminating the lease over the premises effective January 31, 1994 for the reason of
personal use and to pay rentals with three (3) months to vacate and surrender premises;

As may be gleaned from the foregoing allegations, two (2) grounds are relied upon by the
respondents in seeking petitioner's ejectment from the premises in question, namely:

(a) respondents' need of the leased premises for their own personal use; andcralawlibrary

(b) expiration of the lease contract with the termination of the month-to-month lease effective
January 31, 1994.

In both instances, respondents gave petitioner a grace period of three (3) months within which to
vacate the place.

ISSUES: (1) the ejectment complaint is fatally flawed as it failed to state a cause of action
because while it is based on the need of the leased premises for the personal use of the
respondents, the same complaint failed to allege that respondents do not own any other

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residential unit in the same municipality, as required by Section 5 (c) of Batas Pambansa (B.P.)
Blg. 877; NO

(2) both the MeTC and the RTC erred in ordering petitioner's ejectment on ground of expiration
of the lease despite the fact that such a ground is not pleaded in the complaint; and NO. A lease
on a month-to-month basis is, under Art. 1687, a lease with a definite period. Accordingly,
a lease agreement though not having a fixed period, but rentals are paid monthly, is
deemed to be from month to month, thereby considered to be for a definite period,
nonetheless.

(3) even if alleged, the expiration of petitioner's month-to-month contract of lease cannot be a
basis for ejectment because Section 6 of B.P. Blg. 877 suspended the application of Article 1687
of the Civil Code. NO. What has been suspended by the Rent Control Law (Section 6 of B.P.
Blg. 877, formerly Section 6 of B.P. Blg. 25) is Art. 1673 and not Art. 1687 of the Civil
Code.

HELD:

We DENY.

The aforementioned grounds for judicial ejectment are expressly provided for in B.P. Blg. 877,
entitled "An Act Providing for the Stabilization and Regulation of Rentals of Certain Residential
Units and for other Purposes", which, by virtue of R.A. 7644, was in force until 1997. Section 5
thereof pertinently reads:

Section 5. Grounds for Judicial Ejectment. - Ejectment shall be allowed on the following
grounds:

xxx       xxx       xxx

(c) Legitimate need of owner/lessor to repossess his property for his own use or for the use of
any immediate member of his family as a residential unit, such owner or immediate member not
being the owner of any other available residential unit within the same city or
municipality: Provided, however, That the lease for a definite period has expired: Provided,
further, That the lessor has given the lessee formal notice three (3) months in advance of lessor's
intention to repossess the property: and Provided, finally, That the owner/lessor is prohibited
from leasing the residential unit or allowing its use by a third party for at least one year.

xxx       xxx       xxx

(f) Expiration of the period of the lease contract.

xxx       xxx       xxx

Anent the first ground under Section 5(c) above, which is the respondents' need of the property
for their own use, petitioner contends that the complaint should be dismissed for lack of cause of

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action because it failed to allege that the respondents had no other available residential unit
within the same city or municipality.

We agree with the Court of Appeals that there was here a substantial compliance with the
requirement of Section 5 (c) of B.P. Blg. 877 when respondents specifically averred in their
Supplemental to Position Paper that "plaintiffs has (sic) no other property in Makati except that
property located at Eureka St., Makati, Metro Manila"7 . In much the same way that a complaint,
which fails to state a cause of action, may be cured by evidence presented during the trial in
regular procedure, a defective complaint in summary procedure may likewise be cured by the
allegations in the position paper. Thus, the MeTC cannot be faulted for not dismissing the case
for lack of cause of action.

The ground for judicial ejectment stated in Section 5 (c) of B.P. Blg. 877 may be reduced to
the following essential requisites:

(1) the owner's/lessor's legitimate need to repossess the leased property for his own personal use
or for the use of any of his immediate family;

(2) the owner/lessor does not own any other available residential unit within the same city or
municipality;

(3) the lease for a definite period has expired;

(4) there was formal notice at least three (3) months prior to the intended date to repossess the
property; andcralawlibrary

(5) the owner must not lease or allow the use of the property to a third party for at least one year.

Thus far, we have noted and discussed the first and second requisites. The fact that there was
formal notice and that it was given at least three (3) months from intended date to repossess the
property, which is the fourth requisite, is not disputed.

Our discussion now brings us to the third element, which is the alleged expiration of the period
of lease.

It is acknowledged that there was neither any written nor verbal agreement as to a fixed period of
lease between the respondents and the petitioner. There was, however, a verbal agreement for the
payment of rental at P2,112.00 on a monthly basis. By express provision of Article 16878 of the
Civil Code, the term of the lease in the case at bar is from month-to-month. Admittedly, there
was a written notice served by the respondents on January 10, 1994 upon petitioner for the
termination of the lease effective January 31, 1994. Citing this Court's ruling in De Vera v. Court
of Appeals,9 the Court of Appeals held that the period of lease thereby expired by the end of the
month of January, 1994.

Petitioner, however, contends otherwise. He argues that the operation of Article 1687 was
suspended with the suspension of Article 1673 by Section 6 of B.P. Blg. 877, which states:

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Section 6. Application of the Civil Code and Rules of Court of the Philippines. - Except when the
lease is for a definite period, the provisions of paragraph (1) of Article 167310 of the Civil Code
of the Philippines, insofar as they refer to residential units covered by this Act, shall be
suspended during the effectivity of this Act, but other provisions of the Civil Code and the Rules
of Court on lease contracts, insofar as they are not in conflict with the provisions of this Act shall
apply.

The Court disagrees.

The Court's pronouncement in De Vera v. Court of Appeals,11 is enlightening:

x x x The issue in this case is whether the oral contract of lease was on a month-to-month basis
which is terminated at the end of every month. We hold that it is. We have already ruled in a
number of cases that a lease on a month-to-month basis is, under Art. 1687, a lease with a
definite period, upon the expiration of which upon demand made by the lessor on the lessee to
vacate, the ejectment of the lessee may be ordered.

Art. 1687 of the Civil Code provides:

Art. 1687. If the period for the lease has not been fixed, it is understood to be from year to year,
if the rent agreed upon is annual; from month to month, if it is monthly; from week to week, if
the rent is weekly; and from day to day, if the rent is to be paid daily. However, even though a
monthly rent is paid, and no period for the lease has been set, the Courts may fix a longer term
for the lease after the lessee has occupied the premises for over one year. If the rent is weekly,
the Courts may likewise determine a longer period after the lessee has been in possession for
over six months. In case of daily rent, the courts may also fix a longer period after the lessee has
stayed in the place for over one month.

This provision has not been affected by the suspension in '6 of B.P. Blg. 877 which provides:

'6. Application of the Civil Code and Rules of Court of the Philippines. - Except when the lease is
for a definite period, the provisions of paragraph (1) of Article 1673 of the Civil Code of the
Philippines, in so far as they refer to residential units covered by this Act, shall be suspended
during the effectivity of this Act, but other provisions of the Civil Code and the Rules of Court
on lease contracts, in so far as they are not in conflict with the provisions of this Act shall apply.

Thus, what has been suspended by the Rent Control Law (Section 6 of B.P. Blg. 877,
formerly Section 6 of B.P. Blg. 25) is Art. 1673 and not Art. 1687 of the Civil Code. The
effect of the suspension [of Art. 1673] on Art. 1687 is only that the lessor cannot eject the tenant
by reason alone of the expiration of the period of lease as provided in said Art. 1687. Otherwise,

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Art. 1687 itself has not been suspended. Hence, it can be used to determine the period of a lease
agreement.

As petitioner was notified of the expiration of the lease effective December 30, 1990, her
right to stay in the premises came to an end. (Emphasis supplied.)

As early as 1986, in Rivera v. Florendo,12 the Court settled this issue on Section 6 of B.P. 877
(formerly Section 6, of B.P. 25) when it explained:

What is suspended under the aforequoted provision of law is Article 1673 of the Civil Code of
the Philippines and not Article 1687 of the same Code. The effect of said suspension is that
independently of the grounds for ejectment enumerated in Batas Pambansa Blg. 25, the
owner/lessor cannot eject the tenant by reason of the expiration of the period of lease as fixed or
determined under Article 1687. It does not mean that the provisions of Article 1687 itself had
been suspended. Thus, the determination of the period of a lease agreement can still be made in
accordance with said Article 1687.

Similar to the case at bar, in Rivera, there was admittedly no definite period of lease agreed upon
by the parties. However, it was established that the rent was paid on a monthly basis. The Court's
conclusion in Rivera that the period of lease is considered to be from month to month in
accordance with Article 1687 is, therefore, applicable to the present case as well.

When the respondent spouses gave petitioner notice on January 10, 1994 of their personal
need to use the property, demanding that petitioner vacate the same, the contract of lease is
deemed to have expired as of the end of that month or on January 31, 1994 as indicated in
the said notice to vacate.

In Baens v. Court of Appeals,13 we held:

x x x even if the month to month arrangement is on a verbal basis, if it is shown that the
lessor needs the property for his own use or for the use of an immediate member of the
family or any other statutory grounds to eject under Section 5 of Batas Pambansa Blg. 25
(later also Section 5 of B.P. Blg. 877), which happens to be applicable, then the lease is
considered terminated as of the end of the month, after proper notice or demand to vacate
has been given. (See Crisostomo v. Court of Appeals, 116 SCRA 199). (Emphasis supplied.)

The third element required in Section 5(c) of B.P. Blg. 877 which is the expiration of the lease
contract is definitely present in the instant case.

The fifth element, being in the nature of a condition, simply entails an undertaking by the
owner/lessor not to lease or allow a third party to use the property for at least one year.

All the elements required by Section 5(c) of B.P. Blg. 877 are extant in the present case.
There is, then, no other logical conclusion but to uphold the uniform ruling of the three (3) lower
courts mandating petitioner's ejectment from the subject premises.

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Anent the second ground for judicial ejectment under Section 5(f) of B.P. Blg. 877 which is
the expiration of the lease contract, this Court for the first time, through Justice Teodoro
Padilla in Uy Hoo and Sons Realty Development Corp. v. Court of Appeals, 14 applied Article
1687 of the Civil Code resulting in the expiration of the lease contract therein involved, so much
so that even if the lessor does not need the leased property for personal use under Section 5(c) of
B.P. Blg. 877, such expiration of the lease term may be equally be used by the lessor to eject the
tenant based on Section 5(f) of B.P. 877.

The ruling in Uy Hoo was applied by the Court in the succeeding cases of Palanca v.
Intermediate Appellate Court,15 Legar Management & Realty Corp. v. Court of Appeals,16 and
once again, in De Vera v. Court of Appeals17, where the Court ruled:

The expiration of a period of lease as a ground for ejectment is expressly provided in '5(f).
Petitioner is in error in relying on '5 of the original law, B.P. Blg. 25, which speaks of the
expiration of "written lease contract" as ground for ejectment implying that an oral lease contract
like the one at bar is a lease contract without a definite period. B.P. Blg. 877 '5(f) now says
"expiration of the period of the lease contract," thus removing the distinction between a written
and oral contract of lease. Hence, the ejectment of petitioner is justified. (Emphasis supplied.)

Recapitulating, the Court stresses that Article 1687 of the Civil Code has not been suspended by
Section 6 of Blg. 877, such that the period of the lease contract may be made deemed to expire in
accordance with Article 1687.18 Accordingly, a lease agreement though not having a fixed
period, but rentals are paid monthly, is deemed to be from month to month, thereby
considered to be for a definite period, nonetheless. Such a lease contract expires after the last
day of any given 30-day period repeating the same cycle of the 30-day period until either party
expresses his intention to terminate the month-to-month lease agreement.19

No. 2 DARBY PILIPINAS, INC. v. GOODYEAR PHILIPPINES, INC. and

MACGRAPHICS CARRANZ INTERNATIONAL CORPORATION
G.R. NO. 182148; JUNE 8, 2011

FACTS: Macgraphics owned several billboards across Metro Manila and other surrounding
municipalities, one of which was a 35 x 70 neon billboard located at the Magallanes Interchange
in Makati City. The Magallanes billboard was leased by Macgraphics to Sime Darby in April
1994 at a monthly rental of P120,000.00. The lease had a term of four years and was set to expire
on March 30, 1998. Upon signing of the contract, Sime Darby paid Macgraphics a total of
Php1.2 million representing the ten-month deposit which the latter would apply to the last ten
months of the lease. Thereafter, Macgraphics configured the Magallanes billboard to feature
Sime Darby's name and logo.

On April 22, 1996, Sime Darby executed a Memorandum of Agreement (MOA) with Goodyear,
whereby it agreed to sell its tire manufacturing plants and other assets to the latter for a total of
P1.5 billion.

Just a day after, on April 23, 1996, Goodyear improved its offer to buy the assets of Sime Darby

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from P1.5 billion toP1.65 billion. The increase of the purchase price was made in consideration,
among others, of the assignment by Sime Darby of the receivables in connection with its
billboard advertising in Makati City and Pulilan, Bulacan.

On May 9, 1996, Sime Darby and Goodyear executed a deed entitled "Deed of Assignment in
connection with Microwave Communication Facility and in connection with Billboard
Advertising in Makati City and Pulilan, Bulacan"(Deed of Assignment),through which Sime
Darby assigned, among others, its leasehold rights and deposits made to Macgraphics pursuant to
its lease contract over the Magallanes billboard.

Sime Darby then notified Macgraphics of the assignment of the Magallanes billboard in favor of
Goodyear through a letter-notice dated May 3, 1996.

After submitting a new design for the Magallanes billboard to feature its name and logo,
Goodyear requested that Macgraphics submit its proposed quotation for the production costs of
the new design. In a letter dated June 21, 1996 Macgraphics informed Goodyear that the monthly
rental of the Magallanes billboard is Php 250,000.00 and explained that the increase in rental was
in consideration of the provisions and technical aspects of the submitted design.

Goodyear replied on July 8, 1996 stating that due to budget constraints, it could not accept
Macgraphics offer to integrate the cost of changing the design to the monthly rental. Goodyear
stated that it intended to honor the P120,000.00 monthly rental rate given by Macgraphics to
Sime Darby. It then requested that Macgraphics send its quotation for the simple background
repainting and re-lettering of the neon tubing for the Magallanes billboard.

Macgraphics then sent a letter to Sime Darby, dated July 11, 1996, informing the latter that it
could not give its consent to the assignment of lease to Goodyear. Macgraphics explained that
the transfer of Sime Darbys leasehold rights to Goodyear would necessitate drastic changes to
the design and the structure of the neon display of the Magallanes billboard and would entail the
commitment of manpower and resources that it did not foresee at the inception of the lease.

Attaching a copy of this letter to a correspondence dated July 15, 1996, Macgraphics advised
Goodyear that any advertising service it intended to get from them would have to wait until after
the expiration or valid pre-termination of the lease then existing with Sime Darby.

On September 23, 1996, due to Macgraphics refusal to honor the Deed of Assignment, Goodyear
sent Sime Darby a letter, via facsimile, demanding partial rescission of the Deed of Assignment
and the refund of Php 1,239,000.00, the pro-rata value of Sime Darby's leasehold rights over the
Magallanes billboard.

As Sime Darby refused to accede to Goodyears demand for partial rescission, the latter
commenced Civil Case No. 97-561 with the RTC. In its complaint, Goodyear alleged that Sime
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Darby [1] was unable to deliver the object of the Deed of Assignment and [2] was in breach of
its warranty under Title VII, Section B, paragraph 2 of the MOA, stating that "no consent of any
third party with whom Sime Darby has a contractual relationship is required in connection with
the execution and delivery of the MOA, or the consummation of the transactions contemplated
therein."

Including Macgraphics as an alternative defendant, Goodyear argued that should the court find
the partial rescission of the Deed of Assignment not proper, it must be declared to have
succeeded in the rights and interest of Sime Darby in the contract of lease and Macgraphics be
ordered to pay it the amount of P1,239,000.00.

ISSUE: Is partial rescission of the Deed of Assignment is proper? YES. Apply Art. 1649 of
Civil Code .

HELD: The petition of Sime Darby remains bereft of any merit. Article 1649 of the New Civil
Code provides:

Art. 1649. The lessee cannot assign the lease without the consent of the lessor, unless there is a
stipulation to the contrary. (n)

In an assignment of a lease, there is a novation by the substitution of the person of one of the
parties the lessee. The personality of the lessee, who dissociates from the lease, disappears.
Thereafter, a new juridical relation arises between the two persons who remain the lessor and the
assignee who is converted into the new lessee. The objective of the law in prohibiting the
assignment of the lease without the lessors consent is to protect the owner or lessor of the
leased property.

Broadly, a novation may either be extinctive or modificatory. It is extinctive when an old

obligation is terminated by the creation of a new obligation that takes the place of the former; it
is merely modificatory when the old obligation subsists to the extent it remains compatible with
the amendatory agreement. An extinctive novation results either by changing the object or
principal conditions (objective or real), or by substituting the person of the debtor or subrogating
a third person in the rights of the creditor (subjective or personal). Under this mode, novation
would have dual functions one to extinguish an existing obligation, the other to substitute a new
one in its place. This requires a conflux of four essential requisites: (1) a previous valid
obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of
the old obligation; and (4) the birth of a valid new obligation.

While there is no dispute that the first requisite is present, the Court, after careful consideration
of the facts and the evidence on record, finds that the other requirements of a valid novation are
lacking. A review of the lease contract between Sime Darby and Macgraphics discloses no
stipulation that Sime Darby could assign the lease without the consent of Macgraphics.
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Moreover, contrary to the assertions of Sime Darby, the records are bereft of any evidence that
clearly shows that Macgraphics consented to the assignment of the lease. As aptly found by the
RTC and the CA, Macgraphics was never part of the negotiations between Sime Darby and
Goodyear. Neither did it give its conformity to the assignment after the execution of the Deed of
Assignment.

The consent of the lessor to an assignment of lease may indeed be given expressly or
impliedly. It need not be given simultaneously with that of the lessee and of the assignee.
Neither is it required to be in any specific or particular form. It must, however, be clearly
given. In this case, it cannot be said that Macgraphics gave its implied consent to the assignment
of lease. DENIED.

No. 3 LILIBETH SUNGA-CHAN and CECILIA SUNGA vs. LAMBERTO T. CHUA

G.R. No. 143340       August 15, 2001

FACTS

Lamberto T. Chua, respondent, filed a complaint against Lilibeth Sunga Chan and Cecilia
Sunga, daughter and wife, respectively of the deceased Jacinto L. Sunga, for "Winding Up of
Partnership Affairs, Accounting, Appraisal and Recovery of Shares and Damages with Writ of
Preliminary Attachment" with the RTC of Zamboanga del Norte.

Respondent alleged that he verbally entered into a partnership with Jacinto in the
distribution of Shellane Liquefied Petroleum Gas in Manila. For business convenience,
respondent and Jacinto allegedly agreed to register the business name of their
partnership under the name of Jacinto as a sole proprietorship. Respondent allegedly delivered
his initial capital contribution of P100,000.00 to Jacinto while the latter in turn produced
P100,000.00 as his counterpart contribution, with the intention that the profits would be equally
divided between them. Its business operation went quite and was profitable. Respondent claimed
that he could attest to success of their business because of the volume of orders and deliveries.
Respondent however suspected that the amount indicated in these documents were understated
and undervalued by Jacinto and Josephine for their own selfish reasons and for tax avoidance.

Upon Jacinto's death his surviving wife, petitioner Cecilia and particularly his daughter,
petitioner Lilibeth, took over the operations, control, custody, disposition and management of
Shellite without respondent's consent. Despite respondent's repeated demands upon petitioners
for accounting, inventory, appraisal, winding up and restitution of his net shares in the
partnership, petitioners failed to comply. Petitioner Lilibeth allegedly continued the operations of
Shellite, converting to her own use and advantage its properties.

Respondent claimed that after petitioner Lilibeth ran out the alibis and reasons to evade
respondent's demands, she disbursed out of the partnership funds the amount of P200,000.00 and
partially paid the same to respondent. Petitioner Lilibeth allegedly informed respondent that the
amount represented partial payment of the latter's share in the partnership, with a promise that
the former would make the complete inventory and winding up of the properties of the business
establishment. Despite such commitment, petitioners allegedly failed to comply with their duty

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to account, and continued to benefit from the assets and income of Shellite to the damage and
prejudice of respondent. Due to the petitioner’s failure to appear the hearings, they were deemed
to have waived the right to object the claim. The Sheriff of Manila levied the property of Lilibeth
Sunga-Chan which was auctioned to Lamberto Chua for P8 million. However, petitioner Sunga-
Chan argues that such property forms part of a conjugal partnership between his husband and
cannot be held liable.

ISSUE
1.       Whether a partnership existed between respondent and Jacinto from 1977 until Jacinto's
death.       YES.

2.       Whether the partnership is invalid on the ground that it was not registered to SEC? NO.
VALID

RULING

1. A partnership may be constituted in any form, except where immovable property of

real rights are contributed thereto, in which case a public instrument shall
necessary. Hence, based on the intention of the parties, a verbal contract of partnership
may arise. The essential profits that must be proven to that a partnership was agreed
upon are (1) mutual contribution to a common stock, and (2) a joint interest in the
profits. 

Understandably so, in view of the absence of the written contract of partnership between
respondent and Jacinto, respondent resorted to the introduction of documentary and testimonial
evidence to prove said partnership. The "Dead Man's Statute" was applied by the petitioner to
this case so as to render inadmissible respondent's testimony and that of his witness, Josephine.
However, petitioners' reliance alone on such cannot prevail over the factual findings of the trial
court and the Court of Appeals that a partnership was established between respondent and
Jacinto.

Considering that the death of a partner results in the dissolution of the partnership, in this
case, it was Jacinto's death that respondent as the surviving partner had the right to an account of
his interest as against petitioners. It bears stressing that while Jacinto's death dissolved the
partnership, the dissolution did not immediately terminate the partnership. The Civil
Code expressly provides that upon dissolution, the partnership continues and its legal personality
is retained until the complete winding up of its business, culminating in its termination.

2. Petitioners maintain that said partnership that had initial capital of P200,000.00 should
have been registered with the Securities and Exchange Commission (SEC) since
registration is mandated by the Civil Code, True, Article 1772 of the Civil Code requires
that partnerships with a capital of P3,000.00 or more must register with the SEC,
however, this registration requirement is not mandatory.

Article 1768 of the Civil Code  explicitly provides that the partnership retains its juridical
personality even if it fails to register. The failure to register the contract of partnership
does not invalidate the same as among the partners, so long as the contract has the essential
requisites, because the main purpose of registration is to give notice to third parties, and it can

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be assumed that the members themselves knew of the contents of their contract. In the case at
bar, non-compliance with this directory provision of the law will not invalidate the partnership
considering that the totality of the evidence proves that respondent and Jacinto indeed forged the
partnership in question.

ISSUE: Whether or not the absolute community of property of spouses Lilibeth Sunga-Chan and
Norberto Chan may be lawfully made to answer Lilibeth Sunga-Chan’s liability? YES.

HELD:
The fact that the levied parcel of land is a conjugal property of the spouses Chan does not vitiate
the levy and the sale of property, per se. The property is not among those exempted from
execution under the rules of Court. The property levied by the Sheriff may be held liable for the
liabilities of Lilibeth Sunga-Chan as the same is a part of absolute community property. The use
of the assets of Shellite may be reasonably considered to have been used for Lilibeth Sunga-
Chan and Norberto Chan’s benefit. The property was auctioned for a price of P8 million by Chua
but the claim of Chua only amounts to P5,529,392.52 which means that Lamberto Chua owes
Lilibeth Sunga-Chan the excess amount of P2,470,607.48.

No.4 LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and CARMELITO

JOSE vs. DONALDO EFREN C. RAMIREZ and Spouses CESAR G. RAMIREZ JR. and
CARMELITA C. RAMIREZ
G.R. NO. 144214, 14 JULY 2003

A share in a partnership can be returned only after the completion of the latter’s dissolution,
liquidation and winding up of the business.

FACTS:

Luzviminda J. Villareal, Carmelito Jose and Jesus Jose formed a partnership with a capital of
P750,000 for the operation of a restaurant and catering business under the name “Aquarius Food
House and Catering Services.” Villareal was appointed general manager and Carmelito Jose,
operations manager. Respondent Donaldo Ramirez joined as a partner on September 5, 1984
with a capital contribution of P250,000 which was paid by his parents, Respondents Cesar and
Carmelita Ramirez. Subsequently, one of the partners, Jesus Jose, withdrew from the partnership,
and his capital contribution of 1/4 was refunded to him in cash by agreement of the partners. His
capital contribution of P250,000 was refunded to him in cash by agreement of the partners.

Meanwhile, without prior knowledge of respondents, petitioners closed down the restaurant,
allegedly because of increased rental. Respondent informed petitioners that they were no longer
interested in continuing their partnership or in reopening the restaurant, and that they were
accepting the latter’s offer to return their capital contribution consisting of 1/3 share. However,
all their written requests left unheeded.

Respondents subsequently filed a Complaint for the collection of a sum of money from
petitioners. Petitioners contended that respondents had expressed a desire to withdraw from the
partnership and had called for its dissolution under Articles 1830 and 1831; that respondents had
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been paid, upon the turnover to them of furniture and equipment worth over P400,000; and that
the latter had no right to demand a return of their equity because their share, together with the
rest of the capital of the partnership, had been spent as a result of irreversible business losses.

In their Reply, respondents alleged that had not received any regular report or accounting from
the latter, who had solely managed the business. Respondents alleged that they did not know of
any loan encumbrance on the restaurant. According to them, the loans incurred by petitioners
should be regarded as purely personal and, as such, not chargeable to the partnership.

Respondents also alleged that they expected the equipment and the furniture stored in their house
to be removed by petitioners as soon as the latter found a better location for the restaurant. RTC
17 ruled that the parties had voluntarily entered into a partnership, which could be dissolved at
any time. Petitioners clearly intended to dissolve it when they stopped operating the restaurant.
Hence, the trial court rendered a judgment in favor of respondents and ordering the petitioners to
pay jointly and severally.

Hence, this Petition.

ISSUE:

Whether petitioners are liable to respondents for the latter’s share in the partnership. NO.

RULING:

We hold that respondents have no right to demand from petitioners the return of their equity
share.

Both the trial and the appellate courts found that a partnership had indeed existed, and that it was
dissolved when respondents informed petitioners of the intention to discontinue it because of the
former’s dissatisfaction with, and loss of trust in, the latter’s management of the partnership
affairs. Except as managers of the partnership, petitioners did not personally hold its equity or
assets. The partnership has a juridical personality separate and distinct from that of each
of the partners. Since the capital was contributed to the partnership, not to petitioners, it is the
partnership that must refund the equity of the retiring partners, the amount to be refunded is
necessarily limited to its total resources. In other words, it can only pay out what it has in its
coffers, which consists of all its assets. However, before the partners can be paid their shares,
the creditors of the partnership must first be compensated. After all the creditors have been
paid, whatever is left of the partnership assets becomes available for the payment of the partners
shares.

Evidently, in the present case, the exact amount of refund equivalent to respondents’ one-third
share in the partnership cannot be determined until all the partnership assets will have been
liquidated.

The records show that the partnership capital was actually reduced. When petitioners and
respondents ventured into business together, they should have prepared for the fact that their
investment would either grow or shrink. In the present case, the investment of respondents
substantially dwindled. The original amount of P250,000 which they had invested could no

12 | P a g e
longer be returned to them, because one third of the partnership properties at the time of
dissolution did not amount to that much.

It is a long established doctrine that the law does not relieve parties from the effects of unwise,
foolish or disastrous contracts they have entered into with all the required formalities and with
full awareness of what they were doing. Courts have no power to relieve them from obligations
they have voluntarily assumed, simply because their contracts turn out to be disastrous deals or
unwise investments.

No. 5 SPS. ROLANDO AND HERMINIA SALVADOR v. SPS. ROGELIO AND

ELIZABETH RABAJA AND ROSARIO GONZALES
GR No. 199990, February 4, 2015

FACTS:

Spouses Rabaja learned that Spouses Salvador were looking for a buyer of the subject property.

Petitioner Herminia Salvador (Herminia) personally introduced Gonzales to them as the

administrator of the said property. Spouses Salvador even handed to Gonzales the owner's
duplicate certificate of title over the subject property.

Spouses Rabaja made an initial payment of P48,000.00 to Gonzales in the presence of Herminia.
Gonzales then presented the Special Power of Attorney[3] (SPA), executed by Rolando Salvador
(Rolando).

On the same day, the parties executed the Contract to Sell[4] which stipulated that for a
consideration of P5,000,000.00, Spouses Salvador sold, transferred and conveyed in favor of
Spouses Rabaja the subject property. Spouses Rabaja made several payments totaling
P950,000.00, which were received by Gonzales pursuant to the SPA provided earlier as
evidenced by the check vouchers signed by Gonzales and the improvised receipts signed by
Herminia.

Spouses Salvador complained to Spouses Rabaja that they did not receive any payment from
Gonzales. This prompted Spouses Rabaja to suspend further payment of the purchase price; and
as a consequence, they received a notice to vacate the subject property from Spouses Salvador
for non-payment of rentals.

Spouses Salvador instituted an action for ejectment against Spouses Rabaja. In turn, Spouses
Rabaja filed an action for rescission of contract against Spouses Salvador and Gonzales.

In the action for ejectment, the MeTC ruled in favor of Spouses Salvador finding that valid
grounds existed for the eviction of Spouses Rabaja from the subject property and ordering them
to pay back rentals.

Spouses Rabaja appealed to the Regional Trial Court which reversed the MeTC ruling. The CA
ruled in favor of Spouses Salvador and reinstated the MeTC ruling ejecting Spouses Rabaja.

CA decision became final and executory.

13 | P a g e
Spouses Salvador filed their answer with counterclaim and cross-claim[12] contending that there
was no meeting of the minds between the parties and that the SPA in favor of Gonzales was
falsified. They further averred that they did not receive any payment from Spouses Rabaja
through Gonzales.

RTC- rendered a decision in favor of Spouses Rabaja. It held that the signature of Spouses
Salvador affixed in the contract to sell appeared to be authentic. It also held that the contract,
although denominated as "contract to sell," was actually a contract of sale because Spouses
Salvador, as vendors, did not reserve their title to the property until the vendees had fully paid
the purchase price. The CA affirmed the decision of the RTC.

ISSUE: Whether there was a valid “contract to sell”? Contract of sales

HELD:

The Court agrees with the courts below in finding that the contract entered into by the
parties was essentially a contract of sale which could be validly rescinded. Spouses Salvador
insist that they did not receive the payments made by Spouses Rabaja from Gonzales which
totaled P950,000.00 and that Gonzales was not their duly authorized agent. These contentions,
however, must fail in light of the applicable provisions of the New Civil Code which state:

Art. 1900. So far as third persons are concerned, an act is deemed to have been performed within
the scope of the agent's authority, if such act is within the terms of the power of attorney, as
written, even if the agent has in fact exceeded the limits of his authority according to an
understanding between the principal and the agent.

xxxx

Art. 1902. A third person with whom the agent wishes to contract on behalf of the principal may
require the presentation of the power of attorney, or the instructions as regards the agency.
Private or secret orders and instructions of the principal do not prejudice third persons who have
relied upon the power of attorney or instructions shown them.

xxxx

Art. 1910. The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.

Persons dealing with an agent must ascertain not only the fact of agency, but also the nature and
extent of the agent's authority. A third person with whom the agent wishes to contract on behalf
of the principal may require the presentation of the power of attorney, or the instructions as
regards the agency. The basis for agency is representation and a person dealing with an agent is
put upon inquiry and must discover on his own peril the authority of the agent.

According to Article 1990 of the New Civil Code, insofar as third persons are concerned, an act
is deemed to have been performed within the scope of the agent's authority, if such act is within
the terms of the power of attorney, as written. In this case, Spouses Rabaja did not recklessly
enter into a contract to sell with Gonzales. They required her presentation of the power of
attorney before they transacted with her principal. And when Gonzales presented the SPA to
Spouses Rabaja, the latter had no reason not to rely on it.

14 | P a g e
The law mandates an agent to act within the scope of his authority which what appears in the
written terms of the power of attorney granted upon him.[36] The Court holds that, indeed,
Gonzales acted within the scope of her authority. The SPA precisely stated that she could
administer the property, negotiate the sale and collect any document and all payments related to
the subject property.[37] As the agent acted within the scope of his authority, the principal must
comply with all the obligations.[38] As correctly held by the CA, considering that it was not
shown that Gonzales exceeded her authority or that she expressly bound herself to be liable, then
she could not be considered personally and solidarily liable with the principal, Spouses Salvador.
[39]

Perhaps the most significant point which defeats the petition would be the fact that it was
Herminia herself who personally introduced Gonzalez to Spouses Rabaja as the administrator of
the subject property. By their own ostensible acts, Spouses Salvador made third persons believe
that Gonzales was duly authorized to administer, negotiate and sell the subject property. This fact
was even affirmed by Spouses Salvador themselves in their petition where they stated that they
had authorized Gonzales to look for a buyer of their property.[40] It is already too late in the day
for Spouses Salvador to retract the representation to unjustifiably escape their principal
obligation.

As correctly held by the CA and the RTC, considering that there was a valid SPA, then Spouses
Rabaja properly made payments to Gonzales, as agent of Spouses Salvador; and it was as if they
paid to Spouses Salvador. It is of no moment, insofar as Spouses Rabaja are concerned, whether
or not the payments were actually remitted to Spouses Salvador. Any internal matter,
arrangement, grievance or strife between the principal and the agent is theirs alone and should
not affect third persons.  If Spouses Salvador did not receive the payments or they wish to
specifically revoke the SPA, then their recourse is to institute a separate action against Gonzales.
Such action, however, is not any more covered by the present proceeding.

No. 6 YUN KWAN BYUNG vs. PHILIPPINE AMUSEMENT AND GAMING

CORPORATION

G.R. No. 163553           December 11, 2009

FACTS
PAGCOR launched its Foreign Highroller Marketing Program. The Program aims to
invite patrons from foreign countries to play at the dollar pit of designated PAGCOR-operated
casinos under specified terms and conditions and in accordance with industry practice.

The Korean-based ABS Corporation was one of the international groups that availed of
the Program. In a letter-agreement dated 25 April 1996 (Junket Agreement), ABS Corporation
agreed to bring in foreign players to play at the five designated gaming tables of the Casino
Filipino Silahis at the Grand Boulevard Hotel in Manila (Casino Filipino).

Petitioner, a Korean national, alleges that he came to the Philippines from November
1996 to March 1997, four times to play for high stakes at the Casino Filipino; that in the course
of the games, he was able to accumulate gambling chips worth US$2.1 million. Petitioner
contends that when he presented the gambling chips for encashment with PAGCORs employees
or agents, PAGCOR refused to redeem them.
GAMING ROOM is exclusively operated by ABS under arrangement with PAGCOR
15 | P a g e
 PAGCOR claims that petitioner, who was brought into the Philippines by ABS
Corporation, is a junket player who played in the dollar pit exclusively leased by ABS
Corporation for its junket players. PAGCOR alleges that it provided ABS Corporation with
distinct junket chips. ABS Corporation distributed these chips to its junket players. At the end of
each playing period, the junket players would surrender the chips to ABS Corporation. Only
ABS Corporation would make an accounting of these chips to PAGCORs casino treasury.
PAGCOR argues that petitioner is not a PAGCOR player because under PAGCORs gaming
rules, gambling chips cannot be brought outside the casino. Trial Court : dismissed the complaint
and counterclaim. CA affirmed.
ISSUES:
1 Whether or not an implied agency was created? NO.
2 Whether the CA erred in failing to consider that PAGCOR ratified, or at least adopted, the acts
of the agent, ABS Corporation? NO.
3 Whether the CA erred in holding that PAGCOR is not liable to petitioner, disregarding the
doctrine of implied agency, or agency by estoppels? NO

RULING

1. There is no implied agency in this case because PAGCOR did not hold out to the public
as the principal of ABS Corporation. PAGCORs actions did not mislead the public into
believing that an agency can be implied from the arrangement with the junket operators, nor did
it hold out ABS Corporation with any apparent authority to represent it in any capacity. The
Junket Agreement was merely a contract of lease of facilities and services.

Article 1869 of the Civil Code states that implied agency is derived from the acts of the
principal, from his silence or lack of action, or his failure to repudiate the agency, knowing that
another person is acting on his behalf without authority. Implied agency, being an actual agency,
is a fact to be proved by deductions or inferences from other facts. The law makes no
presumption of agency and proving its existence, nature and extent is incumbent upon the person
alleging it. Whether or not an agency has been created is a question to be determined by the fact
that one represents and is acting for another.

2. The Junket Agreement is void. A void or inexistent contract is one which has no force and
effect from the very beginning. Hence, it is as if it has never been entered into and cannot be
validated either by the passage of time or by ratification.

Article 1409 of the Civil Code provides that contracts expressly prohibited or declared void by
law, such as gambling contracts, "cannot be ratified."

3. Petitioner alleges that there is an implied agency. Alternatively, petitioner claims that even
assuming that no actual agency existed between PAGCOR and ABS Corporation, there is still an
agency by estoppel based on the acts and conduct of PAGCOR showing apparent authority in
favor of ABS Corporation. Petitioners argument is clearly misplaced. The basis for agency is
representation, that is, the agent acts for and on behalf of the principal on matters within

16 | P a g e
the scope of his authority and said acts have the same legal effect as if they were personally
executed by the principal. On the part of the principal, there must be an actual intention to
appoint or an intention naturally inferable from his words or actions, while on the part of the
agent, there must be an intention to accept the appointment and act on it. Absent such
mutual intent, there is generally no agency.

PAGCOR has the sole and exclusive authority to operate a gambling activity. PAGCOR is not
allowed under the same charter to relinquish or share its franchise. PAGCOR cannot delegate its
power in view of the legal principle of delegata potestas delegare non potest.

PAGCOR, by taking only a percentage of the earnings of ABS Corporation from its foreign
currency collection, allowed ABS Corporation to operate gaming tables in the dollar pit. The
Junket Agreement is in direct violation of PAGCOR's charter and is therefore void.

Since the Junket Agreement violates PAGCOR's charter, gambling between the junket player
and the junket operator under such agreement is illegal and may not be enforced by the courts.

RA 9487 cannot be applied to the present case. The Junket Agreement was entered into between
PAGCOR and ABS Corporation on 25 April 1996 when the PAGCOR charter then prevailing
(PD 1869) prohibited PAGCOR from entering into any arrangement with a third party.

The Court of Appeals correctly used the intent of the contracting parties in determining whether
an agency by estoppel existed.

PRINCIPLES:

Gambling is prohibited by the laws of the Philippines as specifically provided in Articles 195 to
199 of the Revised Penal Code. The only form of gambling allowed by law is that stipulated
under Presidential Decree No. 1869, which gave PAGCOR its franchise to maintain and operate
gambling casinos.

RA 9487 amended the PAGCOR charter, granting PAGCOR the power to enter into special
agreement with third parties to share the privileges under its franchise laws should only be
applied prospectively unless the legislative intent to give them retroactive effect is expressly
declared or is necessarily implied from the language used.

All laws operate prospectively absent a clear contrary language in the text, in every case of
doubt, the doubt will be resolved against the retroactive operation of laws.

Implied agency, being an actual agency, is a fact to be proved by deductions or inferences from
other facts.

Apparent authority is based on estoppel and can arise from two instances. First, the principal
may knowingly permit the agent to hold himself out as having such authority, and the principal
becomes estopped to claim that the agent does not have such authority.

Second, the principal may clothe the agent with the indicia of authority as to lead a reasonably
prudent person to believe that the agent actually has such authority.

17 | P a g e
The law makes no presumption of agency proving its existence, nature and extent is incumbent
upon the person alleging.

An agency by estoppel, which is similar to the doctrine of apparent authority requires

proof of reliance upon the representations.

NO. 7 NOGALES VS CAPITOL MEDICAL CENTER

GR NO. 142625, December 19, 2006

FACTS: Pregnant with her fourth child, Corazon Nogales, who was then 37 y/o was under the
exclusive prenatal care of Dr. Oscar Estrada beginning on her fourth month of pregnancy or as
early as December 1975. While Corazon was on her last trimester of pregnancy, Dr. Estrada
noted an increase in her blood pressure and development of leg edemas indicating preeclampsia
which is a dangerous complication of pregnancy.

Around midnight of May 26, 1976, Corazon started to experience mild labor pains prompting
Corazon and Rogelio Nogales to see Dr. Estrada at his home. After examining Corazon, Dr.
Estrada advised her immediate admission to Capitol Medical Center (CMC).

Upon her admission, an internal examination was conducted upon her by a resident-physician.
Based on the doctor’s sheet, around 3am, Dr. Estrada advised for 10mg valium to be
administered immediately by intramuscular injection, he later ordered the start of intravenous
administration of syntociron admixed with dextrose, 5% in lactated ringer’s solution, at the rate
of 8-10 micro-drops per minute. When asked if he needed the services of anesthesiologist, he
refused. Corazon’s bag of water ruptured spontaneously and her cervix was fully dilated and she
experienced convulsions. Dr. Estrada ordered the injection of 10g of magnesium sulfate but his
assisting Doctor, Dr. Villaflor, only administered 2.5g. She also applied low forceps to extract
Corazon’s baby. In the process, a 10 x 2.5cm piece of cervical tissue was allegedly torn. The
baby came out in an apric, cyanatic weak and injured condition. Consequently, the baby had to
be intubated and resuscitated. Corazon had professed vaginal bleeding where a blood typing was
ordered and she was supposed to undergo hysterectomy, however, upon the arrival of the doctor,
she was already pronounced dead due to hemorrhage.

ISSUE: Whether or not in the conduct of child delivery, the doctors and the respondent hospital
is liable for negligence. YES.

HELD: In general, a hospital is not liable for the negligence of an independent contractor-
physician. There is, however an exception to this principle. The hospital may be liable if the
physician is the ostensible agent of the hospital. This exception is also known as the doctrine
of apparent authority.

Under the doctrine of apparent authority, a hospital can be held vicariously liable for the
negligent acts of a physician providing care at the hospital, regardless of whether the
physician is an independent contractor, unless the patient knows, or should have known,
that the physician is an independent contractor.

For a hospital to be liable under the doctrine of apparent authority, a plaintiff must show
that:

18 | P a g e
1) the hospital, or its agent, acted in a manner that would lead a reasonable person to conclude
that the individual who was alleged to be negligent was an employee or agent of the hospital;

2.) Where the acts of the agent create the appearance of authority, the plaintiff must also prove
that the hospital had knowledge of and acquired in them; and

3.) the plaintiff acted in reliance upon the conduct of the hospital or its agent, consistent with
ordinary care and prudence.

Borrowed servant doctrine provides that once a surgeon enters the operating room and takes
charge of the acts or omissions of operating room personnel and any negligence associated with
each acts or omissions are imputable to the surgeon, while the assisting physicians and nurses
may be employed by the hospital, or engaged by the patient, they normally become the
temporary servants or agents of the surgeon in charge while the operation is in progress, and
liability may be imposed upon the surgeon for their negligent acts under the doctrine of
respondeat superior.

In the instant case, CMC impliedly held out Dr. Estrada as a member of its medical staff.
Through CMC’s acts, CMC clothed Dr. Estrada with apparent authority thereby leading the
Spouses Nogales to believe that Dr. Estrada was an employee or agent of CMC. CMC cannot
now repudiate such authority. The records show that the Spouses Nogales relied upon a
perceived employment relationship with CMC in accepting Dr. Estrada’s services. Rogelio
testified that he and his wife specifically chose Dr. Estrada to handle Corazon’s delivery not only
because of their friend’s recommendation, but more importantly because of Dr. Estrada’s
“connection with a reputable hospital, the [CMC].” In other words, Dr. Estrada’s relationship
with CMC played a significant role in the Spouses Nogales’ decision in accepting Dr. Estrada’s
services as the obstetrician-gynecologist for Corazon’s delivery. Moreover, as earlier stated,
there is no showing that before and during Corazon’s confinement at CMC, the Spouses
Nogales knew or should have known that Dr. Estrada was not an employee of CMC. xxx
CMC’s defense that all it did was “to extend to [Corazon] its facilities” is untenable. The Court
cannot close its eyes to the reality that hospitals, such as CMC, are in the business of treatment.

xxx

The Court finds respondent Capitol Medical Center vicariously liable for the negligence of Dr.
Oscar Estrada.

Art. 2180. The obligation imposed by Article 2176 is demandable not only for one’s own acts or
omissions, but also for those of persons for whom one is responsible.
x x x x
Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks, even though the former are not engaged in any
business or industry.
x x x x
The responsibility treated of in this article shall cease when the persons herein mentioned prove
that they observed all the diligence of a good father of a family to prevent damage.

Art. 2176. Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-

19 | P a g e
existing contractual relation between the parties, is called a quasi-delict and is governed by the
provisions of this Chapter.

x x x x
The doctrine of apparent authority essentially involves two factors to determine the liability of an
independent-contractor physician: The first factor focuses on the hospital’s manifestations and is
sometimes described as an inquiry whether the hospital acted in a manner which would lead a
reasonable person to conclude that the individual who was alleged to be negligent was an
employee or agent of the hospital. In this regard, the hospital need not make express
representations to the patient that the treating physician is an employee of the hospital; rather a
representation may be general and implied. The second factor focuses on the patient’s reliance. It
is sometimes characterized as an inquiry on whether the plaintiff acted in reliance upon the
conduct of the hospital or its agent, consistent with ordinary care and prudence.

No. 8 PROSPERO RINGOR, et al., vs. CONCORDIA, FELIPA, EMETERIA, all

surnamed RINGOR, MARCELINA RINGOR, in behalf of her deceased father, AGAPITO
RINGOR, et al.,

G.R. No. 147863             August 13, 2004

480 Phil. 141

FACTS: The controversy involves lands in San Fabian, Pangasinan, owned by the late Jacobo
Ringor. By his first wife, Gavina Laranang, he had two children, Juan and Catalina. He did not
have offsprings by his second and third wives. Catalina predeceased her father Jacobo who died
sometime in 1935, leaving Juan his lone heir.

Juan married Gavina Marcella. They had seven (7) children, namely: Jose (the father and
predecessor-in-interest of herein petitioners), Genoveva, Felipa, Concordia, Agapito, Emeteria
and Espirita. Genoveva and Agapito are represented in this case by Teofilo Abalos and
Marcelina Ringor, their respective children. Espirita is represented by her children, Avelina,
Cresencia and Felimon Almasen.

Jacobo applied for the registration of his lands under the Torrens system. He filed three land
registration cases alone, with his son Juan, or his grandson Jose, applying jointly with him.

The first application, docketed as Expediente 241, was applied for alone by Jacobo. While
Jacobo was the only applicant in Expediente 241, on November 22, 1921, Parcels 1 and 2 of the
lands in Expediente 241 were adjudicated to Jacobo and his son, Juan, in equal shares as pro-
indiviso co-owners.[3] On March 6, 1922, OCT No. 23689 was issued in the names of Jacobo and
Juan.[4] With Jacobo's thumbmark, in a Compraventa dated November 6, 1928, the one-half (½)
undivided interest of Jacobo in the said Parcels 1 and 2 was sold and transferred to Jose.

By another Compraventa also dated November 6, 1928, and with the same circumstances as the
Compraventa in Parcels 1 and 2, the entire interest of Jacobo in Parcel 3 was likewise sold and
transferred to Jose. Thereafter, TCT No. 5090 was issued in the name of Jose.[8] All the lands
declared to Jacobo in Expediente 241 were allegedly sold to Jose for P6,000.[9]

20 | P a g e
In the second application, Expediente 244, G.L.R.O. Record No. 13168, Jacobo named Jose as
the applicant. The five (5) parcels of land in Expediente 244 were adjudicated to Jose as a
"donacion de su abuelo" (donation of his grandfather).[10] On April 18, 1918, OCT No. 18797
was issued exclusively to Jose.[11]

The third application docketed as Expediente 4449, G.L.R.O. Record No. 23643, was filed in the
names of Jacobo and his only son Juan.[12] It covered three parcels of land. Juan died on July 16,
1922, a year before the decision of the land registration court was issued. On October 10, 1923,
in Decree No. 147191, half of Parcel 1 was adjudicated to Jacobo and the other half to Jose and
later, three-fourths (¾) of parcels 2 and 3 to Jacobo and one-fourth (¼) to Jose. [13] Although Juan
was one of the named applicants, it later appeared that Jose's name was substituted for Juan's
name because of an erroneous information that Jose was the only successor-in-interest of Juan.[14]
Thus, on February 29, 1924, OCT Nos. 25885 and 25886 were issued in the names of Jacobo and
Jose respectively.[15]

Subsequently, in a Compraventa dated November 3, 1928, Jacobo allegedly sold and transferred
to Jose his one-half (½) undivided interest in Parcel 1. Jacobo's thumbmark appeared on the
Compraventa.[16] These lands are now covered by TCT, in the name of petitioner corporation,
Heirs of Jose M. Ringor, Inc., organized after the initiation of the instant case. [17] By another
Compraventa also dated November 3, 1928, the three-fourths (¾) undivided interests of Jacobo
in Parcels 2 and 3 covered by OCT No. 25886 were likewise sold and transferred to Jose. The
Compraventas were duly registered sometime in 1940. The OCTs were cancelled and new TCTs
were issued in the name of Jose. Jacobo allegedly sold to Jose for P800 all the lands declared to
him in Expediente 4449.[18]

During trial, witnesses attested that even after the decisions in the three land registration cases
and the Compraventas, Jacobo remained in possession of the lands and continued administering
them as he did prior to their registration. He unfailingly gave a share of the produce to all the 7
children of his son Juan. According to witness Julio Monsis,[19] Jacobo did not partition the lands
since the latter said that he still needed them.[20] When Jacobo died on June 7, 1935, the lands
under the three land registration applications, including those which petitioners sought to
partition in their counterclaim before the trial court, remained undivided. Jose, as the eldest
grandchild, assumed and continued the administration of the lands.[21] He also conscientiously
gave his 5 younger sisters and only brother Agapito, their share in the produce and income from
the lands.[22] Herein respondents claim they repeatedly asked Jose for partitioning of the land;
however, every time they did, Jose always answered that it was not going to be easy because
there would be "big and small shares."[23] Respondents explained that they did not zealously press
for the immediate partition of the lands because Jose constantly assured them that he would
never cheat them and because they respected him highly.[24]

Jose died on April 30, 1971. Respondents demanded from Jose's children, herein petitioners, the
partition and delivery of their share in the estate left by Jacobo and under Jose's administration.
The petitioners refused and attempts at amicable settlement failed.[25] On March 27, 1973,
respondents filed a Complaint for partition and reconveyance with damages.]

In their Complaint, herein respondents claimed that (1) they are all grandchildren and/or great
grandchildren of Jacobo, who left intestate the disputed lands with a total area of 322,775 sq. m.,
all located in San Fabian, Pangasinan, and declared for tax purposes in the name of Jose Ringor;
(2) that the late Jose Ringor had always been the administrator and trustee of Jacobo;[27] (3) that
after Jacobo's death, they asked for their shares of the intestate properties but was refused; and

21 | P a g e
(4) that Jose as trustee and overseer of all these properties was answerable to the respondents for
their just shares in the intestate properties of Jacobo.[28] They asked for (a) the partition of their
corresponding shares, the cancellation of OCT No. 18797 issued in the name of Jose Ringor
under Expediente 244 and that these be subdivided among the seven children of Jose Ringor, and
the six children and grandchildren of Juan Ringor; (b) the payment to plaintiffs of whatever
maybe found as chargeable to the late Jose Ringor as trustee, as well as liability for
administering these properties from the time of Jose's death up to the time the case is terminated;
and (c) the payment of attorney's fees, surveyor's expenses and cost of the suit. [29]

In their Answer, herein petitioners insisted that they rightfully own and possess the disputed
lands. They alleged that their father acquired legitimate title to and remained in continuous,
uninterrupted and exclusive possession and enjoyment of the said parcels of land in the concept
of an owner at varying times since 1917, 1923, and 1928, as evidenced by the certificates of title
issued more than thirty (30) years ago and in some cases more than fifty (50) years ago, before
the present suit was instituted by respondents. They claimed that Jacobo sold the parcels of land
under Expediente Nos. 4449 and 241 to Jose for valuable consideration on November 3 and 6,
1928, respectively, evidenced by notarial deeds of sale duly registered in the Registry of Deeds
of Pangasinan. The other disputed lands sought to be divided, petitioners assured, were held by
Jose as exclusive owner.

In their Amended Answer, petitioners averred that the parcels of land in the exclusive name of
Jose are his exclusive properties acquired by him either by inheritance, homestead patent, or
purchase. Further, according to petitioners, whatever cause or right of action, if any, the
respondents had with respect to the properties owned and possessed by them and their late father,
including those based on constructive trust, it had long been barred by prescription and laches
and/or prior judgments since it is an incontrovertible fact that Jose had been, for more than thirty
(30) years and in some cases for more than fifty (50) years, the exclusive registered owner of the
registered properties.[30] Lastly, petitioners asserted that respondents' claim of express trust
concerning the properties in question could not be proved by parol evidence.

While trial of the case was in progress, Julio Monsis, alleging he was the only child of Macaria
Discipulo and Jacobo, filed a Complaint in Intervention. So did Leocadia Ringor, alleging she
was the only child of Jacobo with Marcelina Gimeno. When Julio died on February 3, 1977, he
was survived by his wife Felipa and their legitimate children Maria, Federico, Eusebio,
Paciencia, Panfilo and Fermin, all surnamed Monsis. On July 8, 1982, herein respondents filed
an Amendment to their Amended Complaint impleading as additional party-defendants, the
Heirs of Jose M. Ringor, Inc.[31]

On February 10, 1995, the RTC decided in favor of respondents.

The trial court concluded that Jacobo created an express trust over his entire property in favor of
his grandchildren. It found that Jose held the subject lands as co-owner and trustee of the express
trust. The trial court held that the notarial deeds of sale executed between Jacobo and Jose in
Expediente 241 were false and simulated. It noted that Jose registered the deed of sale twelve
years after their execution and five years after Jacobo's death. More important, the trial court
declared that Jacobo continued to occupy and exercise acts of ownership over the same parcels
of land until his death despite the supposed sale to Jose.

On Expediente 244, the trial court observed that the document evidencing that Jacobo donated
the lands therein to Jose was never presented to the registration court, nor was any explanation

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given for the failure to register the alleged donation. Hence, the donation was declared invalid.

On Expediente 4449, the trial court observed that although the applicants were Jacobo and Juan,
the land was erroneously adjudicated to Jacobo and Jose because it was made to appear that Jose
was the only child who succeeded Juan, who died a year before the application was adjudicated,
when in fact Juan had seven children. Jacobo knew of this error, yet he did nothing to correct it.

Thus, the trial court continued, from the acts of Jacobo and his full exercise of dominion over the
lands until his death, it could be deduced that the compraventas were without consideration and
this was why the compraventas were not registered during Jacobo's lifetime. The trial court noted
that even after the registration of the compraventas, until his own death, Jose continued Jacobo's
practice of sharing the produce of the land with his siblings, a recognition that even Jose
considered that his siblings were beneficial co-owners of the lands under his care.[33]

The trial court reasoned that despite the absence of a document proving the express trust, the
same was proven by parol evidence. The trial court explained that the prohibition in Article
1443[34] of the New Civil Code that no express trust concerning an immovable or any interest
therein may be proved by parol evidence is a prohibition for purposes of presenting proof on the
matter, but it could be waived by a party.[35] It went on to say that the failure to object to parol
evidence during trial and the cross-examination of the witnesses is a waiver of the prohibition.
Furthermore, it said that Jose, as trustee, did not repudiate the trust, such that the trust remained,
and since the trust continued to exist, an action to compel the trustee to convey the properties has
not prescribed nor is it barred by laches.[36]

The Court of Appeals affirmed the lower court's decision. The Motion for Reconsideration of
petitioners was also denied.

ISSUES: (1) Was there a valid express trust established by Jacobo Ringor?
(2) May parol evidence be used as proof of the establishment of the express trust?
(3) Did the court in effect nullify the Torrens titles over the disputed parcels of land?
(4) Were respondents' action barred by prescription and laches?

HELD:

Petitioners' main contention is that the trial and appellate courts had no basis to conclude that
Jacobo constituted an express trust because respondents did not present any deed, instrument or
document expressly declaring that a trust was constituted. Petitioners, in their petition, insist that
the intent to create a trust must be in writing; and they claimed that they objected, from the
beginning, to the introduction of any oral testimony to prove the establishment of an express
trust.

Respondents, for their part, argue that Jacobo created an express trust. Respondents cite the three
applications for registration of the lands referred to the Expedientes 241, 244 and 4449 and the
three Compraventas as documentary proofs that an express trust was created by Jacobo.
According to them, this conclusion can be gleaned clearly when Jacobo exercised acts of
ownership over all the disputed lands even after the alleged donation and deeds of sale in favor
of Jose, and when Jacobo religiously gave shares of the income and produce of the disputed
lands to the respondents, a practice Jose continued until three years before his death.

Express trusts, sometimes referred to as direct trusts, are intentionally created by the direct and

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positive acts of the settlor or the trustor by some writing, deed, or will, or oral declaration.[45] It
is created not necessarily by some written words, but by the direct and positive acts of the
parties. No particular words are required, it being sufficient that a trust was clearly intended. [46]
Unless required by a statutory provision, such as the Statute of Frauds, a writing is not a
requisite for the creation of a trust.[47] Such a statute providing that no instruments concerning
lands shall be "created" or declared unless by written instruments signed by the party creating the
trust, or by his attorney, is not to be construed as precluding a creation of a trust by oral
agreement, but merely as rendering such a trust unenforceable.[48]

Contrary to the claim of petitioners, oral testimony is allowed to prove that a trust exists. It is
not error for the court to rely on parol evidence, - - i.e., the oral testimonies of witnesses
Emeteria Ringor, Julio Monsis and Teofilo Abalos - - which the appellate court also relied on to
arrive at the conclusion that an express trust exists. What is crucial is the intention to create a
trust. While oftentimes the intention is manifested by the trustor in express or explicit language,
such intention may be manifested by inference from what the trustor has said or done, from the
nature of the transaction, or from the circumstances surrounding the creation of the purported
trust.[49]

However, an inference of the intention to create a trust, made from language, conduct or
circumstances, must be made with reasonable certainty.[50] It cannot rest on vague, uncertain or
indefinite declarations. An inference of intention to create a trust, predicated only on
circumstances, can be made only where they admit of no other interpretation.[51]

From all these premises and the fact that Jose did not repudiate the claim of his co-heirs, it can be
concluded that as far as the lands covered by Expediente Nos. 241 and 4449 are concerned, when
Jacobo transferred these lands to Jose, in what the lower court said were simulated or falsified
sales, Jacobo's intention impressed upon the titles of Jose a trust in favor of the true party-
beneficiaries, including herein respondents.

Under the doctrine of partial performance recognized in this jurisdiction, the objection to the
oral character of a trust may be overcome or removed where there has been partial performance
of the terms of the trust as to raise an equity in the promisee.[52] A trustee may perform the
provisions of the trust, and if he does, the beneficiary is protected in benefits that he has received
from such performance.[53]

Thus, when a verbal contract has been completed, executed or partially consummated, its
enforceability will not be barred by the Statute of Frauds, which applies only to an
executory agreement.[54] Noteworthy, despite the compraventas transferring the lands in his
name, Jose unfailingly gave his siblings their share of the produce of the lands. Furthermore, not
only did he fail to repudiate the trust, he also assured his co-heirs that it was the inconvenience of
partitioning that kept him from transferring the shares of his siblings to them. Accordingly, with
respect to the lands covered by Expediente Nos. 241 and 4449, an express trust exists with Jose
Ringor as trustee in favor of all the heirs of Jacobo Ringor. As far as prescription or laches are
concerned, they pose no hindrance or limitation to the enforcement of an express trust.[55]

Finally, on the lands covered in Expediente 244, we note that as a "donacion de su abuelo," the
donation impaired the hereditary rights of succession of Jose's co-heirs. Nevertheless, these were
transferred to Jose by final judgment of the land registration court. Despite the registration in
Jose's name, Jose did not take possession over them from the date of registration to the time of
Jacobo's death. Instead, while alive, Jacobo retained possession, and continued the administration

24 | P a g e
of the lands. Considering then these circumstances, Article 1449 of the New Civil Code on
implied trusts is the pertinent law. It provides that, "[t]here is also an implied trust when a
donation is made to a person but it appears that although the legal estate is transmitted to
the donee, he nevertheless is either to have no beneficial interest or only a part thereof."

Article 1449 creates a resulting trust where the donee becomes the trustee of the real beneficiary.
[56]
Generally, resulting trusts do not prescribe except when the trustee repudiates the trust.[57]
Further, the action to reconvey does not prescribe so long as the property stands in the name of
the trustee.[58] To allow prescription would be tantamount to allowing a trustee to acquire title
against his principal and true owner.[59] Here, Jose did not repudiate the trust, and the titles of the
disputed lands are still registered in Jose's name or in the name of the Heirs of Jose M. Ringor,
Inc.

A trustee who obtains a Torrens title over a property held in trust for him by another
cannot repudiate the trust by relying on the registration.[60] A Torrens Certificate of Title in
Jose's name did not vest ownership of the land upon him. The Torrens system does not create or
vest title. It only confirms and records title already existing and vested. It does not protect a
usurper from the true owner.[61] Petitioners cannot rely on the registration of the lands in Jose's
name nor in the name of the Heirs of Jose M. Ringor, Inc., for the wrong result they seek. For
Jose could not repudiate a trust by relying on a Torrens title he held in trust for his co-heirs. [64]
The beneficiaries are entitled to enforce the trust, notwithstanding the irrevocability of the
Torrens title. The intended trust must be sustained.

The trial court found in favor of herein respondents' claim that the deeds of sale that caused the
registration of the TCTs in Expedientes 241 and 4449 in Jose's name were invalid. The deeds
were false, simulated and clearly without consideration.

No. 9 ESTATE OF MARGARITA D. CABACUNGAN v. MARILOU LAIGO

GR No. 175073, August 15, 2011

FACTS: It appears that sometime in 1969, Roberto applied for a tourist visa for the United
States. However, in order to qualify, Roberto had to prove that he owned real properties. Roberto
asked his mother, Margarita, to help him by transferring her tax declarations over the above-
mentioned properties in his name. Margarita obliged, executing a Transferors Affidavit in favor
of Roberto. The transfer was made without the knowledge of Margaritas other children. Armed
of such ownership, Roberto succeeded in acquiring a visa. Roberto then left for the United States
but returned in due time.

On February 1979, Roberto married Estela Balagot in Aringay La Union. On July 26, 1990,
Roberto sold the 4,502 square meters land in Baccuit, Bauang, La Union to spouses Mario and
Julia Campos for Php 23,000.00 without the knowledge or consent of Margarita and her other
children. On August 26, 1992, Roberto likewise sold the 1,986 and 3,454 square meters land to
his adopted children, Marilou and Pedro Laigo, for in consideration of Php100,000.00 and
Php40,000.00, respectively, again without the knowledge or consent of Margarita and her other
children.

On August 15, 1995, Roberto died. During his wake, Margarita learned of the surreptitious sale
of the properties by Roberto, prompting Margarita to file a complaint for annulment of sale of
real property, recovery of ownership and possession and cancellation of Tax Declarations with
damages against the spouses Campos, Marilou and Pedro. Margarita claimed that the transfer of

25 | P a g e
the properties to Roberto was not intended to divest her of ownership the properties; that the sale
is null and void as Roberto had no right to sell the properties. Margarita also alleged that the sale
is merely fictitious or simulated, the consideration for the alleged sale being grossly inadequate
and done in evident bad faith. Marilou and Pedro on the other hand, countered that when they
acquired the subject properties from Roberto, there was no legal infirmity in the ownership of
Roberto and that thy were innocent purchasers for value. Since Margarita was already barred by
laches and prescription.

On February 03, 1999, Margarita and spouses Campos entered into compromise agreement.
Thus, the case against the spouses Campos was dismissed while the case against Marilou and
Pedro remained. On February 04,1999, Margarita died and was substituted by siblings of
Roberto.

On February 8, 1999, the trial court rendered a Partial Decision approving the compromise
agreement and dismissing the complaint against the Spouses Campos. Forthwith, trial on the
merits ensued with respect to Pedro and Marilou. On July 02, 2001, the court rendered judgment
dismissing the complaint in favor of respondents Marilou and Pedro. The trial court ruled that the
1968 Affidavit of Transfer operated as a simple transfer of the subject properties from Margarita
to Roberto. It found no express trust created between Roberto and Margarita by virtue merely of
the said document as there was no evidence of another document showing Robertos undertaking
to return the subject properties. Interestingly, it concluded that, instead, an "implied or
constructive trust" was created between the parties, as if affirming that there was indeed an
agreement albeit unwritten to have the properties returned to Margarita in due time. Moreover,
the trial court surmised how Margarita could have failed to recover the subject properties from
Roberto at any time between 1968, following the execution of the Affidavit of Transfer, and
Roberto’s return from the United States shortly thereafter. Finding Margarita guilty of laches by
such inaction, the trial court barred recovery from respondents who were found to have acquired
the properties supposedly in good faith and for value. It also pointed out that recovery could no
longer be pursued in this case because Margarita had likewise exhausted the ten-year prescriptive
period for reconveyance based on an implied trust which had commenced to run in 1968 upon
the execution of the Affidavit of Transfer. Finally, it emphasized that mere inadequacy of the
price as alleged would not be a sufficient ground to annul the sales in favor of Pedro and Marilou
absent any defect in consent.

Aggrieved, petitioner appealed to the Court of Appeals which, on October 13, 2006, affirmed the
trial courts disposition. The appellate court dismissed petitioners claim that Roberto was merely
a trustee of the subject properties as there was no evidence on record supportive of the allegation
that Roberto merely borrowed the properties from Margarita upon his promise to return the same
on his arrival from the United States. Further, it hypothesized that granting the existence of an
implied trust, still Margaritas action thereunder had already been circumscribed by laches.
Curiously, while the appellate court had found no implied trust relation in the transaction
between Margarita and Roberto, nevertheless, it held that the ten-year prescriptive period under
Article 1144 of the Civil Code, in relation to an implied trust created under Article 1456, had
already been exhausted by Margarita because her cause of action had accrued way back in 1968;
and that while laches and prescription as defenses could have availed against Roberto, the same
would be unavailing against Pedro and Marilou because the latter were supposedly buyers in
good faith and for value.

ISSUES: 1. Whether or not the trial court erred in ruling that Margarita was guilty of laches for
her failure to recover the property during her lifetime after her son, Roberto’s lips were sealed.

26 | P a g e
2. Whether or not the trial court erred in ruling that Margaritas action to recover the said
properties prescribed after the lapse of the (10) years from the time of transfer by Margarita to
Roberto in 1968.

3. Whether or not the trial court erred in holding that the petitioner failed to rebut the
presumption of good faith.

4. Whether or not that there is an implied trust created between Margarita and her son Roberto

RULING: The petitioner contends that since laches signify the absence of any effort to assert a
right for a prolonged period of time, it cannot apply to Margarita since she continued to par real
estate taxes on the properties until Robertos demise; that she retained physical, actual, open, and
continuous possession and ownership over the properties until her demise on February 04,1999.
Thus, she continued to exercise acts of ownership over the properties.

Laches as a rule of equity, cannot find application in the instant case where Margarita
never showed signs of total abandonment of the property, but on the contrary exerted
complete and uncontrovertible acts of ownership. Laches, being rooted in equity, is not
always to be applied strictly in a way that would obliterate an otherwise valid claim especially
between blood relatives. The existence of a confidential relationship based upon consanguinity is
an important circumstance for consideration; hence, the doctrine is not to be applied
mechanically as between near relatives.

In Adaza v. Court of Appeals, it held that the relationship between the parties therein, who were
siblings, was sufficient to explain and excuse what would otherwise have been a long delay in
enforcing the claim and the delay in such situation should not be as strictly construed as where
the parties are complete strangers vis-à-vis each other; thus, reliance by one party upon his blood
relationship with the other and the trust and confidence normally connoted in our culture by that
relationship should not be taken against him. Sotto v. Teves ruled that the doctrine of laches is
not strictly applied between near relatives, and the fact that the parties are connected by
ties of blood or marriage tends to excuse an otherwise unreasonable delay.

The petitioner claims that the court a quo erred in applying the ten (10) year prescriptive period
for actions to recover property based on implied trust. The court a quo overlooked the rule that
an action for reconveyance of title based on breach of fiduciary relations and/ or fraud should be
filed within four (4) years from the time of discovery of the fraud, citing Miguel vs CA, 29 SCRA
760. The petitioner faults the court for upholding respondents good faith, insisting that as
members of the family, respondents were presumed to have known Margaritas ownership, this
claim must fail as no evidence has been adduced to show that Margarita or any of her children
had informed respondents as to Margaritas ownership or the truth behind the Transferors
affidavit executed by margarita in favor of Roberto. It is worth noting that the transfer was
executed in 1967, long before respondents’ formal adoption by Roberto in 1979. Thus, they are
deemed ignorant of the said transaction, unless it is proven otherwise. Petitioner also harps on
the gross inadequacy of the price, allegedly confirming that the sale was fictitious or simulated.
However, it concurs with the court a quo in holding that consideration, though grossly
inadequate, cannot invalidate a sale absent a showing of a defect in consent. Settled is the
rule that hardness of the bargain or the inadequacy of the price is not sufficient ground for the
cancellation of a contract otherwise free from invalidating defects.

PRINCIPLES:

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A trust is the legal relationship between one person having an equitable ownership of
property and another person owning the legal title to such property, the equitable
ownership of the former entitling him to the performance of certain duties and the exercise
of certain powers by the latter.

Trusts are either express or implied. Express or direct trusts are created by the direct and
positive acts of the parties, by some writing or deed, or will, or by oral declaration in words
evincing an intention to create a trust.

Implied trusts - also called "trusts by operation of law," "indirect trusts" and "involuntary
trusts" - arise by legal implication based on the presumed intention of the parties or on equitable
principles independent of the particular intention of the parties. They are those which, without
being expressed, are deducible from the nature of the transaction as matters of intent or,
independently of the particular intention of the parties, as being inferred from the transaction by
operation of law basically by reason of equity.

Implied trusts are further classified into constructive trusts and resulting trusts. 
Constructive trusts, on the one hand, come about in the main by operation of law and not by
agreement or intention.  They arise not by any word or phrase, either expressly or impliedly,
evincing a direct intention to create a trust, but one which arises in order to satisfy the demands
of justice.[35]  Also known as trusts ex maleficio, trusts ex delicto and trusts de son tort, they are
construed against one who by actual or constructive fraud, duress, abuse of confidence,
commission of a wrong or any form of unconscionable conduct, artifice, concealment of
questionable means, or who in any way against equity and good conscience has obtained or holds
the legal right to property which he ought not, in equity and good conscience, hold and enjoy.
[36] They are aptly characterized as "fraud-rectifying trust,"[37] imposed by equity to satisfy the
demands of justice[38] and to defeat or prevent... the wrongful act of one of the parties.[39] 
Constructive trusts are illustrated in Articles 1450, 1454, 1455 and 1456.[40]

On the other hand, resulting trusts arise from the nature or circumstances of the consideration
involved in a transaction whereby one person becomes invested with legal title but is obligated in
equity to hold his title for the benefit of another. This is based on the equitable doctrine that
valuable consideration and not legal title is determinative of equitable title or interest and is
always presumed to have been contemplated by the parties.[41]  Such intent is presumed as it is
not expressed in the instrument or deed of conveyance and is to be found in the nature of their
transaction.[42] Implied trusts of this nature are hence describable as "intention-enforcing
trusts."[43] Specific examples of resulting trusts may be found in the Civil Code, particularly
Articles 1448, 1449, 1451, 1452 and 1453.[44]

Articles 1448 to 1456 of the Civil Code enumerate cases of implied trust, but the list according to
Article 1447 is not exclusive of others which may be established by the general law on trusts so
long as the limitations laid down in Article 1442 are observed, that is, that they be not in conflict
with the New Civil Code, the Code of Commerce, the Rules of Court and special laws.

While resulting trusts generally arise on failure of an express trust or of the purpose thereof, or
on a conveyance to one person upon a consideration from another (sometimes referred to as a
"purchase-money resulting trust"), they may also be imposed in other circumstances such that the
court, shaping judgment in its most efficient form and preventing a failure of justice, must decree
the existence of such a trust.[47] A resulting trust, for instance, arises where, there being no
fraud or violation of the trust, the circumstances indicate intent of the parties that legal

28 | P a g e
title in one be held for the benefit of another.[48] It also arises in some instances where the
underlying transaction is without consideration, such as that contemplated in Article
1449[49] of the Civil Code.  Where property, for example, is gratuitously conveyed for a
particular purpose and that purpose is either fulfilled or frustrated, the court may affirm the
resulting trust in favor of the grantor or transferor,[50] where the beneficial interest in property
was not intended to vest in the grantee.[51]

Intention - although only presumed, implied or supposed by law from the nature of the
transaction or from the facts and circumstances accompanying the transaction, particularly the
source of the consideration - is always an element of a resulting trust[52] and may be inferred
from the acts or conduct of the parties rather than from direct expression of conduct.[53]
Certainly, intent as an indispensable element, is a matter that necessarily lies in the evidence, that
is, by evidence, even circumstantial, of statements made by the parties at or before the time title
passes.[54]  Because an implied trust is neither dependent upon an express agreement nor
required to be evidenced by writing,[55] Article 1457[56] of our Civil Code authorizes the
admission of parole evidence to prove their existence. Parole evidence that is required to
establish the existence of an implied trust necessarily has to be trustworthy and it cannot rest on
loose, equivocal or indefinite declarations.

No. 10 SPS. SALVADOR ABELLA AND ALMA ABELLA v. SPS. ROMEO ABELLA
AND ANNIE ABELLA
GR No. 195166, July 8, 2015

Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be due unless
it has been expressly stipulated in writing. "On the matter of interest, the text of the
acknowledgment receipt is simple, plain, and unequivocal. It attests to the contracting parties'
intent to subject to interest the loan extended by petitioners to respondents. The controversy,
however, stems from the acknowledgment receipt's failure to state the exact rate of interest. It
remains that where interest was stipulated in writing by the debtor and creditor in a simple
loan or mutuum, but no exact interest rate was mentioned, the legal rate of interest shall
apply. At present, this is 6% per annum, subject to Nacar's qualification on prospective
application. Applying this, the loan obtained by respondents from petitioners is deemed
subjected to conventional interest at the rate of 12% per annum, the legal rate of interest at the
time the parties executed their agreement. Moreover, should conventional interest still be due as
of July 1, 2013, the rate of 12% per annum shall persist as the rate of conventional interest. This
is so because interest in this respect is used as a surrogate for the parties' intent, as expressed as
of the time of the execution of their contract. In this sense, the legal rate of interest is an
affirmation of the contracting parties' intent; that is, by their contract's silence on a specific rate,
the then prevailing legal rate of interest shall be the cost of borrowing money. This rate, which
by their contract the parties have settled on, is deemed to persist regardless of shifts in the legal
rate of interest. Stated otherwise, the legal rate of interest, when applied as conventional interest,
shall always be the legal rate at the time the agreement was executed and shall not be susceptible
to shifts in rate.
FACTS: On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a Complaint for
sum of money and damages with prayer for preliminary attachment against respondents Spouses
Romeo and Annie Abella before the Regional Trial Court. In their Complaint, petitioners alleged
that respondents obtained a loan from them in the amount of P500,000.00. The loan was
evidenced by an acknowledgment receipt dated March 22, 1999 and payable within one (1) year.
29 | P a g e
Petitioners added that respondents were able to pay a total of P200,000.00—P100,000.00 paid on
two separate occasions—leaving an unpaid balance of P300,000.00.
In their Answer, respondents alleged that the amount involved did not pertain to a loan they
obtained from petitioners but was part of the capital for a joint venture involving the lending of
money. Specifically, respondents claimed that they were approached by petitioners, who
proposed that if respondents were to "undertake the management of whatever money
[petitioners] would give them, [petitioners] would get 2.5% a month with a 2.5% service fee to
[respondents]."The 2.5% that each party would be receiving represented their sharing of the 5%
interest that the joint venture was supposedly going to charge against its debtors. Respondents
further alleged that the one year averred by petitioners was not a deadline for payment but the
term within which they were to return the money placed by petitioners should the joint venture
prove to be not lucrative. Moreover, they claimed that the entire amount of P500,000.00 was
disposed of in accordance with their agreed terms and conditions and that petitioners terminated
the joint venture, prompting them to collect from the joint venture's borrowers. They were,
however, able to collect only to the extent of P200,000.00; hence, the P300,000.00 balance
remained unpaid.
In the Decision dated December 28, 2005, the Regional Trial Court ruled in favor of petitioners.
It noted that the terms of the acknowledgment receipt executed by respondents clearly showed
that: (a) respondents were indebted to the extent of P500,000.00; (b) this indebtedness was to be
paid within one (1) year; and (c) the indebtedness was subject to interest. Thus, the trial court
concluded that respondents obtained a simple loan, although they later invested its proceeds in a
lending enterprise. The Regional Trial Court adjudged respondents solidarity liable to
petitioners. In the Order dated March 13, 2006, the Regional Trial Court denied respondents'
Motion for Reconsideration. On respondents' appeal, the Court of Appeals ruled that while
respondents had indeed entered into a simple loan with petitioners, respondents were no longer
liable to pay the outstanding amount of P300,000.00. The Court of Appeals reasoned that the
loan could not have earned interest, whether as contractually stipulated interest or as interest in
the concept of actual or compensatory damages. As to the loan's not having earned stipulated
interest, the Court of Appeals anchored its ruling on Article 1956 of the Civil Code, which
requires interest to be stipulated in writing for it to be due. The Court of Appeals noted that while
the acknowledgement receipt showed that interest was to be charged, no particular interest rate
was specified. Thus, at the time respondents were making interest payments of 2.5% per month,
these interest payments were invalid for not being properly stipulated by the parties. In the
Resolution dated January 4, 2011, the Court of Appeals denied petitioners' Motion for
Reconsideration.

ISSUES:

1. Whether interest accrued on respondents' loan from petitioners, If so, at what rate? YES. 12%
per annum (before July 1, 2013)

2. Whether petitioners are liable to reimburse respondents for the latter's supposed excess
payments and for interest. YES

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3. Whether or not the Court of Appeals erred in completely striking off interest despite the
parties' written agreement stipulating it, as well as in ordering them to reimburse and pay interest
to respondents. YES

RULING:

Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual
relation is one of simple loan or mutuum:

Art. 1933. By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall be paid, in which case the contract is simply
called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous
or with a stipulation to pay interest. In commodatum, the bailor retains the ownership of the thing
loaned, while in simple loan, ownership passes to the borrower.

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and
quality. (Emphasis supplied)

On March 22, 1999, respondents executed an acknowledgment receipt to petitioners, which

states: Batan, Aklan March 22, 1999. This is to acknowledge receipt of the Amount of Five
Hundred Thousand (P500,000.00) Pesos from Mrs. Alma R. Abella, payable within one (1) year
from date hereof with interest. Annie C. Abella (sgd.)Romeo M. Abella (sgd.)(Emphasis
supplied)

The text of the acknowledgment receipt is uncomplicated and straightforward. It attests to: first,
respondents' receipt of the sum of P500,000.00 from petitioner Alma Abella; second,
respondents' duty to pay tack this amount within one (1) year from March 22, 1999; and third,
respondents' duty to pay interest. Consistent with what typifies a simple loan, petitioners
delivered to respondents with the corresponding condition that respondents shall pay the same
amount to petitioners within one (1) year. Although we have settled the nature of the contractual
relation between petitioners and respondents, controversy persists over respondents' duty to pay
conventional interest, i.e., interest as the cost of borrowing money.

Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be due unless it
has been expressly stipulated in writing." On the matter of interest, the text of the
acknowledgment receipt is simple, plain, and unequivocal. It attests to the contracting parties'
intent to subject to interest the loan extended by petitioners to respondents. The controversy,
however, stems from the acknowledgment receipt's failure to state the exact rate of interest.
Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a
rate.

In Spouses Toring v. Spouses Olan, this court clarified the effect of Article 1956 of the Civil
Code and noted that the legal rate of interest (then at 12%) is to apply: "In a loan or forbearance
of money, according to the Civil Code, the interest due should be that stipulated in writing, and
in the absence thereof, the rate shall be 12% per annum."

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Eastern Shipping Lines, Inc. v. Court of Appeals, which, in turn, stated:1. 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 12% 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.(Emphasis supplied)The rule is not only definite; it
is cast in mandatory language.

Our intervening Decision in Nacar v. Gallery Frames recognized that the legal rate of interest
has been reduced to 6% per annum. Recently, however, the Bangko Sentral ng Pilipinas
Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16, 2013, approved the
amendment of Section 2 of Circular No. 905, Series of 1982 and, accordingly, issued Circular
No. 799, Series of 2013, effective July 1, 2013, the pertinent portion of which reads: The
Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts,
thereby amending Section 2 of Circular No. 905, Series of 1982: Section 1.The rate of interest
for the loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to such rate of interest, shall be six
percent (6%) per annum.

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money, goods
or credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum
—as reflected in the case of Eastern Shipping Lines but will now be six percent (6%) per annum
effective July 1, 2013. It should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the twelve percent (12%) per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%)
per annum shall be the prevailing rate of interest when applicable.(Emphasis supplied, citations
omitted)Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013 and
Nacar retain the definite and mandatory framing of the rule articulated in Eastern Shipping,
Security Bank, and SpousesToring.

Nacar restates Eastern Shipping: To recapitulate and for future guidance, the guidelines laid
down in the case of Eastern Shipping Lines are accordingly modified to embody BSP-MB
Circular No. 799, as follows:

1.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.

Thus, it remains that where interest was stipulated in writing by the debtor and creditor in a
simple loan or mutuum, but no exact interest rate was mentioned, the legal rate of interest shall
apply. At present, this is 6% per annum, subject to Nacar's qualification on prospective
application. Applying this, the loan obtained by respondents from petitioners is deemed

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subjected to conventional interest at the rate of 12% per annum, the legal rate of interest at the
time the parties executed their agreement.

Moreover, should conventional interest still be due as of July 1, 2013, the rate of 12% per annum
shall persist as the rate of conventional interest. This is so because interest in this respect is used
as a surrogate for the parties' intent, as expressed as of the time of the execution of their contract.
In this sense, the legal rate of interest is an affirmation of the contracting parties' intent; that is,
by their contract's silence on a specific rate, the then prevailing legal rate of interest shall be the
cost of borrowing money. This rate, which by their contract the parties have settled on, is
deemed to persist regardless of shifts in the legal rate of interest. Stated otherwise, the legal rate
of interest, when applied as conventional interest, shall always be the legal rate at the time the
agreement was executed and shall not be susceptible to shifts in rate.

Petitioners, however, insist on conventional interest at the rate of 2.5% per month or 30% per
annum. They argue that the acknowledgment receipt fails to show the complete and accurate
intention of the contracting parties. They rely on Article 1371 of the Civil Code, which provides
that the contemporaneous and subsequent acts of the contracting parties shall be considered
should there be a need to ascertain their intent. In addition, they claim that this case falls under
the exceptions to the Parol Evidence Rule, as spelled out in Rule 130, Section 9 of the Revised
Rules on Evidence. It is a basic precept in legal interpretation and construction that a rule or
provision that treats a subject with specificity prevails over a rule or provision that treats a
subject in general terms. Simple loans or Mutuum is a type of nominate contract that is
specifically recognized by the Civil Code and for which the Civil Code provides a specific set of
governing rules: Articles 1953 to 1961. In contrast, Article 11371 is among the Civil Code
provisions generally dealing with contracts. As this case particularly involves a simple loan, the
specific rule spelled out in Spouses Toring finds preferential application as against Article
1371.Contrary to petitioners' assertions, there is no room for entertaining extraneous (or parol)
evidence. Even if it can be shown that the parties have agreed to monthly interest at the rate of
2.5%, this is unconscionable. As emphasized in Castro v. Tan, the willingness of the parties to
enter into a relation involving an unconscionable interest rate is inconsequential to the validity of
the stipulated rate. The legal rate of interest is the presumptive reasonable compensation for
borrowed money. While parties are free to deviate from this, any deviation must be reasonable
and fair. Any deviation that is far-removed is suspect.

Thus, in cases where stipulated interest is more than twice the prevailing legal rate of interest, it
is for the creditor to prove that this rate is required by prevailing market conditions. Here,
petitioners have articulated no such justification. In sum, Article 1956 of the Civil Code, read
in light of established jurisprudence, prevents the application of any interest rate other
than that specifically provided for by the parties in their loan document or, in lieu of it, the
legal rate.

Here, as the contracting parties failed to make a specific stipulation, the legal rate must apply.
Moreover, the rate that petitioners adverted to is unconscionable. The conventional interest due
on the principal amount loaned by respondents from petitioners is held to be 12% per annum.
Apart from respondents' liability for conventional interest at the rate of 12% per annum,
outstanding conventional interest—if any is due from respondents—shall itself earn legal interest
from the time judicial demand was made by petitioners, i.e., on July 31, 2002, when they filed
their Complaint. This is consistent with Article 2212 of the Civil Code, which provides:

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Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point.

So, too, Nacar states that "the interest due shall itself earn legal interest from the time it is
judicially demanded." Consistent with Nacar, as well as with our ruling in Rivera v. Spouses
Chua, the interest due on conventional interest shall be at the rate of 12% per annum from July
31, 2002 to June 30, 2013. Thereafter, or starting July 1, 2013, this shall be at the rate of 6% per
annum. Proceeding from these premises, we find that respondents made an overpayment in the
amount of P3,379.17. As respondents made an overpayment, the principle of solutio indebiti as
provided by Article 2154 of the Civil Code applies.

Article 2154. If something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises.

The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall
enrich himself unjustly at the expense of another. It applies where:

(1) a payment is made when there exists no binding relation between the payor, who has no
duty to pay, and the person who received the payment, and

(2) the payment is made through mistake, and not through liberality or some other cause.

Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of
money is involved, or shall be liable for fruits received or which should have been received if the
thing produces fruits.

No. 11 TAMBUNTING PAWNSHOP, INC. v. COMMISSIONER OF INTERNAL

REVENUE
G.R. No. 179085, January 21, 2010

FACTS: P H. Tambunting Pawnshop, Inc. (petitioner), is a domestic corporation duly licensed

and authorized to engage in the pawnshop business. On June 26, 2000, the Bureau of Internal
Revenue (BIR), issued assessment notices and demand letters, assessing Tambunting for
deficiency percentage tax, income tax and compromise penalties for taxable year 1997.

On July 26, 2000, Tambunting instituted an administrative protest against the assessment notices
and demand letters with the Commissioner of Internal Revenue.[3]

On February 21, 2001, Tambunting brought a petition for review in the CTA, [4] citing the
inaction of the Commissioner of Internal Revenue on its protest within the 180-day period
prescribed by law.

On October 8, 2004, the CTA First Division rendered a decision, stating that petitioner is still
liable for deficiency income tax for the year 1997, plus 20% delinquency interest computed from
August 29, 2000 until full payment thereof.

After its motion for reconsideration was denied for lack of merit on February 18, 2005,[6]
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Tambunting filed a petition for review in the CTA En Banc. On April 24, 2006, the CTA En
Banc denied Tambunting's petition for review.

On June 29, 2006, the CTA En Banc also denied Tambunting's motion for reconsideration for its
lack of merit.

The petitioner argues that a pawnshop is not enumerated as one of those engaged in sale or
exchange of services in Section 108 of the National Internal Revenue Code and citing the case
of Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshops, Inc. as basis.
ISSUE: 1) Whether petitioner is liable for the deficiency VAT. NO.
    2) Whether the petitioner is liable for the documentary stamp tax. YES.
RULING:
1) The Court cited the case of First Planters Pawnshop, Inc. v. Commissioner of Internal
Revenue. In the foregoing case, since the imposition of VAT on pawnshops, which are non-bank
financial intermediaries, was deferred for the tax years 1996 to 2002, petitioner is not liable for
VAT for the tax year 1999.
2) Sections 195 of the NIRC provides that on the pledge of personal property, there shall be
collected a documentary stamp tax.
The Court held in Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue that
the documentary stamp tax is an excise tax on the exercise of a right or privilege and that
pledge is among the privileges, the exercise of which is subject to documentary stamp
taxes. For purposes of taxation, pawn tickets are proof of an exercise of a taxable privilege of
concluding a contract of pledge.

NO. 12 MOBIL OIL PHILIPPINES vs. RUTH R. DIOCARES

GR NO. L-26371, September 30, 1969

Even if the instrument were not recorded, "the mortgage is nevertheless binding between the
parties."

FACTS:

Mobil Oil Philippines, Inc., filed a complaint against Ruth and Lope Diocares praying that the
later be ordered to pay its obligation, and in default thereof, the mortgaged properties be sold.

"In its complaint plaintiff alleged that on Feb. 9, 1965 defendants Ruth R. Diocares and Lope T.
Diocares entered into a contract of loan and real estate mortgage wherein the plaintiff extended
to the said defendants a loan of P45,000.00; that said defendants also agreed to buy from the
plaintiff on cash basis their petroleum requirements in an amount of not less than 50,000 liters
per month; the said defendants will pay to the plaintiff 9-1/2% per annum on the diminishing
balance of the amount of their loan; that the defendants will repay the said loan in monthly
installments of P950.88 for a period of five (5) years from February 9, 1965; that to secure the
performance of the foregoing obligation they executed a first mortgage on two parcels of land
covered by Transfer Certificates of Title Nos. T-27136 and T-27946, both issued by the Register
of Deeds of Bacolod City.  The agreement further provided that in case of failure of the
defendants to pay any of the installments due and purchase their petroleum requirements in the

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minimum amount of 50,000 liters per month from the plaintiff, the latter has the right to
foreclose the mortgage or recover the payment of the entire obligation or its remaining unpaid
balance; that in case of foreclosure the plaintiff shall be entitled to 12% of the indebtedness as
damages and attorney's fees.

The defendant paid only the amount of P1,901.76 to the plaintiff, thus leaving a balance of
P43,098.24, excluding interest, on their indebtedness. The said defendants also failed to buy on
cash basis the minimum amount of petroleum which they agreed to purchase from the plaintiff. 
The plaintiff, therefore, prayed that the defendants be ordered to pay the amount of P43,098.24,
with interest at 9-1/2% per annum from the date it fell due, and in default of such payment that
the mortgaged properties be sold and the proceeds applied to the payment of defendants'
obligation."

Defendants, Ruth R. Diocares and Lope T. Diocares, now appellees, admitted their indebtedness
as set forth above, denying merely the alleged refusal to pay, the truth, according to them, being
that they sought for an extension of time to do so, inasmuch as they were not in a position to
comply with their obligation.

Then came a motion from the plaintiff for a judgment on the pleadings, which motion was
favorably acted on by the lower court.  As was stated in the order appealed from:  "The answer
of the defendants dated October 21, 1965 did not raise any issue.  On the contrary, said answer
admitted the material allegations of the complaint. The plaintiff is entitled to a judgment on the
pleadings."[7]

As to why the foreclosure sought by plaintiff was denied, the lower court order on appeal reads
thus:  "The Court cannot, however, order the foreclosure of the mortgage of properties, as prayed
for, because there is no allegation in the complaint nor does it appear from the copy of the loan
and real estate mortgage contract attached to the complaint that the mortgage had been
registered.  The said loan agreement although binding among the parties merely created a
personal obligation but did not establish a real estate mortgage.  The document should have been
registered.  (Art. 2125, Civil Code of the Phil.)"

ISSUE: Whether or not a mortgage contract not registered, in effect no real estate mortgage
established and its consequent refusal to order the foreclosure of the mortgaged properties was
proper? NO.

HELD: The lower court predicated its inability to order the foreclosure in view of the
categorical nature of the opening sentence of the governing article 10 that it is indispensable, "in
order that a mortgage may be validly constituted, that the document in which it appears be
recorded in the Registry of Property." Note that it ignored the succeeding sentence: "If the
instrument is not recorded, the mortgage is nevertheless binding between the parties." Its
conclusion, however, is that what was thus created was merely "a personal obligation but did not
establish a real estate mortgage."

Such a conclusion does not commend itself for approval. The codal provision is clear and
explicit. Even if the instrument were not recorded, "the mortgage is nevertheless binding
between the parties." The law cannot be any clearer. Effect must be given to it as written. The
mortgage subsists; the parties are bound. As between them, the mere fact that there is as yet
no compliance with the requirement that it be recorded cannot be a bar to foreclosure.

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In the language of the Report of the Code Commission: "In article [2125] an additional provision
is made that if the instrument of mortgage is not recorded, the mortgage is nevertheless binding
between the parties." 12

Nor is the reason difficult to discern why such an exception should be made to the rule that is
indispensable for a mortgage to be validly constituted that it be recorded. Equity so demands,
and justice is served. There is thus full acknowledgment of the binding effect of a promise,
which must be lived up to, otherwise the freedom a contracting party is supposed to possess
becomes meaningless. It could be said of course that to allow foreclosure in the absence of such
a formality is to offend against the demands of jural symmetry. What is "indispensable" may be
dispense with. Such an objection is far from fatal. This would not be the first time when logic
yields to what is fair and what is just. To such an overmastering requirement, law is not immune.

PRINCIPLES:

The New Civil Code provides: "A contract is a meeting of minds between two persons whereby
one binds himself, with respect to the other, to give something or to render some service." 2 So it
is likewise under American law. Thus: "A contract is a promise or a set of promises for the
breach of which the law gives a remedy, or the performance of which the law in some way
recognizes as a duty."

Thus, for a mortgage to be validly constituted, "it is indispensable, that the document in which it
appears be recorded in the Registry of Property." The same codal provision goes on: "If the
instrument is not recorded, the mortgage is nevertheless binding between the parties."

No. 13 SUICO RATTAN V. CA

GR NO. 138145, June 15, 2006

FACTS:

Suico Rattan & Buri Interiors, Inc. (SRBII) is a domestic corporation engaged in the business of
export of rattan and buri products. Spouses Esmeraldo and Elizabeth Suico (Suico spouses) are
officers of SRBII.  On the other hand, Metropolitan Bank and Trust Co., Inc. (Metrobank) is a
commercial banking corporation duly organized and existing under the laws of the Philippines.

SRBII applied for a credit line with Metrobank. They entered into a Credit Line Agreement
(Agreement) wherein the latter granted the former a discounting line amounting to
P7,000,000.00 and an export bills purchase or draft against payment line (EBP/DP line)
P10,000,000.00 for a maximum aggregate principal amount of P17,000,000.00.[secured by a
Continuing Surety Agreement for the sum of P17,500,000.00 executed by the Suico spouses.

Previous to the execution of the Agreement, the Suico spouses had already incurred loan
obligations from Metrobank which are secured by separate Real Estate Mortgages executed on
May 8, 1986, March 23, 1987 and August 24,1987 over the same properties which are the
subject of the Real Estate Mortgage executed on September 5, 1991.

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SRBII and the Suico spouses were unable to pay their obligations prompting Metrobank to extra-
judicially foreclose the four mortgages constituted over the subject properties.

On November 5, 1992, Metrobank filed an action for the recovery of a sum of money arising
from the obligations of SRBII and the Suico spouses on their export bills purchases incurred
between June and July, 1991.[14]  SRBII and the Suico spouses filed their Answer contending
that their indebtedness are secured by a real estate mortgage and that the value of the mortgaged
properties is more than enough to answer for all their obligations to Metrobank.

CA REVERSED. The clear intent of the contracting parties is that the mortgages shall not be
limited to the amount secured under the said contracts but shall extend to other obligations that
they may obtain from Metrobank, including renewals or extensions thereof, the same is not
sufficient to answer for the entire obligation of petitioners to Metrobank and that the latter may
still recover the deficiency of  P16,585,286.27 representing the value of the export bills
purchased by herein petitioners.

ISSUES:

1 Whether the mortgage contract executed on September 5, 1991 serves as security for all the
obligations of petitioners to respondent bank; YES

2 Whether the foreclosure of the mortgaged properties precludes respondent bank from claiming
the sum of P16,585,286.27 representing the amount covered by the export bills purchased by
herein petitioners between June and July 1991. NO.

3Whether or not the spouses are solidarily liable with SRBII in view of the
surety agreement. YES.

HELD:

1. The Court agrees with petitioners that all their obligations, including their indebtedness arising
from their purchase of export bills, are secured by the Real Estate Mortgage contract executed on
September 5, 1991.

However, a perusal of the entire Agreement shows that the credit line extended to petitioners
refers only to transactions that the latter may enter into after the execution of the said Agreement.
There is nothing in the said document which shows that the credit line covered the export bill
purchases incurred prior to the execution of the Agreement.

Neither is the Court persuaded by respondent bank's contention that petitioners' obligations
arising from their purchase of export bills is separate and distinct from their other loan
obligations with respondent bank because the export bills purchases were availed by petitioners
through the bank's Cebu Downtown Center/Plaridel branch while the other loan obligations of
petitioners were obtained from its Mandaue City branch.

Hence, it is now estopped from claiming that the mortagaged properties secure only those
transactions entered into with its Mandaue branch simply because the mortgage contracts were
entered into through the said branch. It does not matter that the export bills purchases of

38 | P a g e
petitioners were entered into through the facility of respondent bank's Plaridel branch and
evidenced by separate and distinct documents because in all these transactions there is only one
creditor, which is the corporate entity known as Metrobank.

Moreover, petitioners are not justified in concluding that they should be considered as having
paid their obligations in full since respondent bank was the one who acquired the mortgaged
properties and that the price it paid was very inadequate. Settled is the rule that a mortgage is
simply a security and not a satisfaction of indebtedness.[25]

Having settled that the mortgaged properties served as security for all the petitioners' obligations
to Metrobank and that the former's liability is solidary, the next question to be resolved is
whether, under the facts and circumstances obtaining in the present case, the respondent bank is
precluded from recovering the amount representing the value of the export bills purchased by
petitioners from it in June and July, 1991.

2. Hence, a remedy is deemed chosen upon the filing of the suit for collection or upon the
filing of the complaint in an action for foreclosure of mortgage, pursuant to the provisions
of Rule 68 of the Rules of Court.

As to extrajudicial foreclosure, such remedy is deemed elected by the mortgage creditor

upon filing of the petition not with any court of justice but with the office of the sheriff of
the province where the sale is to be made, in accordance with the provisions of Act No.
3135, as amended by Act No. 4118.[38]

Records show that the complaint for a sum of money was filed with the RTC on November 5,
1992.  On the other hand, there is no direct evidence to show when respondent bank filed a
petition with the provincial sheriff of Cebu for the extrajudicial foreclosure of the mortgaged
properties.

What appears on record is that the auction sale of the foreclosed properties was conducted on
November 17, 1992.

In a provision in Act. No. 3135, as amended, the creditor is not precluded from taking action
to recover any unpaid balance on the principal obligation simply because he chose to
extrajudicially foreclose the real estate mortgage.

Hence, in the present case, the Court's dismissal of the complaint should be without prejudice to
the filing of another action for the recovery of the balance left in petitioners' obligation after the
foreclosure sale of the mortgaged properties.

3. The time-honored rule is that the surety obligates himself to pay the debt if the principal
debtor will not pay, regardless of whether or not the latter is financially capable to fulfil his
obligation.

Thus, a creditor can go directly against the surety although the principal debtor is solvent and is
able to pay or no prior demand is made on the principal debtor. Although a surety contract is
secondary to the principal obligation, the liability of the surety is direct, primary and
absolute; or equivalent to that of a regular party to the undertaking.

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A surety is considered in law to be on the same footing as the principal debtor in relation to
whatever is adjudged against the latter. In the present case, it is clear from the Continuing Surety
Agreement executed by the Suico spouses that they hold themselves solidarily liable with SRBII
in the payment of the latter’s obligations.

PRINCIPLES:

In the language of the contract, it is clear that the mortgaged properties were intended to secure
all loans, credit accommodations and all other obligations of herein petitioners to Metrobank,
whether such obligations have been contracted before, during or after the constitution of the
mortgage.

Thus, although the Agreement does not refer to export bill purchases incurred prior to the
execution of said Agreement, the Real Estate Mortgage encompasses all obligations incurred by
petitioners, including the June and July 1991 export bill purchases but not the purchases made
after September 5, 1991 under the Agreement.

An election of one remedy operates as a waiver of the other.

However, as mentioned earlier, the remedy of extrajudicial foreclosure is deemed chosen not
on the date of foreclosure sale but upon the filing of the petition for foreclosure with the
office of the sheriff of the province where the sale is to be made.

Hence, for purposes of determining which remedy was first elected - the personal action for debt
or the real action for foreclosure - there is a need to determine when the respondent bank filed a
petition for extrajudicial foreclosure.

Considering that the complaint for a sum of money was only filed on November 5, 1992, the
only conclusion that can be arrived at is that respondent bank first elected to avail of the remedy
of extrajudicial foreclosure.  Thus, by availing of such remedy it is deemed to have waived its
right to file an ordinary case for collection.

No. 14 ANTONIO P. TAMBUNTING v. SPS. EMILIO SUMABAT AND ESPERANZA

BAELLO
GR NO. 144101, September 16, 2005

Where the law or contract has already been contravened prior to the filing of an action for
declaratory relief, the court can no longer assume jurisdiction over the action.

FACTS: Spouses Sumabat and Baello were the registered land owners of a parcel of land in
Caloocan. In May 1973, and in order to obtain a P7,727.95 loan from petitioner Tambunting, the
spouses mortgaged said land to the former. Subsequently, Tambunting assigned his rights to the
mortgaged to Commercial House Finance (CHFI). And because respondent spouses have not
been paying their monthly amortizations, they were informed that their indebtedness has
ballooned to P15,000.

CHFI and Tambunting filed a case for foreclosure but was restrained by Branch 33 of the RTC
of Caloocan. The reason for the restraint was because the respondents were able to file an action

40 | P a g e
for declaratory relief with said RTC. In their action, respondents were praying that the court rule
on the extent or amount of their actual indebtedness. In said RTC case, which was filed March
1979, herein petitioners were declared in default. Thus, even when the Tambunting, et al moved
for the dismissal of the case on the ground that mortgaged deed/contract had already been
breached prior to the action , said motion was denied for having been filed out of time.

On Jan. 1981, the RTC rendered a decision finding that respondents liability, by virtue of their
mortgage deed/contract, was P15,743.83. Pursuant to this decision, the respondents made a
consignation with the RTC in said amount.

After almost 14 years, or on Feb 1995, CHFI again foreclosed on the contested land. The
respondents came to know of this because they received a notice of foreclosure sale, to be
conducted by the sheriff, of the land in question. This time, the petitioners filed an action with
Branch 120 of the RTC of Caloocan for injunction against the foreclosure sale. But, the sale still
pushed thru, with CHFI being declared the highest bidder. A new TCT was then issued to CHFI .
Thus, respondent spouses amended their complaint to an action for nullification of the
foreclosure/sheriff s sale, the new TCT of CHFI, as well as reconveyance.

On Feb 2000, Branch 120 of the RTC declared the foreclosure sale as void. It likewise ruled that
reconveyance of the property should be made to the respondents. This decision was grounded on
the fact that consignation of P15,000 has already been made by CHFI pursuant to the earlier
decision of the Branch 33 of the RTC. After a denial of petitioner’s Motion of Reconsideration,
they filed petition for review on certiorari with the SC. The petitioners argued that RTC, Branch
33, erred when it ordered the consignation of P15,000. As earlier pointed out, the action in first
case was for declaratory relief. But petitioner points out the fact that respondents are not entitled
anymore to file an action for declaratory relief because there had already been a violation of the
mortgaged contract when the spouses defaulted on their amortizations. Furthermore the action
for foreclosure by CHFI on 1995 has already prescribed.

ISSUE: 1 Whether the RTC erred when it ordered the nullification of the foreclosure sale on the
ground that consignation has already been made in a previous case? YES. The trial court erred
when it affirmed the validity of the consignation.

2 Was the foreclosure action in 1995 and subsequent sale of the property already barred by
prescription? Thus, should the action for nullification and reconveyance filed by the respondents
be dismissed? YES.

3 Whether an action for declaratory relief was proper? NO. Where the law or contract has
already been contravened prior to the filing of an action for declaratory relief, the court
can no longer assume jurisdiction over the action.

HELD:

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1 The RTC should have been barred from taking cognizance of the action for declaratory
relief since petitioners, being already in default in their loan amortizations, there existed a
violation of the mortgage deed even before the institution of the action.

Hence, the CFI could not have rendered a valid judgment and the consignation made pursuant to
a void judgment was likewise void. An action for declaratory relief should be filed by a
person interested under a deed, will, contract or other written instrument, and whose
rights are affected by a statute, executive order, regulation or ordinance before breach or
violation thereof. The purpose of the action is to secure an authoritative statement of the
rights and obligations of the parties under a statute, deed, contract, etc. for their guidance in its
enforcement or compliance and not to settle issues arising from its alleged breach. It may be
entertained only before the breach or violation of the statute, deed, contract, etc. to which it
refers. Where the law or contract has already been contravened prior to the filing of an
action for declaratory relief, the court can no longer assume jurisdiction over the action.
Nonetheless, the petition must fail.

2. Article 1142 of the Civil Code is clear. A mortgage action prescribes after ten years. Here,
petitioners right of action accrued in May 1977 when respondents defaulted in their obligation to
pay their loan amortizations. It was from that time that the ten-year period to enforce the right
under the mortgage started to run. The period was interrupted when respondents filed Civil Case
No. C-6329 sometime after May 1977 and the CFI restrained the intended foreclosure of the
property. However, the period commenced to run again on November 9, 1977 when the case was
dismissed.

The respondents' institution of Civil Case in the CFI on March 16, 1979 did not interrupt
the running of the ten-year prescriptive period because, as discussed above, the court
lacked jurisdiction over the action for declaratory relief.  All proceedings therein, were
without legal effect.  Thus, petitioners could have enforced their right under the mortgage,
including its foreclosure, only until November 7, 1987, the tenth year from the dismissal of Civil
Case No. C-6329.  Thereafter, their right to do so was already barred by prescription.

The foreclosure held on February 8, 1995 was therefore some seven years too late. The same
thing can be said about the public auction held on March 27, 1995, the consolidation of title in
CHFI's favor and the issuance of TCT No. 310191 in its name.  They were all void and did not
exist in the eyes of the law.

3 A court has no more jurisdiction over an action for declaratory relief if its subject, i.e., the
statute, deed, contract, etc., has already been infringed or transgressed before the institution of
the action.

Here, an infraction of the mortgage terms had already taken place before the filing of Civil Case
No. C-7496.  Thus, the CFI lacked jurisdiction when it took cognizance of the case in 1979.

NO. 15 PHILIPPINE NATIONAL BANK vs. GREGORIO B. MARAYA

GR NO. 164104, SEPTEMBER 11, 2009

FACTS: On or about June 22, 1977, [the spouses Maraya] secured a loan for P6,000.00 from
[PNB] and constituted a real estate mortgage of their parcel of land located in Southern Leyte.

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Upon their failure to pay their obligation, defendant-appellant PNB initiated an extrajudicial
foreclosure of the mortgaged property without having the intended foreclosure sale published in
the newspaper of general circulation. PNB emerged as the highest bidder and was awarded the
Sheriff's certificate of sale.

For failure of [the spouses Maraya] to redeem the property and their failure to buy back the same
despite several periods granted by PNB after one year allowed by law, PNB decided to sell the
property. A public bidding was conducted for the said purpose with defendant appellant Jesus
Cerro as the successful bidder.

PNB through its Branch Manager Francisco Bangi, executed a Deed of Absolute Sale over the
aforementioned land in favor of Jesus Cerro. [The spouses Maraya] were notified by PNB of the
sale in favor of Jesus Cerro and were advised to vacate the premises. As they refused to vacate,
Jesus Cerro was constrained to file a complaint for unlawful detainer against them. The
Municipal Trial Court of Maasin rendered a decision in favor of Jesus Cerro.

[The spouses Maraya] appealed the said decision and it was during the pendency of the appeal
that [the Spouses Maraya] filed the complaint for Annulment of Sale and Quieting of Title
against [PNB and the spouses Cerro] before the Regional Trial Court of Maasin, Southern Leyte.

The trial court ruled in favor of the spouses Maraya. The trial court ruled that there was no valid
extrajudicial foreclosure sale of real property because of PNB's failure to comply with the
substantive requirement of Section 3, Act No. 3135 as to publication of the notice of sale once a
week for at least three consecutive weeks in a newspaper of general circulation.

The spouses Maraya filed an Urgent Motion for Execution Pending Appeal before the trial court.
Before the motion could be heard, PNB and the spouses Cerro filed their respective Notices of
Appeal. PNB and the spouses Cerro likewise filed their respective Oppositions to the motion
filed by the spouses Maraya. The trial court approved the Notices of Appeal and directed the
transmittal of the records of the present case to the appellate court.

The trial court denied the spouses Maraya's motion for execution for lack of jurisdiction to
resolve the same.

The spouses Maraya filed before the appellate court on 29 October 1997 an Urgent Motion for
Execution of Judgment Pending Appeal. The appellate court denied this motion. The appellate
court affirmed the decision of the trial court.

Failure to comply with the statutory requirement as to publication of notice, invalidates the sale.

The appellate court denied PNB's motion for reconsideration.

ISSUE: Whether or not the extrajudicial foreclosure sale conducted is valid even in the absence
of publication of the notice of foreclosure of mortgage and Spouses Maraya had knowledge of
the extrajudicial foreclosure proceedings? NO.

HELD:

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This Court cannot bring itself to agree with PNB's position that its failure to comply with the
requirement of publication is excusable because the spouses Maraya had knowledge of the
extrajudicial foreclosure proceedings.

Statutory provisions governing publication of notice of mortgage foreclosure sales must be

strictly complied with, and that even slight deviations therefrom will invalidate the notice
and render the sale at least voidable.

Indeed, one of the most important requirements of Act No. 3135 is that the notice of the
time and place of sale shall be given. If the sheriff acts without notice, or at a time and place
other than that designated in the notice, the sheriff acts without warrant of law.

Publication is required to give the extrajudicial foreclosure sale a reasonably wide publicity
such that those interested might attend the public sale. To allow the parties to waive this
jurisdictional requirement would result in converting into a private sale what ought to be a public
auction.

PRINCIPLES:

Section 3 of Act No. 3135 reads:

Section 3. Notice shall be given by posting notices of the sale for not less than twenty (20) days
in at least three public places of the municipality or city where the property is situated, and if
such property is worth more than four hundred pesos, such notice shall also be published once a
week for at least three consecutive weeks in a newspaper of general circulation in the
municipality or city.
No. 16 SPS. BONIFACIO AND FAUSTINA PARAY vs. DRA. ABDULIA C.
RODRIGUEZ
GR NO. 132287, January 24, 2006

FACTS: Respondents were the owners, in their respective personal capacities, of shares of stock
in a corporation known as the Quirino-Leonor-Rodriguez Realty Inc.

Sometime during the years 1979 to 1980, respondents secured by way of pledge of some of their
shares of stock to petitioners Bonifacio and Faustina Paray ("Parays") the payment of certain
loan obligations.

When the Parays attempted to foreclose the pledges on account of respondents' failure to pay
their loans, respondents filed complaints with the Regional Trial Court (RTC) of Cebu City.

The actions, which were consolidated and tried before RTC Branch 14, Cebu City, sought the
declaration of nullity of the pledge agreements, among others. However the RTC, in its
decision[3] dated 14 October 1988, dismissed the complaint and gave "due course to the
foreclosure and sale at public auction of the various pledges subject of these two cases."

Notwithstanding the consignations, the public auction took place as scheduled, with petitioner
Vidal Espeleta successfully bidding the amount of P6,200,000.00 for all of the pledged shares.

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The Court of Appeals Eighth Division however reversed the RTC on appeal, ruling that the
consignations extinguished the loan obligations and the subject pledge contracts; and the auction
sale of 4 November 1991 as null and void.

Most crucially, the appellate court chose to uphold the sufficiency of the consignations owing to
an imputed policy of the law that favored redemption and mandated a liberal construction to
redemption laws.

ISSUE: Whether or not petitioners were authorized to refuse as they did the tender of payment
since they were undertaking the auction sale pursuant to the final and executory decision in Civil
Case. YES.

HELD: It must be clarified that the subject sale of pledged shares was an extrajudicial sale,
specifically a notarial sale, as distinguished from a judicial sale as typified by an execution sale.

Under the Civil Code, the foreclosure of a pledge occurs extrajudicially, without
intervention by the courts. All the creditor needs to do, if the credit has not been satisfied in
due time, is to proceed before a Notary Public to the sale of the thing pledged. In this case,
petitioners attempted as early as 1980 to proceed extrajudicially with the sale of the pledged
shares by public auction. However, extrajudicial sale was stayed with the filing of Civil Cases
No. R-20120 and 20131, which sought to annul the pledge contracts. The final and executory
judgment in those cases affirmed the pledge contracts and disposed. Since the pledged shares in
this case are not subject to redemption, the Court of Appeals had no business invoking and
applying the inexistent right of redemption. We cannot thus agree that the consigned payments
should be treated with liberality, or somehow construed as having been made in the exercise of
the right of redemption.

We also must reject the appellate courts declaration that the buyer of at the public auction is
not ipso facto rendered the owner of the auctioned shares, since the debtor enjoys the one-
year redemptive period to redeem the property. Obviously, since there is no right to redeem
personal property, the rights of ownership vested unto the purchaser at the foreclosure sale are
not entangled in any suspensive condition that is implicit in a redemptive period.

The phrase "giving due course to the foreclosure and sale at public auction of the various pledges
subject of these two cases" may give rise to the impression that such sale is judicial in character.
While the decision did authorize the sale by public auction, such declaration could not detract
from the fact that the sale so authorized is actually extrajudicial in character.

Note that the final judgment in said cases expressly did not direct the sale by public auction of
the pledged shares, but instead upheld the right of the Parays to conduct such sale at their own
volition.

The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to
execution sales, more precisely execution sales of real property.

The Court of Appeals expressly asserted the notion that pledged property, necessarily personal in
character, may be redeemed by the creditor after being sold at public auction. Yet, as a
fundamental matter, does the right of redemption exist over personal property? No law or
jurisprudence establishes or affirms such right. Indeed, no such right exists.

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The right to redeem property sold as security for the satisfaction of an unpaid obligation does not
exist preternaturally. Neither is it predicated on proprietary right, which, after the sale of
property on execution, leaves the judgment debtor and vests in the purchaser.

Instead, it is a bare statutory privilege to be exercised only by the persons named in the statute.

Since the pledged shares in this case are not subject to redemption, the Court of Appeals
had no business invoking and applying the inexistent right of redemption.

No. 17 PRUDENTIAL BANK vs. HONORABLE DOMINGO D. PANIS

G.R. No. L-50008 August 31, 1987

A Real Estate Mortgage can be constituted on the building erected on the land belonging to
another.

FACTS:
On 19 November 1971, Fernando A. Magcale and Teodula Baluyut Magcale secured a loan of
P70,000.00 from Prudential Bank. To secure payment of this loan, the Magcales executed in
favor of Prudential Bank a deed of Real Estate Mortgage over a 2-storey, semi-concrete
residential building with warehouse space (total area of 263 sq.m.); and granting upon the
mortgagee the right of occupancy on the lot where the property is erected. A rider is also
included in the deed that in the event the Sales Patent on the lot is issued of Bureau of Lands, the
Register of Deeds is authorized to hold the Registration until the mortgage is cancelled or
annotate the encumbrance on the title upon authority from the Secretary of Agriculture and
Natural Resources, which title with annotation release in favor of the mortgage. The Real Estate
Mortgage was registered under the Provisions of Act 3344 with the Registry of Deeds of
Zambales on 23 November 1971.

Subsequently, the Magcales secured an additional loan from Prudential Bank, secured by another
deed of Real Estate Mortgage registered with the Registry of Deeds in Olongapo City, on 2 May
1973.On 24 April 1973, the Secretary of Agriculture issued Miscellaneous Sales Patent 4776
over the parcel of land, possessory rights over which were mortgaged to Prudential Bank, in
favor of the Magcales. On the basis of the Patent, and upon its transcription in the Registration
Book of the Province of Zambales, OCT P-2554 was issued in the name of Fernando Magcale,
by the Ex-Oficio Register of Deeds of Zambales, on 15 May 1972.

For failure of the Magcales to pay their obligation to the Bank after it became due, the deeds of
Real Estate Mortgage were extrajudicially foreclosed. Consequent to the foreclosure was the sale
of the properties mortgaged to the bank as the highest bidder in a public auction sale conducted
by the City Sheriff on 12 April 1978. The auction sale was held despite written request from the
Magcales through counsel, dated 29 March 1978, for the City Sheriff to desist from going with
the scheduled public auction sale. The issue was raised to the CF Zambales and Olongapo City
which, on 3 November 1978, declared the deeds of Real Estate Mortgage as null and void. The
bank filed a motion for reconsideration on 14 December 1978, which the court denied on 10
January 1979 for lack of merit. Hence, the petition.

ISSUE: Whether or not a real estate mortgage can be instituted on the building of a land
belonging to another. YES.

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HELD: A real estate mortgage can be constituted on the building erected on the land
belonging to another.

The Supreme Court modified the decision of the CFI Zambales & Olongapo, declaring that the
Deed of Real Estate Mortgage for P70,000.00 is valid but ruling that the Deed of Real Estate
Mortgage for an additional loan of P20,000.00 is null and void, without prejudice to any
appropriate action the Government may take against private respondents.

In the enumeration of properties under Article 415 of the Civil Code of the Philippines, it is
obvious that the inclusion of 'building' separate and distinct from the land, in said provision
of law can only mean that a building is by itself an immovable property. (Lopez vs. Orosa,
Jr., et al., L-10817-18, Feb. 28, 1958; Associated Inc. and Surety Co., Inc. vs. Iya, et al., L-
10837-38, May 30, 1958). A building can be mortgaged apart from the land it is built;
possessory rights may be validly transferred in a deed of mortgage. While a mortgage of
land necessarily includes, in the absence of stipulation of the improvements thereon, buildings;
still a building by itself may be mortgaged apart from the land on which it has been built.
Such a mortgage would be still a real estate mortgage for the building would still be
considered immovable property even if dealt with separately and apart from the land
(Leung Yee vs. Strong Machinery Co., 37 Phil. 644). Possessory rights over said properties
before title is vested on the grantee, may be validly transferred or conveyed as in a deed of
mortgage (Vda. de Bautista vs. Marcos, 3 SCRA 438 [1961]).

A valid real estate mortgage may be constituted on the building erected on the land
belonging to another. The original mortgage was executed (19 November 1971) before the
issuance of the final patent (24 April 1972) and before the government was divested of its title to
the land (15 May 1972), an event which takes effect only on the issuance of the sales patent and
its subsequent registration in the Office of the Register of Deeds (Visayan Realty Inc. vs. Meer,
96 Phil. 515).

In the case at bar, it is evident that the mortgage executed by Magcale on his own building which
was erected on the land belonging to the government is to all intents and purposes a valid
mortgage. Public land act and RA 730 not violated in first mortgage as to restrictions appearing
to the Magcales title; Sections 121, 122 and 124 of the Public Land Act refer to land already
acquired under the Public Land Act or any improvement thereon.

Section 2 of RA 730 refers to encumbrance or alienation before the patent is issued because it
refers specifically to encumbrance or alienation on the land itself and does not mention anything
regarding the improvements existing thereon. Both have no application to the assailed mortgage
in the case at bar; as the former, the mortgage was executed before such eventuality, and the
latter, it does not encumber nor alienate the land. Mortgage made after issuance of Sales Patent
an OCT prohibited; Estoppel does not give validating effect to a void contract.

As regards the second mortgage executed, such mortgage executed after the issuance of the sales
patent and of the Original Certificate of Title, falls squarely under the prohibitions stated in
Sections 121, 122 and 124 of the Public Land Act and Section 2 of RA 730, and is therefore null
and void. Even if the title was voluntary surrendered to the bank for the mortgage to be annotated
without the prior approval of the Ministry of Natural Resources; in pari delicto may not be
invoked to defeat the policy of the State neither may the doctrine of estoppel give a validating
effect to a void contract. Indeed, it is generally considered that as between parties to a contract,
validity cannot be given to it by estoppel if it is prohibited by law or is against public policy (19

47 | P a g e
Am. Jur. 802). It is not within the competence of any citizen to barter away what public policy
by law seeks to preserve (Gonzalo Puyat & Sons, Inc. vs. De los Amas and Alino, supra; Arsenal
vs. IAC, 143 SCRA 54 [1986]). Such does not, however, preclude new contracts that may be
entered into in accordance with the requirements of the law. Any new transaction, however,
would be subject to whatever steps the Government may take for the reversion of the land in its
favor.

HELD:

No. 18 MAXIMA HEMEDES v. THE HONORABLE COURT OF APPEALS,

DOMINIUM REALTY AND CONSTRUCTION CORPORATION, ENRIQUE D.
HEMEDES, and R & B INSURANCE CORPORATION
G.R. No. 107132. October 8, 1999

FACTS:  

The instant controversy involves a question of ownership over an unregistered parcel of land,
situated in Sala, Cabuyao, Laguna. It was originally owned by the late Jose Hemedes, father of
Maxima Hemedes and Enrique D. Hemedes. Jose Hemedes executed a document entitled
Donation Inter Vivos With Resolutory Condition whereby he conveyed ownership over the
subject land, together with all its improvements, in favor of his third wife, Justa Kauapin, subject
to the following resolutory conditions:

(a) Upon the death or remarriage of the DONEE, the title to the property donated shall revert
to any of the children, or their heirs, of the DONOR expressly designated by the DONEE
in a public document conveying the property to the latter; or

(b) In absence of such an express designation made by the DONEE before her death or
remarriage contained in a public instrument as above provided, the title to the property shall
automatically revert to the legal heirs of the DONOR in common.

Pursuant to the first condition abovementioned, Justa Kausapin executed a Deed of Conveyance
of Unregistered Real Property by Reversion conveying to Maxima Hemedes the subject property
except the possession and enjoyment of the said property which shall remain vested in Justa
Kausapin during her lifetime, or widowhood and which upon her death or remarriage shall also
automatically revert to, and be transferred to Maxima Hemedes.

Maxima Hemedes and her husband Raul Rodriguez constituted a real estate mortgage over the
subject property in its favor to serve as security for a loan which they obtained in the amount of
P6,000.00., R & B Insurance extrajudicially foreclosed the mortgage since Maxima Hemedes
failed to pay the loan even after it became due. The land was sold at a public auction with R & B
Insurance as the highest bidder and a certificate of sale was issued by the sheriff in its favor.
Since Maxima Hemedes failed to redeem the property within the redemption period, R & B
Insurance executed an Affidavit of Consolidation. The annotation of usufruct in favor of Justa
Kausapin was maintained in the new title.

Despite the earlier conveyance of the subject land in favor of Maxima Hemedes, Justa Kausapin
executed whereby she transferred the same land to her stepson Enrique D. Hemedes, pursuant to
the resolutory condition in the deed of donation executed in her favor by her late husband Jose

48 | P a g e
Hemedes. Enrique D. Hemedes obtained two declarations of real property, when the assessed
value of the property was raised.  Also, he has been paying the realty taxes on the property from
the time Justa Kausapin conveyed the property to him.  In the cadastral survey, the property was
assigned in the name of Enrique Hemedes.  Enrique Hemedes is also the named owner of the
property in the records of the Ministry of Agrarian Reform office at Calamba, Laguna.

Enriques D. Hemedes sold the property to Dominium Realty and Construction Corporation
(Dominium). Dominium leased the property to its sister corporation Asia Brewery, Inc. (Asia
Brewery) who, even before the signing of the contract of lease, constructed two warehouses
made of steel and asbestos costing about P10,000,000.00 each. Upon learning of Asia Brewery’s
constructions upon the subject property, R & B Insurance sent it a letter informing the former of
its ownership of the property as evidenced by TCT No. 41985 issued in its favor and of its right
to appropriate the constructions since Asia Brewery is a builder in bad faith. A conference was
held between R & B Insurance and Asia Brewery but they failed to arrive at an amicable
settlement.

Maxima Hemedes also wrote a letter addressed to Asia Brewery asserting that she is the rightful
owner of the subject property and denying the execution of any real estate mortgage in favor of
R&B.

Dominium and Enrique D. Hemedes filed a complaint with the Court of First Instance of Binan,
Laguna for the annulment of TCT No. 41985 issued in favor of R & B Insurance and/or the
reconveyance to Dominium of the subject property. Specifically, the complaint alleged that
Dominium was the absolute owner of the subject property by virtue of the deed of sale executed
by Enrique D. Hemedes, who in turn obtained ownership of the land from Justa Kausapin, as
evidenced by the Kasunduan. The plaintiffs asserted that Justa Kausapin never transferred the
land to Maxima Hemedes and that Enrique D. Hemedes had no knowledge of the registration
proceedings initiated by Maxima Hemedes.

The trial court rendered judgment in favor of plaintiffs Dominium and Enrique D. Hemedes, The
Court of Appeals affirmed the assailed decision in toto.

ISSUE: Which of the two conveyances by Justa Kausapin, effectively transferred ownership
over the subject land? Is it the first in favor of Maxima Hemedes or the second in favor of
Enrique D. Hemedes? The first one to Maxima Hemedes.

HELD: Enrique D. Hemedes and his transferee, Dominium, did not acquire any rights over
the subject property. 

In upholding the deed of conveyance in favor of Maxima Hemedes, we must concomitantly rule
that Enrique D. Hemedes and his transferee, Dominium, did not acquire any rights over the
subject property. Justa Kausapin sought to transfer to her stepson exactly what she had earlier
transferred to Maxima Hemedes the ownership of the subject property pursuant to the first
condition stipulated in the deed of donation executed by her husband. Thus, the donation in favor
of Enrique D. Hemedes is null and void for the purported object thereof did not exist at the time
of the transfer, having already been transferred to his sister. Similarly, the sale of the subject
property by Enrique D. Hemedes to Dominium is also a nullity for the latter cannot acquire
more rights than its predecessor-in-interest and is definitely not an innocent purchaser for
value since Enrique D. Hemedes did not present any certificate of title upon which it relied.

49 | P a g e
The declarations of real property by Enrique D. Hemedes, his payment of realty taxes, and
his being designated as owner of the subject property in the cadastral survey of Cabuyao,
Laguna and in the records of the Ministry of Agrarian Reform office in Calamba, Laguna
cannot defeat a certificate of title, which is an absolute and indefeasible evidence of
ownership of the property in favor of the person whose name appears therein. Particularly,
with regard to tax declarations and tax receipts, this Court has held on several occasions
that the same do not by themselves conclusively prove title to the land.

Whether or not R&B Insurance is a purchaser in good faith

R & B Insurance alleges that, contrary to public respondents ruling, the presence of an
encumbrance on the certificate of title is no reason for the purchaser or a prospective mortgagee
to look beyond the face of the certificate of title. We sustain petitioner R & B Insurances claim
that it is entitled to the protection of a mortgagee in good faith.

The annotation of usufructuary rights in favor of Justa Kausapin upon Maxima Hemedes OCT
does not impose upon R & B Insurance the obligation to investigate the validity of its
mortgagor’s title. Usufruct gives a right to enjoy the property of another with the obligation
of preserving its form and substance. The usufructuary is entitled to all the natural,
industrial and civil fruits of the property and may personally enjoy the thing in usufruct,
lease it to another, or alienate his right of usufruct, even by a gratuitous title, but all the
contracts he may enter into as such usufructuary shall terminate upon the expiration of the
usufruct.

Clearly, only the jus utendi and jus fruendi over the property is transferred to the
usufructuary. The owner of the property maintains the jus disponendi or the power to
alienate, encumber, transform, and even destroy the same. This right is embodied in the
Civil Code, which provides that the owner of the property, the usufruct of which is held by
another, may alienate it, although he cannot alter the property’s form or substance, or do
anything which may be prejudicial to the usufructuary.

There is no doubt that the owner may validly mortgage the property in favor of a third
person and the law provides that, in such a case, the usufructuary shall not be obliged to
pay the debt of the mortgagor, and should the immovable be attached or sold judicially for
the payment of the debt, the owner shall be liable to the usufructuary for whatever the
latter may lose by reason thereof.

If, after a perfect and binding contract has been executed between the parties, it occurs to one of
them to allege some defect therein as a reason for annulling it, the alleged defect must be
conclusively proven, since the validity and fulfilment of contracts cannot be left to the will of
one of the contracting parties.

No. 19 TERESITA I. BUENAVENTURA v. METROPOLITAN BANK & TRUST

COMPANY +
GR No. 167082, Aug 03, 2016

FACTS:
On January 20, 1997 and April 17, 1997, Teresita Buenaventura (or "appellant") executed
Promissory Notes each in the amount of P 1,500,000.00 and payable to Metropolitan Bank and
Trust Company (or "appellee"). PN No. 232663 was to mature on July 1, 1997, with interest and
50 | P a g e
credit evaluation and supervision fee (or "CESF") at the rate of 17.532% per annum, while PN
No. 232711 was to mature on April 7, 1998, with interest and CESF at the rate of 14.239% per
annum. Both PNs provide for penalty of 18% per annum on the unpaid principal from date of
default until full payment of the obligation.

Despite demands, there remained unpaid on PN Nos. 232663 and 232711 the amounts of
P2,061,208.08 and PI,492,236.37, respectively, as of July 15, 1998, inclusive of interest and
penalty. Consequently, appellee filed an action against appellant for recovery of said amounts,
interest, penalty and attorney's fees before the Regional Trial Court of Makati City (Branch 61).

In answer, appellant averred that in 1997, she received from her nephew, Rene Imperial (Or
"Imperial"), three postdated checks drawn against appellee (Tabaco Branch), dated January 5,
1998 in the amount of PI,200,000.00, Check No. 1270482455PA dated March 31, 1998 in the
amount of PI,197,000.00 and Check No. TA1270482451PA dated March 31, 1998 in the amount
of P500,000.00 (or "subject checks"), as partial payments for the purchase of her properties; that
she rediscounted the subject checks with appellee (Timog Branch), for which she was required to
execute the PNs to secure payment thereof; and that she is a mere guarantor and cannot be
compelled to pay unless and until appellee shall have exhausted all the properties of Imperial.[4]
On July 11, 2002, the RTC rendered its judgment in favor of plaintiff METROPOLITAN BANK
AND TRUST COMPANY.

On May 21, 2004, the petitioner moved for the reconsideration of the decision, but the CA
denied her motion for that purpose on February 9, 2005.[9]

ISSUE:
1 Whether or not the promissory notes executed by petitioner are null and void for being
simulated and fictitious.

2 Even assuming that the promissory notes are valid, these are intended as mere guaranty to
secure Rene Imperial's payment of the rediscounted checks. Hence, being a mere guarantor, the
action against petitioner under the said promissory notes is premature.

A. Metrobank is deemed to have subrogated petitioner as creditor of Mr.

Imperial (the issuer of the checks). Hence, Metrobank's recourse as
creditor, is against Mr. Imperial.

HELD:
The appeal lacks merit.

First of all, the petitioner claims that the promissory notes she executed were contracts of
adhesion because her only participation in their execution was affixing her signature,[11] and that
the terms of the promissory notes should consequently be strictly construed against the
respondent as the party responsible for their preparation. [12] In contrast, the respondent counters
that the terms and conditions of the promissory notes were clear and unambiguous; hence, there
was no room or need for interpretation thereof.[13]

The respondent is correct.

The promissory notes were written as follows:

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FOR VALUE RECEIVED, I/we jointly and severally promise to pay Metropolitan Bank and
Trust Company, at its office x x x the principal sum of PESOS xxx, Philippine currency, together
with interest and credit evaluation and supervision fee (CESF) thereon at the effective rate of xxx
per centum xxx per annum, inclusive, from date hereof and until fully paid.[14]
What the petitioner advocates is for the Court to now read into the promissory notes terms and
conditions that would contradict their clear and unambiguous terms in the guise of such
promissory notes being contracts of adhesion. This cannot be permitted, for, even assuming that
the promissory notes were contracts of adhesion, such circumstance alone did not necessarily
entitle her to bar their literal enforcement against her if their terms were unequivocal. It is
preposterous on her part to disparage the promissory notes for being contracts of adhesion, for
she thereby seems to forget that the validity and enforceability of contracts of adhesion were
the same as those of other valid contracts. The Court has made this plain in Avon Cosmetics,
Inc. v. Luna,[15] stating:
A contract of adhesion is so-called because its terms are prepared by only one party while the
other party merely affixes his signature signifying his adhesion thereto. Such contract is
just as binding as ordinary contracts.
It is true that we have, on occasion, struck down such contracts as void when the weaker party is
imposed upon in dealing with the dominant bargaining party and is reduced to the alternative of
taking it or leaving it, completely deprived of the opportunity to bargain on equal footing.
Nevertheless, contracts of adhesion are not invalid per se and they are not entirely
prohibited. The one who adheres to the contract is in reality free to reject it entirely, if he
adheres, he gives his consent.

x x x x

Accordingly, a contract duly executed is the law between the parties, and they are obliged to
comply fully and not selectively with its terms. A contract of adhesion is no exception.
The terms and conditions of the promissory notes involved herein, being clear and beyond doubt,
should then be enforced accordingly. In this regard, we approve of the observation by the CA,
citing Cruz v. Court of Appeals, [17] that the intention of the parties should be "deciphered not
from the unilateral post facto assertions of one of the parties, but from the language used in the
contract." Accordingly, no court, even this Court, can "make new contracts for the parties or
ignore those already made by them, simply to avoid seeming hardships. Neither abstract justice
nor the rule of liberal construction justifies the creation of a contract for the parties which they
did not make themselves or the imposition upon one party to a contract of an obligation not
assumed."[20]

Secondly, the petitioner submits that the promissory notes were null and void for being simulated
and fictitious; hence, the CA erred in enforcing them against her.

The submission contradicts the records and the law pertinent to simulated contracts.

Based on Article 1345[21] of the Civil Code, simulation of contracts is of two kinds, namely: (1)
absolute; and (2) relative. Simulation is absolute when there is color of contract but without any
substance, the parties not intending to be bound thereby.[22] It is relative when the parties
come to an agreement that they hide or conceal in the guise of another contract.[23]

The effects of simulated contracts are dealt with in Article 1346 of the Civil Code, to wit:

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Art. 1346. An absolutely simulated or fictitious 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 real agreement.
The burden of showing that a contract is simulated rests on the party impugning the contract.
This is because of the presumed validity of the contract that has been duly executed.[24] The proof
required to overcome the presumption of validity must be convincing and preponderant. Without
such proof, therefore, the petitioner's allegation that she had been made to believe that the
promissory notes would be guaranties for the rediscounted checks, not evidence of her primary
and direct liability under loan agreements,[25] could not stand.

Moreover, the issue of simulation of contract was not brought up in the RTC. It was raised for
the first time only in the CA.[26] Such belatedness forbids the consideration of simulation of
contracts as an issue. Indeed, the appellate courts, including this Court, should adhere to the rule
that issues not raised below should not be raised for the first time on appeal. Basic considerations
of due process and fairness impel this adherence, for it would be violative of the right to be heard
as well as unfair to the parties and to the administration of justice if the points of law, theories,
issues and arguments not brought to the attention of the lower courts should be considered and
passed upon by the reviewing courts for the first time.

Thirdly, the petitioner insists that the promissory notes, even if valid, were meant as guaranties to
secure payment of the checks by the issuer, Rene Imperial; hence, her liability was that of a
guarantor, and would take effect only upon exhaustion of all properties and after resort to all
legal remedies against Imperial.[27]

The insistence of the petitioner is bereft of merit.

The CA rejected this insistence, expounding as follows:

A guaranty is not presumed; it must be expressed (Art. 2055, New Civil Code). The PNs
provide, in clear language, that appellant is primarily liable thereunder. On the other hand, said
PNs do not state that Imperial, who is not even privy thereto, is the one primarily liable and that
appellant is merely a guarantor. Parenthetically, the disclosure statement (Exh. "D") executed by
appellant states that PN No. 232711 is "secured by postdated checks". In other words, it does not
appear that the PNs were executed as guaranty for the payment of the subject checks.

Nevertheless, appellant insists that she did not obtain a short-term loan from appellee but
rediscounted the subject checks, with the PNs as guaranty. The contention is untenable.

In Great Asian Sales Center Corporation vs. Court of Appeals (381 SCRA 557), which was cited
in support of appellant's claim, the Supreme Court explained the meaning of "discounting
line", thus:

"In the financing industry, the term 'discounting line' means a credit facility with a financing
company or bank which allows a business entity to sell, on a continuing basis, its accounts
receivable at a discount. The term 'discount' means the sale of a receivable at less than its face
value. The purpose of a discounting line is to enable a business entity to generate instant
cash out of its receivables which are still to mature at future dates. The financing company
or bank which buys the receivables makes its profit out of the difference between the face value
of the receivable and the discounted price."

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A guarantor may bind himself for less, but not for more than the principal debtor, both as
regards the amount and the onerous nature of the conditions (Art. 2054, id). Curiously, the
face amounts of the PNs (totaling P3,000,000.00) are more than those of the subject checks
(totaling P2,897,000.00). And unlike the subject checks, the PNs provide for interest, CESF and
penalty.

Moreover, the maturity date (July 1, 1997) of PN No. 232663 is ahead of the dates (January 5,
1998 and March 31, 1998) of the subject checks. In other words, appellant, as "guarantor",
was supposed to make good her "guaranty", i.e. PNs in question, even before the
"principal" obligations, i.e. subject checks, became due. It is also noted that the rediscounting
of the subject checks (in January 1997) occurred months ahead of the execution of PN No.
232711 (on April 17, 1997) even as the PNs were supposedly a precondition to said
rediscounting.

x x x x

Stated differently, appellant is primarily liable under the subject checks. She is a principal debtor
and not a guarantor. Consequently, the benefit of excussion may not be interposed as a defense in
an action to enforce appellant's warranty as indorser of the subject checks.

Moreover, it is absurd that appellant (as maker of the PNs) may act as guarantor of her own
obligations (as indorser of the subject checks). Thus, Art. 2047 of the New Civil Code provides
that "(b)y guaranty, a person called the guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter should fail to do so."[28] (Emphasis
supplied)
The CA was correct. A contract of guaranty is one where a person, the guarantor, binds himself
or herself to another, the creditor, to fulfill the obligation of the principal debtor in case of failure
of the latter to do so.[29] It cannot be presumed, but must be express and in writing to be
enforceable,[30] especially as it is considered a special promise to answer for the debt,
default or miscarriage of another.[31] It being clear that the promissory notes were entirely
silent about the supposed guaranty in favor of Imperial, we must read the promissory notes
literally due to the absence of any ambiguities about their language and meaning. In other words,
the petitioner could not validly insist on the guaranty. In addition, the disclosure statements[32]
and the statements of loan release[33] undeniably identified her, and no other, as the borrower in
the transactions. Under such established circumstances, she was directly and personally liable for
the obligations under the promissory notes.

Fourth, the petitioner argues that the respondent was immediately subrogated as the creditor of
the accounts by its purchase of the checks from her through its rediscounting facility; [34] and that
legal subrogation should be presumed because the petitioner, a third person not interested in the
obligation, paid the debt with the express or tacit approval of the debtor.[35]

The argument is barren of factual and legal support.

Legal subrogration finds no application because there is no evidence showing that Imperial, the
issuer of the checks, had consented to the subrogation, expressly or impliedly.[36] This
circumstance was pointed out by the RTC itself. [37] Also, as the CA emphatically observed,[38] the
argument was off-tangent because the suit was not for the recovery of money by virtue of the
checks of Imperial but for the enforcement of her obligation as the maker of the promissory
notes.

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Fifth, the petitioner posits that she was made to believe by the manager of the respondent's
Timog Avenue, Quezon City Branch that the promissory notes would be mere guaranties for the
rediscounted checks;[39] and that her acceding to signing the promissory notes should not be taken
against her as to conclude her.[40]

The petitioner's position is unworthy of serious consideration.

After having determined that the terms and conditions of the promissory notes were clear and
unambiguous, and thus should be given their literal meaning and not be interpreted differently,
we insist and hold that she should be bound by such terms and conditions. Verily, the promissory
notes as contracts should bind both contracting parties; hence, the validity or compliance
therewith should not be left to the will of the petitioner.[41] Otherwise, she would contravene and
violate the principles of mutuality and of the obligatory force of contracts. A respected
commentator on civil law has written in this respect:

The binding effect of the contract on both parties is based on the principles (1) that obligations
arising from contracts have the force of law between the contracting parties; and (2) that there
must be mutuality between the parties based on their essential equality, to which is repugnant to
have one party bound by the contract leaving the other free therefrom.

The next matter to be considered and determined is the date of default.

According to Article 1169 of the Civil Code, there is delay or default from the time the
obligee judicially or extrajudically demands from the obligor the fulfillment of his or her
obligation. The records reveal that the respondent did not establish when the petitioner defaulted
in her obligation to pay based on the two promissory notes. As such, its claim for payment
computed from July 15, 1998 until full payment of the obligation had no moorings other than
July 15, 1998 being the date reflected in the statements of past due interest and penalty charges
as of July 15, 1998. Nonetheless, its counsel, through the letter dated July 7, 1998, [58] made a
final demand in writing for the petitioner to settle her total obligation within five days from
receipt. As the registry return receipt indicated,[59] the final demand letter was received for the
petitioner by one Elisa dela Cruz on July 28, 1998. Hence, the petitioner had five days from such
receipt, or until August 2, 1998, within which to comply. The reckoning date of default is,
therefore, August 3, 1998.
Verily, a penal clause is an accessory undertaking attached to a principal obligation. It has for its
purposes, firstly, to provide for liquidated damages; and, secondly, to strengthen the coercive
force of the obligation by the threat of greater responsibility in the event of breach of obligation.
[61]
Under Article 1226 of the Civil Code,[62] a penal clause is a substitute indemnity for
damages and the payment of interests in case of noncompliance, unless there is a
stipulation to the contrary.

Penalty on delinquent loans may take different forms. Quoting Equitable Banking Corp. v.
Liwanag, the GSIS case went on to state that such a stipulation about payment of an additional
interest rate partakes of the nature of a penalty clause which is sanctioned by law, more
particularly under Article 2229 of the New Civil Code which provides that:

If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the

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interest agreed upon, and the absence of stipulation, the legal interest, which is six per cent per
annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the
time of default by the petitioner. There is no doubt that the petitioner is liable for both the
stipulated monetary interest and the stipulated penalty charge. The penalty charge is also called
penalty or compensatory interest.
The Court has explained the rate of compensatory interest on monetary awards adjudged in
decisions of the Court in Planters Development Bank v. Lopez,[64] citing Nacar v. Gallery
Frames [65] to wit:
With respect to the computation of compensatory interest, Section 1 of Bangko Sentral ng
Pilipinas (BSP) Circular No. 799, Series of 2013, which took effect on July 1, 2013, provides:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall
be six percent (6%) per annum.
Pursuant to these changes, this Court modified the guidelines in Eastern Shipping Lines, Inc. v.
Court of Appeals in the case of Dario Nacar v. Gallery Frames, et al.(Nacar). In Nacar, we
established the following guidelines:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-

contracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.

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:

1. 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, (emphasis and underscore
supplied)

2. 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.
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 3. 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.

Article 2212 of the Civil Code requires that interest due shall earn legal interest from the time it
is judicially demanded, although the obligation may be silent upon this point. Accordingly, the
interest due shall itself earn legal interest of 6% per annum from the date of finality of the
judgment until its full satisfaction, the interim period being deemed to be an equivalent to a
forbearance of credit.[66]

NO. 20 KASILAG V. RODRIGUEZ

G.R. NO. 46623, 7 DECEMBER 1939

FACTS: Respondents, Rafaela Rodriguez, et al., children and heirs of the deceased Emiliana
Ambrosio, commenced a civil case to recover from the petitioner the possession of the land and
its improvements granted by way of homestead to Emiliana Ambrosio (EA).
The parties entered into a contract of mortgage of the improvements on the land acquired as
homestead to secure the payment of the indebtedness for P1,000 plus interest.

In clause V, the parties stipulated that EA was to pay, w/in 4 1/2 yrs, the debt w/ interest thereon,
in w/c event the mortgage would not have any effect; in clause VI, the parties agreed that the tax
on the land and its improvements, during the existence of the mortgage, should be paid by the
owner of the land; in clause VII, it was covenanted that w/in 30 days from the date of the
contract, the owner of the land would file a motion in the CFI of Bataan asking that cert. of title
no. 325 be cancelled and that in lieu thereof another be issued under the provisions of RA 496; in
clause VIII the parties agreed that should EA fail to redeem the mortgage w/in the stipulated
period of 4 1/2 yrs, she would execute an absolute deed of sale of the land in favor of the
mortgagee, the petitioner, for the same amount of the loan including unpaid interest; and in
clause IX it was stipulated that in case the motion to be presented under clause VII should be
disapproved by the CFI-Bataan, the contract of sale of sale would automatically become void
and the mortgage would subsist in all its force.
One year after the execution of the mortgage deed, it came to pass that EA was unable to pay the
stipulated interest as well as the tax on the land and its improvements. For this reason, she and
the petitioner entered into another verbal contract whereby she conveyed to the latter the
possession of the land on condition that the latter would not collect the interest on the loan,
would attend to the payment of the land tax, would benefit by the fruits of the land, and would
introduce improvements thereon.

The parties entered into a contract of loan to which has an accompanying accessory contract of
mortgage. The executed accessory contract involved the improvements on a piece land, the land
having been acquired by means of homestead. P for his part accepted the contract of mortgage.

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Believing that there are no violations to the prohibitions in the alienation of lands, P, acting in
good faith took possession of the land. To wit, the P has no knowledge that the enjoyment of the
fruits of the land is an element of the credit transaction of Antichresis.

ISSUE: Whether or not petitioner is deemed to be a possessor in good faith of the land, because
he was unaware of any flaw in his title or in the manner of its acquisition by which it is
invalidated that petitioner’s lack of knowledge of the contract of antichresis. YES

HELD: The accessory contract of mortgage of the improvements of on the land is valid.
The verbal contract of antichresis agreed upon is deemed null and void.

Gross and inexcusable ignorance of law may not be the basis of good faith, but possible,
excusable ignorance may be such basis. It is a fact that the petitioner is not conversant with the
laws because he is not a lawyer. In accepting the mortgage of the improvements he proceeded on
the well-grounded belief that he was not violating the prohibition regarding the alienation of the
land. In taking possession thereof and in consenting to receive its fruits, he did not know, as
clearly as a jurist does, that the possession and enjoyment of the fruits are attributes of the
contract of antichresis and that the latter, as a lien, was prohibited by section 116. These
considerations again bring us to the conclusion that, as to the petitioner, his ignorance of the
provisions of section 116 is excusable and may, therefore, be the basis of his good faith.

Section 433 of the Civil Code of the Philippines provides “Every person who is unaware of
any flaw in his title or in the manner of its acquisition by which it is invalidated shall be deemed
a possessor of good faith.” And in this case, the petitioner acted in good faith. Good faith maybe
a basis of excusable ignorance of the law, the petitioner acted in good faith in his enjoyment of
the fruits of the land to which was done through his apparent acquisition thereof.

The possession by the petitioner and his receipts of the fruits of the land, considered as
integral elements of the contract of antichresis, are illegal and void agreements, because the
such contract is a lien and as such is expressly prohibited by Sec 116 of Act No. 2874, as
amended. The CA held that petitioner acted in bad faith in taking possession of the land because
he knew that the contract he made w/ EA was an absolute sale, and further, that the latter could
not sell the land because it is prohibited by Sec. 116 of Act 2874.
xxx [A] person is deemed a possessor in BF when he knows that there is a flaw in his title or in
the manner of its acquisition, by w/c it is invalidated.

The question to be answered is w/n the petitioner should be deemed a possessor in good faith
because he was unaware of any flaw in his title or in the manner of its acquisition by w/c it is
invalidated. Ignorance of the flaw is the keynote of the rule. From the facts as found by the CA,
we can neither deduce nor presume that the petitioner was aware of a flaw in his title or in the
manner of its acquisition, aside from the prohibition contained in Sec. 116. This being the case,
the question is w/n GF may be premised upon ignorance of the laws.

The petitioners being in GF, the respondents may elect to have the improvements introduced by
the petitioner by paying the latter the value thereof, P3,000, or to compel the petitioner to buy
and have the land where the improvements or plants are found, by paying them its market value
to be fixed by the court of origin, upon hearing the parties.

RULING:

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Even ignorance of the law may be based upon error of fact, or better still, ignorance of a fact is
possible as to the capacity to transmit and as to the intervention of certain persons, compliance
with certain formalities and appreciation of certain acts, and error of law is possible in the
interpretation of doubtful doctrines.

In accepting the mortgage of the improvements he proceeded on the well-grounded belief that he
was not violating the prohibition regarding the alienation of the land. In taking possession
thereof and in consenting to receive its fruits, he did not know, as clearly as a jurist does, that the
possession and enjoyment of the fruits are attributes of the contract of antichresis and that the
latter, as lien, was prohibited by section 116. These considerations again bring us to the
conclusion that, as to the petitioner, his ignorance of the provisions of section 116 is excusable
and may therefore, be the basis of good faith. We do not give much importance to the change of
the tax declaration, which consisted in making the petitioner appear as the owner of the land,
because such an act may only be considered as a sequel to the change of possession and
enjoyment of the fruits by the petitioner, to about which we have stated that the petitioner’s
ignorance of the law is possible and excusable. We, therefore, hold that the petitioner acted in
good faith in taking possession of the land and enjoying its fruits.

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