Manila Surety & Fidelity Co., Inc. vs. Velayo, 21 SCRA 515, No.

L-21069, October 26, 1967 MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee, vs.RODOLFO R. VELAYO, REYES, J.B.L., J.: Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435) sentencing appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum of P2,565.00 with interest at 12-% per annum from July 13, 1954; P120.93 as premiums with interest at the same rate from June 13, 1954: attorneys' fees in an amount equivalent to 15% of the total award, and the costs. Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil Code of the Philippines (1950). The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to pay the surety company an annual premium of P112.00; to indemnify the Company for any damage and loss of whatsoever kind and nature that it shall or may suffer, as well as reimburse the same for all money it should pay or become liable to pay under the bond including costs and attorneys' fees. As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety Company "for the latter's further protection", with power to sell the same in case the surety paid or become obligated to pay any amount of money in connection with said bond, applying the proceeds to the payment of any amounts it paid or will be liable to pay, and turning the balance, if any, to the persons entitled thereto, after deducting legal expenses and costs (Rec. App. pp. 12-15). Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing therefrom a net product of P235.00 only. Thereafter and upon Velayo's failure to pay the balance, the surety company brought suit in the Municipal Court. Velayo countered with a claim that the sale of the pledged jewelry extinguished any further liability on his part under Article 2115 of the 1950 Civil Code, which recites: Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to the Court of First Instance, the defense was once more overruled, and the case decided in the terms set down at the start of this opinion. Thereupon, Velayo resorted to this Court on appeal. The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72): It is thus crystal clear that the main agreement between the parties is the Indemnity Agreement and if the pieces of jewelry mentioned by the defendant were delivered to the plaintiff, it was merely as an added protection to the latter. There was no understanding that, should the same be sold at public auction and the value thereof should be short of the undertaking, the defendant would have no further liability to the plaintiff. On the contrary, the last portion of the said agreement specifies that in case the said collateral should diminish in value, the plaintiff may demand additional securities. This stipulation is incompatible with the idea of pledge as a principal agreement. In this case, the status of the pledge is nothing more nor less than that of a mortgage given as a collateral for the principal obligation in which the creditor is entitled to a deficiency judgment for the balance should the collateral not command the price equal to the undertaking.

It appearing that the collateral given by the defendant in favor of the plaintiff to secure this obligation has already been sold for only the amount of P235.00, the liability of the defendant should be limited to the difference between the amounts of P2,800.00 and P235.00 or P2,565.00. We agree with the appellant that the above quoted reasoning of the appealed decision is unsound. The accessory character is of the essence of pledge and mortgage. As stated in Article 2085 of the 1950 Civil Code, an essential requisite of these contracts is that they be constituted to secure the fulfillment of a principal obligation, which in the present case is Velayo's undertaking to indemnify the surety company for any disbursements made on account of its attachment counterbond. Hence, the fact that the pledge is not the principal agreement is of no significance nor is it an obstacle to the application of Article 2115 of the Civil Code. The reviewed decision further assumes that the extinctive effect of the sale of the pledged chattels must be derived from stipulation. This is incorrect, because Article 2115, in its last portion, clearly establishes that the extinction of the principal obligation supervenes by operation of imperative law that the parties cannot override: If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency notwithstanding any stipulation to the contrary. The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the articles pledged, instead of suing on the principal obligation, the creditor has waived any other remedy, and must abide by the results of the sale. No deficiency is recoverable. It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the legal prescription contained in Article 1484(3) of the same Code, concerning the effect of a foreclosure of a chattel mortgage constituted to secure the price of the personal property sold in installments, and which originated in Act 4110 promulgated by the Philippine Legislature in 1933. WHEREFORE, the decision under appeal is modified and the defendant absolved from the complaint, except as to his liability for the 1954 premium in the sum of P120.93, and interest at 12-1/2% per annum from June 13, 1954. In this respect the decision of the Court below is affirmed. No costs. So ordered.

G.R. Nos. 175181-82

September 14, 2007

METROPOLITAN BANK and TRUST COMPANY, INC., petitioner, vs.SLGT HOLDINGS, INC., DANILO A. DYLANCO and ASB DEVELOPMENT CORPORATION, respondents. G.R. Nos. 175354 & 175387-88 September 14, 2007

UNITED COCONUT PLANTERS BANK, petitioner, vs.SLGT HOLDINGS, INC. and ASB DEVELOPMENT CORPORATION, respondents. It happened before; it will likely happen again. A developer embarks on an aggressive marketing campaign and succeeds in selling units in a yet to-be completed condominium project. Short of funds, the developer borrows money from a bank and, without apprising the latter of the pre-selling transactions, mortgages the condominium complex, but also without informing the buyers of the mortgage constitution. Saddled with debts, the developer fails to meet its part of the bargain. The defaulting developer is soon sued by the fully-paid unit buyers for specific performance or refund and is threatened at the same time with a foreclosure of mortgage. Having his hands full parrying legal blows from different directions, the developer seeks a declaration of suspension of payment, followed by a petition for rehabilitation with suspension of action. With a slight variation, the scenario thus depicted describes the instant case which features respondent ASB Development Corporation (ASB, for short), as the defaulting developer of the BSA Twin Towers Condominium Project (BSA Towers or Project, for short) situated at Ortigas Center, Mandaluyong City, and respondents Danilo A. Dylanco and SLGT Holdings, Inc. (Dylanco and SLGT, respectively, hereinafter) as the unit buyers. Petitioners Metropolitan Bank and Trust Company, Inc. (Metrobank) and United Coconut Planters Bank (UCPB) are the lending-mortgagee banks. And now to the case: Before the Court are these separate petitions for review under Rule 45 of the Rules of Court separately interposed by Metrobank and UCPB to nullify and set aside the consolidated Decision1 and Resolution2 dated June 29, 2006, and October 31, 2006, respectively, of the Court of Appeals (CA) in CA-G.R. SP No. 92807, CA-G.R. SP No. 92808 and CA-G.R. SP No. 92882. The first assailed issuance affirmed the earlier Decision3 dated October 10, 2005 of the Office of the President (OP, hereinafter), as modified in its Order4 of December 22, 2005, in consolidated OP Case No. 05-F-212 and OP Case No. 05-G-215. The second assailed issuance, on the other hand, denied reconsideration of the first. Per its Resolution5 of March 26, 2007, the Court ordered the consolidation of these petitions. From the petitions and the comments thereon, with their respective annexes, and other pleadings, the Court gathers the following facts: On October 25, 1995, Dylanco and SLGT each entered into a contract to sell with ASB for the purchase of a unit (Unit 1106 for Dylanco and Unit 1211 for SLGT) at BSA Towers then being developed by the latter. As stipulated, ASB will deliver the units thus sold upon completion of the construction or before December 1999. Relying on this and other undertakings, Dylanco and SLGT each paid in full the contract price of their respective units. The promised completion date came and went, but ASB failed to deliver, as the Project remained unfinished at that time. To make matters worse, they learned that the lots on which the BSA Towers were to be erected had been mortgaged6 to Metrobank, as the lead bank, and UCPB7 without the prior written approval of the Housing and Land Use Regulatory Board (HLURB). Alarmed by this foregoing turn of events, Dylanco, on August 10, 2004, filed with the HLURB a complaint8for delivery of property and title and for the declaration of nullity of mortgage. A similar complaint9 filed by SLGT followed three (3) days later. At this time, it appears that the ASB Group of Companies, which included ASB, had already filed with the Securities and Exchange Commission a petition for rehabilitation and a rehabilitation receiver had in fact been appointed.

What happened next are laid out in the OP decision adverted to above, thus: In response to the above complaints, ASB alleged that it encountered liquidity problems sometime in 2000 after its creditors [UCPB and Metrobank] simultaneously demanded payments of their loans; that on May 4, 2000, the Commission (SEC) granted its petition for rehabilitation; that it negotiated with UCPB and Metrobank but nothing came out positive from their negotiation . On the other hand, Metrobank claims that complainants [Dylanco and SLGT] have no personality to ask for the nullification of the mortgage because they are not parties to the mortgage transaction ; that the complaints must be dismissed because of the ongoing rehabilitation of ASB; xxx that its claim against ASB, including the mortgage to the [Project] have already been transferred to Asia Recovery Corporation; xxx. UCPB, for its part, denies its liability to SLGT [for lack of privity of contract] [and] questioned the personality of SLGT to challenge the validity of the mortgage reasoning that the latter is not party to the mortgage contract [and] maintains that the mortgage transaction was done in good faith. Finally, it prays for the suspension of the proceedings because of the ongoing rehabilitation of ASB. In resolving the complaint in favor of Dylanco and SLGT, the Housing Arbiter ruled that the mortgage constituted over the lots is invalid for lack of mortgage clearance from the HLURB. He also rebuffed the banks request to suspend the proceedings under Section 5 of Presidential Decree (PD) No. 902-A as the banks are parties under receivership. xxx The HLURB Board of Commissioners, [per its separate Decision both dated April 21, 2005] affirmed the above rulings with the modification that ASB should cause the subdivision of the mother titles into condominium certificates of title of Dylanco and SLGT free from all liens and encumbrances. [On June 28, 2005 the HLURB denied the separate motions of Metrobank and UCPB for reconsideration. (Words in brackets and emphasis added). For perspective, the decretal portion of the HLURBs underlying decision10 with respect to the Dylanco case, docketed thereat as REM-A-050208-0021, reads as follows: WHEREFORE, the appeals are dismissed for lack of merit and the decision of the office below is modified as follows: 1. Declaring the mortgage over the subject condominium unit in favor of respondent [Metrobank] as null and void for violation of Section 18 of [PD] No. 957; 2. Directing respondent bank to cancel/release the mortgage on the subject condominium unit [Unit 1106]; and accordingly, surrender/release the title thereof to the complainant; 3. Directing respondent Bank to release to respondent ASB the transfer certificate of title of the lots covering the BSA Twin Towers Project; directing ASB to cause the subdivision of the mother titles into condominium certificates of tile within 90 days and to thereafter deliver title to complainant [Dylanco] free from all liens and encumbrances; [and] 4. Ordering respondent ASB to complete the subject condominium project as per SEC Order dated 03 November 2004. (Words in brackets added) On the other hand, the HLURB decision11 on the SLGT case, docketed as REM-A-050208-0020, was, on all material points, of the same tenor as in the Dylanco case, albeit the unit involved is different and the banks referred to in SLGT are UCPB and Metrobank. From the HLURB resolutions in REM-A-050208-0020 and REM-A-050208-0021, Metrobank appealed to the OP, followed by UCPBs own appeal from the resolution in REM-A-0502080020. Owing to the obvious similarities in both cases, the OP had them consolidated, the Dylanco case docketed as O.P. Case No. 05-F-212 and the SLGT case as O.P. Case No. 05-F215. On October 10, 2005, the OP rendered a decision12 against Metrobank and UCPB, disposing as follows:

WHEREFORE, premises considered, the appeals filed by Metropolitan Bank and Trust Company and the United Coconut Planters Bank are hereby DISMISSED for lack of merit. SO ORDERED. From the October 10, 2005 OP Decision, petitioner banks and SLGT interposed their respective motions for reconsideration, SLGT excepting to that portion of the decision declaring the mortgage contract as void only insofar as it and Dylanco are concerned. To SLGT, the indivisibility of a mortgage contract requires that a declaration of nullity or a validity for that matter - should cover the entire mortgage. On December 22, 2005, the OP issued an Order13 acting favorably on SLGTs motion, but denying those of Metrobank and UCPB. The fallo of the OPs Order reads: "WHEREFORE, the Motions for Reconsideration of [Metrobank] and [UCPB] are hereby DENIED. With respect to the partial motion for reconsideration of SLGT , the same is hereby GRANTED. Accordingly, the mortgage contract executed between ASB Development Corporation and respondent banks (Metrobank and UCPB) is hereby declared null and void in its entirety. Respondents-appellants are hereby ordered to release to ASBDC [TCT] Nos. 9834 and 9835, and for ASBDC to cause the subdivision of the mother titles into condominium certificates of title, and thereafter deliver to complainants [SLGT and Dylanco] their respective condominium certificates of title free of lien and encumbrances. The records of the instant cases are hereby remanded to [HLURB] for its appropriate disposition. SO ORDERED. (Emphasis and words in brackets added) In time, petitioner banks went to the CA on a petition for review under Rule 43 of the Rules of Court whereat the appellate recourses were likewise consolidated and docketed as CA-G.R. SP No. 92807, CA-G.R. SP No. 92808and CA-G.R. SP No. 92882. As stated at the threshold hereof, the appellate court, in its assailed Decision14 of June 29, 2006, affirmed the OPs October 10, 2005 Decision as modified in its December 22, 2005 Order, the affirmance being predicated, in gist, on the following main premises: 1. A mortgage constituted on a condominium project without the approval of the HLURB in violation of the prescription of Presidential Decree (PD) 957, like the ASB-Metrobank-Trust Division mortgage contract, is void; a mortgage is indivisible and cannot be divided into a valid and invalid parts. 2. The complaints of Dylanco and SLGT are not covered by the order issued by the SEC suspending all actions and proceedings against ASB. Petitioner banks separate motions for reconsideration were later denied in the CAs equally assailed resolution15dated October 31, 2006. Hence, these separate petitions. Although formulated a bit differently, the grounds and arguments advanced in support of the petitions converge and focus on two issues, to wit: 1. The declaration of nullity of the entire mortgage constituted on the project land site and the improvements thereon; and 2. The applicability to this case of the suspension order granted by SEC to ASB. We DENY. As to the first issue, it is the petitioners posture that the CA, and, before it, the OP, erred when it declared the subject mortgage contract void in its entirety and then directed both petitioner banks to release the mortgage on the Project.

We are not persuaded. Both petitioners do not dispute executing the mortgage in question without the HLURBs prior written approval and notice to both individual respondents. Section 18 of Presidential Decree No. (PD) 957 The Subdivision and Condominium Buyers Protective Decree provides: SEC. 18.Mortgages. - No mortgage of any unit or lot shall be made by the owner or developer without prior written approval of the [HLURB]. Such approval shall not be granted unless it is shown that the proceeds of the mortgage loan shall be used for the development of the condominium or subdivision project . The loan value of each lot or unit covered by the mortgage shall be determined and the buyer thereof, if any, shall be notified before the release of the loan. The buyer may, at his option, pay his installment for the lot or unit directly to the mortgagee who shall apply the payments to the corresponding mortgage indebtedness secured by the particular lot or unit being paid for . (Emphasis and word in bracket added) There can thus be no quibbling that the project lot/s and the improvements introduced or be introduced thereon were mortgaged in clear violation of the aforequoted provision of PD 957. And to be sure, Dylanco and SLGT, as Project unit buyers, were not notified of the mortgage before the release of the loan proceeds by petitioner banks. As it were, PD 957 aims to protect innocent subdivision lot and condominium unit buyers against fraudulent real estate practices. Its preambulatory clauses say so and the Court need not belabor the matter presently. Section 18, supra, of the decree directly addresses the problem of fraud and other manipulative practices perpetrated against buyers when the lot or unit they have contracted to acquire, and which they religiously paid for, is mortgaged without their knowledge, let alone their consent. The avowed purpose of PD 957 compels, as the OP correctly stated, the reading of Section 18 as prohibitory and acts committed contrary to it are void.16 Any less stringent construal would only accord unscrupulous developers and their financiers unbridled discretion to follow or not to follow PD 957 and thus defeat the very lofty purpose of that decree. It thus stands to reason that a mortgage contract executed in breach of Section 18 of the decree is null and void. In Philippine National Bank v. Office of the President,17 involving a defaulting mortgagorsubdivision developer, a mortgagee-bank and a lot buyer, the Court expounded on the rationale behind PD 957, as a tool to protect subdivision lot and/or condominium unit buyers against developers and mortgaging banks, in the following wise: xxx [T]he unmistakable intent of the law [is] to protect innocent lot buyers from scheming subdivision developers. As between these small lot buyers and the gigantic financial institutions which the developers deal with, it is obvious that the law as an instrument of social justice must favor the weak. Indeed, the petitioner bank had at its disposal vast resources with which it could adequately protect its loan activities, and therefore is presumed to have conducted the usual "due diligence" checking and ascertaining the actual status, condition, utilization and occupancy of the property offered as collateral. xxx On the other hand, private respondents obviously were powerless to discover the attempt of the land developer to hypothecate the property being sold to them. It was precisely in order to deal with this kind of situation that P.D. 957 was enacted, its very essence and intendment being to provide a protective mantle over helpless citizens who may fall prey to the razzmatazz of what P.D. 957 termed "unscrupulous subdivision and condominium sellers." The Court then quoted with approval the following instructive comments of the Solicitor General: Verily, if P.D. 957 were to exclude from its coverage the aforecited mortgage contract, the vigorous regulation which P.D. 957 seeks to impose on unconscientious subdivision sellers will be translated into a feeble exercise of police power just because the iron hand of the state cannot particularly touch mortgage contracts badged with the unfortunate accident of having been constituted prior to the enactment of P.D. 957. Indeed, it would be illogical in the extreme if P.D. 957 is to be given full force and effect and yet, the fraudulent practices and manipulations it seeks to curb. xxx

Given the foregoing perspective, the next question to be addressed turns on whether or not the nullity extends to the entire mortgage contract. The poser should be resolved, as the CA and OP did resolve it, in the affirmative. This disposition stems from the basic postulate that a mortgage contract is, by nature, indivisible.18 Consequent to this feature, a debtor cannot ask for the release of any portion of the mortgaged property or of one or some of the several properties mortgaged unless and until the loan thus secured has been fully paid, notwithstanding the fact that there has been partial fulfillment of the obligation. Hence, it is provided that the debtor who has paid a part of the debt cannot ask for the proportionate extinguishments of the mortgage as long as the debt is not completely satisfied. The situation obtaining in the case at bench is within the purview of the aforesaid rule on the indivisibility of mortgage. It may be that Section 18 of PD 957 allows partial redemption of the mortgage in the sense that the buyer is entitled to pay his installment for the lot or unit directly to the mortgagee so as to enable him - the said buyer - to obtain title over the lot or unit after full payment thereof. Such accommodation statutorily given to a unit/lot buyer does not, however, render the mortgage contract also divisible. Generally, the divisibility of the principal obligation is not affected by the indivisibility of the mortgage. The real estate mortgage voluntarily constituted by the debtor (ASB) on the lots or units is one and indivisible. In this case, the mortgage contract executed between ASB and the petitioner banks is considered indivisible, that is, it cannot be divided among the different buildings or units of the Project. Necessarily, partial extinguishment of the mortgage cannot be allowed. In the same token, the annulment of the mortgage is an all or nothing proposition. It cannot be divided into valid or invalid parts. The mortgage is either valid in its entirety or not valid at all. In the present case, there is doubtless only one mortgage to speak of. Ergo, a declaration of nullity for violation of Section 18 of PD 957 should result to the mortgage being nullified wholly. It will not avail the petitioners any to feign ignorance of PD 957 requiring prior written approval of the HLURB, they being charged with knowledge of such requirement since granting loans secured by a real estate mortgage is an ordinary part of their business. Neither could they rightly claim to be mortgagees in good faith. We shall explain. The unyielding rule is that persons dealing with property brought under the Torrens system of land registration have the right to rely on what appears on the certificate of title without inquiring further;19 that in the absence of anything to excite or arouse suspicion that should impel a reasonably cautious person to make such further inquiry, a would-be mortgagee is without obligation to look beyond the certificate and investigate the title of the mortgagor. Such rule, however, does not apply to mortgagee-banks,20 their business being one affected with public interest, holding as they do and keeping, in trust, money pertaining to the depositing public which they should guard with earnest. Unlike private individuals, it behooves banks to exercise greater care and prudence in their dealings, including those involving registered lands.21 As we wrote in Cruz v. Bancom Finance Corporation,22"a banking institution is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it as a security must be standard and indispensable part of its operations." A bank that failed to observe due diligence cannot be accorded the status of a bona fide mortgagee.23 Surely, petitioner banks cannot plausibly assert compliance with the due diligence requirement exacted contextually by the situation. For, have they done so, they could have easily discovered that there is an on-going condominium project on the lots offered as mortgage collateral and, as such, could have aroused their suspicion that the developer may have engaged in pre-selling, or, with like effect, that there may be unit buyers therein, as was the case here. Having been short in care and prudence, petitioners cannot be deemed to be mortgagees in good faith entitled to the benefits arising from such status. This thus brings us to the next issue of whether or not the HLURB, OP and, necessarily, the CA reversibly erred in continuing with the resolution of this case notwithstanding the rehabilitation proceedings before, and the appointment by, the SEC of a receiver for ASB which, under Section 6 (c)24 of PD 902-A, as amended,25necessarily suspended "all actions for claims" against distressed corporations.

Petitioners maintain that individual respondents demands initially filed with the HLURB partake of the nature of "claim" within the contemplation of the aforesaid suspensive section of PD 902A. They cite Sobrejuanite v. ASB Development Corporation26 to drive home the idea of the encompassing reach of the word "claim" which they deem to include any and all claims or demands of whatever nature and character. The Court is unable to accommodate the petitioners. As we articulated in Arranza v. B.F. Homes, Inc.,27 the fact that respondent B.F. Homes is under receivership does not preclude the continuance before the HLURB of the case for specific performance of a real estate developers obligation under PD 957. For, "[E]"ven if respondent is under receivership, its obligations as a real estate developer under P.D. 957 are not suspended. Section 6 (C) of P.D. No. 902-A, as amended , on suspension of all actions for claims against corporations refers solely to monetary claims."28 Says the Court further: xxx The appointment of a receiver does not dissolve the corporation, nor does it interfere with the exercise of corporate rights. In this case where there appears to be no restraints imposed upon respondent as it undergoes rehabilitation receivership, respondent continues or should continue to perform its contractual and statutory responsibilities to petitioners as homeowners. No violation of the SEC order suspending payments to creditors would result as far as petitioners complaint before the HLURB is concerned. To reiterate, what petitioners seek to enforce are respondents obligation as subdivision developer [for which the HLURB, not the SEC, is equipped with the expertise to deal with the matter]. Such claims are basically not pecuniary in nature.29 Arranza actually complemented the earlier case of Finasia Investments and Finance Corporation v. CA30 where the Court defined and explained the term "claim" in the following wise: We agree that the word "claim" as used in Sec. 6 (c) of P.D. 902-A, as amended, refers to debts or demands of a pecuniary nature. It means "the assertion of a right to have money paid. It is used in special proceedings like those before administrative court, on insolvency. Consequently, the word "claim" Petitioners citation and undue reliance on Sobrejuanite is quite misplaced in view of differing set of facts. In that case, the Court held that the HLURB is bereft of jurisdiction to proceed with the case during the pendency of the rehabilitation proceedings since the spouses Sobrejuanites claim involves pecuniary consideration, or a claim for refund of the purchase price paid, with interest, to be precise. Unlike the spouses Sobrejuanite in Sobrejuanite, SLGTs and Dylancos complaints in the instant case did not seek monetary recovery or to touch the corporate coffers of ASB ahead of others. They did not even consider themselves as money claimants. All they ask was for the enforcement of ASBs statutory and contractual obligations as a condominium developer. In the concrete, they pressed for the delivery of their units free from all liens and encumbrances and the declaration of nullity of the mortgage in question arising from the breach of Section 18 of PD 957. Significantly, in Sobrejuanite, the Court stated the observation, in reference to the Arranza case, that "the proceedings before the HLURB [may] be suspended during the rehabilitation [of the ailing corporation]" "if the claim was for monetary awards."31 The Court is very much aware of A.M. No. 00-8-10-SC or the Interim Rules on Corporate Rehabilitation32 which defines the term "claim" as including all claims or demands of whatever character against a debtor or its property, whether for money or otherwise. But as aptly explained by the CA, Section 2433 of the interim rules limits the coverage of the Rules on rehabilitation and consequently the rule of suspension of action to those who stand in the category or debtors and creditors. The relationship between the petitioner banks, as mortgagor of the ASB property, on one hand, and respondents SLGT and Dylanco, as unit buyers, on the other, cannot be that of a debtor-creditor as to bring the case within the purview of the rules on corporate recovery, let alone theSobrejuanite case. Then, too, the vinculum that binds SLGT/Dylanco, as unit buyers and as suitors before the HLURB, and ASB is far from being akin to that of debtor-creditor. As it were, SLGT/Dylanco sued ASB for having

constituted, in breach of PD 957, a mortgage on the condominium project without prior HLURB approval and so much as notifying them of the loan release for which reason they prayed for the delivery of their units free from all liens and encumbrances. With the view we take of the case, the complaint of individual respondents is not in the nature of "claims" that should be covered by the suspensive effect of a rehabilitation proceeding. Looking beyond the strictly legal issues involved in this case, however, the pendency of the rehabilitation proceedings ought not, as stressed in the Order34 of the OP, be invoked to defeat or deny the claim of individual respondents. Suspending the proceedings would only perpetuate and compound the injustice committed by ASB on SLGT and Dylanco. It would reduce to pure jargon the beneficent provisions and render illusory the purpose of PD 957 which, to repeat, is to protect innocent unit and lot buyers from scheming subdivision/condominium owners/developers. As a matter of good conscience, the Court cannot allow it under the factual and legal premises surrounding this case. WHEREFORE, the instant petitions are DENIED and the assailed CA Decision and Resolution are AFFIRMED.

Philippine National Bank vs. Cabatingan G.R. No. 167058, 557 SCRA 426, July 09, 2008 CORONA, J.: Respondent spouses Tomas Cabatingan and AgapitaEdullantes obtained two loans, secured by a real estate mortgage,1 in the total amount of P421,2002 from petitioner Philippine National Bank. However, they were unable to fully pay their obligation despite having been granted more than enough time to do so.3 Thus, on September 25, 1991, petitioner extrajudicially foreclosed on the mortgage pursuant to Act 3135.4 Thereafter, a notice of extrajudicial sale5 was issued stating that the foreclosed properties would be sold at public auction on November 5, 1991 between 9:00 a.m. and 4:00 p.m. at the main entrance of the office of the Clerk of Court on San Pedro St., Ormoc City. Pursuant to the notice, the properties were sold at public auction on November 5, 1991. The auction began at 9:00 a.m. and was concluded after 20 minutes with petitioner as the highest bidder.6 On March 16, 1993, respondent spouses filed in the Regional Trial Court (RTC) of Ormoc City, Branch 12 a complaint for annulment of extrajudicial foreclosure of real estate mortgage and the November 5, 1991 auction sale.7 They invoked Section 4 of Act 3135 which provides: Section 4. The sale shall be made at public auction, between the hours of nine in the morning and four in the afternoon, and shall be under the direction of the sheriff of the province, the justice or auxiliary justice of peace of the municipality in which such sale has to be made, or of a notary public of said municipality, who shall be entitled to collect a fee of Five pesos for each day of actual work performed, in addition to his expenses. (emphasis supplied) Petitioners claimed that the provision quoted above must be observed strictly. Thus, because the public auction of the foreclosed properties was held for only 20 minutes (instead of seven hours as required by law), the consequent sale was void. On November 4, 2004, the RTC issued an order8 annulling the November 5, 1991 sale at public auction. It held: [T]he rationale behind the holding of auction sale between the hours of 9:00 in the morning and 4:00 in the afternoon of a particular day as mandated in Section 4 of Act 3135 is to give opportunity to more would-be bidders to participate in the auction sale thus giving the judgment-debtor more opportunity to recover the value of his or her property subject of the auction sale. Petitioner moved for reconsideration but it was denied in an order dated February 7, 2005.9 Hence, this petition. The issue here is whether a sale at public auction, to be valid, must be conducted the whole day from 9:00 a.m. until 4:00 p.m. of the scheduled auction day. Petitioner contends that the RTC erred in interpreting Section 4 of Act 3135. The law only prohibits the conduct of a sale at any time before nine in the morning and after four in the afternoon. Thus, a sale held within the intervening period (i.e., at any time between 9:00 a.m. and 4:00 p.m.), regardless of duration, is valid. We grant the petition. We note that neither the previous rule (Administrative Order No. 3)10 nor the current rules (A.M. No. 99-10-05-O, as amended, and the guidelines for its enforcement, Circular No. 7-2002)11 governing the conduct of foreclosure proceedings provide a clear answer to the question at hand. Statutes should be sensibly construed to give effect to the legislative intention.12 Act 3135 regulates the extrajudicial sale of mortgaged real properties13 by prescribing a procedure which effectively safeguards the rights of both debtor and creditor. Thus, its construction (or interpretation) must be equally and mutually beneficial to both parties.

Section 4 of Act 3135 provides that the sale must take place between the hours of nine in the morning and four in the afternoon. Pursuant to this provision, Section 5 of Circular No. 7-2002 states: Section 5. Conduct of extrajudicial foreclosure sale-a. The bidding shall be made through sealed bids which must be submitted to the Sheriff who shall conduct the sale between the hours of 9 a.m. and 4 p.m. of the date of the auction (Act 3135, Sec. 4).14 The property mortgaged shall be awarded to the party submitting the highest bid and, in case of a tie, an open bidding shall be conducted between the highest bidders. Payment of the winning bid shall be made in either cash or in manager's check, in Philippine Currency, within five (5) days from notice. (emphasis supplied) A creditor may foreclose on a real estate mortgage only if the debtor fails to pay the principal obligation when it falls due.15 Nonetheless, the foreclosure of a mortgage does not ipso facto extinguish a debtors obligation to his creditor. The proceeds of a sale at public auction may not be sufficient to extinguish the liability of the former to the latter.16 For this reason, we favor a construction of Section 4 of Act 3135 that affords the creditor greater opportunity to satisfy his claim without unduly rewarding the debtor for not paying his just debt. The word "between" ordinarily means "in the time interval that separates."17 Thus, "between the hours of nine in the morning and four in the afternoon" merely provides a time frame within which an auction sale may be conducted. Therefore, a sale at public auction held within the intervening period provided by law (i.e., at any time from 9:00 a.m. until 4:00 p.m.) is valid, without regard to the duration or length of time it took the auctioneer to conduct the proceedings.1avvphi1 In this case, the November 5, 1991 sale at public auction took place from 9:00 a.m. to 9:20 a.m. Since it was conducted within the time frame provided by law, the sale was valid. WHEREFORE, the petition is hereby GRANTED. The November 4, 2004 and February 7, 2005 orders of the Regional Trial Court of Ormoc City, Branch 12 in Civil Case No. 3111-0 are REVERSED and SET ASIDE. SO ORDERED.

Makati Leasing and Finance Corp. vs. Wearever Textile Mills, Inc., No. L-58469, 122 SCRA 296 , May 16, 1983 DE CASTRO, J.: Petition for review on certiorari of the decision of the Court of Appeals (now Intermediate Appellate Court) promulgated on August 27, 1981 in CA-G.R. No. SP-12731, setting aside certain Orders later specified herein, of Judge Ricardo J. Francisco, as Presiding Judge of the Court of First instance of Rizal Branch VI, issued in Civil Case No. 36040, as wen as the resolution dated September 22, 1981 of the said appellate court, denying petitioner's motion for reconsideration. It appears that in order to obtain financial accommodations from herein petitioner Makati Leasing and Finance Corporation, the private respondent Wearever Textile Mills, Inc., discounted and assigned several receivables with the former under a Receivable Purchase Agreement. To secure the collection of the receivables assigned, private respondent executed a Chattel Mortgage over certain raw materials inventory as well as a machinery described as an Artos Aero Dryer Stentering Range. Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of the properties mortgage to it. However, the Deputy Sheriff assigned to implement the foreclosure failed to gain entry into private respondent's premises and was not able to effect the seizure of the aforedescribed machinery. Petitioner thereafter filed a complaint for judicial foreclosure with the Court of First Instance of Rizal, Branch VI, docketed as Civil Case No. 36040, the case before the lower court. Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the enforcement of which was however subsequently restrained upon private respondent's filing of a motion for reconsideration. After several incidents, the lower court finally issued on February 11, 1981, an order lifting the restraining order for the enforcement of the writ of seizure and an order to break open the premises of private respondent to enforce said writ. The lower court reaffirmed its stand upon private respondent's filing of a further motion for reconsideration. On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of private respondent and removed the main drive motor of the subject machinery. The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by herein private respondent, set aside the Orders of the lower court and ordered the return of the drive motor seized by the sheriff pursuant to said Orders, after ruling that the machinery in suit cannot be the subject of replevin, much less of a chattel mortgage, because it is a real property pursuant to Article 415 of the new Civil Code, the same being attached to the ground by means of bolts and the only way to remove it from respondent's plant would be to drill out or destroy the concrete floor, the reason why all that the sheriff could do to enfore the writ was to take the main drive motor of said machinery. The appellate court rejected petitioner's argument that private respondent is estopped from claiming that the machine is real property by constituting a chattel mortgage thereon. A motion for reconsideration of this decision of the Court of Appeals having been denied, petitioner has brought the case to this Court for review by writ of certiorari. It is contended by private respondent, however, that the instant petition was rendered moot and academic by petitioner's act of returning the subject motor drive of respondent's machinery after the Court of Appeals' decision was promulgated. The contention of private respondent is without merit. When petitioner returned the subject motor drive, it made itself unequivocably clear that said action was without prejudice to a motion for reconsideration of the Court of Appeals decision, as shown by the receipt duly signed by respondent's representative. 1Considering that petitioner has reserved its right to question the propriety of the Court of Appeals' decision, the contention of private respondent that this petition has been mooted by such return may not be sustained. The next and the more crucial question to be resolved in this Petition is whether the machinery in suit is real or personal property from the point of view of the parties, with petitioner arguing that it is a personality, while the respondent claiming the contrary, and was sustained by the appellate court, which accordingly held that the chattel mortgage constituted thereon is null and void, as contended by said respondent.

A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where this Court, speaking through Justice J.B.L. Reyes, ruled: Although there is no specific statement referring to the subject house as personal property, yet by ceding, selling or transferring a property by way of chattel mortgage defendantsappellants could only have meant to convey the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand by claiming otherwise. Moreover, the subject house stood on a rented lot to which defendants-appellants merely had a temporary right as lessee, and although this can not in itself alone determine the status of the property, it does so when combined with other factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personality. Finally, unlike in the Iya cases, Lopez vs. Orosa, Jr. & Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery & Williamson, wherein third persons assailed the validity of the chattel mortgage, it is the defendants-appellants themselves, as debtors-mortgagors, who are attacking the validity of the chattel mortgage in this case. The doctrine of estoppel therefore applies to the herein defendants-appellants, having treated the subject house as personality. Examining the records of the instant case, We find no logical justification to exclude the rule out, as the appellate court did, the present case from the application of the abovequoted pronouncement. If a house of strong materials, like what was involved in the above Tumalad case, may be considered as personal property for purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no reason why a machinery, which is movable in its nature and becomes immobilized only by destination or purpose, may not be likewise treated as such. This is really because one who has so agreed is estopped from denying the existence of the chattel mortgage. In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of Appeals lays stress on the fact that the house involved therein was built on a land that did not belong to the owner of such house. But the law makes no distinction with respect to the ownership of the land on which the house is built and We should not lay down distinctions not contemplated by law. It must be pointed out that the characterization of the subject machinery as chattel by the private respondent is indicative of intention and impresses upon the property the character determined by the parties. As stated in Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by agreement treat as personal property that which by nature would be real property, as long as no interest of third parties would be prejudiced thereby. Private respondent contends that estoppel cannot apply against it because it had never represented nor agreed that the machinery in suit be considered as personal property but was merely required and dictated on by herein petitioner to sign a printed form of chattel mortgage which was in a blank form at the time of signing. This contention lacks persuasiveness. As aptly pointed out by petitioner and not denied by the respondent, the status of the subject machinery as movable or immovable was never placed in issue before the lower court and the Court of Appeals except in a supplemental memorandum in support of the petition filed in the appellate court. Moreover, even granting that the charge is true, such fact alone does not render a contract void ab initio, but can only be a ground for rendering said contract voidable, or annullable pursuant to Article 1390 of the new Civil Code, by a proper action in court. There is nothing on record to show that the mortgage has been annulled. Neither is it disclosed that steps were taken to nullify the same. On the other hand, as pointed out by petitioner and again not refuted by respondent, the latter has indubitably benefited from said contract. Equity dictates that one should not benefit at the expense of another. Private respondent could not now therefore, be allowed to impugn the efficacy of the chattel mortgage after it has benefited therefrom, From what has been said above, the error of the appellate court in ruling that the questioned machinery is real, not personal property, becomes very apparent. Moreover, the case of Machinery and Engineering Supplies, Inc. v. CA, 96 Phil. 70, heavily relied upon by said court is not applicable to the case at bar, the nature of the machinery and equipment involved therein as real properties never having been disputed nor in issue, and they were not the

subject of a Chattel Mortgage. Undoubtedly, the Tumalad case bears more nearly perfect parity with the instant case to be the more controlling jurisprudential authority. WHEREFORE, the questioned decision and resolution of the Court of Appeals are hereby reversed and set aside, and the Orders of the lower court are hereby reinstated, with costs against the private respondent. SO ORDERED.

THIRD DIVISION [A.M. No.P-02-1568. April 25, 2002] CRISTE A. TA-OCTA, complainant, vs. Sheriff IV WINSTON T. EGUIA, Sheriff IV EDWIN G. TORRES, Regional Trial Court, Iloilo City, Branch 26 and Branch 38, respectively, respondents. VITUG, J.: In a complaint, dated 20 March 2000, filed with the Office of the Executive Judge of the Regional Trial Court (RTC) of Iloilo City, Criste Ta-Octa charged respondent sheriffs Winston Eguia and Edwin Torres with grave abuse of authority in connection with a petition for foreclosure of chattel mortgage instituted by AC (Iloilo) Lenders, Inc., against complainant TaOcta for the latter's failure to comply with the conditions of the Chattel Mortgage and Promissory Note he had executed on 02 July 1999. The chattel mortgage covered a one (1) unit motor vehicle, viz: Make : FUSO Type : Fighter Tanker Motor NO. : 6D14-563562 Serial No. : FK335J-530111 Plate No. : FEA-691 Complainant claimed that the petition for foreclosure of chattel mortgage had been served by respondent sheriffs on the same day it was filed with the Office of Provincial/City Sheriff of Iloilo, without any raffle being first conducted and sans the approval of the trial court. He asserted that no notice or demand from either AC (Iloilo) Lenders, Inc., or respondents had been made before possession of the motor vehicle was taken away from him nor did respondents issue any receipt on the accessories of the vehicle. Complainant said that respondents, after taking possession of the subject vehicle, hid it instead of having it parked at the grounds of the Hall of Justice. Complainant added that respondents had made erasures on the entry in the foreclosure book at the Office of the Sheriff when the petition for foreclosure of mortgage was filed and recorded. Executive Judge Tito A. Gustilo required respondents to submit their respective answers to the complaint. In their joint comment, respondents averred that they had complied with the procedure for extrajudicial foreclosures of mortgages. The petition was filed and docketed, and the filing fees were duly paid with the Office of the Clerk of Court. Respondents, however, admitted that the petition was immediately served, without a raffle having first been conducted because of the fear, entertained by AC Lenders, Inc., that complainant might abscond. In fact, respondents already found the subject vehicle at the house of a relative of complainant. Respondents were informed that complainant had pending criminal cases before the municipal trial courts for violation of Batas PambansaBlg. 22. Respondents denied having made erasures on the entries in the foreclosure book and, by way of substantiating the denial, submitted the affidavits of Josephine Marie Lagura and JonalynGasataya, employees both assigned at the Office of the Clerk of Court ("OCC") of the Regional Trial Court of Iloilo City and tasked with receiving, docketing and updating the entries in the Sheriff and Notary Public Foreclosure cases filed before the OCC. In her affidavit, Josephine Lagura attested that on 22 February 2000 (the date when petition was filed), the Rural Bank of Guimbal, through its counsel, had filed notarial foreclosure incidents which she erroneously docketed in the Sheriff's Foreclosure Book, and the mistake was only discovered when Atty. Gerry Sumaculub, Assistant Clerk of Court, reviewed the book. She claimed that the erasures and erroneous entries were done in good faith. JonalynGasataya, in her affidavit, corroborated the statements of Josephine. The Executive Judge conducted an investigation pursuant to Administrative Order No. 6, dated 30 June 1975.[1] In his report of 13 October 2000, Judge Gustilo stated that "After a thorough reading and evaluation of the evidence both oral and documentary submitted by the complainant and the respondents the undersigned Executive Judge finds respondents Sheriff Winston T. Eguia and Edwin G. Torres, of RTC, Branch 26 and Branch 38, respectively, Guilty for violation of Administrative Circular No. 3-98, dated February 5, 1998, and Administrative Order No. 3, dated October 9, 1984, which mandates the raffling of extrajudicial foreclosure of mortgage shall be strictly enforced by the Executive Judge among the

deputy sheriffs in order to avoid an unequal distribution of cases and fraternization between sheriffs and the applicant mortgagee." The Investigating Judge recommended that the penalty of one month suspension, without pay, be imposed on respondents. The Office of the Court Administrator, in its memorandum of 02 March 2001, adopted in toto the findings and recommendation of the Investigating Judge. The Court sees the findings of the Investigating Judge and the Office of the Court Administrator to be well-taken but finds the recommended penalty of suspension, given the circumstances, a bit too harsh. A.M. No. 99-10-05-0, issued by the Court En Banc on 07 August 2001 and made effective on 01 September 2001, provides for the procedure in the extra-judicial foreclosure of mortgage, thusly: "1. All applications for extra-judicial foreclosure of mortgage whether under the direction of the sheriff or a notary public, pursuant to Act 3135, as amended by Act 4118, and Act 1508, as amended, shall be filed with the Executive Judge, through the Clerk of Court who is also the Ex-Officio Sheriff. "2. Upon receipt of an application for extra-judicial foreclosure of mortgage, it shall be the duty of the Clerk of Court to: "a) "b) receive and docket said application and to stamp thereon the corresponding file number, date and time of filing; collect the filing fees therefor pursuant to Rule 141, Section 7(c), as amended by A.M. No. 00-2-01-SC, and issue the corresponding official receipt; sign and issue the certificate of sale, subject to the approval of the Executive Judge, or in his absence, the Vice-Executive Judge. No certificate of sale shall be issued in favor of the highest bidder until all fees provided for in the aforementioned sections and in Rule 141, Section 9(1), as amended by A.M. No. 00-2-01-SC, shall have been paid; Provided, that in no case shall the amount payable under Rule 141, Section 9(1), as amended, exceed P100,000.00; after the certificate of sale has been issued to the highest bidder, keep the complete records, while awaiting any redemption within a period of one (1) year from date of registration of the certificate of sale with the Register of Deeds concerned, after which, the records shall be archived. Notwithstanding the foregoing provision, juridical persons whose property is sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property until, but not after, the registration of the certificate of foreclosure sale which in no case shall be more than three (3) months after foreclosure, whichever is earlier, as provided in Section 47 of Republic Act No. 8791 (as amended, Res. of August 7, 2001).

"d)

"e)

"3. The notices of auction sale in extrajudicial foreclosure for publication by the sheriff or by a notary public shall be published in a newspaper of general circulation pursuant to Section 1, Presidential Decree No. 1079, dated January 2, 1977, and non-compliance therewith shall constitute a violation of Section 6 thereof. "4. The Executive Judge shall, with the assistance of the Clerk of Court, raffle applications for extrajudicial foreclosure of mortgage under the direction of the sheriff among all sheriffs, including those assigned to the Office of the Clerk of Court and Sheriffs IV assigned in the branches. "5. The name/s of the bidder/s shall be reported by the sheriff or the notary public who conducted the sale to the Clerk of Court before the issuance of the certificate of sale." Verily, respondent sheriffs have violated the procedure set forth in A.M. No. 99-10-05-0 in failing to conduct a raffle of the petition for extrajudicial foreclosure of mortgage filed by AC Lenders, Inc., against complainant before the office of the Clerk of Court. The raffling of cases

is designed to avoid the unequal distribution of cases and fraternization between the sheriff and the applicant-mortgagee.[2] While it might be true that petitioner (AC Iloilo Lenders Inc.) requested for the immediate enforcement of the petition for foreclosure of chattel mortgage on the ground that complainant could likely flee and abscond with his assets and that, in fact, the subject vehicle was recovered from the house of one of his relatives, respondents, nevertheless, were not excused from observing the mandated procedure therefor. Respondents should not forget that they are public officials entrusted with a grave responsibility, and their conduct not only should be characterized by great circumspection but also be always above suspicion.[3] Sheriffs play an important role in the administration of justice, called upon, no less than others, to carry out their tasks with utmost care and diligence. High standards in their performance of duty are rightly required of them.[4] Regrettably, respondents have failed to live up to expectations. Being respondents first offense, however, the Court deems it proper to decrease the recommended penalty of suspension to a fine of One Thousand Pesos (P1,000.00) on each respondent and to caution them to do better than what they have shown. WHEREFORE, respondents Winston T. Eguia and Edwin G. Torres are found to have violated A.M. No. 99-10-05-0 relative to the procedure on extrajudicial foreclosure of mortgage and are each hereby ordered to pay a fine in the amount of One Thousand Pesos (P1,000.00), with a warning that the commission of similar or other infractions in the future will be dealt with severely. SO ORDERED.

TUMALAD V. VICENCIO 41 SCRA 143 FACTS: Vicencio and Simeon executed a chattel mortgage in favor of plaintiffs Tumalad over their house, which was being rented by Madrigal and company. This was executed to guarantee a loan, payable in one year with a 12% per annum interest. The mortgage was extrajudicially foreclosed upon failure to pay the loan. The house was sold at a public auction and the plaintiffs were the highest bidder. of sale was issued. A corresponding certificate Thereafter, the plaintiffs filed an action for ejectment against the

defendants, praying that the latter vacate the house as they were the proper owners. HELD: Certain deviations have been allowed from the general doctrine that buildings are immovable property such as when through stipulation, parties may agree to treat as personal property those by their nature would be real property. This is partly based on the principle of estoppel wherein the principle is predicated on statements by the owner declaring his house as chattel, a conduct that may conceivably stop him from subsequently claiming otherwise. In the case at bar, though there be no specific statement referring to the subject house as personal property, yet by ceding, selling or transferring a property through chattel mortgage could only have meant that defendant conveys the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand by claiming otherwise.

G.R. No. L-22962 September 28, 1972

PILAR N. BORROMEO, MARIA B. PUTONG, FEDERICO V. BORROMEO, JOSE BORROMEO, CONSUELO B. MORALES and CANUTO V. BORROMEO, JR., petitioners, vs. COURT OF APPEALS and JOSE A. VILLAMOR, (Deceased) Substituted by FELISA VILLAMOR, ROSARIO V. LIAO LAMCO, MANUEL VILLAMOR, AMPARO V. COTTON, MIGUEL VILLAMOR and CARMENCITA VILLAMOR, respondents. The point pressed on us by private respondents, 1 in this petition for review of a decision of the Court of Appeals in the interpretation of a stipulation which admittedly is not free from ambiguity, there being a mention of a waiver of the defense of prescription, is not calculated to elicit undue judicial sympathy. For if accorded acceptance, a creditor, now represented by his heirs, 2 who, following the warm and generous impulse of friendship, came to the rescue of a debtor from a serious predicament of his own making would be barred from recovering the money loaned. Thus the promptings of charity, unfortunately not often persuasive enough, would be discredited. It is unfortunate then that respondent Court of Appeals did not see it that way. For its decision to be upheld would be to subject the law to such a scathing indictment. A careful study of the relevant facts in the light of applicable doctrines calls for the reversal of its decision. The facts as found by the Court of Appeals follow: "Before the year 1933, defendant [Jose A. Villamor] was a distributor of lumber belonging to Mr. Miller who was the agent of the Insular Lumber Company in Cebu City. Defendant being a friend and former classmate of plaintiff [Canuto O. Borromeo] used to borrow from the latter certain amounts from time to time. On one occasion with some pressing obligation to settle with Mr. Miller, defendant borrowed from plaintiff a large sum of money for which he mortgaged his land and house in Cebu City. Mr. Miller filed civil action against the defendant and attached his properties including those mortgaged to plaintiff, inasmuch as the deed of mortgage in favor of plaintiff could not be registered because not properly drawn up. Plaintiff then pressed the defendant for settlement of his obligation, but defendant instead offered to execute a document promising to pay his indebtedness even after the lapse of ten years. Liquidation was made and defendant was found to be indebted to plaintiff in the sum of P7,220.00, for which defendant signed a promissory note therefor on November 29, 1933 with interest at the rate of 12% per annum, agreeing to pay 'as soon as I have money'. The note further stipulates that defendant 'hereby relinquish, renounce, or otherwise waive my rights to the prescriptions established by our Code of Civil Procedure for the collection or recovery of the above sum of P7,220.00. ... at any time even after the lapse of ten years from the date of this instrument'. After the execution of the document, plaintiff limited himself to verbally requesting defendant to settle his indebtedness from time to time. Plaintiff did not file any complaint against the defendant within ten years from the execution of the document as there was no property registered in defendant's name, who furthermore assured him that he could collect even after the lapse of ten years. After the last war, plaintiff made various oral demands, but defendants failed to settle his account, hence the present complaint for collection." 3 It was then noted in the decision under review that the Court of First Instance of Cebu did sentence the original defendant, the deceased Jose A. Villamor, to pay Canuto O. Borromeo, now represented by petitioners, the sum of P7,220.00 within ninety days from the date of the receipt of such decision with interest at the rate of 12% per annum from the expiration of such ninety-day period. That was the judgment reversed by the Court of Appeals in its decision of March 7, 1964, now the subject of this petition for review. The legal basis was the lack of validity of the stipulation amounting to a waiver in line with the principle "that a person cannot renounce future prescription." 4 The rather summary and curt disposition of the crucial legal question of respondent Court in its fivepage decision, regrettably rising not too-far-above the superficial level of analysis hardly commends itself for approval. In the first place, there appeared to be undue reliance on certain words employed in the written instrument executed by the parties to the total disregard of their intention. That was to pay undue homage to verbalism. That was to ignore the warning of Frankfurter against succumbing to the vice of literalism in the interpretation of language whether found in a constitution, a statute, or a contract. Then, too, in effect it would nullify what ought to have been evident by a perusal that is not-too-cursory, namely, that the creditor moved by ties of friendship was more than willing to give the debtor the utmost latitude as to when his admittedly scanty resources will allow him to pay. He was not renouncing any right; he was just being considerate, perhaps excessively so. Under the view of respondent Court, however, what had been agreed upon was in effect voided. That was to run counter to the well-settled maxim that between two possible interpretations, that which saves rather than destroys is to be preferred. What vitiates most the appealed decision, however, is that it would amount not to just negating an agreement duly entered into but would put a premium on conduct that is hardly fair and could be characterized as duplicitous. Certainly, it would reflect on a debtor apparently bent all the while on repudiating his obligation. Thus he would be permitted to repay an act of kindness with base ingratitude. Since as will hereafter be shown, there is, on the contrary, the appropriate construction

of the wording that found its way in the document, one which has all the earmarks of validity and at the same time is in consonance with the demands of justice and morality, the decision on appeal, as was noted at the outset, must be reversed. 1. The facts rightly understood argue for the reversal of the decision arrived at by respondent Court of Appeals. Even before the event that gave rise to the loan in question, the debtor, the late Jose A. Villamor, being a friend and a former classmate, used to borrow from time to time various sums of money from the creditor, the late Canuto O. Borromeo. Then faced with the need to settle a pressing obligation with a certain Miller, he did borrow from the latter sometime in 1933 what respondent Court called "a large sum of money for which he mortgaged his land and house in Cebu City." 5 It was noted that this Miller did file a suit against him, attaching his properties including those he did mortgage to the late Borromeo, there being no valid objection to such a step as the aforesaid mortgage, not being properly drawn up, could not be registered. Mention was then made of the late Borromeo in his lifetime seeking the satisfaction of the sum due with Villamor unable to pay, but executing a document promising "to pay his indebtedness even after the lapse of ten years." 6 It is with such a background that the words employed in the instrument of November 29, 1933 should be viewed. There is nothing implausible in the view that such language renouncing the debtor's right to the prescription established by the Code of Civil Procedure should be given the meaning, as noted in the preceding sentence of the decision of respondent Court, that the debtor could be trusted to pay even after the termination of the ten-year prescriptive period. For as was also made clear therein, there had been since then verbal requests on the part of the creditor made to the debtor for the settlement of such a loan. Nor was the Court of Appeals unaware that such indeed was within the contemplation of the parties as shown by this sentence in its decision: "Plaintiff did not file any complaint against the defendant within ten years from the execution of the document as there was no property registered in defendant's name who furthermore assured him that he could collect even after the lapse of ten years." 7 2. There is much to be said then for the contention of petitioners that the reference to the prescriptive period is susceptible to the construction that only after the lapse thereof could the demand be made for the payment of the obligation. Whatever be the obscurity occasioned by the words is illumined when the light arising from the relationship of close friendship between the parties as well as the unsuccessful effort to execute a mortgage, taken in connection with the various oral demands made, is thrown on them. Obviously, it did not suffice for the respondent Court of Appeals. It preferred to reach a conclusion which for it was necessitated by the strict letter of the law untinged by any spirit of good morals and justice, which should not be alien to legal norms. Even from the standpoint of what for some is strict legalism, the decision arrived at by the Court of Appeals calls for disapproval. It is a fundamental principle in the interpretation of contracts that while ordinarily the literal sense of the words employed is to be followed, such is not the case where they "appear to be contrary to the evident intention of the contracting parties," which "intention shall prevail." 8 Such a codal provision has been given full force and effect since the leading case of Reyes v. Limjap, 9 a 1910 decision. Justice Torres, who penned the above decision, had occasion to reiterate such a principle when he spoke for the Court in De la Vega v. Ballilos 10 thus: "The contract entered into by the contracting parties which has produced between them rights and obligations is in fact one of antichresis, for article 1281 of the Civil Code prescribes among other things that if the words should appear to conflict with the evident intent of the contracting parties, the intent shall prevail." 11 In Abella v. Gonzaga, 12 this Court through the then Justice Villamor, gave force to such a codal provision when he made clear that the inevitable conclusion arrived at was "that although in the contract Exhibit A the usual words 'lease,' 'lessee,' and 'lessor' were employed, that is no obstacle to holding, as we do hereby hold, that said contract was a sale on installments, for such was the evident intention of the parties in entering into said contract. 13 Only lately inNielson and Company v. Lepanto Consolidated Mining Company, 14 this Court, with Justice Zaldivar, as ponente, after stressing the primordial rule that in the construction and interpretation of a document, the intention of the parties must be sought, went on to state: "This is the basic rule in the interpretation of contracts because all other rules are but ancillary to the ascertainment of the meaning intended by the parties. And once this intention has been ascertained it becomes an integral part of the contract as though it had been originally expressed therein in unequivocal terms ... ." 15 While not directly in point, what was said by Justice Labrador in Tumaneng v. Abad 16 is relevant: "There is no question that the terms of the contract are not clear on the period of redemption. But the intent of the parties thereto is the law between them, and it must be ascertained and enforced." 17 Nor is it to be forgotten, following what was first announced in Velasquez v. Teodoro 18 that "previous, simultaneous and subsequent acts of the parties are properly cognizable indicia of their true intention." 19 There is another fundamental rule in the interpretation of contracts specifically referred to in Kasilag v. Rodriguez,20 as "not less important" 21 than other principles which "is to the effect that the terms, clauses and conditions contrary to law, morals and public order should be separated from the

valid and legal contract when such separation can be made because they are independent of the valid contract which expresses the will of the contracting parties. Manresa, commenting on article 1255 of the Civil Code and stating the rule of separation just mentioned, gives his views as follows: 'On the supposition that the various pacts, clauses, or conditions are valid, no difficulty is presented; but should they be void, the question is as to what extent they may produce the nullity of the principal obligation. Under the view that such features of the obligation are added to it and do not go to its essence, a criterion based upon the stability of juridical relations should tend to consider the nullity as confined to the clause or pact suffering therefrom, except in cases where the latter, by an established connection or by manifest intention of the parties, is inseparable from the principal obligation, and is a condition, juridically speaking, of that the nullity of which it would also occasion.' ... The same view prevails in the Anglo-American law as condensed in the following words: 'Where an agreement founded on a legal consideration contains several promises, or a promise to do several things, and a part only of the things to be done are illegal, the promises which can be separated, or the promise, so far as it can be separated, from the illegality, may be valid. The rule is that a lawful promise made for a lawful consideration is not invalid merely because an unlawful promise was made at the same time and for the same consideration, and this rule applies, although the invalidity is due to violation of a statutory provision, unless the statute expressly or by necessary implication declares the entire contract void. ..."22 Nor is it to be forgotten that as early as Compania Agricola Ultramar v. Reyes, 23 decided in 1904, the then Chief Justice Arellano in a concurring opinion explicitly declared: "It is true that contracts are not what the parties may see fit to call them, but what they really are as determined by the principles of law." 24 Such a doctrine has been subsequently adhered to since then. As was rephrased by Justice Recto in Aquino v. Deala: 25 "The validity of these agreements, however, is one thing, while the juridical qualification of the contract resulting therefrom is very distinctively another." 26 In a recent decision, Shell Company of the Phils., Ltd. vs. Firemen's Insurance Co. of Newark, 27 this court, through Justice Padilla, reaffirmed the doctrine thus: "To determine the nature of a contract courts do not have or are not bound to rely upon the name or title given it by the contracting parties, should there be a controversy as to what they really had intended to enter into, but the way the contracting parties do or perform their respective obligations, stipulated or agreed upon may be shown and inquired into, and should such performance conflict with the name or title given the contract by the parties, the former must prevail over the latter." 28 Is it not rather evident that since even the denomination of the entire contract itself is not conclusively determined by what the parties call it but by the law, a stipulation found therein should likewise be impressed with the characterization the law places upon it? What emerges in the light of all the principles set forth above is that the first ten years after November 29, 1933 should not be counted in determining when the action of creditor, now represented by petitioners, could be filed. From the joint record on appeal, it is undoubted that the complaint was filed on January 7, 1953. If the first ten-year period was to be excluded, the creditor had until November 29, 1953 to start judicial proceedings. After deducting the first ten-year period which expired on November 29, 1943, there was the additional period of still another ten years. 29 Nor could there be any legal objection to the complaint by the creditor Borromeo of January 7, 1953 embodying not merely the fixing of the period within which the debtor Villamor was to pay but likewise the collection of the amount that until then was not paid. An action combining both features did receive the imprimatur of the approval of this Court. As was clearly set forth in Tiglao v. The Manila Railroad Company: 30 "There is something to defendant's contention that in previous cases this Court has held that the duration of the term should be fixed in a separate action for that express purpose. But we think the lower court has given good reasons for not adhering to technicalities in its desire to do substantial justice." 31 The justification became even more apparent in the latter portion of the opinion of Justice Alex Reyes for this Court: "We may add that defendant does not claim that if a separate action were instituted to fix the duration of the term of its obligation, it could present better proofs than those already adduced in the present case. Such separate action would, therefore, be a mere formality and would serve no purpose other than to delay." 32 There is no legal obstacle then to the action for collection filed by the creditor. Moreover, the judgment of the lower court, reversed by the respondent Court of Appeals, ordering the payment of the amount due is in accordance with law. 3. There is something more to be said about the stress in the Tiglao decision on the sound reasons for not adhering to technicalities in this Court's desire to do substantial justice. The then Justice, now Chief Justice, Concepcion expressed a similar thought in emphasizing that in the determination of the rights of the contracting parties "the interest of justice and equity be not ignored." 33 This is a principle that dates back to the earliest years of this Court. The then Chief Justice Bengzon in Arrieta v. Bellos, 34 invoked equity. Mention has been made of "practical and substantial justice," 35 "[no] sacrifice of the substantial rights of a litigant in the altar of sophisticated

technicalities with impairment of the sacred principles of justice," 36 "to afford substantial justice" 37 and "what equity demands." 38 There has been disapproval when the result reached is "neither fair, nor equitable." 39 What is to be avoided is an interpretation that "may work injustice rather than promote justice." 40 What appears to be most obvious is that the decision of respondent Court of Appeals under review offended most grievously against the above fundamental postulate that underlies all systems of law. WHEREFORE, the decision of respondent Court of Appeals of March 7, 1964 is reversed, thus giving full force and effect to the decision of the lower court of November 15, 1956. With costs against private respondents.