Pledge and Mortgage

FIRST DIVISION

[G.R. No. 118342. January 5, 1998.]

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and

LYDIA CUBA, respondents.

[G.R. No. 118367. January 5, 1998.]

LYDIA P.
CUBA, petitioner, vs. COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES a
nd AGRIPINA P. CAPERAL, respondents.

Office of the Legal Counsel DBP for petitioner.

Virgilio C . Leynes, Agripina Laperal J .C . Calida and Associates for

respondent Lydia Cuba.

SYNOPSIS

Lydia P. Cuba (Cuba) obtained from the Development Bank of the Philippines (DBP) three
separate loans, each of which was covered by a promissory note. As a security for said
loans, Cuba executed two Deeds of Assignment of her Leasehold Rights over her 44-hectare
fishpond. For failure of Cuba to pay her loans, DBP appropriated her Leasehold Rights
over the fishpond without foreclosure proceedings. Subsequently, Cuba offered and agreed
to repurchase her leasehold rights from DBP. For failure to pay the monthly amortizations
stipulated in the deed of conditional sale executed by DBP in favor of Cuba, DBP took
possession of the leasehold right and subsequently sold the same to Agripina Capera. Cuba
filed a complaint with the Regional Trial Court seeking declaration of nullity DBP's
appropriation of her leasehold rights without foreclosure proceedings which is contrary to
Article 2088 of the Civil Code.The trial court resolved the issue in favor of Cuba and
declared invalid the deed of assignment for being a clear case of patum commissorium. On
appeal, the Court of Appeals reverse the decision of the trial court and declared
that the deed of assignment was an express authority from Cuba for DBP to sell whatever
right she had over the fishpond. The appellate court likewise held
that the deed of assignment amounted to a novation of the promissory note.

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The Supreme Court ruled that the deed of assignment of leasehold rights was a mortgage
contract. The assignment, being in its essence a mortgage, was but a security and not a
satisfaction of indebtedness. DBP's act of appropriating Cuba's rights was
violative of Article 2088 of the Civil Code, which forbids a creditor from appropriating, or
disposing of, the thing given as security for the payment of debt. DBP cannot take refuge
in the deed of assignment to justify its act of appropriating the leasehold rights
since the said deed did not provide that the leasehold rights would automatically pass to
DBP upon Cuba's failure to pay the loans on time. It merely provided
forthe appointment of DBP as attorney-in-fact with authority, among other things, to sell or
otherwise dispose of the said real rights, in case of default by Cuba, and to
applythe proceeds to the payment of the loan. The Supreme Court likewise found no merit
in the contention that the assignment novated the promissory notes in that theobligation to
pay a sum of money was substituted by the assignment of the rights
over the fishpond. The said assignment merely complemented or
supplemented thepromissory notes. The obligation to pay a sum of money remained,
and the assignment merely served as security for the loans covered by the promissory
notes. HcSaAD

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; MORTGAGE; AN ASSIGNMENT TO

GUARANTEE AN OBLIGATION IS VIRTUALLY A MORTGAGE; CASE AT BAR. We agree
with CUBA that the assignment of leasehold rights was a mortgage contract. Simultaneous
with the execution of the notes was the execution "Assignments ofLeasehold Rights" where
CUBA assigned her leasehold rights and interest on a 44-hectare fishpond, together
with the improvements thereon. As pointed out by CUBA,the deeds of assignment
constantly referred to the assignor (CUBA) as "borrower"; the assigned rights, as mortgaged
properties; and the instrument itself, as mortgage contract. Moreover, under condition No.
22 of the deed, it was provided that "failure to comply with the terms and
condition of any of the loans shall cause all other loans to become due and demandable
and all mortgages shall be foreclosed." And, condition No. 33 provided that if "foreclosure is
actually accomplished, the usual 10% attorney's fees and 10% liquidated
damages of the total obligation shall be imposed." There is, therefore, no shred of doubt
that a mortgage was intended. In People'sBank & Trust Co. vs. Odom,
this Court had the occasion to rule that an assignment to guarantee an obligation is in
effect as mortgage.

2. ID.; ID.; ID.; ASSIGNMENT OF RIGHTS COMPLEMENTED AND DID NOT

NOVATE THE PROMISSORY NOTES. We find no merit in DBP's contention
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that theassignment novated the promissory notes in that the obligation to pay a
sum of money the loans (under the promissory notes) was substituted
by the assignment of therights over the fishpond (under the deed of assignment). As
correctly pointed out by CUBA, the said assignment merely complemented or
supplemented the notes; both could stand together. The former was only an accessory
to the latter. Contrary to DBP's submission, the obligation to pay a sum of money remained,
and the assignment merely served as security for the loans were granted. Also, the last
paragraph of the assignment stated: "The assignor further reiterates and states all terms,
covenants, are conditions stipulated in the promissory note or
notes covering the proceeds of this loan, making said promissory note or notes, to all intent
and purposes, an integralpart hereof".

3. ID.; ID.; PAYMENT BY CESSION ; DOES NOT APPLY WHERE THERE IS ONLY ONE
CREDITOR. Neither did the assignment amount to payment by cession under Article
1255 of the Civil Code for the plain and simple reason that there was only one
creditor, the DBP. Article 1255 contemplates the existence of two or more creditors and
involves the assignment of all the debtor's property.

4. ID.; ID.; DATION IN PAYMENT; DOES NOT APPLY WHERE ASSIGNMENT WAS A MERE
SECURITY AND NOT IN SATISFACTION OF INDEBTEDNESS. Nor did theassignment
constitute dation in payment under Article 1245 of the Civil Code, which reads: "Dation in
payment, whereby property is alienated to the creditor in satisfaction of a debt in money,
shall be governed by the law on sales." It bears stressing that the assignment, being in its
essence a mortgage, was but a security and not a satisfaction of indebtedness.

5. ID.; ID.; PACTUM COMMISSORIUM ; ELEMENTS. The elements of pactum

commissorium are as follows: (1) there should be a property mortgaged by way ofsecurity
for the payment of the principal obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged in case ofnon-
payment of the principal obligation within the stipulated period.

6. ID.; ID.; ID.; NOT PRESENT WHERE THERE IS NO AUTOMATIC APPROPRIATION

BY THE CREDITOR OF THE THING MORTGAGED; CASE AT BAR. Condition No. 12 did
not provide that the ownership over the leasehold rights would automatically pass to DBP
upon CUBA's failure to pay the loan on time. It merely provided for theappointment of DBP
as attorney-in-fact with authority, among other things, to sell or otherwise
dispose of the said real rights, in case of default by CUBA, and to apply theproceeds
to the payment of the loan. This provision is a standard condition in mortgage contracts
and is in conformity with Article 2087 of the Civil Code, which authorizesthe mortgagee to

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foreclose the mortgage and alienate the mortgaged property for the payment of the principal
obligation. DBP, however, exceeded the authority vested by condition No.
12 of the deed of assignment. As admitted by it during the pre-trial, it had "[w]ithout,
foreclosure proceedings, whether judicial or extrajudicial . . .appropriated the [l]easehold
rights of plaintiff Lydia Cuba over the fishpond in question." Its contention that it limited
itself to mere administration by posting caretakers is further belied
by the deed of conditional sale it executed in favor of CUBA. DBP cannot take refuge in
condition No. 12 of the deed of assignment to justify its act ofappropriating the leasehold
rights. As stated earlier, condition No. 12 did not provide that CUBA's default would operate
to vest in DBP ownership of the said rights. Besides, an assignment to guarantee an
obligation, as in the present case, is virtually a mortgage and not an absolute
conveyance of title which confers ownership on theassignee.

7. ID.; ID.; MORTGAGE; CREDITOR CANNOT APPROPRIATE THE THING GIVEN AS

SECURITY; CASE AT BAR. At any rate, DBP's act of appropriating CUBA's leasehold
rights was violative of Article 2088 of the Civil Code, which forbids a creditor from
appropriating, or disposing of the thing given as security for the payment of a debt.
Instead of taking ownership of the questioned real rights upon default by CUBA, DBP
should have foreclosed the mortgage, as has been stipulated in condition no.
22 ofthe deed of assignment. But, as admitted by DBP, there was no such foreclosure. Yet,
in its letter dated 26 October 1997, addressed to the Minister of Agriculture and Natural
Resources and coursed through the Director of the Bureau of Fisheries and Aquatic
Resources, DBP declared that it "had foreclosed the mortgage and
enforcedthe assignment of leasehold rights on March 21, 1979 for failure of said spouses
(CUBA spouses) to pay their loan amortizations." This only goes to show that DBP was
aware of the necessity of foreclosure proceedings. In view of the false representation of DBP
that it had already foreclosed the mortgage, the Bureau of Fisheries cancelled CUBA's
original lease permit, approved the deed of conditional sale, and issued a new permit in
favor of CUBA. Said acts which were predicated on such false representation, as well
as the subsequent acts emanating from DBP's appropriation of the leasehold rights, should
therefore be set aside. To validate these acts would open the floodgates to
circumvention of Article 2088 of the Civil Code.Even in cases where foreclosure proceedings
were had, this Court had not hesitated to nullify theconsequent auction sale for failure to
comply with the requirements laid down by law, such as Act No. 3135, as amended. With
more reason that the sale of property given as security for the payment of a debt be set
aside if there was no prior foreclosure proceeding.

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8. REMEDIAL LAW; ACTIONS; ESTOPPEL; CANNOT GIVE VALIDITY TO AN ACT
PROHIBITED BY LAW. The fact that CUBA offered and agreed to purchase her leasehold
rights from DBP did not estop her from questioning DBP's act of appropriation. Estoppel is
unvailing in this case as held by this Court in some cases estoppel cannot give validity to
an act that is prohibited by law or against public policy.
Hence, the appropriation of the leasehold rights, being contrary to Article 2088 of the Civil
Code and to public policy, cannot be deemed validated by estoppel.

9. CIVIL LAW; DAMAGES; ACTUAL OR COMPENSATORY DAMAGES; MUST BE DULY

PROVED. Actual or compensatory damages cannot be presumed, but must be proved
with reasonable degree of certainty. A court cannot rely on speculations, conjectures, or
guesswork as to the fact and amount of damages, but must depend upon competent proof
that they have been suffered by the injured party and on the best obtainable
evidence of the actual amount thereof. It must point out specific facts which could afford a
basis for measuring whatever compensatory or actual damages' are borne.

10. ID.; ID.; ID.; ID.; CASE AT BAR. In the present case, the trial court awarded in
favor of CUBA P1,067,500 as actual damages consisting of P550,000 which
represented the value of the alleged lost articles of CUBA and P517,500 which
represented the value of the 230,000 pieces of bangus allegedly stocked in 1979 when DBP
first ejected CUBA from the fishpond and the adjoining house. This award was affirmed
by the Court of Appeals. We find that the alleged lost of personal belongings and equipment
was not proved by clear evidence. Other than the testimony of CUBA and her caretaker,
there was no proof as to the existence of those items before DBP took over the fishpond in
question. With regard to the award of P517,000 representing the value of the alleged
230,000 pieces of bangus which died when DBP took possession of the fishpond in March
1979, the same was not called for. Such loss was not duly proved; besides, the claim
therefor was delayed unreasonably. From 1979 until after the filing of her complaint
in court in May 1985, CUBA did not bring to the attention of DBP the alleged
loss. The award of actual damages should, therefore, be struck down for lack of sufficient
basis.

11. ID.; ID.; MORAL DAMAGES; AWARD PROPER WHERE ASSAILED ACT IS CONTRARY
TO LAW. In view, however, of DBP's act of appropriating CUBA's leasehold rights which
was contrary to law and public policy, as well as its false representation to the then
Ministry of Agriculture and Natural Resources that it had "foreclosed themortgage," an
award of moral damages in the amount of P50,000 is in order conformably with Article
2219(10), in relation to Article 21, of the Civil Code.

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12. ID.; ID.; EXEMPLARY OR CORRECTIVE DAMAGES; AWARDED IN CASE AT BAR.
Exemplary or corrective damages in the amount of P25,000 should likewise be awarded by
way of example or correction for the public good.

13. ID.; ID.; ATTORNEY'S FEE; RECOVERABLE WHERE THERE IS

AWARD OF EXEMPLARY DAMAGES. There being an award of exemplary damages,
attorney's fees are also recoverable.

DECISION

DAVIDE, JR., J p:

These two consolidated cases stemmed from a complaint 1 filed

against the Development Bank of the Philippines (hereafter DBP) and Agripina Caperal filed
by Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional
Trial Court of Pangasinan, Branch 54. The said complaint sought
(1) the declaration of nullity of DBP's appropriation of CUBA's rights, title, and interests
over a 44-hectare fishpond located in Bolinao, Pangasinan, for being violative of Article
2088 of the Civil Code; (2) theannulment of the Deed of Conditional Sale executed in her
favor by DBP; (3) the annulment of DBP's sale of the subject fishpond to Caperal;
(4) the restoration of her rights, title, and interests over the fishpond; and
(5) the recovery of damages, attorney's fees, and expenses of litigation. LLjur

After the joinder of issues following the filing by the parties of their respective
pleadings, the trial court conducted a pre-trial where CUBA and DBP agreed
on thefollowing facts, which were embodied in the pre-trial order: 2

1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new) dated
May 13, 1974 from the Government;

2. Plaintiff Lydia P. Cuba obtained loans

from the Development Bank of the Philippines in the amounts of P109,000.00;
P109,000.00; and P98,700.00 underthe terms stated in the Promissory Notes dated
September 6, 1974; August 11, 1975; and April 4, 1977;

3. As security for said loans, plaintiff Lydia P. Cuba executed two

Deeds of Assignment of her Leasehold Rights;

4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance
with the terms of the Promissory Notes;

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5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP
appropriated the leasehold Rights of plaintiff Lydia Cuba over thefishpond in question;

6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba
over the fishpond in question, defendant DBP, in turn, executed a Deedof Conditional
Sale of the Leasehold Rights in favor of plaintiff Lydia Cuba over the same fishpond in
question;

7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters
to the Manager DBP, Dagupan City dated November 6, 1979 and December 20, 1979. DBP
thereafter accepted the offer to repurchase in a letter addressed to plaintiff dated February
1, 1982;

8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a new
Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued
by the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding her
husband;

9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional
Sale;

10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of Conditional
Sale, she entered with the DBP a temporary arrangement whereby in consideration
for the deferment of the Notarial Rescission of Deed of Conditional Sale, plaintiff Lydia
Cuba promised to make certain payments as stated in temporary Arrangement dated
February 23, 1982;

11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated March 13,
1984, and which was received by plaintiff Lydia Cuba;

12. After the Notice of Rescission, defendant DBP took possession of the Leasehold
Rights of the fishpond in question;

13. That after defendant DBP took possession of the Leasehold Rights over the fishpond in
question, DBP advertised in the SUNDAY PUNCH the public bidding dated June 24, 1984,
to dispose of the property;

14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant
Agripina Caperal on August 6, 1984;

15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A on
December 28, 1984 by the Ministry of Agriculture and Food.
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Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the pre-trial
order. 3

Trial was thereafter had on other matters.

The principal issue presented was whether the act of DBP in appropriating to itself CUBA's
leasehold rights over the fishpond in question without foreclosure proceedings was contrary
to Article 2088 of the Civil Code and, therefore, invalid. CUBA insisted on an affirmative
resolution. DBP stressed that it merely exercised its contractual right
under the Assignments of Leasehold Rights, which was not a contract of mortgage.
Defendant Caperal sided with DBP.

The trial court resolved the issue in favor of CUBA by declaring that DBP's taking
possession and ownership of the property without foreclosure was plainly violative ofArticle
2088 of the Civil Code which provides as follows:

ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage,
or dispose of them. Any stipulation to the contrary is null and void.

It disagreed with DBP's stand that the Assignments of Leasehold Rights were not
contracts of mortgage because (1) they were given as security for loans (2)
althoughthe "'fishpond land"' in question is still a public land, CUBA's leasehold rights and
interest thereon are alienable rights which can be the proper subject of a mortgage; and
(3) the intention of the contracting parties to treat the Assignment of Leasehold Rights as a
mortgage was obvious and unmistakable; hence, upon CUBA's default, DBP's only right
was to foreclose the Assignment in accordance with law.

The trial court also declared invalid condition no. 12 of the Assignment of Leasehold Rights
for being a clear case of pactum commissorium expressly prohibited and declared null and
void by Article 2088 of the Civil Code.It then concluded that since DBP never acquired
lawful ownership of CUBA's leasehold rights, all acts of ownership and possession
by the said bank were void. Accordingly, the Deed of Conditional Sale in
favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Sale in
favor of defendant Caperal, as well as the Assignment of Leasehold Rights executed by
Caperal in favor of DBP, were also void and ineffective.

As to damages, the trial court found "ample evidence on record" that in

1984 the representatives of DBP ejected CUBA and her caretakers not only
from the fishpond area but also from the adjoining big house; and that when CUBA's son
and caretaker went there on 15 September 1985, they found the said house unoccupied

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and destroyed and CUBA's personal belongings, machineries, equipment, tools, and other
articles used in fishpond operation which were kept in the house were missing. Themissing
items were valued at about P550,000. It further found that when CUBA and her men were
ejected by DBP for the first time in 1979, CUBA had stocked thefishpond with 250,000
pieces of bangus fish (milkfish), all of which died because the DBP representatives
prevented CUBA's men from feeding the fish. At theconservative price of P3.00 per
fish, the gross value would have been P690,000, and after deducting 25% of said value as
reasonable allowance for the cost of feeds, CUBA suffered a loss of P517,500. It then
set the aggregate of the actual damages sustained by CUBA at P1,067,500.

The trial court further found that DBP was guilty of gross bad faith in falsely representing
to the Bureau of Fisheries that it had foreclosed its mortgage on CUBA's leasehold rights.
Such representation induced the said Bureau to terminate CUBA's leasehold rights and to
approve the Deed of Conditional Sale in favor of CUBA. And considering that by
reason of her unlawful ejectment by DBP, CUBA "suffered moral shock, degradation, social
humiliation, and serious anxieties for which she became sick and had to be
hospitalized" the trial court found her entitled to moral and exemplary
damages. The trial court also held that CUBA was entitled to P100,000 attorney's fees in
view of the considerable expenses she incurred for lawyers' fees and in view of the finding
that she was entitled to exemplary damages.

In its decision of 31 January 1990, 4 the trial court disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. DECLARING null and void and without any legal

effect the act of defendant Development Bank of the Philippines in appropriating for its own
interest, without any judicial or extra-judicial foreclosure, plaintiffs leasehold rights and
interest over the fishpond land in question under her Fishpond Lease Agreement No. 2083
(new);

2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and
between the defendant Development Bank of the Philippines and plaintiff (Exh. E and Exh.
1) and the acts of notarial rescission of the Development Bank of the Philippines relative to
said sale (Exhs. 16 and 26) as void and ineffective;

3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and
between the Development Bank of the Philippines and defendant Agripina Caperal (Exh. F

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and Exh. 21), the Fishpond Lease Agreement No. 2083-A dated December 28,
1984 of defendant Agripina Caperal (Exh. 23) and theAssignment of Leasehold Rights dated
February 12, 1985 executed by defendant Agripina Caperal in
favor of the defendant Development Bank ofthe Philippines (Exh. 24) as void ab initio; cdtai

4. ORDERING defendant Development Bank of the Philippines and defendant Agripina

Caperal, jointly and severally, to restore to plaintiff the latter's leasehold rights and
interests and right of possession over the fishpond land in question, without prejudice
to the right of defendant DevelopmentBank of the Philippines to foreclose the securities
given by plaintiff;

5. ORDERING defendant Development Bank of the Philippines to pay to

plaintiff the following amounts:

a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED PESOS

(P1,067,500.00), as and for actual damages;

b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral damages;

c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary damages;

d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and for attorney's
fees;

6. And ORDERING defendant Development Bank of the Philippines to reimburse and pay to
defendant Agripina Caperal the sum of ONE MILLION FIVE HUNDRED THIRTY-TWO
THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS (P1,532,610.75)
representing the amounts paid by defendant Agripina Caperal to
defendant Development Bank of the Philippines under their Deed of Conditional Sale.

CUBA and DBP interposed separate appeals from the decision

to the Court of Appeals. The former sought an increase in the amount of damages,
while the latter questioned the findings of fact and law of the lower court.

In its decision 5 of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in
declaring that the deed of assignment was null and void and that defendant Caperal could
not validly acquire the leasehold rights from DBP; (2) contrary
to the claim of DBP, the assignment was not a cession under Article 1255 of the Civil
Codebecause DBP appeared to be the sole creditor to CUBA cession presupposes
plurality of debts and creditors; (3) the deeds of assignment represented the voluntary
act of CUBA in assigning her property rights in payment of her debts, which amounted to a

10
novation of the promissory notes executed by CUBA in favor of DBP; (4) CUBA was estopped
from questioning the assignment of the leasehold rights, since she agreed to
repurchase the said rights under a deed of conditional sale; and (5) condition no.
12 of the deed of assignment was an express authority from CUBA for DBP to sell whatever
right she had over the fishpond. It also ruled that CUBA was not entitled to loss of profits
for lack of evidence, but agreed with the trial court as to the actual damages of P1,067,500.
It, however, deleted the amount of exemplary damages and reduced the award of moral
damages from P100,000 to P50,000 and attorney's fees, from P100.00 to P50,000.

The Court of Appeals thus declared as valid the following: (1) the act of DBP in
appropriating Cuba's leasehold rights and interest under Fishpond Lease Agreement No.
2083; (2) the deeds of assignment executed by Cuba in favor of DBP;
(3) the deed of conditional sale between CUBA and DBP; and (4) the deed of conditional sale
between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal,
and the assignment of leasehold rights executed by Caperal in favor of DBP. It then ordered
DBP to turn over possession of the property to Caperal as lawful holder of the leasehold
rights and to pay CUBA the following amounts: (a) P1,067,500 as actual damages; P50,000
as moral damages; and P50,000 as attorney's fees.

Since their motions for reconsideration were denied, 6 DBP and CUBA filed separate
petitions for review.

In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages and
attorney's fees in favor of CUBA.

Upon the other hand, in her petition (G.R. No. 118367), CUBA contends
that the Court of Appeals erred (1) in not holding that the questioned deed of assignment
was apactum commissorium contrary to Article 2088 of the Civil Code; (b) in holding
that the deed of assignment effected a novation of the promissory notes; (c) in holding that
CUBA was estopped from questioning the validity of the deed of assignment when she
agreed to repurchase her leasehold rights under a deed of conditional sale; and (d) in
reducing the amounts of moral damages and attorney's fees, in
deleting the award of exemplary damages, and in not increasing the amount of damages.

We agree with CUBA that the assignment of leasehold rights was mortgage contract.

It is undisputed that CUBA obtained from DBP three separate loans totalling P335,000,
each of which was covered by a promissory note. In all of these notes, there was a provision
that: "In the event of foreclosure of the mortgage securing this notes, I/We further bind
myself/ourselves, jointly and severally, to pay the deficiency, if any." 7
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Simultaneous with the execution of the notes
was the execution of "Assignments of Leasehold Rights" 8 where CUBA assigned her
leasehold rights and interest on a 44-hectare fishpond, together with the improvements
thereon. As pointed out by CUBA, the deeds of assignment constantly referred
to the assignor (CUBA) as "borrower";the assigned rights, as mortgaged properties;
and the instrument itself, as mortgage contract. Moreover, under condition no.
22 of the deed, it was provided that "failure to comply with the terms and
condition of any of the loans shall cause all other loans to become due and demandable
and all mortgages shall be foreclosed." And, condition no. 33 provided that if " foreclosure is
actually accomplished, the usual 10% attorney's fees and 10% liquidated
damages of the total obligation shall be imposed." There is, therefore, no shred of doubt
that a mortgage was intended.

Besides, in their stipulation of facts the parties admitted that the assignment was by
way of security for the payment of the loans; thus:

3. As security for said loans, plaintiff Lydia P. Cuba executed two

Deeds of Assignment of her Leasehold Rights. LibLex

In People's Bank & Trust Co. vs. Odom, 9 this Court had the occasion to rule that an
assignment to guarantee an obligation is in effect a mortgage.

We find no merit in DBP's contention that the assignment novated the promissory notes in
that the obligation to pay a sum of money the loans (under the promissory notes) was
substituted by the assignment of the rights over the fishpond
(under the deed of assignment). As correctly pointed out by CUBA, the said assignment
merely complemented or supplemented the notes; both could stand together. The former
was only an accessory to the latter. Contrary to DBP's submission, the obligation to pay a
sum of money remained, and the assignment merely served as security for the loans
covered by the promissory notes. Significantly, both the deeds of assignment
and the promissory notes were executed on the same dates the loans were granted.
Also, the last paragraph of the assignment stated: "The assignor further reiterates and
states all terms, covenants and conditions stipulated in the promissory note or
notes covering the proceeds of this loan, making said promissory note or notes, to all intent
and purposes, an integral part hereof."

Neither did the assignment amount to payment by cession under Article 1255 of the Civil
Code for the plain and simple reason that there was only one creditor, the DBP. Article
1255 contemplates the existence of two or more creditors and
involves the assignment of all the debtor's property.
12
Nor did the assignment constitute dation in payment under Article 1245 of the Civil Code,
which reads: "Dation in payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the law on sales." It bears stressing
that the assignment, being in its essence a mortgage, was but a security and not a
satisfaction of indebtedness. 10

We do not, however, buy CUBA's argument that condition no. 12 of the deed of assignment
constituted pactum commissorium. Said condition reads:

12. That effective upon the breach of any condition of this assignment, the Assignor hereby
appoints the Assignee his Attorney-in-fact with full power and authority to take actual
possession of the property above-described, together with all improvements thereon,
subject to the approval of the Secretary ofAgriculture and Natural Resources, to
lease the same or any portion thereof and collect rentals, to make repairs or improvements
thereon and pay the same, to sell or otherwise dispose of whatever rights the Assignor has
or might have over said property and/or its improvements and perform any other act
which theAssignee may deem convenient to protect its interest. All expenses advanced
by the Assignee in connection with purpose above indicated which shall bear thesame
rate of interest aforementioned are also guaranteed by this Assignment. Any amount
received from rents, administration, sale or disposal of said property may be supplied
by the Assignee to the payment of repairs, improvements, taxes, assessments and other
incidental expenses and obligations and thebalance, if any, to the payment of interest and
then on the capital of the indebtedness secured hereby. If after disposal or sale of said
property and upon application of total amounts received there shall remain a deficiency,
said Assignor hereby binds himself to pay the same to the Assignee upon demand, together
with all interest thereon until fully paid. The power herein granted shall not be revoked as
long as the Assignor is indebted to the Assignee and all acts that may be executed
by the Assignee by virtue of said power are hereby ratified.

The elements of pactum commissorium are as follows: (1) there should be a property
mortgaged by way of security for the payment of the principal obligation, and (2) there
should be a stipulation for automatic appropriation by the creditor of the thing mortgaged
in case of non-payment of the principal obligation within the stipulated period. 11

Condition no. 12 did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon CUBA's failure to pay the loan on time. It merely provided
for the appointment of DBP as attorney-in-fact with authority, among other things, to sell
or otherwise dispose of the said real rights, in case of default by CUBA, and to
13
apply the proceeds to the payment of the loan. This provision is a standard condition in
mortgage contracts and is in conformity with Article 2087 of the Civil Code, which
authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged property
for the payment of the principal obligation. dctai

DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment.
As admitted by it during the pre-trial, it had "without foreclosure proceedings, whether
judicial or extrajudicial, . . . appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba
over the fishpond in question." Its contention that it limited itself to mere administration by
posting caretakers is further belied by the deed of conditional sale it executed in
favor of CUBA. The deed stated:

WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor
by the herein vendees [Cuba spouses] the former acquired all the rights and
interest of the latter over the above-described property;

xxx xxx xxx

The title to the real estate property [sic] and all improvements thereon shall
remain the name of the Vendor until after the purchase price, advances and interest shall
have been fully paid. (Emphasis supplied).

It is obvious from the above-quoted paragraphs that DBP had appropriated and taken
ownership of CUBA's leasehold rights merely on the strength of the deed ofassignment.

DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its
act of appropriating the leasehold rights. As stated earlier, condition no. 12 did not provide
that CUBA's default would operate to vest in DBP ownership of the said rights. Besides an
assignment to guarantee an obligation, as in the present case, is virtually a mortgage
and not an absolute conveyance of title which confers ownership on the assignee. 12

At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of Article
2088 of the Civil Code, which forbids a creditor from appropriating, or
disposing of,the thing given as security for the payment of a debt.

The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not
estop her from questioning DBP's act of appropriation. Estoppel is unavailing in this case.
As held by this Court in some cases, 13 estoppel cannot give validity to an act that is
prohibited by law or against public policy. Hence, the appropriation of theleasehold rights,
being contrary to Article 2088 of the Civil Code and to public policy, cannot be deemed
validated by estoppel.
14
Instead of taking ownership of the questioned real rights upon default by CUBA, DBP
should have foreclosed the mortgage, as has been stipulated in condition no.
22 ofthe deed of assignment. But, as admitted by DBP, there was no such foreclosure. Yet
in its letter dated 26 October 1979, addressed to the Minister of Agriculture and Natural
Resources and coursed through the Director of the Bureau of Fisheries and Aquatic
Resources, DBP declared that it "had foreclosed the mortgage and
enforcedthe assignment of leasehold rights on March 21, 1979 for failure of said spouses
[Cuba spouses] to pay their loan amortizations." 14 This only goes to show that DBP was
aware of the necessity of foreclosure proceedings.

In view of the false representation of DBP that it had already

foreclosed the mortgage, the Bureau of Fisheries canceled CUBA's original lease permit,
approved the deedof conditional sale, and issued a new permit in favor of CUBA. Said acts
which were predicated on such false representation, as well as the subsequent acts
emanating from DBP's appropriation of the leasehold rights, should therefore be set aside.
To validate these acts would open the floodgates to circumvention of Article 2088 of theCivil
Code.

Even in cases where foreclosure proceedings were had, this Court had not hesitated to
nullify the consequent auction sale for failure to comply with the requirements laid down by
law, such as Act No. 3135, as amended. 15 With more reason that the sale of property given
as security for the payment of a debt be set aside if there was no prior foreclosure
proceeding.

Hence, DBP should render an accounting of the income derived

from the operation of the fishpond in question and apply the said income in accordance
with condition no. 12 of the deed of assignment which provided: "Any amount received from
rents, administration, . . . may be applied to the payment of repairs, improvements, taxes,
assessment, and other incidental expenses and obligations and the balance, if any,
to the payment of interest and then on the capital of the indebtedness . . ."

We shall now take up the issue of damages.

Article 2199 provides:

Except as provided by law or by stipulation, one is entitled to an adequate compensation

only for such pecuniary loss suffered by him as he has duly proved. Such compensation is
referred to as actual or compensatory damages.

15
Actual or compensatory damages cannot be presumed, but must be proved with reasonable
degree of certainty. 16 A court cannot rely on speculations, conjectures, or guesswork as
to the fact and amount of damages, but must depend upon competent proof that they have
been suffered by the injured party and on the best obtainable evidence of the actual
amount thereof. 17 It must point out specific facts which could afford a basis for measuring
whatever compensatory or actual damages are borne.18

In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual damages
consisting of P550,000 which represented the value of the alleged lost articlesof CUBA and
P517,500 which represented the value of the 230,000 pieces of bangus allegedly stocked in
1979 when DBP first ejected CUBA from the fishpond and theadjoining house. This award
was affirmed by the Court of Appeals.

We find that the alleged loss of personal belongings and equipment was not proved by clear
evidence. Other than the testimony of CUBA and her caretaker, there was no proof as
to the existence of those items before DBP took over the fishpond in question. As pointed
out by DBP, there was no "inventory of the alleged lost items beforethe loss which is normal
in a project which sometimes, if not most often, is left to the care of other persons." Neither
was a single receipt or record of acquisition presented.

Curiously, in her complaint dated 17 May 1985, CUBA included "losses of property" as
among the damages resulting from DBP's take-over of the fishpond. Yet, it was only in
September 1985 when her son and a caretaker went to the fishpond and the adjoining
house that she came to know of the alleged loss of several articles. Such claim for
"losses of property," having been made before knowledge of the alleged actual loss, was
therefore speculative. The alleged loss could have been a mere afterthought or subterfuge to
justify her claim for actual damages.

With regard to the award of P517,000 representing the value of the alleged 230,000
pieces of bangus which died when DBP took possession of the fishpond in March
1979, the same was not called for. Such loss was not duly proved; besides, the claim
therefor was delayed unreasonably. From 1979 until after the filing of her complaint
in court in May 1985, CUBA did not bring to the attention of DBP the alleged loss. In fact,
in her letter dated 24 October 1979, 19 she declared:

1. That from February to May 1978, I was then seriously ill in Manila and within the same
period I neglected the management and supervision of thecultivation and
harvest of the produce of the aforesaid fishpond thereby resulting to the irreparable loss
in the produce of the same in the amount of about P500,000.00 to my great damage and
prejudice due to fraudulent acts of some of my fishpond workers.
16
Nowhere in the said letter, which was written seven months after DBP took
possession of the fishpond, did CUBA intimate that upon DBP's take-over there was a
total of230,000 pieces of bangus, but all of which died because of DBP's representatives
prevented her men from feeding the fish.

The award of actual damages should, therefore, be struck down for lack of sufficient basis.

In view however, of DBP's act of appropriating CUBA's leasehold rights which was contrary
to law and public policy, as well as its false representation to the then
Ministryof Agriculture and Natural Resources that it had "foreclosed the mortgage," an
award of moral damages in the amount of P50,000 is in order conformably with Article
2219(10), in relation to Article 21 of the Civil Code.Exemplary or corrective damages
in the amount of P25,000 should likewise be awarded by way of example or correction
for the public good. 20 There being an award of exemplary damages, attorney's fees are also
recoverable. 21

WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No. 26535
is hereby REVERSED, except as to the award of P50,000 as moral damages, which is
hereby sustained. The 31 January 1990 Decision of the Regional Trial Court of Pangasinan,
Branch 54, in Civil Case No. A-1574 is MODIFIED setting aside thefinding that condition
no. 12 of the deed of assignment constituted pactum
commissorium and the award of actual damages; and by reducing the amounts of moral
damages from P100,000 to P50,000; the exemplary damages, from P50,000 to P25,000;
and the attorney's fees, from P100,000 to
P20,000. The Development Bank ofthe Philippines is hereby ordered to render an
accounting of the income derived from the operation of the fishpond in question.

Let this case be REMANDED to the trial court for the reception of the income
statement of DBP, as well as the statement of the account of Lydia P. Cuba, and
for thedetermination of each party's financial obligation to one another. SO ORDERED.

FIRST DIVISION

[G.R. No. 126800. November 29, 1999.]

NATALIA P. BUSTAMANTE, petitioner, vs. SPOUSES RODITO F. ROSEL and NORMA

A. ROSEL, respondents.

Emerico B. Lomibao for petitioner.

17
Julio C Contreras for private respondents.

SYNOPSIS

Norma Rosel, respondent herein, entered into a loan agreement with petitioner. Petitioner
used as collateral a portion of land she owned with an area of 70 sq. m., inclusive of the
apartment thereon. Under the terms of their agreement, the lender has the option to buy
the collateral for the amount of P200,000.00 inclusive of the borrowed amount
(P100,000.00) and interest therein (18% per annum). When the loan was about to mature,
respondents proposed to buy the land at the pre-set price of P200,000.00. Petitioner
refused to sell and requested for extension of time to pay the loan and offered to sell
another land instead. Respondents refused all proposals of the petitioner. On maturing date
of the loan, petitioner tendered payment to the respondents, which the latter refused to
accept and insisted that petitioner signed a prepared deed of absolute sale of the collateral.
Respondents refused. They thereafter filed with the Regional Trial Court a complaint for
specific performance with consignation against petitioner. A few days later, petitioner filed a
petition for consignation and deposited the amount of P153,000.00. After due trial, the trial
court rendered a decision denying the execution of the deed of sale to convey the collateral
and ordered that the loan be paid with the corresponding interest thereon. Respondents
appealed to the Court of Appeals, which reversed and set aside the decision of the trial
court and ordering herein petitioner to execute the necessary Deed of Sale and accept the
balance of payment thereon. Hence, this petition for review on certiorari. The questions
here are whether petitioner failed to pay the loan at its maturity date, and whether the
stipulation in the loan contract was valid and enforceable.

The Supreme Court ruled that the petitioner did not fail to pay the loan. When the
respondents refused to accept payment, petitioner consigned the amount with the trial
court. A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to
acquire the property given as security for the loan. This is embraced in the concept
of pactum commissorium, which is proscribed by law. The petition was granted and the
decision of the Court of Appeals was reversed.

SYLLABUS

1. CIVIL LAW; CONDITIONAL OBLIGATION; SALE OF COLLATERAL IS OBLIGATION WITH

SUSPENSIVE CONDITION; CASE AT BAR. The sale of the collateral is an obligation with
a suspensive condition. It is dependent upon the happening of an event, without which the
obligation to sell does not arise. Since the event did not occur, respondents do not have the
right to demand fulfillment of petitioner's obligation, especially where the same would not
only be disadvantageous to petitioner but would also unjustly enrich respondents
18
considering the inadequate consideration (P200,000.00) for a 70 square meter property
situated at Congressional Avenue, Quezon City.

2. ID.; CONTRACTS; HAVE THE FORCE OF LAW BETWEEN THE CONTRACTING PARTIES;
EXCEPTION. Respondents argue that contracts have the force of law between the
contracting parties and must be complied with in good faith. There are, however, certain
exceptions to the rule, specifically Article 1306 of the Civil Code, which provides: "Article
1306. The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy."

3. ID.; ID.; LOAN; PACTUM COMMISSORIUM; ELEMENTS. The elements of pactum

commissorium are as follows: (1) there should be a property mortgaged by way of security
for the payment of the principal obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged in case of non-payment of
the principal obligation within the stipulated period.

4. ID.; ID.; ID.; ID.; CONSTRUED IN CASE AT BAR. A significant task in contract
interpretation is the ascertainment of the intention of the parties and looking into the
words used by the parties to project that intention. In this case, the intent to appropriate
the property given as collateral in favor of the creditor appears to be evident, for the debtor
is obliged to dispose of the collateral at the pre-agreed consideration amounting to
practically the same amount as the loan. In effect, the creditor acquires the collateral in the
event of non-payment of the loan. This is within the concept of pactum commissorium.
Such stipulation is void.

RESOLUTION

PARDO, J p:

The case before the Court is a petition for review on certiorari 1 to annul the decision of the
Court of Appeals, 2 reversing and setting aside the decision of the Regional Trial
Court, 3 Quezon City, Branch 84, in an action for specific performance with
consignation. cdrep

On March 8, 1987, at Quezon City, Norma Rosel entered into a loan agreement with
petitioner Natalia Bustamante and her late husband Ismael C. Bustamante, under the
following terms and conditions:

19
"1. That the borrowers are the registered owners of a parcel of land, evidenced by
TRANSFER CERTIFICATE OF TITLE No. 80667, containing an area of FOUR HUNDRED
TWENTY THREE (423) SQUARE Meters, more or less, situated along Congressional Avenue.

"2. That the borrowers were desirous to borrow the sum of ONE HUNDRED THOUSAND
(P100,000.00) PESOS from the LENDER, for a period of two (2) years, counted from March
1, 1987, with an interest of EIGHTEEN (18%) PERCENT per annum, and to guaranty the
payment thereof, they are putting as a collateral SEVENTY (70) SQUARE METERS portion,
inclusive of the apartment therein, of the aforestated parcel of land, however, in the event
the borrowers fail to pay, the lender has the option to buy or purchase the collateral for a
total consideration of TWO HUNDRED THOUSAND (P200,000.00) PESOS, inclusive of the
borrowed amount and interest therein;

"3. That the lender do hereby manifest her agreement and conformity to the preceding
paragraph, while the borrowers do hereby confess receipt of the borrowed amount." 4

When the loan was about to mature on March 1, 1989, respondents proposed to buy at the
pre-set price of P200,000.00, the seventy (70) square meters parcel of land covered by TCT
No. 80667, given as collateral to guarantee payment of the loan. Petitioner, however, refused
to sell and requested for extension of time to pay the loan and offered to sell to respondents
another residential lot located at Road 20, Project 8, Quezon City, with the principal loan
plus interest to be used as down payment. Respondents refused to extend the payment of
the loan and to accept the lot in Road 20 as it was occupied by squatters and petitioner and
her husband were not the owners thereof but were mere land developers entitled to
subdivision shares or commission if and when they developed at least one half of the
subdivision area. 5

Hence, on March 1, 1989, petitioner tendered payment of the loan to respondents which the
latter refused to accept, insisting on petitioner's signing a prepared deed of absolute sale of
the collateral.

On February 28, 1990, respondents filed with the Regional Trial Court, Quezon City,
Branch 84, a complaint for specific performance with consignation against petitioner and
her spouse. 6

Nevertheless, on March 4, 1990, respondents sent a demand letter asking petitioner to sell
the collateral pursuant to the option to buy embodied in the loan agreement.

20
On the other hand, on March 5, 1990, petitioner filed in the Regional Trial Court, Quezon
City a petition for consignation, and deposited the amount of P153,000.00 with the City
Treasurer of Quezon City on August 10, 1990. 7

When petitioner refused to sell the collateral and barangay conciliation failed, respondents
consigned the amount of P47,500.00 with the trial court. 8 In arriving at the amount
deposited, respondent considered the principal loan of P100,000.00 and 18% interest per
annum thereon, which amounted to P52,500.00. 9 The principal lot and the interest taken
together amounted to P152,500.00, leaving balance of P47,500.00. 10

After due trial, on November 10, 1992, the trial court rendered decision holding:

"WHEREFORE, premises considered, judgment is hereby rendered as follows:

"1. Denying the plaintiff's prayer for the defendants' execution of the Deed of Sale to Convey
the collateral in plaintiffs' favor;

"2. Ordering the defendants to pay the loan of P100,000.00 with interest thereon at
18% per annum commencing on March 2, 1989, up to and until August 10, 1990, when
defendants deposited the amount with the Office of the City Treasurer under Official
Receipt No. 0116548 (Exhibit "2"); and

"3. To pay Attorney's Fees in the amount of P5,000.00, plus costs of suit.

"SO ORDERED. cdasia

"Quezon City, Philippines, November 10, 1992.

"TEODORO P. REGINO

"Judge" 11

On November 16, 1992, respondents appealed from the decision to the Court of
Appeals. 12 On July 8, 1996, the Court of Appeals rendered decision reversing the ruling of
the Regional Trial Court. The dispositive portion of the Court of Appeals' decision reads:

"IN VIEW OF THE FOREGOING, the judgment appeal (sic) from is REVERSED and SET
ASIDE and a new one entered in favor of the plaintiffs ordering the defendants to accept the
amount of P47,000.00 deposited with the Clerk of Court of Regional Trial Court of Quezon
City under Official Receipt No. 0719847, and for defendants to execute the necessary Deed
of Sale in favor of the plaintiffs over the 70 SQUARE METER portion and the apartment
standing thereon being occupied by the plaintiffs and covered by TCT No. 80667 within
fifteen (15) days from finality hereof. Defendants, in turn, are allowed to withdraw the
21
amount of P153,000.00 deposited by them under Official Receipt No. 0116548 of the City
Treasurer's Office of Quezon City. All other claims and counterclaims are DISMISSED, for
lack of sufficient basis. No costs.

"SO ORDERED." 13

Hence, this petition. 14

On January 20, 1997, we required respondents to comment on the petition within ten (10)
days from notice. 15 On February 27, 1997 respondents filed their comment. 16

On February 9, 1998, we resolved to deny the petition on the ground that there was no
reversible error on the part of respondent court in ordering the execution of the necessary
deed of sale in conformity with the parties' stipulated agreement. The contract is the law
between the parties thereof (Syjuco v. Court of Appeals, 172 SCRA 111, 118, citing Phil.
American General Insurance v. Mutuc, 61 SCRA 22; Herrera v. Petrophil Corporation, 146
SCRA 360). 17

On March 17, 1998, petitioner filed with this Court a motion for reconsideration of the
denial alleging that the real intention of the parties to the loan was to put up the collateral
as guarantee similar to as equitable mortgage according to Article 1602 of the Civil
Code. 18

On April 21, 1998, respondents filed an opposition to petitioner's motion for

reconsideration. They contend that the agreement between the parties was not a sale with
right of re-purchase, but a loan with interest at 18% per annum for a period of two years
and if petitioner fails to pay, the respondent was given the right to purchase the property or
apartment for P200,000.00, which is not contrary to law, morals, good customs, public
order or public policy. 19

Upon due consideration of petitioner's motion, we now resolve to grant the motion for
reconsideration.

The questions presented are whether petitioner failed to pay the loan at its maturity date
and whether the stipulation in the loan contract was valid and enforceable.

We rule that petitioner did not fail to pay the loan.

22
The loan was due for payment on March 1, 1989. On said date, petitioner tendered payment
to settle the loan which respondents refused to accept, insisting that petitioner sell to them
the collateral of the loan.

When respondents refused to accept payment, petitioner consigned the amount with the
trial court.

We note the eagerness of respondents to acquire the property given as collateral to

guarantee the loan. The sale of the collateral is an obligation with a suspensive
condition. 20 It is dependent upon the happening of an event, without which the obligation
to sell does not arise. Since the event did not occur, respondents do not have the right to
demand fulfillment of petitioner's obligation, especially where the same would not only be
disadvantageous to petitioner but would also unjustly enrich respondents considering the
inadequate consideration (P200,000.00) for a 70 square meter property situated at
Congressional Avenue, Quezon City.

Respondents argue that contracts have the force of law between the contracting parties and
must be complied with in good faith. 21 There are, however, certain exceptions to the rule,
specifically Article 1306 of the Civil Code, which provides:

"ARTICLE 1306. The contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy." prcd

A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to
acquire the property given as security for the loan. This is embraced in the concept
of pactum commissorium, which is proscribed by law. 22

"The elements of pactum commissorium are as follows: (1) there should be a property
mortgaged by way of security for the payment of the principal obligation, and (2) there
should be a stipulation automatic appropriation by the creditor of the thing mortgaged in
case of non-payment of the principal obligation within the stipulated period." 23

In Nakpil vs. Intermediate Appellate Court, 24 we said:

"The arrangement entered into between the parties, whereby Pulong Maulap was to be
"considered sold to him (respondent) . . . in case petitioner fails to reimburse Valdes, must
then be construed as tantamount to pactum commissorium which is expressly prohibited
by Art. 2088 of the Civil Code. For, there was to be automatic appropriation of the property
by Valdes in the event of failure of petitioner to pay the value of the advances. Thus,
contrary to respondent's manifestation, all the elements of a pactum commissorium were
23
present: there was a creditor-debtor relationship between the parties; the property was
used as security for the loan; and there was automatic appropriation by respondent
of Pulong Maulap in case of default of petitioner."

A significant task in contract interpretation is the ascertainment of the intention of the

parties and looking into the words used by the parties to project that intention. In this
case, the intent to appropriate the property given as collateral in favor of the creditor
appears to be evident, for the debtor is obliged to dispose of the collateral at the pre-agreed
consideration amounting to practically the same amount as the loan. In effect, the creditor
acquires the collateral in the event of non-payment of the loan. This is within the concept
of pactum commissorium. Such stipulation is void. 25

All persons in need of money are liable to enter into contractual relationships whatever the
condition if only to alleviate their financial burden albeit temporarily. Hence, courts are
duty bound to exercise caution in the interpretation and resolution of contracts lest the
lenders devour the borrowers like vultures do with their prey.

WHEREFORE, we GRANT petitioner's motion for reconsideration and SET ASIDE the
Court's resolution of February 9, 1998. We REVERSE the decision of the Court of Appeals
in CA-G.R. CV No. 40193. In lieu thereof, we hereby DISMISS the complaint in Civil Case
No. Q-90-4813.

No costs. SO ORDERED.

SECOND DIVISION

[G.R. No. 172592. July 9, 2008.]

SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-

ONG, petitioners, vs. ROBAN LENDING CORPORATION, respondent.

DECISION

CARPIO-MORALES, J p:

On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses Wilfredo
N. Ong and Edna Sheila Paguio-Ong obtained several loans

24
from Roban LendingCorporation (respondent) in the total amount of P4,000,000.00. These
loans were secured by a real estate mortgage on petitioners' parcels of land located in
Binauganan, Tarlac City and covered by TCT No. 297840. 1

On February 12, 2001, petitioners and respondent executed an Amendment to Amended

Real Estate Mortgage 2 consolidating their loans inclusive of charges thereon which totaled
P5,916,117.50. On even date, the parties executed a Dacion in Payment
Agreement 3 wherein petitioners assigned the properties covered by TCT No. 297840 to
respondent in settlement of their total obligation, and a Memorandum of
Agreement 4 reading: AIaSTE

That the FIRST PARTY [Roban Lending Corporation] and the SECOND PARTY [the
petitioners] agreed to consolidate and restructure all aforementioned loans, which have
been all past due and delinquent since April 19, 2000, and outstanding obligations totaling
P5,916,117.50. The SECOND PARTY hereby sign [sic]another promissory note in the
amount of P5,916,117.50 (a copy of which is hereto attached and forms . . . an integral part
of this document), with a promise to pay the FIRST PARTY in full within one year from the
date of the consolidation and restructuring, otherwise the SECOND PARTY agree to have
their "DACION IN PAYMENT" agreement, which they have executed and signed today in
favor of the FIRST PARTY be enforced[.] 5

In April 2002 (the day is illegible), petitioners filed a Complaint, 6 docketed as Civil Case
No. 9322, before the Regional Trial Court (RTC) of Tarlac City, for declaration of mortgage
contract as abandoned, annulment of deeds, illegal exaction, unjust enrichment,
accounting, and damages, alleging that the Memorandum of Agreement and the Dacion in
Payment executed are void for being pactum commissorium. 7

Petitioners alleged that the loans extended to them from July 14, 1999 to March 20, 2000
were founded on several uniform promissory notes, which provided for 3.5% monthly
interest rates, 5% penalty per month on the total amount due and demandable, and a
further sum of 25% attorney's fees thereon, 8 and in addition, respondent exacted certain
sums denominated as "EVAT/AR". 9 Petitioners decried these additional charges as "illegal,
iniquitous, unconscionable, and revolting to the conscience as they hardly allow any
borrower any chance of survival in case of default." 10

Petitioners further alleged that they had previously made payments on their loan accounts,
but because of the illegal exactions thereon, the total balance appears not to have moved at
all, hence, accounting was in order. 11

Petitioners thus prayed for judgment:

25
a) Declaring the Real Estate Mortgage Contract and its amendments . . . as null and void
and without legal force and effect for having been renounced, abandoned, and given up;

b) Declaring the "Memorandum of Agreement" . . . and "Dacion in Payment" . . . as null and

void for being pactum commissorium;

c) Declaring the interests, penalties, Evat [sic] and attorney's fees assessed and loaded into
the loan accounts of the plaintiffs with defendant as unjust, iniquitous, unconscionable
and illegal and therefore, stricken out or set aside;

d) Ordering an accounting on plaintiffs' loan accounts to determine the true and correct
balances on their obligation against legal charges only; and

e) Ordering defendant to [pay] to the plaintiffs:

e.1 Moral damages in an amount not less than P100,000.00 and exemplary damages of
P50,000.00;

e.2 Attorney's fees in the amount of P50,000.00 plus P1,000.00 appearance fee per hearing;
and

e.3 The cost of suit. 12

as well as other just and equitable reliefs.

In its Answer with Counterclaim, 13 respondent maintained the legality of its transactions
with petitioners, alleging that: CaEIST

xxx xxx xxx

If the voluntary execution of the Memorandum of Agreement and Dacion in Payment

Agreement novated the Real Estate Mortgage then the allegation of Pactum Commissorium
has no more legal leg to stand on;

The Dacion in Payment Agreement is lawful and valid as it is recognized . . . under Art.
1245 of the Civil Code as a special form of payment whereby the debtor-Plaintiffs alienates
their property to the creditor-Defendant in satisfaction of their monetary obligation;

The accumulated interest and other charges which were computed for more than two (2)
years would stand reasonable and valid taking into consideration [that] the principal loan is
P4,000,000 and if indeed it became beyond the Plaintiffs' capacity to pay then the fault is
attributed to them and not the Defendant[.]14

26
After pre-trial, the initial hearing of the case, originally set on December 11, 2002, was
reset several times due to, among other things, the parties' efforts to settle the case
amicably. 15

During the scheduled initial hearing of May 7, 2003, the RTC issued the following order:

Considering that the plaintiff Wilfredo Ong is not around on the ground that he is in
Manila and he is attending to a very sick relative, without objection on the part of the
defendant's counsel, the initial hearing of this case is reset to June 18, 2003 at 10:00
o'clock in the morning. DSATCI

Just in case [plaintiff's counsel] Atty. Concepcion cannot present his witness in the person
of Mr. Wilfredo Ong in the next scheduled hearing, the counsel manifested that he will
submit the case for summary judgment. 16 (Underscoring supplied)

It appears that the June 18, 2003 setting was eventually rescheduled to February 11, 2004
at which both counsels were present 17 and the RTC issued the following order:

The counsel[s] agreed to reset this case on April 14, 2004, at 10:00 o'clock in the morning.
However, the counsels are directed to be ready with their memorand[a] together with all the
exhibits or evidence needed to support their respective positions which should be the basis
for the judgment on the pleadings if the parties fail to settle the case in the next scheduled
setting. ESTCHa

xxx xxx xxx 18 (Underscoring supplied)

At the scheduled April 14, 2004 hearing, both counsels appeared but only the counsel of
respondent filed a memorandum. 19

By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, finding on the basis of the
pleadings that there was no pactum commissorium, dismissed the complaint. 20

On appeal, 21 the Court of Appeals 22 noted that:

. . . [W]hile the trial court in its decision stated that it was rendering judgment on the
pleadings, . . . what it actually rendered was a summary judgment. A judgment on the
pleadings is proper when the answer fails to tender an issue, or otherwise admits the
material allegations of the adverse party's pleading. However, a judgment on the pleadings
would not have been proper in this case as the answer tendered an issue, i.e. the validity of
the MOA and DPA. On the other hand, a summary judgment may be rendered by the court
if the pleadings, supporting affidavits, and other documents show that, except as to the
amount of damages, there is no genuine issue as to any material fact. 23
27
Nevertheless, finding the error in nomenclature "to be mere semantics with no bearing on
the merits of the case", 24 the Court of Appeals upheld the RTC decision that there was
no pactum commissorium. 25

Their Motion for Reconsideration 26 having been denied, 27 petitioners filed the instant
Petition for Review on Certiorari, 28 faulting the Court of Appeals for having committed a
clear and reversible error:

I. . . . WHEN IT FAILED AND REFUSED TO APPLY PROCEDURAL REQUISITES WHICH

WOULD WARRANT THE SETTING ASIDE OF THE SUMMARY JUDGMENT IN VIOLATION
OF APPELLANTS' RIGHT TO DUE PROCESS;

II. . . . WHEN IT FAILED TO CONSIDER THAT TRIAL IN THIS CASE IS NECESSARY

BECAUSE THE FACTS ARE VERY MUCH IN DISPUTE;

III. . . . WHEN IT FAILED AND REFUSED TO HOLD THAT THE MEMORANDUM OF

AGREEMENT (MOA) AND THE DACION EN PAGO AGREEMENT (DPA) WERE DESIGNED
TO CIRCUMVENT THE LAW AGAINST PACTUM COMMISSORIUM; and

IV. . . . WHEN IT FAILED TO CONSIDER THAT THE MEMORANDUM OF AGREEMENT

(MOA) AND THE DACION EN PAGO (DPA) ARE NULL AND VOID FOR BEING CONTRARY TO
LAW AND PUBLIC POLICY. 29

The petition is meritorious.

Both parties admit the execution and contents of the Memorandum of Agreement and
Dacion in Payment. They differ, however, on whether both contracts constitutepactum
commissorium or dacion en pago. cAIDEa

This Court finds that the Memorandum of Agreement and Dacion in Payment
constitute pactum commissorium, which is prohibited under Article 2088 of the Civil Code
which provides:

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void."

The elements of pactum commissorium, which enables the mortgagee to acquire ownership
of the mortgaged property without the need of any foreclosure proceedings, 30 are: (1) there
should be a property mortgaged by way of security for the payment of the principal
obligation, and (2) there should be a stipulation for automatic appropriation by the creditor
of the thing mortgaged in case of non-payment of the principal obligation within the
stipulated period. 31
28
In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no
provisions for foreclosure proceedings nor redemption. Under the Memorandum of
Agreement, the failure by the petitioners to pay their debt within the one-year period gives
respondent the right to enforce the Dacion in Payment transferring to it ownership of the
properties covered by TCT No. 297840. Respondent, in effect, automatically acquires
ownership of the properties upon petitioners' failure to pay their debt within the stipulated
period. ASEIDH

Respondent argues that the law recognizes dacion en pago as a special form of payment
whereby the debtor alienates property to the creditor in satisfaction of a monetary
obligation. 32 This does not persuade. In a true dacion en pago, the assignment of the
property extinguishes the monetary debt. 33 In the case at bar, the alienation of the
properties was by way of security, and not by way of satisfying the debt. 34 The Dacion in
Payment did not extinguish petitioners' obligation to respondent. On the contrary, under
the Memorandum of Agreement executed on the same day as the Dacion in Payment,
petitioners had to execute a promissory note for P5,916,117.50 which they were to pay
within one year. 35

Respondent cites Solid Homes, Inc. v. Court of Appeals 36 where this Court upheld a
Memorandum of Agreement/Dacion en Pago. 37 That case did not involve the issue
ofpactum commissorium. 38

That the questioned contracts were freely and voluntarily executed by petitioners and
respondent is of no moment, pactum commissorium being void for being prohibited by
law. 39

Respecting the charges on the loans, courts may reduce interest rates, penalty charges, and
attorney's fees if they are iniquitous or unconscionable. 40

This Court, based on existing jurisprudence, 41 finds the monthly interest rate of 3.5%, or
42% per annum unconscionable and thus reduces it to 12% per annum. This Court finds
too the penalty fee at the monthly rate of 5% (60% per annum) of the total amount due and
demandable principal plus interest, with interest not paid when due added to and
becoming part of the principal and likewise bearing interest at the same rate, compounded
monthly 42 unconscionable and reduces it to a yearly rate of 12% of the amount due, to
be computed from the time of demand. 43 This Court finds the attorney's fees of 25% of the
principal, interests and interests thereon, and the penalty fees unconscionable, and thus
reduces the attorney's fees to 25% of the principal amount only. 44
29
The prayer for accounting in petitioners' complaint requires presentation of evidence, they
claiming to have made partial payments on their loans, vis a vis respondent's denial
thereof. 45 A remand of the case is thus in order. TDCAIS

Prescinding from the above disquisition, the trial court and the Court of Appeals erred in
holding that a summary judgment is proper. A summary judgment is permitted only if
there is no genuine issue as to any material fact and a moving party is entitled to a
judgment as a matter of law. 46 A summary judgment is proper if, while the pleadings on
their face appear to raise issues, the affidavits, depositions, and admissions presented by
the moving party show that such issues are not genuine. 47 A genuine issue, as opposed to
a fictitious or contrived one, is an issue of fact that requires the presentation of
evidence. 48 As mentioned above, petitioners' prayer for accounting requires the
presentation of evidence on the issue of partial payment.

But neither is a judgment on the pleadings proper. A judgment on the pleadings may be
rendered only when an answer fails to tender an issue or otherwise admits the material
allegations of the adverse party's pleadings. 49 In the case at bar, respondent's Answer with
Counterclaim disputed petitioners' claims that the Memorandum of Agreement and Dation
in Payment are illegal and that the extra charges on the loans are
unconscionable. 50 Respondent disputed too petitioners' allegation of bad faith.51

WHEREFORE, the challenged Court of Appeals Decision is REVERSED and SET ASIDE.
The Memorandum of Agreement and the Dacion in Payment executed by petitioner
spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong and
respondent Roban Lending Corporation on February 12, 2001 are declared NULL AND
VOID for beingpactum commissorium. ECDAcS

In line with the foregoing findings, the following terms of the loan contracts between the
parties are MODIFIED as follows:

1. The monthly interest rate of 3.5%, or 42% per annum, is reduced to 12% per annum;

2. The monthly penalty fee of 5% of the total amount due and demandable is reduced to
12% per annum, to be computed from the time of demand; and

3. The attorney's fees are reduced to 25% of the principal amount only. cHCaIE

Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of receiving
evidence on petitioners' prayer for accounting.

SO ORDERED.

30
Pledge
FIRST DIVISION

[G.R. No. L-49120. June 30, 1988.]

ESTATE OF GEORGE LITTON petitioner, vs. CIRIACO

B. MENDOZA and COURT OF APPEALS, respondents.

Ruben G. Bala for respondent Mendoza.

DECISION

GANCAYCO, J p:

This petition for review presents two (2) main issues, to wit: (1) Can a plaintiff in a case,
who had previously assigned in favor of his creditor his litigated credit in said case, by a
deed of assignment which was duly submitted to the court, validly enter into a compromise
agreement thereafter releasing the defendant therein from his claim without notice to his
assignee? and (2) Will such previous knowledge on the part of the defendant of the
assignment made by the plaintiff estop said defendant from invoking said compromise as a
ground for dismissal of the action against him?

The present case stemmed from Civil Case No. Q-8303 1 entitled "Alfonso Tan vs. Ciriaco
B. Mendoza," an action for the collection of a sum of money representing the value of two
(2) checks which plaintiff Tan claims to have been delivered to him by defendant Mendoza,
private respondent herein, by way of guaranty with a commission.

31
The record discloses that the Bernal spouses 2 are engaged in the
manufacture of embroidery, garments and cotton materials. Sometime in September 1963,
C.B.M. Products, 3 with Mendoza as president, offered to sell to the Bernals textile cotton
materials and, for this purpose, Mendoza introduced the Bernals to Alfonso Tan. Thus, the
Bernals purchased on credit from Tan some cotton materials worth P80,796.62,
payment of which was guaranteed by Mendoza. Thereupon, Tan delivered the said cotton
materials to the Bernals. In view of the said arrangement, on November 1963, C.B.M.
Products, through Mendoza, asked and received from the Bernals PBTC Check No. 626405
for P80,796.62 dated February 20, 1964 with the understanding that the said check will
remain in the possession of Mendoza until the cotton materials are finally manufactured
into garments after which time Mendoza will sell the finished products for the Bernals.
Meanwhile, the said check matured without having been cashed and Mendoza demanded
the issuance of another check 4 in the same amount without a date.

On the other hand, on February 28, 1964, defendant Mendoza issued two (2) PNB
checks 5 in favor of Tan in the total amount of P80,796.62. He informed the Bernals ofthe
same and told them that they are indebted to him and asked the latter to sign an
instrument whereby Mendoza assigned the said amount to Insular Products Inc. Tan had
the two checks issued by Mendoza discounted in a bank. However, the said checks were
later returned to Tan with the words stamped "stop payment" which appears to have been
ordered by Mendoza for failure of the Bernals to deposit sufficient funds for the check that
the Bernals issued in favor of Mendoza. cdrep

Hence, as adverted to above, Tan brought an action against Mendoza docketed as Civil Case
No. Q-8303 6 while the Bernals brought an action for interpleader docketed as Civil Case
No. 56850 7 for not knowing whom to pay. While both actions were pending resolution by
the trial court, on March 20, 1966, Tan assigned in favor of GeorgeLitton, Sr. his litigatious
credit * in Civil Case No. 56850 against Mendoza duly submitted to the court, with notice to
the parties. 8 The deed of assignment was framed in the following tenor:

"DEED OF ASSIGNMENT

I, ALFONSO TAN, of age, Chinese, married to UY CHAY UA, residing at No. 6 Kanlaon,
Quezon City, doing business under the name and style ALTA COMMERCIAL by
way of securing or guaranteeing my obligation to Mr. GEORGE LITTON, SR., do by these
presents CEDE, ASSIGN, TRANSFER AND CONVEY unto the said Mr. GEORGE LITTON,
SR., my claim against C.B.M. Products, Inc., personally guaranteed by Mr. Ciriaco
B. Mendoza, in the amount of Eighty-Thousand Seven Hundred Ninety Six Pesos and Sixty-
two centavos (P80,796.62) the balance of which, in principal, and excluding, interests,

32
costs, damages and attorney's fees now stands at P76,000.00, P4,796.62, having already
been received by the assignor on December 23, 1965, pursuant to the order of the court in
Civil Case No. 56850, C.F.I., Manila, authorizing Alfonso Tan to withdraw the
amount of P4,796.62 then on deposit with the court. All rights, and interests in said net
amount, plus interests and costs, and less attorney's fees, in case the amount allowed
therefor be less than the amounts claimed in the relief in Civil Case 56850 (C.F.I., Manila)
and Q-8503 (C.F.I., Quezon City) are by these presents covered by this assignment.

I further undertake to hold in trust any and all amounts which may hereafter be realized
from the aforementioned cases for the ASSIGNEE, Mr. GEORGE LITTON, SR., and to turn
over to him such amounts in application to my liability to him, as his interest may then
show, and I further undertake to cooperate towards the successful prosecution of the
aforementioned cases making available myself, as witness or otherwise, as well as any and
all documents thereto appertaining . . ." 9

After due trial, the lower court ruled that the said PNB checks were issued by Mendoza in
favor of Tan for a commission in the sum of P4,847.79 and held Mendoza liable as a drawer
whose liability is primary and not merely as an indorser and thus directed Mendoza to pay
Tan the sum of P76,000.00, the sum still due, plus damages and attorney's fees. 10

Mendoza seasonably filed an appeal with the Court of Appeals, docketed as C.A. G.R. No.
41900-R, arguing in the main that his liability is one of an accommodation party and not
as a drawer.

On January 27, 1977, the Court of Appeals rendered a decision affirming in toto the
decision of the lower court. 11

Meanwhile, on February 2, 1971, pending the resolution of the said

appeal, Mendoza entered into a compromise agreement with Tan wherein the latter
acknowledged that all his claims against Mendoza had been settled and that by
reason of said settlement both parties mutually waive, release and quit whatever claim,
right or cause ofaction one may have against the other, with a provision that the said
compromise agreement shall not in any way affect the right of Tan to enforce by appropriate
action his claims against the Bernal spouses. 12

On February 25, 1977, Mendoza filed a motion for reconsideration praying that the
decision of January 27, 1977 be set aside, principally anchored upon the ground that a
compromise agreement was entered into between him and Tan which in effect
released Mendoza from liability. Tan filed an opposition to this motion claiming that the
compromise agreement is null and void as he was not properly represented by his
33
counsel of record Atty. Quiogue, and was instead represented by a certain Atty. Laberinto,
and principally because of the deed of assignment that he executed in
favor of George Litton, Sr. alleging that with such, he has no more right to alienate said
credit. LLphil

While the case was still pending reconsideration by the respondent court, Tan, the assignor,
died leaving no properties whatever to satisfy the claim of the estate of the late
George Litton, Sr.

In its Resolution dated August 30, 1977, 13 the respondent court set aside its decision and
approved the compromise agreement.

As to the first ground invoked by Tan, now deceased, the respondent court ruled that the
non-intervention of Tan's counsel of record in the compromise agreement does not affect
the validity of the settlement on the ground that the client had an undoubted right to
compromise a suit without the intervention of his lawyer, citing Aro vs. Nanawa. 14

As to the second ground, respondent court ruled as follows:

". . . it is relevant to note that Paragraph 1 of the deed of assignment states that the
cession, assignment, transfer, and conveyance by Alfonso Tan was only by way of securing
or guaranteeing his obligation to GEORGE LITTON, SR.

"Hence, Alfonso Tan retained possession and dominion of the credit (Par. 2, Art. 2085, Civil
Code).

"'Even considered as a litigatious credit,' which indeed characterized the claims

herein of Alfonso Tan, such credit may be validly alienated by Tan (Art. 1634. Civil Code).

"Such alienation is subject to the remedies of Litton under Article 6 of the Civil Code,
whereby the waiver, release, or quit-claim made by plaintiff-appellee Alfonso Tan in
favor of defendant-appellant Ciriaco B. Mendoza, if proven prejudicial to George Litton, Sr.
as assignee under the deed of assignment, may entitleLitton to pursue his remedies against
Tan.

"The alienation of a litigatious credit is further subject to the debtor's right of redemption
under Article 1634 of the Civil Code."

As mentioned earlier, the assignor Tan died pending resolution of the motion for
reconsideration. The estate of George Litton, Sr., petitioner herein, as represented by
James Litton, son of George Litton, Sr. and administrator 15 of the former's estate, is now

34
appealing the said resolution to this Court as assignee of the amount sued in Civil Case No.
Q-8303, in relation to Civil Case No. 56850.

Before resolving the main issues aforementioned, the question of legal personality of herein
petitioner to bring the instant petition for review, must be resolved.

As a rule, the parties in an appeal through a review on certiorari are the same original
parties to the case. 16 If after the rendition of judgment the original party dies, he should
be substituted by his successor-in-interest. In this case, it is not disputed that no proper
substitution of parties was done. This notwithstanding, the Court so holds that the same
cannot and will not materially affect the legal right of herein petitioner in instituting the
instant petition in view of the tenor of the deed of assignment, particularly paragraph two
thereof 17 wherein the assignor, Tan, assumed the responsibility to prosecute the case and
to turn over to the assignee whatever amounts may be realized in the prosecution of the
suit.

We note that private respondent moved for the dismissal of the appeal without notifying
the estate of George Litton, Sr. whereas the former was fully aware of the fact that the
said estate is an assignee of Tan's right in the case litigated. 18 Hence, if herein petitioner
failed to observe the proper substitution of parties when Alfonso Tan died during the
pendency of private respondent's motion for reconsideration, no one is to blame but private
respondent himself. Moreover, the right of the petitioner to bring the present petition is well
within the concept of a real party-in-interest in the subject matter of the action. Well-settled
is the rule that a real party-in-interest is a party entitled to the avails of the suit or the
party who would be injured by the judgment. 19 We see the petitioner well within the latter
category. LexLib

Hence, as the assignee and successor-in-interest of Tan, petitioner has the personality to
bring this petition in substitution of Tan.

Now, the resolution of the main issues.

The purpose of a compromise being to replace and terminate controverted claims, 20 courts
encourage the same. A compromise once approved by final order of thecourt has the
force of res judicata between parties and should not be disturbed except for vices of consent
or forgery. 21

35
In this case, petitioner seeks to set aside the said compromise on the ground that previous
thereto, Tan executed a deed of assignment in favor of George Litton, Sr. involving the same
litigated credit.

We rule for the petitioner. The fact that the deed of assignment was done by way of securing
or guaranteeing Tan's obligation in favor of George Litton, Sr., as observed by the
appellate court, will not in any way alter the resolution on the matter. The validity of the
guaranty or pledge in favor of Litton has not been questioned. Our examination of the
deed of assignment shows that it fulfills the requisites of a valid pledge or
mortgage. 22 Although it is true that Tan may validly alienate the litigatious credit as ruled
by the appellate court, citing Article 1634 of the Civil Code, said provision should not be
taken to mean as a grant of an absolute right on the part of the assignor Tan to
indiscriminately dispose of the thing or the right given as security. The Court rules that the
said provision should be read in consonance with Article 2097of the same
code. 23 Although the pledgee or the assignee, Litton, Sr. did not ipso facto become the
creditor of private respondent Mendoza, the pledge being valid, the incorporeal right
assigned by Tan in favor of the former can only be alienated by the latter with due notice to
and consent of Litton, Sr. or his duly authorized representative. To allow the assignor to
dispose of or alienate the security without notice and consent of the assignee will render
nugatory the very purpose of a pledge or an assignment of credit.

Moreover, under Article 1634, 24 the debtor has a corresponding obligation to reimburse
the assignee, Litton, Sr. for the price he paid or for the value given as consideration for the
deed of assignment. Failing in this, the alienation of the litigated credit made by Tan in
favor of private respondent by way of a compromise agreement does not bind the assignee,
petitioner herein.

Indeed, a painstaking review of the record of the case reveals that private respondent has,
from the very beginning, been fully aware of the deed of assignment executed by Tan in
favor of Litton, Sr. as said deed was duly submitted to Branch XI of the then Court of First
Instance of Manila in Civil Case No. 56850 (in relation to Civil Case No. Q-8303) where
C.B.M. Products is one of the defendants and the parties were notified through their
counsel. 25 As earlier mentioned, private respondent herein is the president of C.B.M.
Products, hence, his contention that he is not aware of the said deed of assignment
deserves scant consideration from the Court. Petitioner pointed out at the same time that
private respondent together with his counsel were served with a copy of the
deed of assignment which allegation remains uncontroverted. Having such knowledge
thereof, private respondent is estopped from entering into a compromise agreement
involving the same litigated credit without notice to and consent of the assignee, petitioner
36
herein. More so, in the light of the fact that no reimbursement has ever been made in
favor of the assignee as required under Article 1634. Private respondent acted in bad faith
and in connivance with assignor Tan so as to defraud the petitioner in entering into the
compromise agreement. LibLex

WHEREFORE, the petition is GRANTED. The assailed resolution of the

respondent court dated August 30, 1977 is hereby SET ASIDE, the said compromise
agreement being null and void, and a new one is hereby rendered reinstating its decision
dated January 27, 1977, affirming in toto the decision of the lower court. This decision is
immediately executory. No motion for extension of time to file a motion for reconsideration
will be granted.

SO ORDERED.

37
THIRD DIVISION

[G.R. No. 53955. January 13, 1989.]

THE MANILA BANKING CORPORATION, plaintiff-appellee, vs. ANASTACIO TEODORO JR.

and GRACE ANNA TEODORO, defendants-appellants.

Formoso & Quimbo Law Office for plaintiff-appellee.

Serafin P. Rivera for defendants-appellants.

SYLLABUS

1. CIVIL LAW; CIVIL CODE; OBLIGATIONS AND CONTRACTS; CHARACTER OF

TRANSACTION, DETERMINED NOT BY THE LANGUAGE BUT BY THE INTENTION. The
character of the transactions between the parties is not, however, determined by the
language used in the document but by their intention.

2. ID.; ID.; ID.; NOVATIONS; EXTINGUISHMENT OF OBLIGATION BY ANOTHER WHICH

SUBSTITUTES THE SAME; REQUISITE. Moreover, in order that an obligation may be
extinguished by another which substitutes the same, it is imperative that it be so declared
in unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other (Article 1292, New Civil Code).

3. ID.; ID.; PLEDGE; PRESUMPTION IN FAVOR OF PLEDGE. In case of doubt as to

whether a transaction is a pledge or a dation in payment, the presumption is in favor of
pledge, the latter being the lesser transmission of rights and interests (Lopez v. Court of
Appeals, supra).

4. ID.; ID.; ID.; ESSENCE. It is of course of the essence of a contract of pledge or

mortgage that when the principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor (Article 2087, New Civil
Code).

FELICIANO, J.; CONCURRING:

1. CIVIL LAW; CIVIL CODE; OBLIGATIONS AND CONTRACT; INTENT OF THE PARTIES; TO
BE DETERMINED IN THE FIRST INSTANCE BY THE LANGUAGE USED. I would merely
wish to add a few lines in respect of the point made by Bidin, J., that "the character of the

38
transactions between the parties is not, however, determined by the language used in the
document but by their intention." This statement is basically not exceptionable, so far as it
goes. It might, however, be borne in mind that the intent of the parties to the transaction is
to be determined, in the first instance, by the very language which they used.

2. ID.; ID.; ID.; LANGUAGE SHOWS TRANSACTION IN CASE AT BAR IS FOR A LIMITED
PURPOSE. The point that appears to me to be worth making is that although in its form,
the deed of assignment of receivables partakes of the nature of a complete alienation of the
receivables assigned, such form should be taken in conjunction with, and indeed must be
qualified and controlled by, other language showing an intent of the parties that title to the
receivables shall pass to the assignee for the limited purpose of securing another,
principal; obligation owed by the assignor to the assignee. Title moves from assignor to
assignee but that title is defeasible being designed to collateralize the principal obligation.
Operationally, what this means is that the assignee is burdened with an obligation of taking
the proceeds of the receivables assigned and applying such proceeds to the satisfaction of
the principal obligation and returning any balance remaining thereafter to the assignor.

3. ID.; ID.; ID.; PLEDGE; PACTUM COMMISORIUM; PROHIBITED. The parties gaved the
deed of assignment the form of an absolute conveyance of title over the receivables
assigned, essentially for the convenience of the assignee. Without such formally unlimited
conveyance of title, the assignee would have to treat the deed of assignment as no more
than a deed of pledge or of chattel mortgage. In other words, in such hypothetical case,
should the assignee seek to realize upon the security given to him through the deed of
assignment (which would then have to comply with the documentation and registration
requirements of a pledge or chattel mortgage), the assignee would have to foreclose upon
the securities or credits assigned and place them on public sale and there acquire the
same. It should be recalled that under the principle which forbids a pactum
commisorium Article 2088, Civil Code), a mortgagee or pledgee is prohibited from simply
taking and appropriating the personal property turned over to him as security for the
payment of a principal obligation. A deed of assignment by way of security avoids the
necessity of a public sale imposed by the rule on pactum commisorium, by in effect placing
the sale of the collateral up front.

4. ID.; ID.; TO QUALIFY DEED OF ASSIGNMENT AS A SECURITY ARRANGEMENT,

LANGUAGE TO THAT EFFECT MUST BE FOUND IN THE DOCUMENT. The foregoing is
applicable where, as in the present instance, the deed of assignment of receivables
combines elements of both a complete or absolute alienation of the credits being assigned
and a security arrangement to assure payment of a principal obligation. Where the second
element is absent, that is, where there is nothing to indicate that the parties intended the
39
deed of assignment to function as a security device, it would of course follow that the
simple absolute conveyance embodied in the deed of assignment would be operative; the
assignment would constitute essentially a mode of payment or dacion en pago. Put a little
differently, in order that a deed of assignment of receivables which is in form an absolute
conveyance of title to the credits being assigned, may be qualified and treated as a security
arrangement, language to such effect must be found in the document itself and that
language, precisely, is embodied in the deed of assignment in the instant case. Finally, it
might be noted that that deed simply follows a form in standard use in
commercial banking.

DECISION

BIDIN, J p:

This is an appeal from the decision ** of the Court of First Instance of Manila, Branch XVII
in Civil Case No. 78178 for collection of sum of money based on promissory notes executed
by the defendants-appellants in favor of plaintiff-appellee bank. The dispositive portion of
the appealed decision (Record on Appeal, p. 33) reads as follows:

"WHEREFORE judgment is hereby rendered (a) sentencing defendants,

Anastacio Teodoro, Jr. and Grace Anna Teodoro jointly and severally, to pay plaintiff the
sum of P15,037.11 plus 12% interest per annum from September 30, 1969 until fully paid,
in payment of Promissory Notes No. 11487, plus the sum of P1,000.00 as attorney's fees;
and (b) sentencing defendant Anastacio Teodoro, Jr. to pay plaintiff the sum of P8,934.74,
plus interest at 12% per annum from September 30, 1969 until fully paid, in payment of
Promissory Notes Nos. 11515 and 11699, plus the sum of P500.00 a attorney's fees.

With Costs against defendants."

The facts of the case as found by the trial court are as follows:

"On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and severally,
executed in favor of plaintiff a Promissory Note (No. 11487) for the sum of P10,420.00
payable in 120 days, or on August 25, 1966, at 12% interest per annum. Defendants failed
to pay the aid amount inspite of repeated demands and the obligation as of September 30,
1969 stood at P15,137.11 including accrued interest and service charge.

On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father) and
Anastacio Teodoro, Jr. (Son) executed in favor of plaintiff two Promissory Notes (Nos. 11515
and 11699) for P8,000.00 and P1,000.00 respectively, payable in 120 days at 12% interest
per annum. Father and Son made a partial payment on the May 3, 1966 Promissory Note
40
but none on the June 20, 1966 Promissory Note, leaving still an unpaid balance of
P8,934.74 as of September 30, 1969 including accrued interest and service charge. LexLib

The three Promissory Notes stipulated that any interest due if not paid at the end of every
month shall be added to the total amount then due, the whole amount to bear interest at
the rate of 12% per annum until fully paid; and in case of collection through an attorney-
at-law, the makers shall, jointly and severally, pay 10% of the amount over-due as
attorney's fees, which in no case shall be less than P200.00.

It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed of
Assignment of Receivables from the Emergency Employment Administration in the sum of
P44,635.00. The Deed of Assignment provided that it was for and in consideration of
certain credits, loans, overdrafts and other credit accommodations extended to defendants
as security for the payment of said sum and the interest thereon, and that defendants do
hereby remise, release and quitclaim all its rights, title, and interest in and to the accounts
receivables.' Further:

'(1) The title and right of possession to said accounts receivable is to remain in the
assignee, and it shall have the right to collect the same from the debtor, and whatsoever the
Assignor does in connection with the collection of said accounts, it agrees to do as agent
and representative of the Assignee and in trust for said Assignee . . .;

(6) The Assignor guarantees the existence and legality of said accounts receivable, and the
due and punctual payment thereof unto the assignee, . . . on demand, . . . and further, that
Assignor warrants the solvency and credit worthiness of each and every account.

(7) The Assignor does hereby guarantee the payment when due on all sums payable under
the contracts giving rise to the accounts receivable . . . including reasonable attorney's fees
in enforcing any rights against the debtors of the assigned accounts receivable and will pay
upon demand, the entire unpaid balance of said contract in the event of non payment by
the said debtors of any monthly sum at its due date or of any other default by said debtors .
..

(9) . . . This Assignment shall also stand as a continuing guarantee for any and all
whatsoever there is or in the future there will be justly owing from the Assignor to the
Assignee . . .

In their stipulations of Fact, it is admitted by the parties that plaintiff extended loans to
defendants on the basis and by reason of certain contracts entered into by the defunct
Emergency Employment Administration (EEA) with defendants for the fabrication of fishing

41
boats, and that the Philippine Fisheries Commission succeeded the EEA after its abolition;
that non-payment of the notes was due to the failure of the Commission to pay defendants
after the latter had complied with their contractual obligations; and that the President of
plaintiff Bank took steps to collect from the Commission, but no collection was effected.

For failure of defendants to pay the sums due on the Promissory Note, this action was
instituted on November 13, 1969, originally against the Father, Son, and the latter's wife.
Because the Father died, however, during the pendency of the suit, the case as against him
was dismissed under the provisions of Section 21, Rule 3 of the Rules of Court. The action,
then is against defendant Son and his wife for the collection of the sum of P15,037.11 on
Promissory Note No. 14487; and against defendant Son for the recovery of P8,394.74 on
Promissory Notes Nos. 11515 and 11699, plus interest on both amounts at 12% per annum
from September 30, 1969 until fully paid, and 10% of the amounts due as attorney's fees.

Neither of the parties presented any testimonial evidence and submitted the case for
decision based on their Stipulations of Fact and on their documentary evidence.

The issues, as defined by the parties are: (1) whether or not plaintiff's claim is already
considered paid by the Deed of Assignment of Receivables by the Son; and (2) whether or
not it is plaintiff who should directly sue the Philippine Fisheries Commission for
collection." (Record on Appeal, p. 29-32).

On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8,
1972, defendants filed a motion for reconsideration (Record on Appeal, p. 33) which was
denied by the trial court in its order of June 14, 1972 (Record on Appeal, p. 37). On June
23, 1972, defendants filed with the lower court their notice of appeal together with the
appeal bond (Record on Appeal, p. 38). The record of appeal was forwarded to the Court of
Appeals on August 22, 1972 (Record on Appeal, p. 42). LLpr

In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment
of error, that is

"THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING OF THE

CONTRACT BETWEEN THE PARTIES, IN VIOLATION OF LAW; HENCE, TANTAMOUNT TO
LACK OR EXCESS OF JURISDICTION.'

As the appeal involves a pure question of law, the Court of Appeals, in its resolution
promulgated on March 6, 1980, certified the case to this Court (Rollo, p. 24). The record on
Appeal was forwarded to this Court on March 31, 1980 (Rollo, p. 1).
42
In the resolution of May 30, 1980, the First Division of this Court ordered that the case be
docketed and declared submitted for decision (Rollo, p. 33).

On March 7, 1988, considering the length of time that the case has been pending with the
Court and to determine whether supervening events may have rendered the case moot and
academic, the Court resolved (1) to require the parties to MOVE IN THE PREMISES within
thirty days from notice, and in case they fail to make the proper manifestation within the
required period, (2) to consider the case terminated and closed with the entry of judgment
accordingly made thereon (Rollo, p. 40).

On April 27, 1988, appellee moved for a resolution of the appeal/review interposed by
defendants-appellants (Rollo, p. 41).

The major issues raised in this case are as follows: (1) whether or not the assignment of
receivables has the effect of payment of all the loans contracted by appellants from appellee
bank; and (2) whether or not appellee bank must first exhaust all legal remedies against the
Philippine Fisheries Commission before it can proceed against appellants for collections of
loan under the promissory notes which are plaintiff's bases in the action for collection in
Civil Case No. 78178.

"Assignment of credit is an agreement by virtue of which the owner of a credit, known as

the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and
without the need of the consent of the debtor, transfers his credit and its accessory rights
to another, known as the assignee, who acquires the power to enforce it to the same extent
as the assignor could have enforced it against the debtor . . . It may be in the form of a sale,
but at times it may constitute a dation in payment, such as when a debtor, in order to
obtain a release from his debt, assigns to his creditor a credit he has against a third person,
or it may constitute a donation as when it is by gratuitous title; or it may even be merely by
way of guaranty, as when the creditor gives as a collateral, to secure his own debt in favor of
the assignee, without transmitting ownership. The character that it may assume
determines its requisites and effects, its regulation, and the capacity of the parties to
execute it; and in every case, the obligations between assignor and assignee will depend
upon the judicial relation which is the basis of the assignment: (Tolentino, Commentaries
and Jurisprudence on the Civil Code of the Philippines, Vol. 5, pp. 165-166).

There is no question as to the validity of the assignment of receivables executed by

appellants in favor of appellee bank. The issue is with regard to its legal effects.

43
It is evident that the assignment of receivables executed by appellants on January 24, 1964
did not transfer the ownership of the receivables to appellee bank and release appellants
from their loans with the bank incurred under promissory notes Nos. 11487, 11515 and
11699. LLpr

The Deed of Assignment provided that it was for and in consideration of certain credits,
loans, overdrafts, and their credit accommodations in the sum of P10,000.00 extended to
appellants by appellee bank, and as security for the payment of said sum and the interest
thereon; that appellants as assignors, remise, release, and quitclaim to assignee bank all
their rights, title and interest in and to the accounts receivable assigned (1st paragraph). It
was further stipulated that the assignment will also stand as a continuing guaranty for
future loans of appellants to appellee bank and correspondingly the assignment shall also
extend to all the accounts receivable; appellants shall also obtain in the future, until the
consideration on the loans secured by appellants from appellee bank shall have been fully
paid by them (No. 9).

The position of appellants, however, is that the deed of assignment is a quitclaim in

consideration of their indebtedness to appellee bank, not mere guaranty, in view of the
following provisions of the deed of assignment:

". . . the Assignor do hereby remise, release and quit-claim unto said assignee all its rights,
title and interest in the accounts receivable described hereunder." (Emphasis supplied by
appellants, first par., Deed of Assignment)."

". . . that the title and right of possession to said account receivable is to remain in said
assignee and it shall have the right to collect directly from the debtor,and whatsoever the
Assignor does in connection with the collection of said accounts, it agrees to do
so agent and representative of the Assignee and it trust for said Assignee . . . " (Ibid. par. 2
of Deed of Assignment)." (Record on Appeal, p. 27)

The character of the transactions between the parties is not, however, determined by the
language used in the document but by their intention. Thus, the Court, quoting from the
American Jurisprudence (68 2d, Secured Transaction, Section 50) said:

"The characters of the transaction between the parties is to be determined by their

intention, regardless of what language was used or what the form of the transfer was. If it
was intended to secure the payment of money, it must be construed all a pledge. However,
even though a transfer, if regarded by itself, appears to have been absolute, its object and
character might still be qualified and explained by a contemporaneous writing declaring it
to have been a deposit of the property as collateral security. It has been said that a transfer
44
of property by the debtor to a creditor, even if sufficient on its face to make an absolute
conveyance, should be treated as a pledge if the debt continues in existence and is not
discharged by the transfer, and that accordingly, the use of the terms ordinarily importing
conveyance, of absolute ownership will not be given that effect in such a transaction if they
are also commonly used in pledges and mortgages and therefore do not unqualifiedly
indicate a transfer of absolute ownership, in the absence of clear and ambiguous language
or other circumstances excluding an intent to pledge." (Lopez v. Court of Appeals, 114
SCRA 671 [1962]).

Definitely, the assignment of the receivables did not result from a sale transaction. It
cannot be said to have been constituted by virtue of a dation in payment for appellants'
loans with the bank evidenced by promissory note Nos. 11487, 11515 and 11699 which are
the subject of the suit for collection in Civil Case No. 78178. At the time the deed of
assignment was executed, said loans were non-existent yet. The deed of assignment was
executed on January 24, 1964 (Exh. "G"), while promissory note No. 11487 is dated April
25, 1966 (Exh. "A"), promissory note 11515, dated May 3, 1966 (Exh. "B"), promissory note
11699, on June 20, 1966 (Exh. "C"). At most, it was a dation in payment for P10,000.00,
the amount of credit from appellee bank indicated in the deed of assignment. At the time
the assignment was executed, there was no obligation to be extinguished except the
amount of P10,000.00. Moreover, in order that an obligation may be extinguished by
another which substitutes the same, it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on every point incompatible with each
other (Article 1292, New Civil Code). LLjur

Obviously, the deed of assignment was intended as collateral security for the bank loans of
appellants, as a continuing guaranty for whatever sums would be owing by defendants to
plaintiff, as stated in stipulation No. 9 of the deed.

In case of doubt as to whether a transaction is a pledge or a dation in payment, the

presumption is in favor of pledge, the latter being the lesser transmission of rights and
interests (Lopez v. Court of Appeals, supra).

In one case, the assignments of rights, title and interest of the defendant in the contracts of
lease of two buildings as well as her rights, title and interest in the land on which the
buildings were constructed to secure an overdraft from a bank amounting to P110,000.00
which was increased to P150,000.00, then to P165,000.00 was considered by the Court to
be documents of mortgage contracts inasmuch as they were executed to guarantee the
principal obligations of the defendant consisting of the overdrafts or the indebtedness
resulting therefrom. The Court ruled that an assignment to guarantee an obligation is in

45
effect a mortgage and not an absolute conveyance of title which confers ownership on the
assignee (Peoples Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).

II

As to whether or not appellee bank must have to exhaust all legal remedies against the
Philippine Fisheries Commission before it can proceed against appellants for collection of
loans under their promissory notes, must also be answered in the negative.

The obligation of appellants under the promissory notes not having been released by the
assignment of receivables, appellants remain as the principal debtors of appellee bank
rather than mere guarantors. The deed of assignment merely guarantees said obligations.
That the guarantor cannot be compelled to pay the creditor unless the latter has exhausted
all the property of the debtor, and has resorted to all the legal remedies against the debtor,
under Article 2058 of the New Civil Code does not therefore apply to them. It is of course of
the essence of a contract of pledge or mortgage that when the principal obligation becomes
due, the things in which the pledge or mortgage consists may be alienated for the payment
to the creditor (Article 2087, New Civil Code). In the instant case, appellants are both the
principal debtors and the pledgors or mortgagors. Resort to one is, therefore, resort to the
other.

Appellee bank did try to collect on the pledged receivables. As the Emergency Employment
Agency (EEA) which issued the receivables had been abolished, the collection had to be
coursed through the Office of the President which disapproved the same (Record on Appeal,
p. 16). The receivable became virtually worthless leaving appellants' loans from appellee
bank unsecured. It is but proper that after their repeated demands made on appellants for
the settlement of their obligations, appellee bank should proceed against appellants. It
would be an exercise in futility to proceed against a defunct office for the collection of the
receivables pledged.

WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the
trial court is affirmed in toto.

SO ORDERED.

|||

46
THIRD DIVISION

[G.R. No. 156132. February 6, 2007.]

CITIBANK, N.A. (Formerly First National City Bank)

and INVESTORS' FINANCE CORPORATION, doing business under the name and style of
FNCBFinance, petitioners, vs. MODESTA R. SABENIANO, respondent.

RESOLUTION

CHICO-NAZARIO, J p:

On 16 October 2006, this Court promulgated its Decision 1 in the above-entitled case, the
dispositive portion of which reads

IN VIEW OF THE FOREGOING, the instant Petition is PARTLY GRANTED. The assailed
Decision of the Court of Appeals in CA-G.R. No. 51930, dated 26 March 2002, as already
modified by its Resolution, dated 20 November 2002, is hereby AFFIRMED WITH
MODIFICATION, as follows

1. PNs No. 23356 and 23357 are DECLARED subsisting and outstanding.
Petitioner Citibank is ORDERED to return to respondent the principal amounts of the said
PNs, amounting to Three Hundred Eighteen Thousand Eight Hundred Ninety-Seven Pesos
and Thirty-Four Centavos (P318,897.34) and Two Hundred Three Thousand One Hundred
Fifty Pesos (P203,150.00), respectively, plus the stipulated interest of Fourteen and a half
percent (14.5%) per annum, beginning 17 March 1977;

2. The remittance of One Hundred Forty-Nine Thousand Six Hundred Thirty Two US
Dollars and Ninety-Nine Cents (US$149,632.99) from respondent'sCitibank-Geneva
accounts to petitioner Citibank in Manila, and the application of the same against
respondent's outstanding loans with the latter, is DECLAREDillegal, null and void.
Petitioner Citibank is ORDERED to refund to respondent the said amount, or its equivalent
in Philippine currency using the exchange rate at the time of payment, plus the stipulated
interest for each of the fiduciary placements and current accounts involved, beginning 26
October 1979;

3. Petitioner Citibank is ORDERED to pay respondent moral damages in the amount of

Three Hundred Thousand Pesos (P300,000.00); exemplary damages in the amount of Two
Hundred Fifty Thousand Pesos (P250,000.00); and attorney's fees in the amount of Two
Hundred Thousand Pesos (P200,000.00); and

47
4. Respondent is ORDERED to pay petitioner Citibank the balance of her outstanding
loans, which, from the respective dates of their maturity to 5 September 1979, was
computed to be in the sum of One Million Sixty-Nine Thousand Eight Hundred Forty-Seven
Pesos and Forty Centavos (P1,069,847.40), inclusive of interest. These outstanding loans
shall continue to earn interest, at the rates stipulated in the corresponding PNs, from 5
September 1979 until payment thereof.

Subsequent thereto, respondent Modesta R. Sabeniano filed an Urgent Motion to Clarify

and/or Confirm Decision with Notice of Judgment on 20 October 2006; while,
petitioners Citibank, N.A. and FNCB Finance 2 filed their Motion for Partial Reconsideration
of the foregoing Decision on 6 November 2006.

The facts of the case, as determined by this Court in its Decision, may be summarized as
follows.

Respondent was a client of petitioners. She had several deposits and market placements
with petitioners, among which were her savings account with the local branch of
petitioner Citibank (Citibank-Manila); 3 money market placements with petitioner
FNCB Finance; and dollar accounts with the Geneva branch of
petitioner Citibank(Citibank-Geneva). At the same time, respondent had outstanding loans
with petitioner Citibank, incurred at Citibank-Manila, the principal amounts aggregating to
P1,920,000.00, all of which had become due and demandable by May 1979. Despite
repeated demands by petitioner Citibank, respondent failed to pay her outstanding loans.
Thus, petitioner Citibank used respondent's deposits and money market placements to off-
set and liquidate her outstanding obligations, as follows

Respondent's outstanding obligation (principal and interest as of

26 October 1979) P2,156,940.58

Less: Proceeds from respondent's money market placements

with petitioner FNCB Finance (principal and
interest as of 5 September 1979) (1,022,916.66)

Deposits in respondent's bank accounts with petitioner

Citibank (31,079.14)

Proceeds of respondent's money market placements and

dollar accounts with Citibank-Geneva (peso
equivalent as of 26 October 1979) (1,102,944.78)

48
Balance of respondent's obligation P0.00

===========

Respondent, however, denied having any outstanding loans with petitioner Citibank. She
likewise denied that she was duly informed of the off-setting or compensation thereof made
by petitioner Citibank using her deposits and money market placements with petitioners.
Hence, respondent sought to recover her deposits and money market placements. cADEHI

Respondent instituted a complaint for "Accounting, Sum of Money and Damages" against
petitioners, docketed as Civil Case No. 11336, before the Regional Trial Court (RTC) of
Makati City. After trial proper, which lasted for a decade, the RTC rendered a Decision 4 on
24 August 1995, the dispositive portion of which reads

WHEREFORE, in view of all the foregoing, decision is hereby rendered as follows:

(1) Declaring as illegal, null and void the setoff effected by the defendant Bank
[petitioner Citibank] of plaintiff's [respondent Sabeniano] dollar deposit withCitibank,
Switzerland, in the amount of US$149,632.99, and ordering the said defendant
[petitioner Citibank] to refund the said amount to the plaintiff with legal interest at the rate
of twelve percent (12%) per annum, compounded yearly, from 31 October 1979 until fully
paid, or its peso equivalent at the time of payment;

(2) Declaring the plaintiff [respondent Sabeniano] indebted to the defendant Bank
[petitioner Citibank] in the amount of P1,069,847.40 as of 5 September 1979 and ordering
the plaintiff [respondent Sabeniano] to pay said amount, however, there shall be no interest
and penalty charges from the time the illegal setoff was effected on 31 October 1979;

(3) Dismissing all other claims and counterclaims interposed by the parties against each
other.

Costs against the defendant Bank.

All the parties appealed the afore-mentioned RTC Decision to the Court of Appeals,
docketed as CA-G.R. CV No. 51930. On 26 March 2002, the appellate court promulgated its
Decision, 5 ruling entirely in favor of respondent, to wit

Wherefore, premises considered, the assailed 24 August 1995 Decision of the court a quo is
hereby AFFIRMED with MODIFICATION, as follows:

1. Declaring as illegal, null and void the set-off effected by the defendant-appellant Bank of
the plaintiff-appellant's dollar deposit with Citibank, Switzerland, in the amount of

49
US$149,632.99, and ordering defendant-appellant Citibank to refund the said amount to
the plaintiff-appellant with legal interest at the rate of twelve percent (12%) per annum,
compounded yearly, from 31 October 1979 until fully paid, or its peso equivalent at the
time of payment;

2. As defendant-appellant Citibank failed to establish by competent evidence the alleged

indebtedness of plaintiff-appellant, the set-off of P1,069,847.40 in the account of
Ms. Sabeniano is hereby declared as without legal and factual basis;

3. As defendants-appellants failed to account the following plaintiff-appellant's money

market placements, savings account and current accounts, the former is hereby ordered to
return the same, in accordance with the terms and conditions agreed upon by the
contending parties as evidenced by the certificates of investments, to wit:

(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes NNPN No. 22526) issued on
17 March 1977, P318,897.34 with 14.50% interest p.a.;

(ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes NNPN No. 22528) issued on
17 March 1977, P203,150.00 with 14.50 interest p.a.;

(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes NNPN No. 04952), issued on 02
June 1977, P500,000.00 with 17% interest p.a.;

(iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes NNPN No. 04962), issued on 02
June 1977, P500,000.00 with 17% interest per annum;

(v) The Two Million (P2,000,000.00) money market placements of Ms. Sabeniano with the
Ayala Investment & Development Corporation (AIDC) with legal interest at the rate of twelve
percent (12%) per annum compounded yearly, from 30 September 1976 until fully paid;

4. Ordering defendants-appellants to jointly and severally pay the plaintiff-appellant the

sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00) by way of moral damages, FIVE
HUNDRED THOUSAND PESOS (P500,000.00) as exemplary damages, and ONE HUNDRED
THOUSAND PESOS (P100,000.00) as attorney's fees.

Acting on petitioners' Motion for Partial Reconsideration, the Court of Appeals issued a
Resolution, 6 dated 20 November 2002, modifying its earlier Decision, thus

WHEREFORE, premises considered, the instant Motion for Reconsideration is PARTIALLY

GRANTED as Sub-paragraph (V) paragraph 3 of the assailed Decision'sdispositive portion is
hereby ordered DELETED.

50
The challenged 26 March 2002 Decision of the Court is AFFIRMED with MODIFICATION.

Since the Court of Appeals Decision, dated 26 March 2002, as modified by the Resolution
of the same court, dated 20 November 2002, was still principally in favor of respondent,
petitioners filed the instant Petition for Review on Certiorari under Rule 45 of the Revised
Rules of Court. After giving due course to the instant Petition, this Court promulgated on
16 October 2006 its Decision, now subject of petitioners' Motion for Partial Reconsideration.

Among the numerous grounds raised by petitioners in their Motion for Partial
Reconsideration, this Court shall address and discuss herein only particular points that
had not been considered or discussed in its Decision. Even in consideration of these points
though, this Court remains unconvinced that it should modify or reverse in any way its
disposition of the case in its earlier Decision.

As to the off-setting or compensation

of respondent's outstanding loan
balance with her dollar deposits in
Citibank-Geneva

Petitioners' take exception to the following findings made by this Court in its Decision,
dated 16 October 2006, disallowing the off-setting or compensation of the balance of
respondent's outstanding loans using her dollar deposits in Citibank-Geneva

Without the Declaration of Pledge, petitioner Citibank had no authority to demand the
remittance of respondent's dollar accounts with Citibank-Geneva and to apply them to her
outstanding loans. It cannot effect legal compensation under Article 1278 of the Civil Code
since, petitioner Citibank itself admitted thatCitibank-Geneva is a distinct and separate
entity. As for the dollar accounts, respondent was the creditor and Citibank-Geneva is the
debtor; and as for the outstanding loans, petitioner Citibank was the creditor and
respondent was the debtor. The parties in these transactions were evidently not the
principal creditor of each other. DcHaET

Petitioners maintain that respondent's Declaration of Pledge, by virtue of which she

supposedly assigned her dollar accounts with Citibank-Geneva as security for her loans
with petitioner Citibank, is authentic and, thus, valid and binding upon respondent.
Alternatively, petitioners aver that even without said Declaration of Pledge, the off-setting or
compensation made by petitioner Citibank using respondent's dollar accounts
with Citibank-Geneva to liquidate the balance of her outstanding loans withCitibank-Manila

51
was expressly authorized by respondent herself in the promissory notes (PNs) she signed
for her loans, as well as sanctioned by Articles 1278 to 1290 of the Civil Code. This
alternative argument is anchored on the premise that all branches of petitioner Citibank in
the Philippines and abroad are part of a single worldwide corporate entity and share the
same juridical personality. In connection therewith, petitioners deny that they ever
admitted that Citibank-Manila and Citibank-Geneva are distinct and separate entities.

Petitioners call the attention of this Court to the following provision found in all of the
PNs 7 executed by respondent for her loans

At or after the maturity of this note, or when same becomes due under any of the
provisions hereof, any money, stocks, bonds, or other property of any kind whatsoever, on
deposit or otherwise, to the credit of the undersigned on the books of CITIBANK, N.A. in
transit or in their possession, may without notice be applied at the discretion of the said
bank to the full or partial payment of this note.

It is the petitioners' contention that the term "Citibank, N.A." used therein should be
deemed to refer to all branches of petitioner Citibank in the Philippines and abroad; thus,
giving petitioner Citibank the authority to apply as payment for the PNs even respondent's
dollar accounts with Citibank-Geneva. Still proceeding from the premise that all branches
of petitioner Citibank should be considered as a single entity, then it should not matter that
the respondent obtained the loans fromCitibank-Manila and her deposits were
with Citibank-Geneva. Respondent should be considered the debtor (for the loans) and
creditor (for her deposits) of the same entity, petitioner Citibank. Since
petitioner Citibank and respondent were principal creditors of each other, in compliance
with the requirements under Article 1279 of the Civil Code, 8 then the former could have
very well used off-setting or compensation to extinguish the parties' obligations to one
another. And even without the PNs, off-setting or compensation was still authorized
because according to Article 1286 of the Civil Code, "Compensation takes place by
operation of law, even though the debts may be payable at different places, but there shall
be an indemnity for expenses of exchange or transportation to the place of payment."

Pertinent provisions of Republic Act No. 8791, otherwise known as the General Banking
Law of 2000, governing bank branches are reproduced below

SEC. 20. Bank Branches. Universal or commercial banks may open branches or other
offices within or outside the Philippines upon prior approval of theBangko Sentral.

Branching by all other banks shall be governed by pertinent laws.

52
A bank may, subject to prior approval of the Monetary Board, use any or all of its branches
as outlets for the presentation and/or sale of the financial products of its allied
undertaking or its investment house units.

A bank authorized to establish branches or other offices shall be responsible for all
business conducted in such branches and offices to the same extent and in the same
manner as though such business had all been conducted in the head office. A bank and its
branches and offices shall be treated as one unit.

xxx xxx xxx

SEC. 72. Transacting Business in the Philippines. The entry of foreign banks in the
Philippines through the establishment of branches shall be governed by the provisions of
the Foreign Banks Liberalization Act.

The conduct of offshore banking business in the Philippines shall be governed by the
provisions of Presidential Decree No. 1034, otherwise known as the "Offshore Banking
System Decree."

xxx xxx xxx

SEC. 74. Local Branches of Foreign Banks. In case of a foreign bank which has more
than one (1) branch in the Philippines, all such branches shall be treated as one (1) unit for
the purpose of this Act, and all references to the Philippine branches of foreign banks shall
be held to refer to such units.

SEC. 75. Head Office Guarantee. In order to provide effective protection of the interests
of the depositors and other creditors of Philippine branches of a foreign bank, the head
office of such branches shall fully guarantee the prompt payment of all liabilities of its
Philippine branch. DSETcC

Residents and citizens of the Philippines who are creditors of a branch in the Philippines of
a foreign bank shall have preferential rights to the assets of such branch in accordance
with existing laws.

Republic Act No. 7721, otherwise known as the Foreign Banks Liberalization Law, lays
down the policies and regulations specifically concerning the establishment and operation
of local branches of foreign banks. Relevant provisions of the said statute read

Sec. 2. Modes of Entry. The Monetary Board may authorize foreign banks to operate in
the Philippine banking system through any of the following modes of entry: (i) by acquiring,
purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank; (ii)
53
by investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary
incorporated under the laws of the Philippines; or (iii) by establishing branches with full
banking authority: Provided, That a foreign bank may avail itself of only one (1) mode of
entry: Provided, further, That a foreign bank or a Philippine corporation may own up to a
sixty percent (60%) of the voting stock of only one (1) domestic bank or new banking
subsidiary.

Sec. 5. Head Office Guarantee. The head office of foreign bank branches shall guarantee
prompt payment of all liabilities of its Philippine branches.

It is true that the afore-quoted Section 20 of the General Banking Law of 2000 expressly
states that the bank and its branches shall be treated as one unit. It should be pointed out,
however, that the said provision applies to a universal 9 or commercial bank, 10 duly
established and organized as a Philippine corporation in accordance with Section 8 of the
same statute, 11 and authorized to establish branches within or outside the Philippines.

The General Banking Law of 2000, however, does not make the same categorical statement
as regards to foreign banks and their branches in the Philippines. What Section 74 of the
said law provides is that in case of a foreign bank with several branches in the country, all
such branches shall be treated as one unit. As to the relations between the local branches
of a foreign bank and its head office, Section 75 of the General Banking Law of 2000 and
Section 5 of the Foreign Banks Liberalization Law provide for a "Home Office Guarantee," in
which the head office of the foreign bank shall guarantee prompt payment of all liabilities of
its Philippine branches. While the Home Office Guarantee is in accord with the principle
that these local branches, together with its head office, constitute but one legal entity, it
does not necessarily support the view that said principle is true and applicable in all
circumstances.

The Home Office Guarantee is included in Philippine statutes clearly for the protection of
the interests of the depositors and other creditors of the local branches of a foreign
bank. 12 Since the head office of the bank is located in another country or state, such a
guarantee is necessary so as to bring the head office within Philippine jurisdiction, and to
hold the same answerable for the liabilities of its Philippine branches. Hence, the principle
of the singular identity of that the local branches and the head office of a foreign bank are
more often invoked by the clients in order to establish the accountability of the head office
for the liabilities of its local branches. It is under such attendant circumstances in which
the American authorities and jurisprudence presented by petitioners in their Motion for
Partial Reconsideration were rendered.

54
Now the question that remains to be answered is whether the foreign bank can use the
principle for a reverse purpose, in order to extend the liability of a client to the foreign
bank's Philippine branch to its head office, as well as to its branches in other countries.
Thus, if a client obtains a loan from the foreign bank's Philippine branch, does it absolutely
and automatically make the client a debtor, not just of the Philippine branch, but also of
the head office and all other branches of the foreign bank around the world? This Court
rules in the negative. EIcSTD

There being a dearth of Philippine authorities and jurisprudence on the matter, this Court,
just as what petitioners have done, turns to American authorities and jurisprudence.
American authorities and jurisprudence are significant herein considering that the head
office of petitioner Citibank is located in New York, United States of America (U.S.A.).

Unlike Philippine statutes, the American legislation explicitly defines the relations among
foreign branches of an American bank. Section 25 of the United States Federal Reserve
Act 13 states that

Every national banking association operating foreign branches shall conduct the accounts
of each foreign branch independently of the accounts of other foreign branches established
by it and of its home office, and shall at the end of each fiscal period transfer to its general
ledger the profit or loss accrued at each branch as a separate item.

Contrary to petitioners' assertion that the accounts of Citibank-Manila and Citibank-

Geneva should be deemed as a single account under its head office, the foregoing provision
mandates that the accounts of foreign branches of an American bank shall be conducted
independently of each other. Since the head office of petitionerCitibank is in the U.S.A.,
then it is bound to treat its foreign branches in accordance with the said provision. It is
only at the end of its fiscal period that the bank is required to transfer to its general ledger
the profit or loss accrued at each branch, but still reporting it as a separate item. It is by
virtue of this provision that the Circuit Court of Appeals of New York declared in Pan-
American Bank and Trust Co. v. National City Bank of New York 14 that a branch is not
merely a teller's window; it is a separate business entity.

The circumstances in the case of McGrath v. Agency of Chartered Bank of India, Australia
& China 15 are closest to the one at bar. In said case, the Chartered Bank had branches in
several countries, including one in Hamburg, Germany and another in New York, U.S.A.,
and yet another in London, United Kingdom. The New York branch entered in its books
credit in favor of four German firms. Said credit represents collections made from bills of
55
exchange delivered by the four German firms. The same four German firms subsequently
became indebted to the Hamburg branch. The London branch then requested for the
transfer of the credit in the name of the German firms from the New York branch so as to
be applied or setoff against the indebtedness of the same firms to the Hamburg branch.
One of the question brought before the U.S. District Court of New York was "whether or not
the debts and the alleged setoffs thereto are mutual," which could be answered by
determining first whether the New York and Hamburg branches of Chartered Bank are
individual business entities or are one and the same entity. In denying the right of the
Hamburg branch to setoff, the U.S. District Court ratiocinated that

The structure of international banking houses such as Chartered bank defies one rigorous
description. Suffice it to say for present analysis, branches or agencies of an international
bank have been held to be independent entities for a variety of purposes (a) deposits
payable only at branch where made;Mutaugh v. Yokohama Specie Bank, Ltd., 1933, 149
Misc. 693, 269 N.Y.S. 65; Bluebird Undergarment Corp. v. Gomez, 1931, 139 Misc. 742,
249 N.Y.S. 319; (b) checks need be honored only when drawn on branch where
deposited; Chrzanowska v. Corn Exchange Bank, 1916, 173 App. Div. 285, 159 N.Y.S. 385,
affirmed 1919, 225 N.Y. 728, 122 N.E. 877; subpoena duces tecum on foreign bank's record
barred; In re Harris, D.C.S.D.N.Y. 1939, 27 F. Supp. 480; (d) a foreign branch separate for
collection of forwarded paper; Pan-American Bank and Trust Company v. National City
Bank of New York, 2 Cir., 1925, 6 F. 2d 762, certiorari denied 1925, 269 U.S. 554, 46 S. Ct.
18, 70 L. Ed. 408. Thus in law there is nothing innately unitary about the organization of
international banking institutions. IHcTDA

Defendant, upon its oral argument and in its brief, relies heavily on Sokoloff v. National
City Bank of New York, 1928, 250 N.Y. 69, 164 N.E. 745, as authority for the proposition
that Chartered Bank, not the Hamburg or New York Agency, is ultimately responsible for
the amounts owing its German customers and, conversely, it is to Chartered Bank that the
German firms owe their obligations. The Sokoloff case, aside from its violently different fact
situation, is centered on the legal problem of default of payment and consequent breach of
contract by a branch bank. It does not stand for the principle that in every instance an
international bank with branches is but one legal entity for all purposes. The defendant
concedes in its brief (p. 15) that there are purposes for which the various agencies and
branches of Chartered Bank may be treated in law as separate entities. I fail to see the
applicability of Sokoloff either as a guide to or authority for the resolution of this problem.
The facts before me and the cases catalogued supra lend weight to the view that we are
dealing here with Agencies independent of one another.

xxx xxx xxx

56
I hold that for instant purposes the Hamburg Agency and defendant were independent
business entities, and the attempted setoff may not be utilized by defendant against its debt
to the German firms obligated to the Hamburg Agency.

Going back to the instant Petition, although this Court concedes that all the Philippine
branches of petitioner Citibank should be treated as one unit with its head office, it cannot
be persuaded to declare that these Philippine branches are likewise a single unit with the
Geneva branch. It would be stretching the principle way beyond its intended purpose.

Therefore, this Court maintains its original position in the Decision that the off-setting or
compensation of respondent's loans with Citibank-Manila using her dollar accounts
with Citibank-Geneva cannot be effected. The parties cannot be considered principal
creditor of the other. As for the dollar accounts, respondent was the creditor and Citibank-
Geneva was the debtor; and as for the outstanding loans, petitioner Citibank,
particularly Citibank-Manila, was the creditor and respondent was the debtor. Since legal
compensation was not possible, petitioner Citibank could only use respondent's dollar
accounts with Citibank-Geneva to liquidate her loans if she had expressly authorized it to
do so by contract.

Respondent cannot be deemed to have authorized the use of her dollar deposits
with Citibank-Geneva to liquidate her loans with petitioner Citibank when she signed the
PNs 16 for her loans which all contained the provision that

At or after the maturity of this note, or when same becomes due under any of the
provisions hereof, any money, stocks, bonds, or other property of any kind whatsoever, on
deposit or otherwise, to the credit of the undersigned on the books of CITIBANK, N.A. in
transit or in their possession, may without notice be applied at the discretion of the said
bank to the full or partial payment of this note.

As has been established in the preceding discussion, "Citibank, N.A." can only refer to the
local branches of petitioner Citibank together with its head office. Unless there is any
showing that respondent understood and expressly agreed to a more far-reaching
interpretation, the reference to Citibank, N.A. cannot be extended to all other branches of
petitioner Citibank all over the world. Although theoretically, books of the branches form
part of the books of the head office, operationally and practically, each branch maintains
its own books which shall only be later integrated and balanced with the books of the head
office. Thus, it is very possible to identify and segregate the books of the Philippine
branches of petitioner Citibank from those of Citibank-Geneva, and to limit the authority
granted for application as payment of the PNs to respondent's deposits in the books of the
former.
57
Moreover, the PNs can be considered a contract of adhesion, the PNs being in standard
printed form prepared by petitioner Citibank. Generally, stipulations in a contract come
about after deliberate drafting by the parties thereto, there are certain contracts almost all
the provisions of which have been drafted only by one party, usually acorporation. Such
contracts are called contracts of adhesion, because the only participation of the party is the
affixing of his signature or his "adhesion" thereto. This being the case, the terms of such
contract are to be construed strictly against the party which prepared it. 17

As for the supposed Declaration of Pledge of respondent's dollar accounts with Citibank-
Geneva as security for the loans, this Court stands firm on its ruling that the non-
production thereof is fatal to petitioners' cause in light of respondent's claim that her
signature on such document was a forgery. It bears to note that the original of the
Declaration of Pledge is with Citibank-Geneva, a branch of petitioner Citibank. As between
respondent and petitioner Citibank, the latter has better access to the document. The
constant excuse forwarded by petitioner Citibank that Citibank-Geneva refused to return
possession of the original Declaration of Pledge to Citibank-Manila only supports this
Court's finding in the preceding paragraphs that the two branches are actually operating
separately and independently of each other. aAcHCT

Further, petitioners keep playing up the fact that respondent, at the beginning of the trial,
refused to give her specimen signatures to help establish whether her signature on the
Declaration of Pledge was indeed forged. Petitioners seem to forget that subsequently,
respondent, on advice of her new counsel, already offered to cooperate in whatever manner
so as to bring the original Declaration of Pledge before the RTC for inspection. The
exchange of the counsels for the opposing sides during the hearing on 24 July 1991 before
the RTC reveals the apparent willingness of respondent's counsel to undertake whatever
course of action necessary for the production of the contested document, and the evasive,
non-committal, and uncooperative attitude of petitioners' counsel. 18

Lastly, this Court's ruling striking down the Declaration of Pledge is not entirely based on
respondent's allegation of forgery. In its Decision, this Court already extensively discussed
why it found the said Declaration of Pledge highly suspicious and irregular, to wit

First of all, it escapes this Court why petitioner Citibank took care to have the Deeds of
Assignment of the PNs notarized, yet left the Declaration of Pledge unnotarized. This Court
would think that petitioner Citibank would take greater cautionary measures with the
preparation and execution of the Declaration of Pledge because it involved respondent's "all
present and future fiduciary placements" with a Citibank branch in another country,
58
specifically, in Geneva, Switzerland. While there is no express legal requirement that the
Declaration of Pledge had to be notarized to be effective, even so, it could not enjoy the
sameprima facie presumption of due execution that is extended to notarized documents,
and petitioner Citibank must discharge the burden of proving due execution and
authenticity of the Declaration of Pledge.

Second, petitioner Citibank was unable to establish the date when the Declaration of Pledge
was actually executed. The photocopy of the Declaration of Pledge submitted by
petitioner Citibank before the RTC was undated. It presented only a photocopy of the pledge
because it already forwarded the original copy thereof to Citibank-Geneva when it requested
for the remittance of respondent's dollar accounts pursuant thereto. Respondent, on the
other hand, was able to secure a copy of the Declaration of Pledge, certified by an officer
of Citibank-Geneva, which bore the date 24 September 1979. Respondent, however,
presented her passport and plane tickets to prove that she was out of the country on the
said date and could not have signed the pledge. Petitioner Citibank insisted that the pledge
was signed before 24 September 1979, but could not provide an explanation as to how and
why the said date was written on the pledge. Although Mr. Tan testified that the Declaration
of Pledge was signed by respondent personally before him, he could not give the exact date
when the said signing took place. It is important to note that the copy of the Declaration of
Pledge submitted by the respondent to the RTC was certified by an officer of Citibank-
Geneva, which had possession of the original copy of the pledge. It is dated 24 September
1979, and this Court shall abide by the presumption that the written document is truly
dated. Since it is undeniable that respondent was out of the country on 24 September
1979, then she could not have executed the pledge on the said date.

Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a standard
printed form. It was constituted in favor of Citibank, N.A., otherwise referred to therein as
the Bank. It should be noted, however, that in the space which should have named the
pledgor, the name of petitioner Citibank was typewritten, to wit

The pledge right herewith constituted shall secure all claims which the Bank now has or in
the future acquires against Citibank, N.A., Manila (full name and address of the Debtor),
regardless of the legal cause or the transaction (for example current account, securities
transactions, collections, credits, payments, documentary credits and collections) which
gives rise thereto, and including principal, all contractual and penalty interest,
commissions, charges, and costs. CIETDc

The pledge, therefore, made no sense, the pledgor and pledgee being the same entity. Was a
mistake made by whoever filled-out the form? Yes, it could be a possibility. Nonetheless,

59
considering the value of such a document, the mistake as to a significant detail in the
pledge could only be committed with gross carelessness on the part of petitioner Citibank,
and raised serious doubts as to the authenticity and due execution of the same. The
Declaration of Pledge had passed through the hands of several bank officers in the country
and abroad, yet, surprisingly and implausibly, no one noticed such a glaring mistake.

Lastly, respondent denied that it was her signature on the Declaration of Pledge. She
claimed that the signature was a forgery. When a document is assailed on the basis of
forgery, the best evidence rule applies

Basic is the rule of evidence that when the subject of inquiry is the contents of a document,
no evidence is admissible other than the original document itself except in the instances
mentioned in Section 3, Rule 130 of the Revised Rules of Court. Mere photocopies of
documents are inadmissible pursuant to the best evidence rule. This is especially true
when the issue is that of forgery.

As a rule, forgery cannot be presumed and must be proved by clear, positive and convincing
evidence and the burden of proof lies on the party alleging forgery. The best evidence of a
forged signature in an instrument is the instrument itself reflecting the alleged forged
signature. The fact of forgery can only be established by a comparison between the alleged
forged signature and the authentic and genuine signature of the person whose signature is
theorized upon to have been forged. Without the original document containing the alleged
forged signature, one cannot make a definitive comparison which would establish forgery. A
comparison based on a mere xerox copy or reproduction of the document under controversy
cannot produce reliable results.

Respondent made several attempts to have the original copy of the pledge produced before
the RTC so as to have it examined by experts. Yet, despite several Orders by the RTC,
petitioner Citibank failed to comply with the production of the original Declaration of
Pledge. It is admitted that Citibank-Geneva had possession of the original copy of the
pledge. While petitioner Citibank in Manila and its branch in Geneva may be separate and
distinct entities, they are still incontestably related, and between petitioner Citibank and
respondent, the former had more influence and resources to convince Citibank-Geneva to
return, albeit temporarily, the original Declaration of Pledge. Petitioner Citibank did not
present any evidence to convince this Court that it had exerted diligent efforts to secure the
original copy of the pledge, nor did it proffer the reason why Citibank-Geneva obstinately
refused to give it back, when such document would have been very vital to the case of
petitioner Citibank. There is thus no justification to allow the presentation of a mere
photocopy of the Declaration of Pledge in lieu of the original, and the photocopy of the

60
pledge presented by petitioner Citibank has nil probative value. In addition, even if this
Court cannot make a categorical finding that respondent's signature on the original copy of
the pledge was forged, it is persuaded that petitioner Citibank willfully suppressed the
presentation of the original document, and takes into consideration the presumption that
the evidence willfully suppressed would be adverse to petitionerCitibank if produced.

As far as the Declaration of Pledge is concerned, petitioners failed to submit any new
evidence or argument that was not already considered by this Court when it rendered its
Decision. AIDcTE

As to the value of the dollar deposits

in Citibank-Geneva ordered
refunded to respondent

In case petitioners are still ordered to refund to respondent the amount of her dollar
accounts with Citibank-Geneva, petitioners beseech this Court to adjust the nominal values
of respondent's dollar accounts and/or her overdue peso loans by using the values of the
currencies stipulated at the time the obligations were established in 1979, to address the
alleged inequitable consequences resulting from the extreme and extraordinary devaluation
of the Philippine currency that occurred in the course of the Asian crisis of 1997.
Petitioners base their request on Article 1250 of the Civil Code which reads, "In case an
extraordinary inflation or deflation of the currency stipulated should supervene, the value
of the currency at the time of the establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary."

It is well-settled that Article 1250 of the Civil Code becomes applicable only when there is
extraordinary inflation or deflation of the currency. Inflation has been defined as the sharp
increase of money or credit or both without a corresponding increase in business
transaction. There is inflation when there is an increase in the volume of money and credit
relative to available goods resulting in a substantial and continuing rise in the general price
level. 19 In Singson v. Caltex (Philippines), Inc., 20 this Court already provided a discourse
as to what constitutes as extraordinary inflation or deflation of currency, thus

We have held extraordinary inflation to exist when there is a decrease or increase in the
purchasing power of the Philippine currency which is unusual or beyond the common
fluctuation in the value of said currency, and such increase or decrease could not have
been reasonably foreseen or was manifestly beyond the contemplation of the parties at the
time of the establishment of the obligation.

61
An example of extraordinary inflation, as cited by the Court in Filipino Pipe and
Foundry Corporation vs. NAWASA, supra, is that which happened to thedeutschmark in
1920. Thus:

"More recently, in the 1920s, Germany experienced a case of hyperinflation. In early 1921,
the value of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had
stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that by October 1923, it
had reached 4.2 trillion to the U.S. dollar!" (Bernardo M. Villegas & Victor R.
Abola, Economics, An Introduction [Third Edition]).

As reported, "prices were going up every week, then every day, then every hour. Women
were paid several times a day so that they could rush out and exchange their money for
something of value before what little purchasing power was left dissolved in their hands.
Some workers tried to beat the constantly rising prices by throwing their money out of the
windows to their waiting wives, who would rush to unload the nearly worthless paper. A
postage stamp cost millions of marks and a loaf of bread, billions." (Sidney Rutberg, "The
Money Balloon", New York: Simon and Schuster, 1975, p. 19, cited in "Economics, An
Introduction" by Villegas & Abola, 3rd ed.)

The supervening of extraordinary inflation is never assumed. The party alleging it must lay
down the factual basis for the application of Article 1250.

Thus, in the Filipino Pipe case, the Court acknowledged that the voluminous records and
statistics submitted by plaintiff-appellant proved that there has been a decline in the
purchasing power of the Philippine peso, but this downward fall cannot be considered
"extraordinary" but was simply a universal trend that has not spared our country. Similarly,
in Huibonhoa vs. Court of Appeals, the Court dismissed plaintiff-appellant's
unsubstantiated allegation that the Aquino assassination in 1983 caused building and
construction costs to double during the period July 1983 to February 1984. In Serra vs.
Court of Appeals, the Court again did not consider the decline in the peso's purchasing
power from 1983 to 1985 to be so great as to result in an extraordinary inflation. aEHAIS

Like the Serra and Huibonhoa cases, the instant case also raises as basis for the
application of Article 1250 the Philippine economic crisis in the early 1980s when, based
on petitioner's evidence, the inflation rate rose to 50.34% in 1984. We hold that there is no
legal or factual basis to support petitioner's allegation of the existence of extraordinary
inflation during this period, or, for that matter, the entire time frame of 1968 to 1983, to
merit the adjustment of the rentals in the lease contract dated July 16, 1968. Although by
62
petitioner's evidence there was a decided decline in the purchasing power of the Philippine
peso throughout this period, we are hard put to treat this as an "extraordinary inflation"
within the meaning and intent of Article 1250.

Rather, we adopt with approval the following observations of the Court of Appeals on
petitioner's evidence, especially the NEDA certification of inflation rates based on consumer
price index:

. . . (a) from the period 1966 to 1986, the official inflation rate never exceeded 100% in any
single year; (b) the highest official inflation rate recorded was in 1984 which reached only
50.34%; (c) over a twenty one (21) year period, the Philippines experienced a single-digit
inflation in ten (10) years (i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and
1986); (d) in other years (i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980, 1981, 1982, 1984
and 1989) when the Philippines experienced double-digit inflation rates, the average of
those rates was only 20.88%; (e) while there was a decline in the purchasing power of the
Philippine currency from the period 1966 to 1986, such cannot be considered as
extraordinary; rather, it is a normal erosion of the value of the Philippine peso which is a
characteristic of most currencies.

"Erosion" is indeed an accurate description of the trend of decline in the value of the peso
in the past three to four decades. Unfortunate as this trend may be, it is certainly distinct
from the phenomenon contemplated by Article 1250.

Moreover, this Court has held that the effects of extraordinary inflation are not to be
applied without an official declaration thereof by competent authorities.

The burden of proving that there had been extraordinary inflation or deflation of the
currency is upon the party that alleges it. Such circumstance must be proven by competent
evidence, and it cannot be merely assumed. In this case, petitioners presented no proof as
to how much, for instance, the price index of goods and services had risen during the
intervening period. 21 All the information petitioners provided was the drop of the U.S.
dollar-Philippine peso exchange rate by 17 points from June 1997 to January 1998. While
the said figure was based on the statistics of the Bangko Sentral ng Pilipinas (BSP), it is
also significant to note that the BSP did not categorically declare that the same constitute
as an extraordinary inflation. The existence of extraordinary inflation must be officially
proclaimed by competent authorities, and the only competent authority so far recognized by
this Court to make such an official proclamation is the BSP. 22

Neither can this Court, by merely taking judicial notice of the Asian currency crisis in
1997, already declare that there had been extraordinary inflation. It should be recalled that
63
the Philippines likewise experienced economic crisis in the 1980s, yet this Court did not
find that extraordinary inflation took place during the said period so as to warrant the
application of Article 1250 of the Civil Code.

Furthermore, it is incontrovertible that Article 1250 of the Civil Code is based on equitable
considerations. Among the maxims of equity are (1) he who seeks equity must do equity,
and (2) he who comes into equity must come with clean hands. The latter is a frequently
stated maxim which is also expressed in the principle that he who has done inequity shall
not have equity. 23 Petitioner Citibank, hence, cannot invoke Article 1250 of the Civil Code
because it does not come to court with clean hands. The delay in the recovery 24 by
respondent of her dollar accounts with Citibank-Geneva was due to the unlawful act of
petitioner Citibank in using the same to liquidate respondent's loans.
Petitioner Citibank even attempted to justify the off-setting or compensation of respondent's
loans using her dollar accounts with Citibank-Geneva by the presentation of a highly
suspicious and irregular, and even possibly forged, Declaration of Pledge. EcSaHA

The damage caused to respondent of the deprivation of her dollar accounts for more than
two decades is unquestionably relatively more extensive and devastating, as compared to
whatever damage petitioner Citibank, an international banking corporation with
undoubtedly substantial capital, may have suffered for respondent's non-payment of her
loans. It must also be remembered that petitioner Citibank had already considered
respondent's loans paid or liquidated by 26 October 1979 after it had fully effected
compensation thereof using respondents deposits and money market placements. All this
time, respondent's dollar accounts are unlawfully in the possession of and are being used
by petitioner Citibank for its business transactions. In the meantime, respondent's
businesses failed and her properties were foreclosed because she was denied access to her
funds when she needed them most. Taking these into consideration, respondent's dollar
accounts with Citibank-Geneva must be deemed to be subsisting and continuously
deposited with petitioner Citibank all this while, and will only be presently withdrawn by
respondent. Therefore, petitioner Citibank should refund to respondent the U.S.
$149,632.99 taken from her Citibank-Geneva accounts, or its equivalent in Philippine
currency using the exchange rate at the time of payment, plus the stipulated interest for
each of the fiduciary placements and current accounts involved, beginning 26 October
1979.

As to respondent's Motion to Clarify

and/or Confirm Decision with Notice
of Judgment

64
Respondent, in her Motion, is of the mistaken notion that the Court of Appeals Decision,
dated 26 March 2002, as modified by the Resolution of the same court, dated 20 November
2002, would be implemented or executed together with this Court's Decision.

This Court clarifies that its affirmation of the Decision of the Court of Appeals, as modified,
is only to the extent that it recognizes that petitioners had liabilities to the respondent.
However, this Court's Decision modified that of the appellate court's by making its own
determination of the specific liabilities of the petitioners to respondent and the amounts
thereof; as well as by recognizing that respondent also had liabilities to
petitioner Citibank and the amount thereof.

Thus, for purposes of execution, the parties need only refer to the dispositive portion of this
Court's Decision, dated 16 October 2006, should it already become final and executory,
without any further modifications.

As the last point, there is no merit in respondent's Motion for this Court to already declare
its Decision, dated 16 October 2006, final and executory. A judgment becomes final and
executory by operation of law and, accordingly, the finality of the judgment becomes a fact
upon the lapse of the reglementary period without an appeal or a motion for new trial or
reconsideration being filed. 25 This Court cannot arbitrarily disregard the reglementary
period and declare a judgment final and executory upon the mere motion of one party, for
to do so will be a culpable violation of the right of the other parties to due process.

IN VIEW OF THE FOREGOING, petitioners' Motion for Partial Reconsideration of this

Court's Decision, dated 16 October 2006, and respondent's Motion for this Court to declare
the same Decision already final and executory, are both DENIED for lack of merit. EACIcH

SO ORDERED.

65
THIRD DIVISION

[G.R. No. 132287. January 24, 2006.]

SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL ESPELETA, petitioners, vs. DRA.
ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL assisted by her husband ANTOLIN
JARIOL, SR., LEONORA NOLASCO assisted by her husband FELICIANO NOLASCO,
DOLORES SOBERANO assisted by her husband JOSE SOBERANO, JR., JULIA R.
GENEROSO, TERESITA R. NATIVIDAD and GENOVEVA R. SORONIO assisted by her
husband ALFONSO SORONIO, respondents.

Diores Law Office for petitioners.

Florido & Associates for Heirs of Dra. A. Rodriguez.

Gregorio B. Escasinas for D. Soberano.

Mario Ortiz for Sps. Jarol.

SYLLABUS

1. CIVIL LAW; PLEDGE; EXTRAJUDICIAL SALE OF PLEDGED PROPERTY

DISTINGUISHED FROM JUDICIAL SALE. Preliminary, it must be clarified that the
subject sale of pledged shares was an extrajudicial sale, specifically a notarial 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.

2. ID.; ID.; THERE IS NO LAW WHICH VESTS THE RIGHT OF REDEMPTION OVER
PERSONAL PROPERTY SOLD EXTRAJUDICIALLY; JUSTIFIED. 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 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. The right of redemption over mortgaged
real property sold extrajudically is established by Act No. 3135, as amended. The said law
does not extend the same benefit to personal property. In fact, there is no law in our statute
books which vests the right of redemption over personal property. Act No. 1508, or
the Chattel Mortgage Law, ostensibly could have served as the vehicle for any legislative

66
intent to bestow a right of redemption over personal property, since that law governs the
extrajudicial sale of mortgaged personal property, but the statute is definitely silent on the
point. 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.

3. ID.; ID.; EXTRAJUDICIAL SALE OF PLEDGED PROPERTY; CONDUCT IN CASE TWO OR

MORE THINGS ARE PLEDGED, EXPLAINED. Under the Civil Code, it is the pledgee, and
not the pledgor, who is given the right to choose which of the items should be sold if two or
more things are pledged. No similar option is given to pledgors under the Civil Code.
Moreover, there is nothing in the Civil Code provisions governing the extrajudicial sale of
pledged properties that prohibits the pledges of several different pledge contracts from
auctioning all of the pledged properties on a single occasion, or from the buyer at the
auction sale in purchasing all the pledged properties with a single purchase price. The
relative insignificance of ascertaining the definite apportionments of the sale price to the
individual shares lies in the fact that once a pledged item is sold at auction, neither the
pledgee nor the pledgor can recover whatever deficiency or excess there may be between the
purchase price and the amount of the principal obligation. A different ruling though would
obtain if at the auction, a bidder expressed the desire to bid on a determinate number or
portion of the pledged shares. In such a case, there may lie the need to ascertain with
particularity which of the shares are covered by the bid price, since not all of the shares
may be sold at the auction and correspondingly not all of the pledge contracts
extinguished. The same situation also would lie if one or some of the owners of the pledged
shares participated in the auction, bidding only on their respective pledged shares.

4. ID.; ID.; RIGHT OF CREDITOR TO RETAIN POSSESSION OF PLEDGED ITEM EXISTS

ONLY UNTIL THE DEBT IS PAID. There is no doubt that if the principal obligation is
satisfied, the pledges should be terminated as well. Article 2098 of the Civil Code provides
that the right of the creditor to retain possession of the pledged item exists only until the
debt is paid. Article 2105 of the Civil Code further clarifies that the debtor cannot ask for
the return of the thing pledged against the will of the creditor, unless and until he has paid
the debt and its interest. At the same time, the right of the pledgee to foreclose the pledge is
also established under the Civil Code. When the credit has not been satisfied in due time,
the creditor may proceed with the sale by public auction under the procedure provided
under Article 2112 of the Code.

DECISION

TINGA, J p:

67
The assailed decision of the Court of Appeals took off on the premise that pledged shares of
stock auctioned off in a notarial sale could still be redeemed by their owners. This notion is
wrong, and we thus reverse.

The facts, as culled from the record, follow.

Respondents were the owners, in their respective personal capacities, of shares of stock in a
corporation known as the Quirino-Leonor-Rodriguez Realty Inc. 1 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. The shares pledged are listed below:

Miguel Rodriguez Jariol 1,000 shares covered by Stock

Certificates No. 011, 060, 061 & 062;

Abdulia C. Rodriguez 300 shares covered by Stock Certificates

No. 023 & 093;

Leonora R. Nolasco 407 shares covered by Stock Certificates

No. 091 & 092;

Genoveva Soronio 699 shares covered by Stock Certificates

No. 025, 059 & 099;

Dolores R. Soberano 699 shares covered by Stock Certificates

No. 021, 053, 022 & 097;

Julia Generoso 1,100 shares covered by Stock

Certificates No. 085, 051, 086 & 084;

Teresita Natividad 440 shares covered by Stock Certificates

Nos. 054 & 055 2

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

68
cases." 4 This decision attained finality after it was affirmed by the Court of Appeals and
the Supreme Court. The Entry of Judgment was issued on 14 August 1991. AISHcD

Respondents then received Notices of Sale which indicated that the pledged shares were to
be sold at public auction on 4 November 1991. However, before the scheduled date of
auction, all of respondents caused the consignation with the RTC Clerk of Court of various
amounts. It was claimed that respondents had attempted to tender these payments to the
Parays, but had been rebuffed. The deposited amounts were as follows:

Abdulia C. Rodriguez P120,066.66 14 Oct. 1991

Leonora R. Nolasco 277,381.82 14 Oct. 1991

Genoveva R. Soronio 425,353.50 14 Oct. 1991

38,385.44 14 Oct. 1991

Julia R. Generoso 638,385.00 25 Oct. 1991

Teresita R. Natividad 264,375.00 11 Nov. 1991

Dolores R. Soberano 12,031.61 25 Oct. 1991

520,216.39 11 Nov. 1991

Miguela Jariol 490,000.00 18 Oct. 1991

88,000.00 18 Oct. 1991 5

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. None of respondents participated or appeared at the auction of 4 November
1991.

Respondents instead filed on 13 November 1991 a complaint seeking the declaration of

nullity of the concluded public auction. The complaint, docketed as Civil Case No. CEB-
10926, was assigned to Branch 16 of the Cebu City RTC. Respondents argued that their
tender of payment and subsequent consignations served to extinguish their loan obligations
and discharged the pledge contracts. Petitioners countered that the auction sale was
conducted pursuant to the final and executory judgment in Civil Cases Nos. R-20120 and
20131, and that the tender of payment and consignations were made long after their
obligations had fallen due.

The Cebu City RTC dismissed the complaint, expressing agreement with the position of the
Parays. 6 It held, among others that respondents had failed to tender or consign payments
69
within a reasonable period after default and that the proper remedy of respondents was to
have participated in the auction sale. 7 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. 8 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. The attempts at payment by respondents were
characterized as made in the exercise of the right of redemption.

The Court of Appeals likewise found fault with the auction sale, holding that there was a
need to individually sell the various shares of stock as they had belonged to different
pledgors. Thus, it was observed that the minutes of the auction sale should have specified
in detail the bids submitted for each of the shares of the pledgors for the purpose of
knowing the price to be paid by the different pledgors upon redemption of the auctioned
sales of stock.

Petitioners now argue before this Court that they 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 Cases Nos. R-20120 and 20131, which did not authorize the
payment of the principal obligation by respondents. They point out that the amounts
consigned could not extinguish the principal loan obligations of respondents since they
were not sufficient to cover the interests due on the debt. They likewise argue that the
essential procedural requisites for the auction sale had been satisfied.

We rule in favor of petitioners.

The fundamental premise from which the appellate court proceeded was that the
consignations made by respondents should be construed in light of the rules of redemption,
as if respondents were exercising such right. In that perspective, the Court of Appeals made
three crucial conclusions favorable to respondents: that their act of consigning the
payments with the RTC should be deemed done in the exercise of their right of redemption;
that the buyer at public auction does not ipso factobecome the owner of the pledged shares
pending the lapse of the one-year redemptive period; and that the collective sale of the
shares of stock belonging to several individual owners without specification of the
apportionment in the applications of payment deprives the individual owners of the
opportunity to know of the price they would have to pay for the purpose of exercising the
right of redemption. HDITCS

The appellate court's dwelling on the right of redemption is utterly off-tangent. The right of
redemption involves payments made by debtors after the foreclosure of their properties, and
70
not those made or attempted to be made, as in this case, before the foreclosure sale. The
proper focus of the Court of Appeals should have been whether the consignations made by
respondents sufficiently acquitted them of their principal obligations. A pledge contract is
an accessory contract, and is necessarily discharged if the principal obligation is
extinguished.

Nonetheless, the Court is now confronted with this rather new fangled theory, as
propounded by the Court of Appeals, involving the right of redemption over pledged
properties. We have no hesitation in pronouncing such theory as discreditable.

Preliminarily, 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. 9

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 them in the following fashion:

WHEREFORE, premises considered, judgment is hereby rendered dismissing the

complaints at bar, and

(1)Declaring the various pledges covered in Civil Cases Nos. R-20120 and R-20131 valid
and effective; and

(2)Giving due course to the foreclosure and sale at public auction of the various pledges
subject of these two cases.

Costs against the plaintiffs.

SO ORDERED. 10

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

71
public auction of the pledged shares, but instead upheld the right of the Parays to conduct
such sale at their own volition.

Indeed, as affirmed by the Civil Code, 11 the decision to proceed with the sale by public
auction remains in the sole discretion of the Parays, who could very well choose not to hold
the sale without violating the final judgments in the aforementioned civil cases. If the sale
were truly in compliance with a final judgment or order, the Parays would have no choice
but to stage the sale for then the order directing the sale arises from judicial compulsion.
But nothing in the dispositive portion directed the sale at public auction as a mandatory
recourse, and properly so since the sale of pledged property in public auction is, by virtue
of the Civil Code, extrajudicial in character.

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, nosuch right
exists.

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. 12

The right of redemption over mortgaged real property sold extrajudicially is established
by Act No. 3135, as amended. The said law does not extend the same benefit to personal
property. In fact, there is no law in our statute books which vests the right of redemption
over personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have
served as the vehicle for any legislative intent to bestow a right of redemption over personal
property, since that law governs the extrajudicial sale of mortgaged personal property, but
the statute is definitely silent on the point. And Section 39 of the 1997 Rules of Civil
Procedure, extensively relied upon by the Court of Appeals, starkly utters that the right of
redemption applies to real properties, not personal properties, sold on execution.

72
Tellingly, this Court, as early as 1927, rejected the proposition that personal property may
be covered by the right of redemption. In Sibal 1. v. Valdez, 13 the Court ruled that sugar
cane crops are personal property, and thus, not subject to the right of
redemption. 14 No countervailing statute has been enacted since then that would accord
the right of redemption over personal property, hence the Court can affirm this decades-old
ruling as effective to date. cdtai

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 court's 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 Court of Appeals also found fault with the apparent sale in bulk of the pledged shares,
notwithstanding the fact that these shares were owned by several people, on the premise
the pledgors would be denied the opportunity to know exactly how much they would need
to shoulder to exercise the right to redemption. This concern is obviously rendered a non-
issue by the fact that there can be no right to redemption in the first place. Rule 39 of the
Rules of Court does provide for instances when properties foreclosed at the same time must
be sold separately, such as in the case of lot sales for real property under Section 19.
However, these instances again pertain to execution sales and not extrajudicial
sales. No provision in the Rules of Court or in any law requires that pledged properties sold
at auction be sold separately.

On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who is given
the right to choose which of the items should be sold if two or more things are
pledged. 15 No similar option is given to pledgors under the Civil Code. Moreover, there is
nothing in the Civil Code provisions governing the extrajudicial sale of pledged properties
that prohibits the pledgee of several different pledge contracts from auctioning all of the
pledged properties on a single occasion, or from the buyer at the auction sale in purchasing
all the pledged properties with a single purchase price. The relative insignificance of
ascertaining the definite apportionments of the sale price to the individual shares lies in
the fact that once a pledged item is sold at auction, neither the pledgee nor the pledgor can
recover whatever deficiency or excess there may be between the purchase price and the
amount of the principal obligation. 16
73
A different ruling though would obtain if at the auction, a bidder expressed the desire to
bid on a determinate number or portion of the pledged shares. In such a case, there may lie
the need to ascertain with particularity which of the shares are covered by the bid price,
since not all of the shares may be sold at the auction and correspondingly not all of the
pledge contracts extinguished. The same situation also would lie if one or some of the
owners of the pledged shares participated in the auction, bidding only on their respective
pledged shares. However, in this case, none of the pledgors participated in the auction, and
the sole bidder cast his bid for all of the shares. There obviously is no longer any practical
reason to apportion the bid price to the respective shares, since no matter how slight or
significant the value of the purchase price for the individual share is, the sale is completed,
with the pledgor and the pledgee not entitled to recover the excess or the deficiency, as the
case may be. To invalidate the subject auction solely on this point serves no cause other
than to celebrate formality for formality's sake.

Clearly, the theory adopted by the Court of Appeals is in shambles, and cannot be
resurrected. The question though yet remains whether the consignations made by
respondents extinguished their respective pledge contracts in favor of the Parays so as to
enjoin the latter from auctioning the pledged shares.

There is no doubt that if the principal obligation is satisfied, the pledges should be
terminated as well. Article 2098 of the Civil Code provides that the right of the creditor to
retain possession of the pledged item exists only until the debt is paid. Article 2105 of the
Civil Code further clarifies that the debtor cannot ask for the return of the thing pledged
against the will of the creditor, unless and until he has paid the debt and its interest. At the
same time, the right of the pledgee to foreclose the pledge is also established under the Civil
Code. When the credit has not been satisfied in due time, the creditor may proceed with the
sale by public auction under the procedure provided under Article 2112 of the
Code. IaAEHD

Respondents argue that their various consignations made prior to the auction sale
discharged them from the loan and the pledge agreements. They are mistaken.

Petitioners point out that while the amounts consigned by respondents could answer for
their respective principal loan obligations, they were not sufficient to cover the interests due
on these loans, which were pegged at the rate of 5% per month or 60% per annum. Before
this Court, respondents, save for Dolores Soberano, do not contest this interest rate as
alleged by petitioners. Soberano, on the other hand, challenges this interest rate as
"usurious." 17

74
The particular pledge contracts did not form part of the records elevated to this Court.
However, the 5% monthly interest rate was noted in the statement of facts in the 14 October
1988 RTC Decision which had since become final. Moreover, the said decision pronounced
that even assuming that the interest rates of the various loans were 5% per month, "it is
doubtful whether the interests so charged were exorbitantly or excessively usurious. This is
because for sometime now, usury has become 'legally inexistent.'" 18 The finality of this
1988 Decision is a settled fact, and thus the time to challenge the validity of the 5%
monthly interest rate had long passed. With that in mind, there is no reason for the Court
to disagree with petitioners that in order that the consignation could have the effect of
extinguishing the pledge contracts, such amounts should cover not just the principal loans,
but also the 5% monthly interests thereon.

It bears noting that the Court of Appeals also ruled that respondents had satisfied the
requirements under Section 18, Rule 39, which provides that the judgment obligor may
prevent the sale by paying the amount required by the execution and the costs that have
been incurred therein. 19 However, the provision applies only to execution sales, and not
extra-judicial sales, as evidenced by the use of the phrases "sale of property on execution"
and "judgment obligor." The reference is inapropos, and even if it were applicable, the
failure of the payment to cover the interests due renders it insufficient to stay the sale.

The effect of the finality of the judgments in Civil Cases Nos. R-20120 and R-20131 should
also not be discounted. Petitioners' right to proceed with the auction sale was affirmed not
only by law, but also by a final court judgment. Any subsequent court ruling that would
enjoin the petitioners from exercising such right would have the effect of superseding a final
and executory judgment.

Finally, we cannot help but observe that respondents may have saved themselves much
trouble if they simply participated in the auction sale, as they are permitted to bid
themselves on their pledged properties. 20 Moreover, they would have had a better right
had they matched the terms of the highest bidder. 21 Under the circumstances, with the
high interest payments that accrued after several years, respondents were even placed in a
favorable position by the pledge agreements, since the creditor would be unable to recover
any deficiency from the debtors should the sale price be insufficient to cover the principal
amounts with interests. Certainly, had respondents participated in the auction, there would
have been a chance for them to recover the shares at a price lower than the amount that
was actually due from them to the Parays. That respondents failed to avail of this beneficial
resort wholly accorded them by law is their loss. Now, all respondents can recover is the
amounts they had consigned. TSIDaH

75
WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Appeals is
SET ASIDE and the decision of the Cebu City RTC, Branch 16, dated 18 November 1992 is
REINSTATED. Costs against respondents.

SO ORDERED.

76
Real Estate Mortgage
SECOND DIVISION

[G.R. No. 150197. July 28, 2005.]

PRUDENTIAL BANK, petitioner, vs. DON A. ALVIAR and GEORGIA B. ALVIAR, respondents.

Gella Danguilan Nabaza & Associates for petitioner.

Manuel M. Lazaro & Associates for respondents.

SYLLABUS

1. MERCANTILE LAW; PRIVATE CORPORATIONS; CORPORATION HAS A PERSONALITY

SEPARATE AND DISTINCT FROM THAT OF ITS OFFICERS AND STOCKHOLDERS. Well-
settled is the rule that a corporation has a personality separate and distinct from that of its
officers and stockholders. Officers of a corporation are not personally liable for their acts as
such officers unless it is shown that they have exceeded their authority. However, the legal
fiction that a corporation has a personality separate and distinct from stockholders and
members may be disregarded if it is used as a means to perpetuate fraud or an illegal act or
as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to
confuse legitimate issues. PN BD#76/C-430, being an obligation of Donalco Trading, Inc.,
and not of the respondents, is not within the contemplation of the "blanket mortgage
clause." Moreover, petitioner is unable to show that respondents are hiding behind the
corporate structure to evade payment of their obligations. Save for the notation in the
promissory note that the loan was for house construction and personal consumption, there
is no proof showing that the loan was indeed for respondents' personal consumption.
Besides, petitioner agreed to the terms of the promissory note. If respondents were indeed
the real parties to the loan, petitioner, a big, well-established institution of long standing
that it is, should have insisted that the note be made in the name of respondents
themselves, and not to Donalco Trading, Inc., and that they sign the note in their personal
capacity and not as officers of the corporation.

2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; LOAN; "BLANKET MORTGAGE CLAUSE";

ELUCIDATED. A "blanket mortgage clause," also known as a "dragnet clause" in
77
American jurisprudence, is one which is specifically phrased to subsume all debts of past
or future origins. Such clauses are "carefully scrutinized and strictly construed." Mortgages
of this character enable the parties to provide continuous dealings, the nature or extent of
which may not be known or anticipated at the time, and they avoid the expense and
inconvenience of executing a new security on each new transaction. A "dragnet clause"
operates as a convenience and accommodation to the borrowers as it makes available
additional funds without their having to execute additional security documents, thereby
saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera.
Indeed, it has been settled in a long line of decisions that mortgages given to secure future
advancements are valid and legal contracts, and the amounts named as consideration in
said contracts do not limit the amount for which the mortgage may stand as security if
from the four corners of the instrument the intent to secure future and other indebtedness
can be gathered.

3. ID.; ID.; ID.; ID.; TWO SCHOOLS OF THOUGHT. Under American jurisprudence, two
schools of thought have emerged on this question. One school advocates that a "dragnet
clause" so worded as to be broad enough to cover all other debts in addition to the one
specifically secured will be construed to cover a different debt, although such other debt is
secured by another mortgage. The contrary thinking maintains that a mortgage with such a
clause will not secure a note that expresses on its face that it is otherwise secured as to its
entirety, at least to anything other than a deficiency after exhausting the security specified
therein, such deficiency being an indebtedness within the meaning of the mortgage, in the
absence of a special contract excluding it from the arrangement.

4. ID.; ID.; ID.; ID.; THERE IS NO PROHIBITION AGAINST CONTRACTUALLY REQUIRING

OTHER SECURITIES FOR THE SUBSEQUENT LOANS. The latter school represents the
better position. The parties having conformed to the "blanket mortgage clause" or "dragnet
clause," it is reasonable to conclude that they also agreed to an implied understanding that
subsequent loans need not be secured by other securities, as the subsequent loans will be
secured by the first mortgage. In other words, the sufficiency of the first security is a
corollary component of the "dragnet clause." But of course, there is no prohibition, as in
the mortgage contract in issue, against contractually requiring other securities for the
subsequent loans. Thus, when the mortgagor takes another loan for which another security
was given it could not be inferred that such loan was made in reliance solely on the original
security with the "dragnet clause," but rather, on the new security given. This is the
"reliance on the security test."

5. ID.; ID.; ID.; ID.; WHERE DIFFERENT SECURITY WAS TAKEN FOR THE SECOND LOAN
THERE IS NO INTENT THAT THE PARTIES RELIED ON THE SECURITY OF THE FIRST
78
LOAN. Hence, based on the "reliance on the security test," the California court in the
cited case made an inquiry whether the second loan was made in reliance on the original
security containing a "dragnet clause." Accordingly, finding a different security was taken
for the second loan no intent that the parties relied on the security of the first loan could be
inferred, so it was held. The rationale involved, the court said, was that the "dragnet clause"
in the first security instrument constituted a continuing offer by the borrower to secure
further loans under the security of the first security instrument, and that when the lender
accepted a different security he did not accept the offer.

6. ID.; ID.; ID.; ID.; WHILE IT SUBSISTS THE SECURITY SPECIFICALLY EXECUTED FOR
SUBSEQUENT LOANS MUST FIRST BE EXHAUSTED BEFORE THE MORTGAGED
PROPERTY CAN BE RESORTED TO. It was therefore improper for petitioner in this case
to seek foreclosure of the mortgaged property because of non-payment of all the three
promissory notes. While the existence and validity of the "dragnet clause" cannot be denied,
there is a need to respect the existence of the other security given for PN BD#76/C-345.
The foreclosure of the mortgaged property should only be for the P250,000.00 loan covered
by PN BD#75/C-252, and for any amount not covered by the security for the second
promissory note. As held in one case, where deeds absolute in form were executed to secure
any and all kinds of indebtedness that might subsequently become due, a balance due on a
note, after exhausting the special security given for the payment of such note, was in the
absence of a special agreement to the contrary, within the protection of the mortgage,
notwithstanding the giving of the special security. This is recognition that while the
"dragnet clause" subsists, the security specifically executed for subsequent loans must first
be exhausted before the mortgaged property can be resorted to.

7. ID.; ID.; CONTRACT OF ADHESION; ELUCIDATED. The mortgage contract, as well as

the promissory notes subject of this case, is a contract of adhesion, to which respondents'
only participation was the affixing of their signatures or "adhesion" thereto. A contract of
adhesion is one in which a party imposes a ready-made form of contract which the other
party may accept or reject, but which the latter cannot modify.

8. ID.; ID.; ID.; ANY AMBIGUITY IN A CONTRACT WHOSE TERMS ARE SUSCEPTIBLE OF
DIFFERENT INTERPRETATIONS MUST BE READ AGAINST THE PARTY WHO DRAFTED IT.
The real estate mortgage in issue appears in a standard form, drafted and prepared
solely by petitioner, and which, according to jurisprudence must be strictly construed
against the party responsible for its preparation. If the parties intended that the "blanket
mortgage clause" shall cover subsequent advancement secured by separate securities, then
the same should have been indicated in the mortgage contract. Consequently, any
ambiguity is to be taken contra proferentum, that is, construed against the party who
79
caused the ambiguity which could have avoided it by the exercise of a little more care. To be
more emphatic, any ambiguity in a contract whose terms are susceptible of different
interpretations must be read against the party who drafted it, which is the petitioner in this
case.

DECISION

TINGA, J p:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court.
Petitioner Prudential Bank seeks the reversal of the Decision 1 of the Court of Appeals
dated 27 September 2001 in CA-G.R. CV No. 59543 affirming the Decision of the Regional
Trial Court (RTC) of Pasig City, Branch 160, in favor of respondents.

Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a
parcel of land in San Juan, Metro Manila, covered by Transfer Certificate of Title (TCT) No.
438157 of the Register of Deeds of Rizal. On 10 July 1975, they executed a deed of real
estate mortgage in favor of petitioner Prudential Bank to secure the payment of a loan
worth P250,000.00. 2 This mortgage was annotated at the back of TCT No. 438157. On 4
August 1975, respondents executed the corresponding promissory note, PN BD#75/C-252,
covering the said loan, which provides that the loan matured on 4 August 1976 at an
interest rate of 12% per annum with a 2% service charge, and that the note is secured by a
real estate mortgage as aforementioned. 3 Significantly, the real estate mortgage contained
the following clause:

That for and in consideration of certain loans, overdraft and other credit accommodations
obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred
to, irrespective of number, as DEBTOR, and to secure the payment of the same and those
that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred
Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses
or any other obligation owing to the Mortgagee, whether direct or indirect, principal or
secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor
does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or
assigns, the parcels of land which are described in the list inserted on the back of this
document, and/or appended hereto, together with all the buildings and improvements now
existing or which may hereafter be erected or constructed thereon, of which the Mortgagor
declares that he/it is the absolute owner free from all liens and incumbrances. . . . 4

80
On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345 for
P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured by a
"hold-out" on the mortgagor's foreign currency savings account with the bank under
Account No. 129, and that the mortgagor's passbook is to be surrendered to thebank until
the amount secured by the "hold-out" is settled. 5

On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which
the husband and wife were President and Chairman of the Board and Vice
President, 6 respectively, PN BD#76/C-430 covering P545,000.000. As provided in the note,
the loan is secured by "Clean-Phase out TOD CA 3923," which means that the temporary
overdraft incurred by Donalco Trading, Inc. with petitioner is to be converted into an
ordinary loan in compliance with a Central Bank circular directing the discontinuance of
overdrafts. 7

On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its
approval of a straight loan of P545,000.00, the proceeds of which shall be used to liquidate
the outstanding loan of P545,000.00 TOD. The letter likewise mentioned that the securities
for the loan were the deed of assignment on two promissory notes executed by Bancom
Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and the chattel
mortgage on various heavy and transportation equipment. 8

On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the

obligations of G.B. Alviar Realty and Development, Inc. and for the release of the real estate
mortgage for the P450,000.00 loan covering the two (2) lots located at Vam Buren and
Madison Streets, North Greenhills, San Juan, Metro Manila. The payment was
acknowledged by petitioner who accordingly released the mortgage over the two
properties. 9

On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on
the property covered by TCT No. 438157. Per petitioner's computation, respondents had the
total obligation of P1,608,256.68, covering the three (3) promissory notes, to wit: PN
BD#75/C-252 for P250,000.00, PN BD#76/C-345 for P382,680.83, and PN BD#76/C-340
for P545,000.00, plus assessed past due interests and penalty charges. The public auction
sale of the mortgaged property was set on 15 January 1980. 10

Respondents filed a complaint for damages with a prayer for the issuance of a writ of
preliminary injunction with the RTC of Pasig, 11 claiming that they have paid their
principal loan secured by the mortgaged property, and thus the mortgage should not be
foreclosed. For its part, petitioner averred that the payment of P2,000,000.00 made on 6
March 1979 was not a payment made by respondents, but by G.B. Alviar Realty and
81
Development Inc., which has a separate loan with the bank secured by a separate
mortgage. 12

On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to
proceed with the extra-judicial foreclosure. 13 Respondents sought reconsideration of the
decision. 14 On 24 August 1994, the trial court issued an Order setting aside its earlier
decision and awarded attorney's fees to respondents. 15 It found that only the P250,000.00
loan is secured by the mortgage on the land covered by TCT No. 438157. On the other
hand, the P382,680.83 loan is secured by the foreign currency deposit account of Don
A. Alviar, while the P545,000.00 obligation was an unsecured loan, being a mere conversion
of the temporary overdraft of Donalco Trading, Inc. in compliance with a
Central Bank circular. According to the trial court, the "blanket mortgage clause" relied
upon by petitioner applies only to future loans obtained by the mortgagors, and not by
parties other than the said mortgagors, such as Donalco Trading, Inc., for which
respondents merely signed as officers thereof.

On appeal to the Court of Appeals, petitioner made the following assignment of errors:

I. The trial court erred in holding that the real estate mortgage covers only the promissory
note BD#75/C-252 for the sum of P250,000.00.

II. The trial court erred in holding that the promissory note BD#76/C-345 for
P2,640,000.00 (P382,680.83 outstanding principal balance) is not covered by the real
estate mortgage by expressed agreement.

III. The trial court erred in holding that Promissory Note BD#76/C-430 for P545,000.00 is
not covered by the real estate mortgage.

IV. The trial court erred in holding that the real estate mortgage is a contract of adhesion.

V. The trial court erred in holding defendant-appellant liable to pay plaintiffs-appellees

attorney's fees for P20,000.00. 16

The Court of Appeals affirmed the Order of the trial court but deleted the award of
attorney's fees. 17 It ruled that while a continuing loan or credit accommodation based on
only one security or mortgage is a common practice in financial and commercial
institutions, such agreement must be clear and unequivocal. In the instant case, the
parties executed different promissory notes agreeing to a particular security for each loan.
Thus, the appellate court ruled that the extrajudicial foreclosure sale of the property for the
three loans is improper. 18

82
The Court of Appeals, however, found that respondents have not yet paid the P250,000.00
covered by PN BD#75/C-252 since the payment of P2,000,000.00 adverted to by
respondents was issued for the obligations of G.B. Alviar Realty and Development, Inc. 19

Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors raised in
the Court of Appeals as grounds herein.

Petitioner maintains that the "blanket mortgage clause" or the "dragnet clause" in the real
estate mortgage expressly covers not only the P250,000.00 under PN BD#75/C-252, but
also the two other promissory notes included in the application for extrajudicial foreclosure
of real estate mortgage. 20 Thus, it claims that it acted within the terms of the mortgage
contract when it filed its petition for extrajudicial foreclosure of real estate mortgage.
Petitioner relies on the cases of Lim Julian v. Lutero, 21 Tad-Y v. Philippine
National Bank, 22 Quimson v. Philippine National Bank, 23 C & C Commercial v. Philippine
National Bank, 24 Mojica v. Court of Appeals, 25 andChina Banking Corporation v. Court
of Appeals, 26 all of which upheld the validity of mortgage contracts securing future
advancements. SIDTCa

Anent the Court of Appeals' conclusion that the parties did not intend to include PN
BD#76/C-345 in the real estate mortgage because the same was specifically secured by a
foreign currency deposit account, petitioner states that there is no law or rule which
prohibits an obligation from being covered by more than one security. 27Besides,
respondents even continued to withdraw from the same foreign currency account even
while the promissory note was still outstanding, strengthening the belief that it was the real
estate mortgage that principally secured all of respondents' promissory notes. 28 As for PN
BD#76/C-345, which the Court of Appeals found to be exclusively secured by the Clean-
Phase out TOD 3923, petitioner posits that such security is not exclusive, as the "dragnet
clause" of the real estate mortgage covers all the obligations of the respondents. 29

Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency
of stating that the promissory notes were executed by them not in their personal capacity
but as corporate officers. It claims that PN BD#76/C-430 was in fact for home construction
and personal consumption of respondents. Thus, it states that there is a need to pierce the
veil of corporate fiction. 30

Finally, petitioner alleges that the mortgage contract was executed by respondents with
knowledge and understanding of the "dragnet clause," being highly educated individuals,
seasoned businesspersons, and political personalities. 31 There was no oppressive use of
83
superior bargaining power in the execution of the promissory notes and the real estate
mortgage. 32

For their part, respondents claim that the "dragnet clause" cannot be applied to the
subsequent loans extended to Don Alviar and Donalco Trading, Inc. since these loans are
covered by separate promissory notes that expressly provide for a different form of
security. 33 They reiterate the holding of the trial court that the "blanket mortgage clause"
would apply only to loans obtained jointly by respondents, and not to loans obtained by
other parties. 34 Respondents also place a premium on the finding of the lower courts that
the real estate mortgage clause is a contract of adhesion and must be strictly construed
against petitioner bank. 35

The instant case thus poses the following issues pertaining to: (i) the validity of the "blanket
mortgage clause" or the "dragnet clause"; (ii) the coverage of the "blanket mortgage clause";
and consequently, (iii) the propriety of seeking foreclosure of the mortgaged property for the
non-payment of the three loans. CaHAcT

At this point, it is important to note that one of the loans sought to be included in the
"blanket mortgage clause" was obtained by respondents for Donalco Trading, Inc. Indeed,
PN BD#76/C-430 was executed by respondents on behalf of Donalco Trading, Inc. and not
in their personal capacity. Petitioner asks the Court to pierce the veil of corporate fiction
and hold respondents liable even for obligations they incurred for the corporation. The
mortgage contract states that the mortgage covers "as well as those that the Mortgagee may
extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or indirect, principal or secondary." Well-
settled is the rule that a corporation has a personality separate and distinct from that of its
officers and stockholders. Officers of a corporation are not personally liable for their acts as
such officers unless it is shown that they have exceeded their authority. 36 However, the
legal fiction that a corporation has a personality separate and distinct from stockholders
and members may be disregarded if it is used as a means to perpetuate fraud or an illegal
act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or
to confuse legitimate issues. 37 PN BD#76/C-430, being an obligation of Donalco Trading,
Inc., and not of the respondents, is not within the contemplation of the "blanket mortgage
clause." Moreover, petitioner is unable to show that respondents are hiding behind the
corporate structure to evade payment of their obligations. Save for the notation in the
promissory note that the loan was for house construction and personal consumption, there
is no proof showing that the loan was indeed for respondents' personal consumption.
Besides, petitioner agreed to the terms of the promissory note. If respondents were indeed
the real parties to the loan, petitioner, a big, well-established institution of long standing
84
that it is, should have insisted that the note be made in the name of respondents
themselves, and not to Donalco Trading Inc., and that they sign the note in their personal
capacity and not as officers of the corporation.

Now on the main issues.

A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence,

is one which is specifically phrased to subsume all debts of past or future origins. Such
clauses are "carefully scrutinized and strictly construed." 38 Mortgages of this character
enable the parties to provide continuous dealings, the nature or extent of which may not be
known or anticipated at the time, and they avoid the expense and inconvenience of
executing a new security on each new transaction. 39 A "dragnet clause" operates as a
convenience and accommodation to the borrowers as it makes available additional funds
without their having to execute additional security documents, thereby saving time, travel,
loan closing costs, costs of extra legal services, recording fees, et cetera. 40 Indeed, it has
been settled in a long line of decisions that mortgages given to secure future advancements
are valid and legal contracts, 41 and the amounts named as consideration in said contracts
do not limit the amount for which the mortgage may stand as security if from the four
corners of the instrument the intent to secure future and other indebtedness can be
gathered. 42

The "blanket mortgage clause" in the instant case states:

That for and in consideration of certain loans, overdraft and other credit accommodations
obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred
to, irrespective of number, as DEBTOR, and to secure the payment of the same and those
that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred
Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses
or any other obligation owing to the Mortgagee, whether direct or indirect, principal or
secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor
does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or
assigns, the parcels of land which are described in the list inserted on the back of this
document, and/or appended hereto, together with all the buildings and improvements now
existing or which may hereafter be erected or constructed thereon, of which the Mortgagor
declares that he/it is the absolute owner free from all liens and
incumbrances. . . . 43 (Emphasis supplied.)

Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended
the real estate mortgage to secure not only the P250,000.00 loan from the petitioner, but
85
also future credit facilities and advancements that may be obtained by the respondents.
The terms of the above provision being clear and unambiguous, there is neither need nor
excuse to construe it otherwise. caDTSE

The cases cited by petitioner, while affirming the validity of "dragnet clauses" or "blanket
mortgage clauses," are of a different factual milieu from the instant case. There, the
subsequent loans were not covered by any security other than that for the mortgage deeds
which uniformly contained the "dragnet clause."

In the case at bar, the subsequent loans obtained by respondents were secured by other
securities, thus: PN BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on
his foreign currency savings account, while PN BD#76/C-430, executed by respondents for
Donalco Trading, Inc., was secured by "Clean-Phase out TOD CA 3923" and eventually by a
deed of assignment on two promissory notes executed by Bancom Realty Corporation with
Deed of Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various
heavy and transportation equipment. The matter of PN BD#76/C-430 has already been
discussed. Thus, the critical issue is whether the "blanket mortgage" clause applies even to
subsequent advancements for which other securities were intended, or particularly, to PN
BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this question. One
school advocates that a "dragnet clause" so worded as to be broad enough to cover all other
debts in addition to the one specifically secured will be construed to cover a different debt,
although such other debt is secured by another mortgage. 44The contrary thinking
maintains that a mortgage with such a clause will not secure a note that expresses on its
face that it is otherwise secured as to its entirety, at least to anything other than a
deficiency after exhausting the security specified therein, 45 such deficiency being an
indebtedness within the meaning of the mortgage, in the absence of a special contract
excluding it from the arrangement. 46

The latter school represents the better position. The parties having conformed to the
"blanket mortgage clause" or "dragnet clause," it is reasonable to conclude that they also
agreed to an implied understanding that subsequent loans need not be secured by other
securities, as the subsequent loans will be secured by the first mortgage. In other words,
the sufficiency of the first security is a corollary component of the "dragnet clause." But of
course, there is no prohibition, as in the mortgage contract in issue, against contractually
requiring other securities for the subsequent loans. Thus, when the mortgagor takes
another loan for which another security was given it could not be inferred that such loan

86
was made in reliance solely on the original security with the "dragnet clause," but rather,
on the new security given. This is the "reliance on the security test."

Hence, based on the "reliance on the security test," the California court in the cited case
made an inquiry whether the second loan was made in reliance on the original security
containing a "dragnet clause." Accordingly, finding a different security was taken for the
second loan no intent that the parties relied on the security of the first loan could be
inferred, so it was held. The rationale involved, the court said, was that the "dragnet clause"
in the first security instrument constituted a continuing offer by the borrower to secure
further loans under the security of the first security instrument, and that when the lender
accepted a different security he did not accept the offer. 47

In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the
mortgagor to the bank to provide the security of the mortgage for advances of and when
they were made. Thus, it was concluded that the "offer" was not accepted by the bank when
a subsequent advance was made because (1) the second note was secured by a chattel
mortgage on certain vehicles, and the clause therein stated that the note was secured by
such chattel mortgage; (2) there was no reference in the second note or chattel mortgage
indicating a connection between the real estate mortgage and the advance; (3) the
mortgagor signed the real estate mortgage by her name alone, whereas the second note and
chattel mortgage were signed by the mortgagor doing business under an assumed name;
and (4) there was no allegation by the bank, and apparently no proof, that it relied on the
security of the real estate mortgage in making the advance. 48

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

It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged
property because of non-payment of all the three promissory notes. While the existence and
validity of the "dragnet clause" cannot be denied, there is a need to respect the existence of
the other security given for PN BD#76/C-345. The foreclosure of the mortgaged property
should only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount
not covered by the security for the second promissory note. As held in one case, where
deeds absolute in form were executed to secure any and all kinds of indebtedness that
might subsequently become due, a balance due on a note, after exhausting the special
security given for the payment of such note, was in the absence of a special agreement to
87
the contrary, within the protection of the mortgage, notwithstanding the giving of the
special security. 50 This is recognition that while the "dragnet clause" subsists, the security
specifically executed for subsequent loans must first be exhausted before the mortgaged
property can be resorted to. TEDHaA

One other crucial point. The mortgage contract, as well as the promissory notes subject of
this case, is a contract of adhesion, to which respondents' only participation was the
affixing of their signatures or "adhesion" thereto. 51 A contract of adhesion is one in which
a party imposes a ready-made form of contract which the other party may accept or reject,
but which the latter cannot modify. 52

The real estate mortgage in issue appears in a standard form, drafted and prepared solely
by petitioner, and which, according to jurisprudence must be strictly construed against the
party responsible for its preparation. 53 If the parties intended that the "blanket mortgage
clause" shall cover subsequent advancement secured by separate securities, then the same
should have been indicated in the mortgage contract. Consequently, any ambiguity is to be
taken contra proferentum, that is, construed against the party who caused the ambiguity
which could have avoided it by the exercise of a little more care. 54 To be more emphatic,
any ambiguity in a contract whose terms are susceptible of different interpretations must
be read against the party who drafted it, 55 which is the petitioner in this case.

Even the promissory notes in issue were made on standard forms prepared by petitioner,
and as such are likewise contracts of adhesion. Being of such nature, the same should be
interpreted strictly against petitioner and with even more reason since having been
accomplished by respondents in the presence of petitioner's personnel and approved by its
manager, they could not have been unaware of the import and extent of such contracts.

Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court
found that respondents have not yet paid the P250,000.00, and gave no credence to their
claim that they paid the said amount when they paid petitioner P2,000,000.00. Thus, the
mortgaged property could still be properly subjected to foreclosure proceedings for the
unpaid P250,000.00 loan, and as mentioned earlier, for any deficiency after D/A
SFDX#129, security for PN BD#76/C-345, has been exhausted, subject of course to
defenses which are available to respondents.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV
No. 59543 is AFFIRMED.

Costs against petitioner.

88
SO ORDERED.

EN BANC

[G.R. No. L-17500. May 16, 1967.]

PEOPLE'S BANK AND TRUST CO. and ATLANTIC, GULF AND PACIFIC CO. OF
MANILA, plaintiffs and appellants, vs. DAHICAN LUMBER COMPANY, DAHICAN AMERICAN
LUMBER CORPORATION, and CONNELL BROS. CO. (PHIL.), defendants and appellants.

Angel S. Gamboa for defendants-appellants.

Laurel Law Offices for plaintiffs-appellants.

SYLLABUS

1. REAL ESTATE MORTGAGE; STIPULATION INCLUDING IN THE LIEN AFTER ACQUIRED

PROPERTIES; VALIDITY THEREOF. A stipulation including in the mortgage lien after
acquired properties is common and logical in all cases where the properties given as
collateral are perishable or subject to inevitable wear and tear or were intended to be sold,
or to be used thus becoming subject to the inevitable wear and tear but with the
understanding that they shall be replaced with others to be thereafter acquired by the
mortgagor. Such stipulation is neither unlawful nor immoral, its obvious purpose being to
maintain, to the extent allowed by circumstances, the original value of the properties given
as securities.

89
2. ID.; ID.; ID.; MACHINERIES INTENDED FOR AN INDUSTRY; NATURE THEREOF.
Under Articles 334 and 1877 of the old Civil Code substantially reproduced in Articles 415
and 2127 respectively of the new Civil Code, the properties in question being machinery,
receptacles, instruments or replacements intended by the owner of the tenement for an
industry or works which may be carried on in a building or on a piece of land, and shall
tend directly to meet the needs of the said industry or works, are classified as immovable
properties, therefore not covered by the Chattel Mortgage Law.

3. ID.; ID.; ID.; ID; ID.; SUPPLIERS NOT FINANCIERS CONSIDERED UNPAID SELLERS.
Unpaid sellers who were the suppliers or vendors of the after acquired properties and not
the financiers, like the defendants herein can claim a right superior to the lien constituted
on said properties by virtue of the deeds of mortgage under foreclosure.

4. ID.; ID.; ID.; ID.; ID.; FORECLOSURE PRIOR TO MATURITY OF PROMISSORY NOTE;
WHEN PROPER. Although an extension of time was given to the debtor, considering that
when this complaint was filed the debtor was insolvent, it follows that the debtor thereby
lost the benefit of the period unless he gives a guaranty or security for the debt (Art. 1198,
New Civil Code). Whereas in this case the guaranty given was plainly inadequate, then the
foreclosure was proper because the collection of the notes were not premature.

DECISION

DIZON, J p:

On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia
corporation licensed to do business in the Philippines, hereinafter referred to as
ATLANTIC sold and assigned all its right in the Dahican lumber concession to Dahican
Lumber Company hereinafter referred to as DALCO for the total sum of P500,000.00
of which only the amount of $50,000.00 was paid. Thereafter, to develop the concession,
DALCO obtained various loans from the People's Bank & Trust Company hereinafter
referred to as the Bank amounting, as of July 13, 1950, to P200,000.00. In addition,
DALCO obtained, through the Bank, a loan of $250,000.00 from the Export-Import Bank of
Washington D.C., evidenced by five promissory notes of $50,000.00 each, maturing on
different dates, executed by both DALCO and the Dahican American Lumber Corporation, a
foreign corporation and a stockholder of DALCO, hereinafter referred to as DAMCO, all
payable to the BANK or its order.

As security for the payment of the abovementioned loans, on July 13, 1950 DALCO
executed in favor of the BANK the latter acting for itself and as trustee for the Export,
Import Bank of Washington D. C. a deed of mortgage covering live parcels of land
90
situated in the province of Camarines Norte, together with all the buildings and other
improvements existing thereon and all the personal properties of the mortgagor located in
its place of business in the municipalities of Mambulao and Capalonga, Camarines Norte
(Exhibit D). On the same date, DALCO executed a second mortgage on the same properties
in favor of ATLANTIC to secure payment of the unpaid balance of the sale price of the
lumber concession amounting to the sum of $450,000.00 (Exhibit G). Both deeds contained
the following provision extending the mortgage lien to properties to be subsequently
acquired referred to hereafter as "after acquired properties" by the mortgagor:

"All property of every nature and description taken in exchange or replacement, and all
buildings, machinery, fixtures, tools, equipment and other property which the Mortgagor
may hereafter acquire, construct, install, attach, or use in, to, upon, or in connection with
the premises, shall immediately be and become subject to the lien of this mortgage in the
same manner and to the same extent as if now included therein, and the Mortgagor shall
from time to time during the existence of this mortgage furnish the Mortgagee with an
accurate inventory of such substituted and subsequently acquired property."

Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In
addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO
and 9,286 shares of DAMCO to secure the same obligations.

Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the
BANK paid the same to the Export-Import Bank of Washington D.C. and the latter assigned
to the former its credit and the first mortgage securing it. Subsequently, the BANK gave
DALCO and DAMCO up to April 1, 1953 to pay the overdue promissory note.

After July 13, 1950 the date of execution of the mortgages mentioned above DALCO
purchased various machineries, equipment, spare parts and supplies in addition to, or in
replacement of some of those already owned and used by it on the date aforesaid. Pursuant
to the provision of the mortgage deeds quoted heretofore regarding "after acquired
properties", the BANK requested DALCO to submit complete lists of said properties but the
latter failed to do so. In connection with these purchases, there appeared in the books of
DALCO as due to Connell Bros. Company (Philippines) a domestic corporation who was
acting as the general purchasing agent of DALCO hereinafter called CONNEL the sum
of P452,860.55 and to DAMCO, the sum of P2,151,678.34.

On December 16, 1952, the Board of Directors of DALCO in a special meeting called for the
purpose, passed a resolution agreeing to rescind the alleged sales of equipment, spare parts
and supplies by CONNELL and DAMCO to it. Thereafter, the corresponding agreements of

91
rescission of sale were executed between DALCO and DAMCO, on the one hand, and
between DALCO and CONNELL, on the other.

On January 23, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that
said agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, on
February 12, 1953, ATLANTIC and the BANK, commenced foreclosure proceedings in the
Court of First Instance of Camarines Norte against DALCO and DAMCO. On the same date
they filed an ex-parte application for the appointment of a Receiver and/or for the issuance
of a writ of preliminary injunction to restrain DALCO from removing its properties. The
court granted both remedies and appointed George U. Evans as Receiver. Upon defendants'
motion, however, the court, in its order of February 21, 1953, discharged the Receiver.

On March 2, 1953, defendants filed their answer denying the material allegations of the
complaint and alleging several affirmative defenses and a counterclaim.

On March 4 of the same year, CONNELL filed a motion for intervention alleging that it was
the owner and possessor of some of the equipments, spare parts and supplies which
DALCO had acquired subsequent to the execution of the mortgages sought to be foreclosed
and which plaintiffs claimed were covered by their lien. In its order of March 18, 1953 the
Court granted the motion, as well as plaintiffs' motion to set aside the order discharging the
Receiver. Consequently, Evans was reinstated.

On April 1, 1953, CONNELL filed its answer denying the material averments of the
complaint, and asserting affirmative defenses and a counterclaim.

Upon motion of the parties, the Court, on September 30, 1953, issued an order transferring
the venue of the action to the Court of First Instance of Manila where it was docketed as
Civil Case No. 20987.

On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the
machineries, equipment and supplies of DALCO, and the same were subsequently sold for a
total consideration of P175,000.00 which was deposited in court pending final
determination of the action. By a similar agreement one half (P87,500.00) of this amount
was considered as representing the proceeds obtained from the sale of the "undebated
properties" (those not claimed by DAMCO and CONNELL), and the other half as
representing those obtained from the sale of the "after acquired properties".

After due trial, the Court, on July 15, 1960, rendered Judgment as follows:

"IN VIEW WHEREOF, the Court:

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1. Condemns Dahican Lumber Co. to pay unto People's Bank the sum of P200,000.00 with
7% interest per annum from July 13, 1950, plus another sum of P100,000.00 with 5%
interest per annum from July 13, 1950; plus 10% on both principal sums as attorney's
fees;

2. Condemns Dahican Lumber Co. to pay into Atlantic Gulf the sum of P900,000.00 with
4% interest per annum from July 13, 1950, plus 10% of the principal as attorney's fees;

3. Condemns Dahican Lumber Co. to pay unto Connel Bros. the sum of P425,860.55, and
to pay unto Dahican American Lumber Co. the sum of P2,151,678.34 both with legal
interest from the date of the filing of the respective answers of those parties, plus 10% of
the principals as attorney's fees;

4. Orders that of the sum realized from the sale of the properties of P175,000.00, after
deducting the recognized expenses, one half thereof be adjudicated unto plaintiffs, the
Court no longer specifying the share of each because of their announced intention under
the stipulation of facts to 'pool their resources'; as to the other one-half, the same should
be adjudicated unto both plaintiffs, and defendant Dahican American and Connell Bros. in
the proportion already set forth on page 9, lines 21, 22 and 23 of the body of this decision;
but with the understanding that whatever plaintiffs and Dahican American and Connell
Bros. should receive from the P175,000.00 deposited in the Court shall be applied to the
judgments particularly rendered in favor of each;

5. No other pronouncement as to costs; but the costs of the receivership as to the debated
properties shall be borne by People's Bank, Atlantic Gulf, Connell Bros. and Dahican
American Lumber Co., pro rata."

On the following day, the Court issued the following supplementary decision:

"IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in order to add
the following paragraph 6:

6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90) days, the
Court orders the sale at public auction if the lands object of the mortgages to satisfy the
said mortgages and costs of foreclosure."

From the above-quoted decision, all the parties appealed.

Main contentions of plaintiffs as appellants are the following: that the "after acquired
properties" were subject to the deeds of mortgage mentioned heretofore; that said properties
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were acquired from suppliers other than DAMCO and CONNELL; that even granting that
DAMCO and CONNELL were the real suppliers, the rescission of the sales to DALCO could
not prejudice the mortgage lien in favor of plaintiffs; that considering the foregoing, the
proceeds obtained from the sale of the "after acquired properties" as well as those obtained
from the sale of the "undebated properties" in the total sum of P175,000.00 should have
been awarded exclusively to plaintiffs by reason of the mortgage lien they had thereon; that
damages should have been awarded to plaintiffs against defendants, all of them being guilty
of an attempt to defraud the former when they sought to rescind the sales already
mentioned for the purpose of defeating their mortgage lien, and finally, that defendants
should have been made to bear all the expenses of the Receivership, costs and attorney's
fees.

On the other hand, defendants-appellants contend that the trial court erred: firstly, in not
holding that plaintiffs had no cause of action against them because the promissory note
sued upon was not yet due when the action to foreclose the mortgages was commenced;
secondly, in not holding that the mortgages aforesaid were null and void as regards the
"after acquired properties" of DALCO because they were not registered in accordance with
the Chattel Mortgage Law, the court erring, as a consequence, in holding that said
properties were subject to the mortgage lien in favor of plaintiffs; thirdly, in not holding that
the provision of the fourth paragraph of each of said mortgages did not automatically make
subject to such mortgages the "after acquired properties", the only meaning thereof being
that the mortgagor was willing to constitute a lien over such properties; fourthly, in not
ruling that said stipulation was void as against DAMCO and CONNELL and in not awarding
the proceeds obtained from the sale of the "after acquired properties" to the latter
exclusively; fifthly, in appointing a Receiver and in holding that the damages suffered by
DAMCO and CONNELL by reason of the depreciation or loss in value of the "after acquired
properties" placed under receivership was damnum absque injuria and, consequently, in
not awarding to said parties the corresponding damages claimed in their counterclaim;
lastly, in sentencing DALCO and DAMCO to pay the costs of the Receivership, instead of
sentencing plaintiffs to pay attorney's fees.

Plaintiffs' brief as appellants submit six assignments of error, while that of defendants also
as appellants submit a total of seventeen. However, the multifarious issues thus before Us
may be resolved, directly or indirectly, by deciding the following issues:

Firstly, are the so-called "after acquired properties" covered by and subject to the deeds of
mortgage subject of foreclosure?; secondly, assuming that they are subject thereto, are the
mortgages valid and binding on the properties aforesaid in spite of the fact that they were
not registered in accordance with the provisions of the Chattel Mortgage Law?; thirdly,
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assuming again that the mortgages are valid and binding upon the "after acquired
properties", what is the effect thereon, if any, of the rescission of sales entered into, on the
one hand, between DALCO and DAMCO and between DALCO and CONNELL, on the other?;
and lastly, was the action to foreclose the mortgages premature?

A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property
of every nature and description taken in exchange or replacement, as well as all buildings,
machineries, fixtures, tools, equipments, and other property that the mortgagor may
acquire, construct, install, attach, or use in, to, upon, or in connection with the premises
that is, its lumber concession "shall immediately be and become subject to the lien" of
both mortgages in the same manner and to the same extent as if already included therein
at the time of their execution. As the language thus used leaves no room for doubt as to the
intention of the parties, We see nouseful purpose in discussing the matter extensively.
Suffice it to say that the stipulation referred to is common, and We might say logical, in all
cases where the properties given as collateral are perishable or subject to inevitable wear
and tear or were intended to be sold, or to be used thus becoming subject to the
inevitable wear and tear but with the understanding express or implied that they
shall be replaced with others to be thereafter acquired by the mortgagor. Such stipulation is
neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed
by circumstances, the original value of the properties given as security. Indeed, if such
properties were of the nature already referred to, it would be poor judgment on the part of
the creditor who does not see to it that a similar provision is included in the contract.

B. But defendants contend that, granting without admitting, that the deeds of mortgage in
question cover the "after acquired properties" of DALCO, the same are void and ineffectual
because they were not registered in accordance with the Chattel Mortgage Law. In support
of this and of the proposition that, even if said mortgages were valid, they should not
prejudice them, the defendants argue (1) that the deeds do not describe the mortgaged
chattels specifically, nor were they registered in accordance with the Chattel Mortgage Law;
(2) that the stipulation contained in the fourth paragraph thereof constitutes "mere
executory agreements to give a lien" over the "after acquired properties" upon their
acquisition; and (3) that any mortgage stipulation concerning "after acquired properties"
should not prejudice creditors and other third persons such as DAMCO and CONNELL.

The stipulation under consideration strongly belies defendants' contention. As adverted to

hereinafter, it states that all property of every nature, buildings, machinery, etc. taken in
exchange or replacement by the mortgagor "shall immediately be and become subject to the
lien of this mortgage in the same manner and to the same extent as if now included
therein". No clearer language could have been chosen.
95
Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third
persons, a chattel mortgage must be registered and must describe the mortgaged chattels
or personal properties sufficiently to enable the parties and any other person to identify
them, We say that such law does not apply to this case.

As the mortgages in question were executed on July 13, 1950 with the old Civil Code still in
force, there can be no doubt that the provisions of said code must govern their
interpretation and the question of their validity. It happens, however, that Articles 334 and
1877 of the old Civil Code are substantially reproduced in Article 415 and 2127,
respectively, of the new Civil Code. It is, therefore, immaterial in this case whether we take
the former or the latter as guide in deciding the point under consideration.

Article 415 does not define real property but enumerates what are considered as such,
among them being machinery, receptacles, instruments or replacements intended by the
owner of the tenement for an industry or works which may be carried on in a building or on
a piece of land, and shall tend directly to meet the needs of the said industry or works.

On the strength of the above-quoted legal provisions, the lower court held that inasmuch as
"the chattels were placed in the real properties mortgaged to plaintiffs, they came within
the operation of Art. 415, paragraph 5 and Art. 2127 of the new Civil Code."

We find the above ruling in agreement with our decisions on the subject:

(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph 5 of
the Civil Code (old) gives the character of real property to machinery, liquid containers,
instruments or replacements intended by the owner of any building or land for use in
connection with any industry or trade being carried on therein and which are expressly
adapted to meet the requirements of such trade or industry.

(2) In Cu Unjieng Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held that a mortgage
constituted on a sugar central includes not only the land on which it is built but also the
buildings, machinery and accessories installed at the time the mortgage was constituted as
well as the buildings, machinery and accessories belonging to the mortgagor, installed after
the constitution thereof.

It is not disputed in the case at bar that the "after acquired properties" were purchased by
DALCO in connection with, and for use in the development of its lumber concession and
that they were purchased in addition to, or in replacement of those already existing in the
premises on July 13, 1950. In law, therefore, they must be deemed to have
been immobilized, with the result that the real estate mortgages involved herein which

96
were registered as such did not have to be registered a second time as chattel mortgages
in order to bind the "after acquired properties" and affect third parties.

But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61 Phil. 709,
claim that the "after acquired properties" did not become immobilized because DALCO did
not own the whole area of its lumber concession all over which said properties were
scattered.

The facts in the Davao Sawmill case, however, are not on all fours with the ones obtaining
in the present. In the former, the Davao Sawmill Company, Inc. had repeatedly treated the
machinery therein involved as personal property by executing chattel mortgages thereon in
favor of third parties, while in the present case the parties had treated the "after acquired
properties" as real properties by expressly and unequivocally agreeing that they shall
automatically become subject to the lien of the real estate mortgages executed by them. In
the Davao Sawmill decision it was, in fact, stated that "the characterization of the property
as chattels by the appellant is indicative of intention and impresses upon the property the
character determined by the parties" (61 Phil. 712, Emphasis supplied). In the present
case, the characterization of the "after acquired properties" as real property was made not
only by one but by both interested parties. There is, therefore, more reason to hold that
such consensus impresses upon the properties the character determined by the parties
who must now be held in estoppel to question it.

Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central Altagracia Inc.
(225 U.S. 58) where it was held that while under the general law of Puerto Rico machinery
placed on property by a tenant does not become immobilized, yet, when the tenant places it
there pursuant to contract that it shall belong to the owner, it then becomes immobilized as
to that tenant and even as against his assignees and creditors who had sufficient notice of
such stipulation. In the case at bar it is not disputed that DALCO purchased the "after
acquired properties" to be placed on, and be used in the development of its lumber
concession, and agreed further that the same shall become immediately subject to the lien
constituted by the questioned mortgages. There is also abundant evidence in the record
that DAMCO and CONNELL had full notice of such stipulation and had never thought of
disputing its validity until the present case was filed. Consequently, all of them must be
deemed barred from denying that the properties in question had become immobilized.

What We have said heretofore sufficiently disposes of all the arguments adduced by
defendants in support of their contention that the mortgages under foreclosure are void,
and, that, even if valid, are ineffectual as against DAMCO and CONNELL.
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Now to the question of whether or not DAMCO and CONNELL have rights over the "after
acquired properties" superior to the mortgage lien constituted thereon in favor of plaintiffs.
It is defendants' contention that in relation to said properties they are "unpaid sellers"; that
as such they had not only a superior lien on the "after acquired properties" but also the
right to rescind the sales thereof to DALCO.

This contention it is obvious would have validity only if it were true that DAMCO and
CONNELL were the suppliers or vendors of the "after acquired properties". According to the
record, plaintiffs did not know their exact identity and description prior to the filing of the
case at bar because DALCO, in violation of its obligation under the mortgages, had failed
and refused therefore to submit a complete list thereof. In the course of the proceedings,
however, when defendants moved to dissolve the order of receivership and the writ of
preliminary injunction issued by the lower court, they attached to their motion the lists
marked as Exhibits 1, 2 and 3 describing the properties aforesaid. Later on, the parties
agreed to consider said lists as identifying and describing the "after acquired properties",
and engaged the services of auditors to examine the books of DALCO so as to bring out the
details thereof. The report of the auditors and its annexes (Exhibits V, V-1 V-4) show that
neither DAMCO nor CONNELL had supplied any of the goods of which they respectively
claimed to be the unpaid seller; that all items were supplied by different parties, neither of
whom appeared to be DAMCO or CONNELL; that, in fact, CONNELL collected a 5 per cent
service charge on the net value of all items it claims to have sold to DALCO and which, in
truth, it had purchased for DALCO as the latter's general agent; that CONNELL had to
issue its own invoices in addition to those of the real suppliers in order to collect and justify
such service charge.

Taking into account the above circumstances together with the fact that DAMCO was a
stockholder and CONNELL was not only a stockholder but the general agent of DALCO,
their claim to be the suppliers of the "after acquired properties" would seem to be
preposterous. The most that can be claimed on the basis of the evidence is that DAMCO
and CONNELL probably financed some of the purchases. But if DALCO still owes them any
amount in this connection, it is clear that, as financiers, they can not claim any right over
the "after acquired properties" superior to the lien constituted thereon by virtue of the
deeds of mortgage under foreclosure. Indeed, the execution of the rescission of sales
mentioned heretofore appears to be but a desperate attempt to better or improve DAMCO
and CONNELL's position by enabling them to assume the role of "unpaid suppliers" and
thus claim a vendor's lien over the "after acquired properties". The attempt, of course, is
utterly ineffectual, not only because they are not the "unpaid sellers" they claim to be but
also because there is abundant evidence in the record showing that both DAMCO and

98
CONNELL had known and admitted from the beginning that the "after acquired properties"
of DALCO were meant to be included in the first and second mortgages under foreclosure.

The claim that Belden, of ATLANTIC, had given his consent to the rescission, expressly or
otherwise, is of no consequence and does not make the rescission valid and legally effective.
It must be stated clearly, however, in justice to Belden, that, as a member of the Board of
Directors of DALCO, he opposed the resolution of December 16, 1952 passed by said Board
and the subsequent rescission of the sales.

Finally, defendants claim that the action to foreclose the mortgages filed on February 12,
1953 was premature because the promissory note sued upon did not fall due until April 1
of the same year, concluding from this that, when the action was commenced, the plaintiffs
had no cause of action. Upon this question the lower court says the following in the
appealed judgment:.

"The other is the defense of prematurity of the causes of action in that plaintiffs as a matter
of grace, conceded an extension of time to pay up to 1 April, 1953 while the action was filed
on 12 February 1953, but as to this, the Court taking it that there is absolutely no debate
that Dahican Lumber Co., was insolvent as of the date of the filing of the complaint, it
should follow that the debtor thereby lost the benefit to the period.

'. . . unless he gives a guaranty or security for the debt . . .' (Art. 1198, New Civil Code);

and as the guaranty was plainly inadequate since the claim of plaintiffs reached in the
aggregate, P1,200,000 excluding interest while the aggregate price of the 'after-acquired'
chattels claimed by Connell under the rescission contracts was P1,614,675.94, Exh. 1,
Exh. V, report of auditors, and as a matter of fact, almost all the properties were sold
afterwards for only P175,000.00, page 47, Vol. IV, and the Court understanding that when
the law permits the debtor to enjoy the benefits of the period notwithstanding that he is
insolvent by his giving a guaranty for the debt, that must mean a new and efficient
guaranty, must concede that the causes of action for collection of the notes were not
premature."

Very little need be added to the above. Defendants, however, contend that the lower court
had no basis for finding that, when the action was commenced, DALCO was insolvent for
purposes related to Article 1198, paragraph 1 of the Civil Code. We find, however, that the
finding of the trial court is sufficiently supported by the evidence particularly the resolution
marked as Exhibit K which shows that on December 16, 1952 in the words of the
Chairman of the Board DALCO was "without funds, neither does it expect to have any
funds in the foreseeable future" (p. 64, record on appeal).
99
The remaining issues, namely, whether or not the proceeds obtained from the sale of the
"after acquired properties" should have been awarded exclusively to the plaintiffs or to
DAMCO and CONNELL, and if in law they should be distributed among said parties,
whether or not the distribution should be pro-rata or otherwise; whether or not plaintiffs
are entitled to damages; and lastly, whether or not the expenses incidental to the
Receivership should be borne by all the parties on a pro-rata basis or exclusively by one or
some of them are of a secondary nature as they are already impliedly resolved by what has
been said heretofore.

As regard the proceeds obtained from the sale of the "after acquired properties" and the
"undebated properties", it is clear, in view of our opinion sustaining the validity of the
mortgages in relation thereto, that said proceeds should be awarded exclusively to the
plaintiffs in payment of the money obligations secured by the mortgages under foreclosure.

On the question of plaintiffs' right to recover damages from the defendants, the law (Articles
1313 and 1314 of the New Civil Code) provides that creditors are protected in cases of
contracts intended to defraud them, and that any third person who induces another to
violate his contract shall be liable for damages to the other contracting party. Similar
liability is demandable under Arts. 20 and 21 which may be given retroactive effect (Arts.
2252-53) or under Arts. 1902 and 2176 of the Old Civil Code.

The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO, after
failing to pay the fifth promissory note upon its maturity, conspired jointly with CONNELL
to violate the provisions of the fourth paragraph of the mortgages under foreclosure by
attempting to defeat plaintiffs' mortgage lien on the "after acquired properties". As a result,
the plaintiffs had to go to court to protect their rights thus jeopardized. Defendants' liability
for damages is therefore clear.

However, the measure of the damages suffered by the plaintiffs is not what the latter claim,
namely, the difference between the alleged total obligation secured by the mortgages
amounting to around P1,200,000.00, plus the stipulated interest and attorney's fees, on the
one hand, and the proceeds obtained from the sale of the "after acquired properties", and of
those that were not claimed neither by DAMCO nor CONNELL, on the other. Considering
that the sale of the real properties subject to the mortgages under foreclosure has not been
effected, and considering further the lack of evidence showing that the true value of all the
properties already sold was not realized because their sale was under stress, We feel that
We do not have before Us the true elements or factors that should determine the amount of
damages that plaintiffs are entitled to recover from defendants. It is, however, our
100
considered opinion that, upon the facts established, all the expenses of the Receivership,
which was deemed necessary to safeguard the rights of the plaintiffs, should be borne by
all the defendants, jointly and severally, in the same manner that all of them should pay to
the plaintiffs, jointly and severally, the attorney's fees awarded in the appealed judgment.

In consonance with the portion of this decision concerning the damages that the plaintiffs
are entitled to recover from the defendants, the record of this case shall be remanded below
for the corresponding proceedings.

Modified as above indicated, the appealed judgment is affirmed in all other respects. With
costs.

SECOND DIVISION

[G.R. No. 138292. April 10, 2002.]

KOREA EXCHANGE BANK, petitioner, vs. FILKOR BUSINESS INTEGRATED, INC., KIM
EUNG JOE, and LEE HAN SANG, respondents.

Romulo Mabanta Buenaventura Sayoc & Delos Angeles for petitioner.

Donardo R. Paglinawan for private respondents.

SYNOPSIS

Respondent Filkor Business Integrated, Inc. (Filkor) incurred several obligations in the form
of cash and letters of credit from herein petitioner Korean Exchange Bank. In order to
secure payment of all its obligations, Filkor executed a real estate mortgage of the
101
improvements constructed on a lot which it was leasing from the Cavite Export Processing
Zone Authority. Respondents Kim Eung Joe and Lee Han Sang also executed continuing
suretyship binding them jointly and severally with Filkor to pay the latter's obligations to
petitioner. As the respondents failed to make good on their obligations, petitioner filed a
civil case with the Regional Trial Court of Cavite and moved for summary judgment. The
trial court granted the motion, then rendered judgment in favor of the petitioner. The trial
court, however, failed to order that the property of Filkor be foreclosed and sold at public
auction in the event that Filkor fails to pay its obligations. Petitioner filed a motion for
partial reconsideration of the trial court's order, praying that the relief of foreclosure and
sale at public auction be granted. The trial court denied the motion and ruled that the
petitioner deemed to have abandoned its lien on the property mortgaged when it opted to
file an action for collection of a sum of money. Hence, this appeal before the Supreme
Court.

The Supreme Court granted the petition. According to the Court, the allegations in the
petitioner's complaint and its prayer that the mortgaged property be foreclosed and sold at
public auction indicated that petitioner's action was one for foreclosure of real estate
mortgage. Thus, the trial court erred in concluding that petitioner has abandoned its
mortgage lien on Filkor property, and that what it had filed was an action for collection of a
sum of money. The Court modified the decision to include that the mortgaged property of
Filkor be ordered foreclosed and sold at public auction in the event of respondent's failure
to pay its obligations within a certain period.

SYLLABUS

1. REMEDIAL LAW; ACTIONS; PLEADINGS; ALLEGATIONS IN THE COMPLAINT AND THE

CHARACTER OF THE RELIEF SOUGHT DETERMINE THE NATURE OF AN ACTION;
APPLICATION IN CASE AT BAR. Petitioner's allegations in its complaint, and its prayer
that the mortgaged property be foreclosed and sold at public auction, indicate that
petitioner's action was one for foreclosure of real estate mortgage. We have consistently
ruled that what determines the nature of an action, as well as which court or body has
jurisdiction over it, are the allegations of the complaint and the character of the relief
sought. In addition, we find no indication whatsoever that petitioner had waived its rights
under the real estate mortgage executed in its favor. Thus, the trial court erred in
concluding that petitioner had abandoned its mortgage lien on Filkor's property, and that
what it had filed was an action for collection of a sum of money. Petitioner's action being
one for foreclosure of real estate mortgage, it was incumbent upon the trial court to order
that the mortgaged property be foreclosed and sold at public auction in the event that

102
respondent Filkor fails to pay its outstanding obligations. This is pursuant to Section 2 of
Rule 68 of the 1997 Rules of Civil Procedure. ETaHCD

2. ID.; APPEAL; APPEAL TO THE SUPREME COURT; PURE QUESTION OF LAW AS A

GROUND, PRESENT IN CASE AT BAR. On the propriety of the present appeal, we note
that what petitioner impugns is the determination by the trial court of the nature of action
filed by petitioner, based on the allegations in the complaint. Such a determination as to
the correctness of the conclusions drawn from the pleadings undoubtedly involves a
question of law. As the present appeal involves a question of law, petitioner appropriately
filed it with this Court, pursuant to Section 1 of Rule 45 of the 1997 Rules of Civil
Procedure, which provides: SECTION 1. Filing of petition with Supreme Court. A party
desiring to appeal by certiorari from a judgment or final order or resolution of the Court of
Appeals, the Sandiganbayan, the Regional Trial Court or other courts whenever authorized
by law, may file with the Supreme Court a verified petition for review on certiorari. The
petition shall raise only questions of law which must be distinctly set forth. There
is no dispute with respect to the fact that when an appeal raises only pure questions of law,
this Court has jurisdiction to entertain the same.

DECISION

QUISUMBING, J p:

This petition assails the order 1 dated April 16, 1999 of the Regional Trial Court of Cavite
City, Branch 88, in Civil Case No. N-6689. Said order denied petitioner's partial motion for
reconsideration of the trial court's order 2 dated March 12, 1999 whereby respondents were
ordered to pay petitioner various sums of U.S. dollars as payment of the former's various
loans with interest but omitted to state that the property mortgaged as security for said
loans be foreclosed and sold at public auction in case respondents fail to pay their
obligations to petitioner ninety days from entry of judgment.

The facts are summarized from the findings of the trial court.

On January 9, 1997, respondent Filkor Business Integrated, Inc. (Filkor), borrowed

US$140,000 from petitioner Korea Exchange Bank, payable on July 9, 1997. Of this
amount, only US$40,000 was paid by Filkor. 3

In addition, Filkor executed nine trust receipts in favor of petitioner, from June 26, 1997 to
September 11, 1997. However, Filkor failed to turn over to petitioner the proceeds from the
sale of the goods, or the goods themselves as required by the trust receipts in case Filkor
could not sell them. 4

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In the period from June 9, 1997 to October 1, 1997, Filkor also negotiated to petitioner the
proceeds of seventeen letters of credit issued by the Republic Bank of New York and the
Banque Leumi France, S.A. to pay for goods which Filkor sold to Segerman International,
Inc. and Davyco, S.A. When petitioner tried to collect the proceeds of the letters of credit by
presenting the bills of exchange drawn to collect the proceeds, they were dishonored
because of discrepancies. 5

Prior to all the foregoing, in order to secure payment of all its obligations, Filkor executed a
Real Estate Mortgage on February 9, 1996. It mortgaged to petitioner the improvements
belonging to it constructed on the lot it was leasing at the Cavite Export Processing Zone
Authority. 6 Respondents Kim Eung Joe and Lee Han Sang also executed Continuing
Suretyships binding themselves jointly and severally with respondent Filkor to pay for the
latter's obligations to petitioner. 7

As respondents failed to make good on their obligations, petitioner filed Civil Case No. N-
6689 in the Regional Trial Court of Cavite City, docketed as "Korea Exchange Bank vs.
Filkor Business Integrated, Inc." In its complaint, petitioner prayed that (a) it be paid by
respondents under its twenty-seven causes of action; (b) the property mortgaged be
foreclosed and sold at public auction in case respondents failed to pay petitioner within
ninety days from entry of judgment; and (c) other reliefs just and equitable be granted. 8

Petitioner moved for summary judgment pursuant to Section 1, Rule 35 of the 1997 Rules
of Civil Procedure. On March 12, 1999, the trial court rendered its order granting
petitioner's motion, reasoning as follows:

xxx xxx xxx

It appears that the only reason defendants deny all the material allegations in the
complaint is because the documents attached thereto are mere photocopies and not the
originals thereof. Section 7, Rule 8 of the Rules of Court allows copies of documents to be
attached to the pleading as an exhibit. Defendants are, therefore, deemed to have admitted
the genuineness and due execution of all actionable documents attached to the complaint
inasmuch as they were not specifically denied, pursuant to Section 8 of the Rule 8 of the
Rules of Court.

In the case at bar, there is clearly no substantial triable issue, hence, the motion for
summary judgment filed by plaintiff is proper.

A summary of judgment is one granted by the court upon motion by a party for an
expeditious settlement of the case, there appearing from the pleadings, depositions,

104
admissions and affidavits that there are no important questions or issues of fact involved
(except as to the amount of damages) and that, therefore, the moving party is entitled to a
judgment as a matter of law (Sections 1, 2, 3, Rule 35, 1997 Rules of Civil Procedure).

The court having taken into account the pleadings of the parties as well as the affidavits
attached to the motion for summary judgment and having found that there is
indeed no genuine issue as to any material fact and that plaintiff is entitled to a summary
of judgment as a matter of law, hereby renders judgment for the plaintiff and against the
defendants, ordering said defendants jointly and severally to pay plaintiff, as follows . . . 9

The trial court then rendered judgment in favor of petitioner, granting its prayers under all
its twenty-seven causes of action. It, however, failed to order that the property mortgaged by
respondent Filkor be foreclosed and sold at public auction in the event that Filkor fails to
pay its obligations to petitioner.

Petitioner filed a motion for partial reconsideration of the trial court's order, praying that
the aforesaid relief of foreclosure and sale at public auction be granted. In an order dated
April 16, 1999, the trial court denied petitioner's motion, ruling as follows:

Plaintiff, in opting to file a civil action for the collection of defendants obligations, has
abandoned its mortgage lien on the property subject of the real estate mortgage.

The issue has already been resolved in Danao vs. Court of Appeals, 154 SCRA 446,
citing Manila Trading and Supply Co. vs. Co Kim, et al., 71 Phil. 448, where the Supreme
Court ruled that:

The rule is now settled that a mortgage creditor may elect to waive his security and bring,
instead, an ordinary action to recover the indebtedness with the right to execute a
judgment thereon on all the properties of the debtor including the subject matter of the
mortgage, subject to the qualification that if he fails in the remedy by him elected, he
cannot pursue further the remedy he has waived. SHaATC

WHEREFORE, the Partial Motion for Reconsideration filed by the plaintiff of the Court's
Order dated March 12, 1999 is hereby denied for lack of merit.

SO ORDERED. 10

Hence, the present petition, where petitioner ascribes the following error to the trial court.

105
THE REGIONAL TRIAL COURT OF CAVITE CITY ERRED IN RULING THAT PETITIONER
HAD ABANDONED THE REAL ESTATE MORTGAGE IN ITS FAVOR, BECAUSE IT FILED A
SIMPLE COLLECTION CASE. 11

The resultant issue is whether or not petitioner's complaint before the trial court was an
action for foreclosure of a real estate mortgage, or an action for collection of a sum of
money. In addition, we must also determine if the present appeal was correctly lodged
before us rather than with the Court of Appeals.

In petitioner's complaint before the trial court, Paragraph 183 thereof alleges:

183. To secure payment of the obligations of defendant Corporation under the First to the
Twenty-Seventh Cause of Action, on February 9, 1996, defendant Corporation executed a
Real Estate Mortgage by virtue of which it mortgaged to plaintiff the improvements standing
on Block 13, Lot 1, Cavite Export Processing Zone, Rosario, Cavite, belonging to defendant
Corporation covered by Tax Declaration No. 5906-1 and consisting of a one-story building
called warehouse and spooling area, the guardhouse, the cutting/sewing area building and
the packing area building. (A copy of the Real Estate Mortgage is attached hereto as Annex
"SS" and made an integral part hereof.) 12

This allegation satisfies in part the requirements of Section 1, Rule 68 of the 1997 Rules of
Civil Procedure on foreclosure of real estate mortgage, which provides:

SECTION 1. Complaint in action for foreclosure. In an action for the foreclosure of a

mortgage or other encumbrance upon real estate, the complaint shall set forth the date and
due execution of the mortgage; its assignments, if any; the names and residences of the
mortgagor and the mortgagee; a description of the mortgaged property; a statement of the
date of the note or other documentary evidence of the obligation secured by the mortgage,
the amount claimed to be unpaid thereon; and the names and residences of all persons
having or claiming an interest in the property subordinate in right to that of the holder of
the mortgage, all of whom shall be made defendants in the action.

In Paragraph 183 above, the date and due execution of the real estate mortgage are alleged.
The properties mortgaged are stated and described therein as well. In addition, the names
and residences of respondent Filkor, as mortgagor, and of petitioner, as mortgagee, are
alleged in paragraphs 1 and 2 of the complaint. 13 The dates of the obligations secured by
the mortgage and the amounts unpaid thereon are alleged in petitioner's first to twenty-
seventh causes of action. 14 Moreover, the very prayer of the complaint before the trial
court reads as follows:

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WHEREFORE, it is respectfully prayed that judgment be rendered:

xxx xxx xxx

2. Ordering that the property mortgaged be foreclosed and sold at public auction in case
defendants fail to pay plaintiff within ninety (90) days from entry of judgment.

xxx xxx xxx 15

Petitioner's allegations in its complaint, and its prayer that the mortgaged property be
foreclosed and sold at public auction, indicate that petitioner's action was one for
foreclosure of real estate mortgage. We have consistently ruled that what determines the
nature of an action, as well as which court or body has jurisdiction over it, are the
allegations of the complaint and the character of the relief sought. 16 In addition, we
find no indication whatsoever that petitioner had waived its rights under the real estate
mortgage executed in its favor. Thus, the trial court erred in concluding that petitioner had
abandoned its mortgage lien on Filkor's property, and that what it had filed was an action
for collection of a sum of money.

Petitioner's action being one for foreclosure of real estate mortgage, it was incumbent upon
the trial court to order that the mortgaged property be foreclosed and sold at public auction
in the event that respondent Filkor fails to pay its outstanding obligations. This is pursuant
to Section 2 of Rule 68 of the 1997 Rules of Civil Procedure, which provides:

SEC. 2. Judgment on foreclosure for payment or sale. - If upon the trial in such action the
court shall find the facts set forth in the complaint to be true, it shall ascertain the amount
due to the plaintiff upon the mortgage debt or obligation, including interest and other
charges as approved by the court, and costs, andshall render judgment for the sum so
found due and order that the same be paid to the court or to the judgment obligee within a
period of not less than ninety (90) days nor more than one hundred twenty (120) days from
entry of judgment, and that in default of such payment the property shall be sold at public
auction to satisfy the judgment. (Italics supplied.)

Accordingly, the dispositive portion of the decision of the trial court dated March 12, 1999,
must be modified to comply with the provisions of Section 2 of Rule 68 of the 1997 Rules of
Civil Procedure. This modification is subject to any appeal filed by respondents of said
decision.

On the propriety of the present appeal, we note that what petitioner impugns is the
determination by the trial court of the nature of action filed by petitioner, based on the
allegations in the complaint. Such a determination as to the correctness of the conclusions
107
drawn from the pleadings undoubtedly involves a question of law. 17 As the present appeal
involves a question of law, petitioner appropriately filed it with this Court, pursuant
to Section 1 of Rule 45 of the 1997 Rules of Civil Procedure, which provides:

SECTION 1. Filing of petition with Supreme Court. A party desiring to appeal

by certiorari from a judgment or final order or resolution of the Court of Appeals, the
Sandiganbayan, the Regional Trial Court or other courts whenever authorized by law, may
file with the Supreme Court a verified petition for review oncertiorari. The petition shall
raise only questions of law which must be distinctly set forth. (Italics supplied).

There is no dispute with respect to the fact that when an appeal raises only pure questions
of law, this Court has jurisdiction to entertain the same. 18

WHEREFORE, the petition is GRANTED. The Order dated March 12, 1999, of the Regional
Trial Court of Cavite City, Branch 88, in Civil Case No. N-6689 is hereby MODIFIED, to
state that the mortgaged property of respondent Filkor be ordered foreclosed and sold at
public auction in the event said respondent fails to pay its obligations to petitioner within
ninety (90) days from entry of judgment.

No pronouncement as to costs. DASCIc

SO ORDERED.

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THIRD DIVISION

[G.R. No. 128567. September 1, 2000.]

HUERTA ALBA RESORT INC., petitioner, vs. COURT OF APPEALS and SYNDICATED
MANAGEMENT GROUP INC., respondents.

Benjamin C. Santos & Ofelia Calcetas-Santos and Santos Parungao Aquino & Santos for
petitioner.

Oben, Ventura Defensor.

Abola Associates for petitioner.

Atienza Tabora Del Rosario & Castillo Law Office for respondents.

SYNOPSIS

Private respondent Syndicated Management Group, Inc. (SMGI), as mortgagee-assignee of

Intercom Fund Resource, Inc., filed a complaint for judicial foreclosure of four parcels of
land mortgaged by petitioner Huerta Alba Resort, Inc. before the Regional Trial Court of
Makati City. The trial court ruled in favor of private respondent and ordered the petitioner

109
to pay all its obligations within a period of not less than 150 days from receipt of the
decision. The appeals to the Court of Appeals as well as the Petition for Certiorari to the
Supreme Court filed by petitioner were all dismissed. The dismissal became final and
executory and it was entered in the Book of Entries of Judgment on March 14, 1994.
Accordingly, a writ of execution was issued and the auction sale of the subject properties
was set on September 6, 1994. The petitioner then questioned the issuance of the said Writ
of Execution by claiming that the 150-day period for petitioner to pay the judgment
obligation had not yet lapsed. This issue was again raised by petitioner to the Court of
Appeals. The Court of Appeals ruled that the 150-day period should be computed from the
date the petitioner was notified of the Entry of Judgment and it expired on September 11,
1994. Subsequently, the trial court confirmed the sale of subject properties to the private
respondent. When the private respondent filed a motion for a Writ of Possession, again it
was opposed by petitioner by filing a motion to compel private respondent to accept
redemption. This is the first time petitioner asserted its right to redeem the subject
properties under Section 78 of R.A. No. 337 (General Banking Act). The trial court allowed
the petitioner to redeem the subject properties. However, in a Petition for Certiorari,
Prohibition and Mandamus filed by private respondents, the Court of Appeals set aside the
said Order of the trial court. Hence, this petition. THCSAE

The Court ruled that the claim that petitioner is entitled to the beneficial provisions of
Section 78 of R.A. No. 337 since private respondent's predecessor-in-interest is a credit
institution is in the nature of a compulsory counterclaim which should have been
averred in petitioner's answer to the complaint for judicial foreclosure. The failure of
petitioner to seasonably assert its alleged right under Section 78 of R.A. No. 337 precludes
it from so doing at this late stage of the case. Estoppel may be successfully invoked if the
party fails to raise the question in the early stages of the proceedings. Hence, in conformity
with the ruling in Limpin vs. IAC (166 SCRA 87), the sale of the subject properties,
operated to divest the rights of all the parties to the action and to vest their rights in private
respondent. There then existed only what is known as the equity of redemption, which is
simply the right of the petitioner to extinguish the mortgage and retain ownership of the
property by paying the secured debt within the 90-day period after judgment became final.
There being an explicit finding by the Court of Appeals in its decision that the herein
petitioner failed to exercise its equity of redemption within the prescribed period,
redemption can no longer be effected. The confirmation of the sale and the issuance of the
transfer certificates of title covering the subject properties to private respondent was in
order. The trial court, therefore, has the ministerial duty to place private respondent in the
possession of subject properties.

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SYLLABUS

1. REMEDIAL LAW; SPECIAL CIVIL ACTIONS; FORECLOSURE OF REAL ESTATE

MORTGAGE; EQUITY OF REDEMPTION AND RIGHT OF REDEMPTION; DISTINGUISHED.
On the distinction between the equity of redemption and right of redemption, the case
of Gregorio Y. Limpin vs. Intermediate Appellate Court, comes to the fore. Held the Court in
the said case: "The equity of redemption is, to be sure, different from and should not be
confused with the right of redemption. The right of redemption in relation to a mortgage
understood in the sense of a prerogative to re-acquire mortgaged property after registration
of the foreclosure sale exists only in the case of the extrajudicial foreclosure of the
mortgage. No such right is recognized in a judicial foreclosed of the mortgage. No such right
is recognized in a judicial foreclosed except only where the mortgagee is the Philippine
National Bank or a bank or banking institution. Where a mortgage is foreclosed
extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year
from the registration of the sheriff's certificate of foreclosure sale. Where the foreclosure is
judicially effected, however, no equivalent right of redemption exists. The law declares that a
judicial foreclosure sale, when confirmed by an order of the court, . . . shall operate to
divest the rights of all the parties to the action and to vest their rights in the purchaser,
subject to such rights of redemption as may be allowed by law. Such rights exceptionally
'allowed by law' (i.e., even after confirmation by an order of the court) are those granted by
the charter of the Philippine National Bank (Acts No. 2747 and 2938), and theGeneral
Banking Act (R.A. 337). These laws confer on the mortgagor, his successors in interest or
any judgment creditor of the mortgagor, the right to redeem the property sold on
foreclosure after confirmation by the court of the foreclosure sale which right may be
exercised within a period of one (1) year, counted from the date of registration of the
certificate of sale in the Registry of Property. But, to repeat, no such right of redemption
exists in case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a bank
or banking institution. In such a case, the foreclosure sale, 'when confirmed by an order of
the court. . . . shall operate to divest the rights of all the parties to the action and to vest
their rights in the purchaser.' There then exists only what is known as the equity of
redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage
and retain ownership of the property by paying the secured debt within the 90-day period
after the judgment becomes final, in accordance with Rule 68, or even after the foreclosure
sale but prior to its confirmation.

2. ID.; ID.; ID.; BENEFICIAL PROVISIONS OF SECTION 78 OF GENERAL BANKING

ACT MUST BE RAISED AS COMPULSORY COUNTERCLAIM. [A]t the earliest
opportunity, when it submitted its answer to the complaint for judicial foreclosure,

111
petitioner should have alleged that it was entitled to the beneficial provisions of Section 78
of R.A. No. 337 but again, it did not make any allegation in its answer regarding any right
thereunder. It bears stressing that the applicability of Section 78 ofR.A. No. 337 hinges on
the factual question of whether or not private respondent's predecessor in interest was a
credit institution. As was held in Limpin, a judicial foreclosure sale, "when confirmed by an
order of the court, . . . shall operate to divest the rights of all the parties to the action and
to vest their rights in the purchaser,subject to such rights of redemption as may be allowed
by law," which confer on the mortgagor, his successors in interest of any judgment creditor
of the mortgagor, the right to redeem the property sold on foreclosure after confirmation by
the court of the judicial foreclosure sale. Thus, the claim that petitioner is entitled to the
beneficial provisions of Section 78 of R.A. No. 337 since private respondent's
predecessor-in-interest is a credit institution is in the nature of a compulsory
counterclaim which should have been averred in petitioner's answer to the complaint for
judicial foreclosure.

3. ID.; ID.; ID.; ID.; NOT ALLEGED BY PETITIONER IN EARLY STAGES OF PROCEEDINGS.
[I]t was too late in the day for petitioner to invoke a right to redeem under Section 78
of R.A. No. 337. Petitioner failed to assert a right to redeem in several crucial stages of the
proceedings. For instance, on September 7, 1994, when it filed with the trial court an Ex-
parte Motion for Clarification, petitioner failed to allege and prove that private respondent's
predecessor in interest was a credit institution . . . So also, when it presented before the
trial court an Exception to the Order and Motion to Set Aside said Order dated October 13,
1994, petitioner again was silent on its alleged right under Section 78 of R.A. No. 337 . . .
Then, too, nothing was heard from petitioner on its alleged right under Section 78
of R.A. No. 337 and of the predecessor in interest of private respondent as a credit
institution, when the trial court came out with an order on February 10, 1995, confirming
the sale of subject properties in favor private respondent and declaring that all pending
incidents with respect to the Order dated September 26, 1994 had become moot and
academic. Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification
with the Court of Appeals, seeking "clarification" of the date of commencement of the one
(1) year redemption period for the subject properties . . . If petitioner were really acting in
good faith, it would have ventilated, before the Court of Appeals in CA-G.R. No. 35086 its
alleged right under Section 78 of R.A. No. 337; but petitioner never did do so. cDAITS

4. ID.; ID.; ID.; ID.; ID.; PRINCIPLE OF ESTOPPEL APPLIES. The failure of petitioner to
seasonably assert its alleged right under Section 78 of R.A. No. 337 precludes it from so
doing at this late stage of the case. Estoppel may be successfully invoked if the party fails to
raise the question in the early stages of the proceedings. Thus, "a party to a case who failed

112
to invoke his claim in the main case, while having the opportunity to do so, will be
precluded, subsequently, from invoking his claim, even if it were true, after the decision has
become final, otherwise the judgment may be reduced to a mockery and the administration
of justice may be placed in disrepute."

5. ID.; CIVIL PROCEDURE; COUNTERCLAIM; ELUCIDATED. ". . . A counterclaim is,

most broadly, a cause of action existing in favor of the defendant against the plaintiff. More
narrowly, it is a claim which, if established, will defeat or in some way qualify a judgment or
relief to which plaintiff is otherwise entitled. It is sometimes defined as any cause of
action arising in contract available against any action also arising in contract and existing
at the time of the commencement of such an action. It is frequently defined by the codes as
a cause of action arising out of the contract or transaction set forth in the complaint as the
foundation of the plaintiff's claim, or connected with the subject of the action." "The
counterclaim is in itself a distinct and independent cause of action, so that when properly
stated as such, the defendant becomes, in respect to the matters stated by him, an actor,
and there are two simultaneous actions pending between the same parties, wherein each is
at the same time both a plaintiff and a defendant. Counterclaim is an offensive as well as a
defensive plea and is not necessarily confined to the justice of the plaintiffs claim. It
represents the right of the defendant to have the claims of the parties counterbalanced in
whole or in part, and judgment to be entered in excess, if any. A counterclaim stands on the
same footing, and is to be tested by the same rules, as if it were an independent action."

6. ID.; ID.; ID.; PURPOSE. ". . . The rules of counterclaim are designed to enable the
disposition of a whole controversy of interested parties' conflicting claims, at one time and
in one action, provided all parties' be brought before the court and the matter decided
without prejudicing the rights of any party." ScHADI

7. ID.; ID.; EXECUTION OF JUDGMENT; ERRONEOUS FOR THE TRIAL COURT TO ALLOW
A PARTY AT THIS STAGE TO INTRODUCE EVIDENCE AND OVERRULE THE LAW OF THE
CASE. [T]he trial court erred in still allowing petitioner to introduce evidence that private
respondent's predecessor-in-interest was a credit institution, and to thereafter rule that the
petitioner was entitled to avail of the provisions of Section 78 of R.A. No. 337. In effect, the
trial court permitted the petitioner to accomplish what the latter failed to do before the
Court of Appeals, that is, to invoke its alleged right under Section 78 of R.A. 337 although
the Court of Appeals in CA-G.R. No. 35086 already found that 'the question of whether the
Syndicated Management Council Group, Inc. is a bank or credit institution was never
brought before (the Court of Appeals) squarely." The said pronouncement by the Court of

113
Appeals unerringly signified that petitioner did not make a timely assertion of any right
under Section 78 ofR.A. No. 337 in all the stages of the proceedings below.

8. ID.; ID.; ID.; LAW OF THE CASE; REMAINS AS IT IS, WHETHER OR NOT IT IS
ERRONEOUS IS IMMATERIAL. There is, . . . merit in private respondent's contention
that to allow petitioner to belatedly invoke its right under Section 78 of R.A. No. 337 will
disturb the "law of the case." However, private respondent's statement of what constitutes
the "law of the case" is not entirely accurate. The "law of the case" is not simply that the
defendant possesses an equity of redemption. As the Court has stated, the "law of the case"
holds that petitioner has the equity of the redemption without any qualification whatsoever,
that is, without the right of redemption afforded by Section 78 of R.A. No. 337. Whether or
not the "law of the case" is erroneous is immaterial, it still remains the "law of the case." A
contrary rule will contradict both the letter and spirit of the rulings of the Court of Appeals
in CA-G.R. SP No. 35086, CA-G.R. CV No. 39243, and CA-G.R. 38747, which clearly saw
through the repeated attempts of petitioner to forestall so simple a matter as making the
security given for a just debt to answer for its payment. HATICc

9. ID.; SPECIAL CIVIL ACTIONS; FORECLOSURE OF REAL ESTATE MORTGAGE; EQUITY

OF REDEMPTION CAN NO LONGER BE EFFECTED FOR FAILURE TO EXERCISE WITHIN
THE PRESCRIBED PERIOD. [T]he sale of the subject properties, as confirmed by the
Order dated February 10, 1995 of the trial court in Civil Case No. 89-5424 operated to
divest the rights of all the parties to the action and to vest their rights in private
respondent. There then existed only what is known as the equity of redemption, which is
simply the right of the petitioner to extinguish the mortgage and retain ownership of the
property by paying the secured debt within the 90-day period after the judgment became
final. There being an explicit finding on the part of the Court of Appeals in its Decision of
September 30, 1994 in CA-G.R. No. 35086 that the herein petitioner failed to exercise its
equity of redemption within the prescribed period, redemption can no longer be effected.
The confirmation of the sale and the issuance of the transfer certificates of title covering the
subject properties to private respondent was then, in order. The trial court therefore, has
the ministerial duty to place private respondent in the possession of subject properties.

DECISION

PURISIMA, J. p:

Litigation must at some time be terminated, even at the risk of occasional errors. Public
policy dictates that once a judgment becomes final, executory and unappealable, the
prevailing party should not be denied the fruits of his victory by some subterfuge devised

114
by the losing party. Unjustified delay in the enforcement of a judgment sets at naught the
role of courts in disposing justiciable controversies with finality.

The Case

At bar is a petition assailing the Decision, dated November 14, 1996, and Resolution, dated
March 11, 1997, of the Court of Appeals in CA-G.R. No. 38747, which set aside the Order,
dated July 21, 1995 and Order, dated September 4, 1997, of the Regional Trial Court of
Makati City, in Civil Case No. 89-5424. The aforesaid orders of the trial court held that
petitioner had the right to redeem subject pieces of property within the one-year period
prescribed by Section 78 of Republic Act No. 337 otherwise known as the General Banking
Act.

Section 78 of R.A. No. 337 provides that "in case of a foreclosure of a mortgage in favor of a
bank, banking or credit institution, whether judicially or extrajudicially, the mortgagor shall
have the right, within one year after the sale of the real estate as a result of the foreclosure
of the respective mortgage, to redeem the property."

The Facts

The facts that matter are undisputed:

In a complaint for judicial foreclosure of mortgage with preliminary injunction filed on

October 19, 1989, docketed as Civil Case No. 89-5424 before the Regional Trial Court of
Makati City, the herein private respondent sought the foreclosure of four (4) parcels of land
mortgaged by petitioner to Intercon Fund Resource, Inc. ("Intercon").

Private respondent instituted Civil Case No. 89-5424 as mortgagee-assignee of a loan

amounting to P8.5 million obtained by petitioner from Intercon, in whose favor petitioner
mortgaged the aforesaid parcels of land as security for the said loan.

In its answer below, petitioner questioned the assignment by Intercon of its mortgage right
thereover to the private respondent, on the ground that the same was ultra vires. Petitioner
also questioned during the trial the correctness of the charges and interest on the mortgage
debt in question.

On April 30, 1992, the trial court, through the then Judge now Court of Appeals Justice
Buenaventura J. Guerrero, came out with its decision "granting herein private respondent
SMGI's complaint for judicial foreclosure of mortgage", disposing as follows: aSECAD

"WHEREFORE, judgment is hereby rendered ordering defendant to pay plaintiff the

following:
115
(1) P8,500,000.00 representing the principal of the amount due;

(2) P850,000.00 as penalty charges with interest at 6% per annum, until fully paid;

(3) 22% per annum interest on the above principal from September 6, 1998, until fully paid;

(4) 5% of the sum total of the above amounts, as reasonable attorney's fees; and,

(5) Costs.

All the above must be paid within a period of not less than 150 days from receipt hereof by
the defendant. In default of such payment, the four parcels of land subject matter of the
suit including its improvements shall be sold to realize the mortgage debt and costs, in the
manner and under the regulations that govern sales of real estate under execution." 1

Petitioner appealed the decision of the trial court to the Court of Appeals, the appeal
docketed as CA-G.R. CV No. 39243 before the Sixth Division of the appellate court, which
dismissed the case on June 29, 1993 on the ground of late payment of docket fees.

Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner came to this Court via a
petition for certiorari, docketed as G.R. No. 112044, which this court resolved to dismiss on
December 13, 1993, on the finding that the Court of Appeals erred not in dismissing the
appeal of petitioner.

Petitioner's motion for reconsideration of the dismissal of its petition in G.R. No. 112044
was denied with finality in this Court's Resolution promulgated on February 16, 1994. On
March 10, 1994, leave to present a second motion for reconsideration in G.R. No. 112044 or
to submit the case for hearing by the Court en banc was filed, but to no avail. The Court
resolved to deny the same on May 11, 1994. LibLex

On March 14, 1994, the Resolution dated December 13, 1993, in G.R. No. 112044 became
final and executory and was entered in the Book of Entries of Judgment.

On July 4, 1994, private respondent filed with the trial court of origin a motion for
execution of the Decision promulgated on April 30, 1992 in Civil Case No. 89-5424. The
said motion was granted on July 15, 1994.

Accordingly, on July 15, 1994 a writ of execution issued and, on July 20, 1994, a Notice of
Levy and Execution was issued by the Sheriff concerned, who issued on August 1, 1994 a
Notice of Sheriff's Sale for the auction of subject properties on September 6, 1994.

116
On August 23, 1994, petitioner filed with the same trial court an Urgent Motion to Quash
and Set Aside Writ of Execution ascribing to it grave abuse of discretion in issuing the
questioned Writ of Execution. To support its motion, petitioner invited attention and argued
that the records of the case were still with the Court of Appeals and therefore, issuance of
the writ of execution was premature since the 150-day period for petitioner to pay the
judgment obligation had not yet lapsed and petitioner had not yet defaulted in the payment
thereof since no demand for its payment was made by the private respondent. In
petitioner's own words, the dispute between the parties was "principally on the issue as to
when the 150-day period within which Huerta Alba may exercise its equity of redemption
should be counted."

In its Order of September 2, 1994, the lower court denied petitioner's urgent motion to
quash the writ of execution in Civil Case No. 89-5424, opining that subject judgment had
become final and executory and consequently, execution thereof was a matter of right and
the issuance of the corresponding writ of execution became its ministerial duty.

Challenging the said order granting execution, petitioner filed once more with the Court of
Appeals another petition for certiorari and prohibition with preliminary injunction,
docketed as C.A.-G.R. SP No. 35086, predicated on the same grounds invoked for its Motion
to Quash Writ of Execution.

On September 6, 1994, the scheduled auction sale of subject pieces of properties proceeded
and the private respondent was declared the highest bidder. Thus, private respondent was
awarded subject bidded pieces of property. The covering Certificate of Sale issued in its
favor was registered with the Registry of Deeds on October 21, 1994.

On September 7, 1994, petitioner presented an Ex-Parte Motion for Clarification asking the
trial court to "clarify" whether or not the twelve (12) month period of redemption for
ordinary execution applied in the case.

On September 26, 1994, the trial court ruled that the period of redemption of subject
property should be governed by the rule on the sale of judicially foreclosed property under
Rule 68 of the Rules of Court.

Thereafter, petitioner then filed an Exception to the Order dated September 26, 1994 and
Motion to Set Aside Said Order, contending that the said Order materially altered the
Decision dated April 30, 1992 "which declared that the satisfaction of the judgment shall be
in the manner and under the regulation that govern sale of real estate under execution."

117
Meanwhile, in its Decision of September 30, 1994, the Court of Appeals resolved the issues
raised by the petitioner in C.A.-G.R. SP No. 35086, holding that the one hundred-fifty day
period within which petitioner may redeem subject properties should be computed from the
date petitioner was notified of the Entry of Judgment inG.R. No. 112044; and that the 150-
day period within which petitioner may exercise its equity of redemption expired on
September 11, 1994.

Thus:

"Petitioner must have received the resolution of the Supreme Court dated February 16,
1994 denying with finality its motion for reconsideration in G.R. No. 112044 before March
14, 1994, otherwise the Supreme Court would not have made an entry of judgment on
March 14, 1994. While, computing the 150-day period. Petitioner may have until September
11, 1994. within which to pay the amounts covered by the judgment, such period has
already expired by this time,and therefore, this Court has no more reason to pass upon the
parties' opposing contentions, the same having become moot and
academic." 2 (underscoring supplied). IcaHTA

Petitioner moved for reconsideration of the Decision of the Court of Appeals in C.A.-
G.R. SP No. 35086. In its Motion for Reconsideration dated October 18, 1994, petitioner
theorized that the period of one hundred fifty (150) days should not be reckoned with from
Entry of Judgment but from receipt on or before July 29, 1994 by the trial court of the
records of Civil Case No. 89-5424 from the Court of Appeals. So also, petitioner maintained
that it may not be considered in default, even after the expiration of 150 days from July 29,
1994, because prior demand to pay was never made on it by the private respondent.
According to petitioner, it was therefore, premature for the trial court to issue a writ of
execution to enforce the judgment.

The trial court deferred action on the Motion for Confirmation of the Certificate of Sale in
view of the pendency of petitioner's Motion for Reconsideration in CA-G.R. SPNo. 35086.

On December 23, 1994, the Court of Appeals denied petitioner's motion for reconsideration
in CA-G.R. SP No. 35086. Absent any further action with respect to the denial of the
subject motion for reconsideration, private respondent presented a Second Motion for
Confirmation of Certificate of Sale before the trial court.

As regards the Decision rendered on September 30, 1994 by the Court of Appeals in
CA G.R. SP No. 35086 it became final and executory on January 25, 1995.

118
On February 10, 1995, the lower court confirmed the sale of subject properties to the
private respondent. The pertinent Order declared that all pending incidents relating to the
Order dated September 26, 1994 had become moot and academic. Conformably, the
Transfer Certificates of Title to subject pieces of property were then issued to the private
respondent.

On February 27, 1995, petitioner filed with the Court of Appeals a Motion for Clarification
seeking "clarification" of the date of commencement of the one (1) year period for the
redemption of the properties in question.

In its Resolution dated March 20, 1995, the Court of Appeals merely noted such Motion for
Clarification since its Decision promulgated on September 30, 1994 had already become
final and executory; ratiocinating thus:

"We view the motion for clarification filed by petitioner, purportedly signed by its proprietor,
but which we believe was prepared by a lawyer who wishes to hide under the cloak of
anonymity, as a veiled attempt to buy time and to delay further the disposition of this case.

Our decision of September 30, 1994 never dealt on the right and period of redemption of
petitioner, but was merely circumscribed to the question of whether respondent judge could
issue a writ of execution in its Civil Case No. 89-5424 . . . .

We further ruled that the one-hundred fifty day period within which petitioner may exercise
its equity of redemption should be counted, not from the receipt of respondent court of the
records of Civil Case No. 89-5424 but from the date petitioner was notified of the entry of
judgment made by the appellate court.

But we never made any pronouncement on the one-year right of redemption of petitioner
because, in the first place, the foreclosure in this case is judicial. and as such the
mortgagor has only the equity not the right of redemption . . . . While it may be true that
under Section 78 of R.A. 337 as amended, otherwise known as the General Banking Act, a
mortgagor of a bank, banking or credit institution, whether the foreclosure was
done judicially or extrajudicially, has a period of one year from the auction sale within
which to redeem the foreclosed property, the question of whether the Syndicated
Management Group, Inc., is a bank or credit institution was never brought before us
squarely, and it is indeed odd and strange that petitioner would now sarcastically ask a
rhetorical question in its motion for clarification." 3 (Emphasis supplied).

119
Indeed, if petitioner did really act in good faith, it would have ventilated before the Court of
Appeals in CA-G.R. No. 35086 its pretended right under Section 78 of R.A. No. 337 but it
never did so.

At the earliest opportunity, when it filed its answer to the complaint for judicial foreclosure,
petitioner should have averred in its pleading that it was entitled to the beneficial
provisions of Section 78 of R.A. No. 337; but again, petitioner did not make any such
allegation in its answer.

From the said Resolution, petitioner took no further step such that on March 31, 1995, the
private respondent filed a Motion for Issuance of Writ of Possession with the trial
court. THCSEA

During the hearing called on April 21, 1995, the counsel of record of petitioner entered
appearance and asked for time to interpose opposition to the Motion for Issuance of Writ of
Possession.

On May 2, 1995, in opposition to private respondent's Motion for Issuance of writ of

Possession, petitioner filed a "Motion to Compel Private Respondent to Accept Redemption."
It was the first time petitioner ever asserted the right to redeem subject properties under
Section 78 of R.A. No. 337, the General Banking Act; theorizing that the original mortgagee,
being a credit institution, its assignment of the mortgage credit to petitioner did not remove
petitioner from the coverage of Section 78 ofR.A. No. 337. Therefore, it should have the right
to redeem subject properties within one year from registration of the auction sale, theorized
the petitioner which concluded that in view of its "right of redemption," the issuance of the
titles over subject parcels of land to the private respondent was irregular and premature.

In its Order of July 21, 1995, the trial court, presided over by Judge Napoleon Inoturan,
denied private respondent's motion for a writ of possession, opining that Section 78 of
the General Banking Act was applicable and therefore, the petitioner had until October 21,
1995 to redeem the said parcels of land, said Order ruled as follows:

"It is undisputed that Intercon is a credit institution from which defendant obtained a loan
secured with a real estate mortgage over four (4) parcels of land. Assuming that the
mortgage debt had not been assigned to plaintiff, there is then no question that defendant
would have a right of redemption in case of foreclosure, judicially or extrajudicially,
pursuant to the above quoted Section 78 of RA 337, as amended.

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However, the pivotal issue here is whether or not the defendant lost its right of redemption
by virtue of the assignment of its mortgage debt by Intercon to plaintiff, which is not a bank
or credit institution. The issue is resolved in the negative. The right of redemption in this
case is vested by law and is therefore an absolute privilege which defendant may not lose
even though plaintiff-assignee is not a bank or credit institution (Tolentino versus Court of
Appeals, 106 SCRA 513). Indeed, a contrary ruling will lead to a possible circumvention of
Section 78 because all that may be needed to deprive a defaulting mortgagor of his right of
redemption is to assign his mortgage debt from a bank or credit institution to one which is
not. Protection of defaulting mortgagors, which is the avowed policy behind the provision,
would not be achieved if the ruling were otherwise. Consequently, defendant still possesses
its right of redemption which it may exercise up to October 21, 1995 only, which is one year
from the date of registration of the certificate of sale of subject properties (GSIS versus
Iloilo, 175 SCRA 19, citing Limpin versus IAC, 166 SCRA 87).

Since the period to exercise defendant's right of redemption has not yet expired, the
cancellation of defendant's transfer certificates of title and the issuance of new ones in lieu
thereof in favor of plaintiff are therefore illegal for being premature, thereby necessitating
reconveyance (see Sec. 63 (a) PD 1529, as amended).

WHEREFORE, the Court hereby rules as follows:

(1) The Motion for Issuance of Writ of Possession is hereby denied;

(2) Plaintiff is directed to accept the redemption on or before October 21, 1995 in an
amount computed according to the terms stated in the Writ of Execution dated July 15,
1994 plus all other related costs and expenses mentioned under Section 78, RA 337, as
amended; and

(3) The Register of Deeds of Valenzuela, Bulacan is directed (a) to reconvey to the defendant
the following titles of the four (4) parcels of land, namely TCT Nos. V-38878, V-38879, V-
38880, and V-38881, now in the name of plaintiff, and (b) to register the certificate of sale
dated October 7, 1994 and the Order confirming the sale dated February 10, 1995 by a
brief memorandum thereof upon the transfer certificates of title to be issued in the name of
defendant, pursuant to Sec. 63 (a) PD 1529, as amended.

The Omnibus Motion dated June 5, 1995, together with the Opposition thereto, is now
deemed resolved.

SO ORDERED." 4

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Private respondent interposed a Motion for Reconsideration seeking the reversal of the
Order but to no avail. In its Order dated September 4, 1995, the trial court denied the
same.

To attack and challenge the aforesaid order of July 21, 1995 and subsequent Order of
September 4, 1995 of the trial court, the private respondent filed with this court a Petition
for Certiorari, Prohibition and Mandamus, docketed as G.R. No. 121893, but absent any
special and cogent reason shown for entertaining the same, the Court referred the petition
to the Court of Appeals, for proper determination.

Docketed as G.R. No. 387457 on November 14, 1996, the Court of Appeals gave due course
to the petition and set aside the trial court's Order dated July 21, 1995 and Order dated
September 4, 1995.

In its Resolution of March 11, 1997, the Court of Appeals denied petitioner's Motion for
Reconsideration of the Decision promulgated on November 14, 1996 in CA-G.R.No.
38747. ESCacI

Undaunted, petitioner has come to this Court via the present petition, placing reliance on
the assignment of errors, that:

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT THE

COURT OF APPEALS (TWELFTH DIVISION) IN CA G.R. SP NO. 35086 HAD RESOLVED
"WITH FINALITY" THAT PETITIONER HUERTA ALBA HAD NO RIGHT OF REDEMPTION
BUT ONLY THE EQUITY OF REDEMPTION.

II

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN IGNORING THAT

PETITIONER HUERTA ALBA POSSESSES THE ONE-YEAR RIGHT OF REDEMPTION
UNDER SECTION 78, R.A. NO. 337 (THE GENERAL BANKING ACT).

III

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT PRIVATE

RESPONDENT SYNDICATED MANAGEMENT GROUP, INC. IS ENTITLED TO THE
ISSUANCE OF A WRIT OF POSSESSION OVER THE SUBJECT PROPERTY. 5

In its comment on the petition, private respondent countered that:

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"A. THE HONORABLE COURT OF APPEALS CORRECTLY HELD THAT IT RESOLVED WITH
FINALITY IN C.A.-G.R. SP NO. 35086 THAT PETITIONER ONLY HAD THE RIGHT OF
REDEMPTION IN RESPECT OF THE SUBJECT PROPERTIES.

B. THE PETITION IS AN INSIDIOUS AND UNDERHANDED ATTEMPT TO EVADE THE

FINALITY OF VARIOUS DECISIONS, RESOLUTIONS AND ORDERS WHICH HELD THAT,
PETITIONER ONLY POSSESSES THE EQUITY OF REDEMPTION IN RESPECT OF THE
SUBJECT PROPERTIES.

C. PETITIONER IS BARRED BY ESTOPPEL FROM BELATEDLY RAISING THE ISSUE OF

ITS ALLEGED 'RIGHT OF REDEMPTION.

D. IN HOLDING THAT THE PETITIONER HAD THE 'RIGHT OF REDEMPTION' OVER THE
SUBJECT PROPERTIES, THE TRIAL COURT MADE A MOCKERY OF THE 'LAW OF THE
CASE."' 6

And by way of Reply, petitioner argued, that:

I.

THE COURT OF APPEALS IN CA G.R. SP NO. 35086 COULD NOT HAVE POSSIBLY
RESOLVED THEREIN WHETHER WITH FINALITY OR OTHERWISE THE ISSUE OF
PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO.
337.

II.

THERE IS NO ESTOPPEL HERE. PETITIONER HUERTA ALBA INVOKED ITS RIGHT OF

REDEMPTION UNDER SECTION 78, R.A. NO. 337 IN TIMELY FASHION, i.e., AFTER
CONFIRMATION BY THE COURT OF THE FORECLOSURE SALE, AND WITHIN ONE (1)
YEAR FROM THE DATE OF REGISTRATION OF THE CERTIFICATE OF SALE.

III.

THE PRINCIPLE OF 'THE LAW OF THE CASE' HAS ABSOLUTELY NO BEARING HERE:

(1)

THE RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IS IN FACT
PREDICATED UPON THE FINALITY AND CORRECTNESS OF THE DECISION IN CIVIL
CASE NO. 89-5424. AaHcIT

(2)

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THUS, THE RTC'S ORDER RECOGNIZING PETITIONER HUERTA ALBA'S RIGHT OF
REDEMPTION UNDER SECTION 78, R.A. NO. 337 DOES NOT IN ANY WAY HAVE THE
EFFECT OF AMENDING, MODIFYING, OR SETTING ASIDE THE DECISION IN CIVIL
CASE NO. 89-5424.

The above arguments and counter-arguments advanced relate to the pivotal issue of
whether or not the petitioner has the one-year right of redemption of subject properties
under Section 78 of Republic Act No. 337 otherwise known as the General Banking Act.

The petition is not visited by merit.

Petitioner's assertion of right of redemption under Section 78 of Republic Act No. 337 is
premised on the submission that the Court of Appeals did not resolve such issue in CA-
G.R. SP No. 35086; contending thus:

(1)

BY NO STRETCH OF LOGIC CAN THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO.

35086 BE INTERPRETED TO MEAN THE COURT OF APPEALS HAD RESOLVED 'WITH
FINALITY' THE ISSUE OF WHETHER PETITIONER HUERTA ALBA HAD THE RIGHT OF
REDEMPTION WHEN ALL THAT THE RESOLUTION DID WAS TO MERELY NOTE THE
MOTION FOR CLARIFICATION.

(2)

THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 IS NOT A FINAL

JUDGMENT, ORDER OR DECREE. IT IS NOT EVEN A JUDGMENT OR ORDER TO BEGIN
WITH. IT ORDERS NOTHING; IT ADJUDICATES NOTHING.

(3)

PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO.
37 WAS NOT AN ISSUE AND WAS NOT IN ISSUE, AND COULD NOT HAVE POSSIBLY
BEEN AN ISSUE NOR IN ISSUE, IN CA G.R. SP NO. 35086.

(4)

THE 30 SEPTEMBER 1994 DECISION IN CA G.R. SP NO. 35086 HAVING ALREADY

BECOME FINAL EVEN BEFORE THE FILING OF THE MOTION FOR CLARIFICATION, THE
COURT OF APPEALS NO LONGER HAD ANY JURISDICTION TO ACT OF THE MOTION OR
ANY OTHER MATTER IN CA G.R. SP NO. 35086, EXCEPT TO MERELY NOTE THE
MOTION.

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II.

IN STARK CONTRAST, THE ISSUE OF PETITIONER HUERTA ALBA'S RIGHT OF

REDEMPTION UNDER SECTION 78, R.A. NO. 337 WAS DIRECTLY RAISED AND JOINED
BY THE PARTIES, AND THE SAME DULY RESOLVED BY THE TRIAL COURT.

III.

THE RIGHT OF REDEMPTION UNDER SECTION 78 OF R.A. NO. 337 IS MANDATORY AND
AUTOMATICALLY EXISTS BY LAW. THE COURTS ARE DUTY-BOUND TO RECOGNIZE
SUCH RIGHT.

IV.

EQUITABLE CONSIDERATIONS WEIGH HEAVILY IN FAVOR OF PETITIONER HUERTA

ALBA, NOT THE LEAST OF WHICH IS THE WELL-SETTLED POLICY OF THE LAW TO AID
RATHER THAN DEFEAT THE RIGHT OF REDEMPTION.

V.

THEREFORE THE 21 JULY 1995 AND 04 SEPTEMBER 1995 ORDERS OF THE TRIAL
COURT ARE VALID AND PROPER IN ACCORDANCE WITH THE MANDATE OF THE LAW.

From the various decisions, resolutions and orders a quo it can be gleaned that what
petitioner has been adjudged to have was only the equity of redemption over subject
properties. On the distinction between the equity of redemption and right of redemption,
the case of Gregorio Y. Limpin vs. Intermediate Appellate Court, 7comes to the fore. Held
the Court in the said case:

"The equity of redemption is, to be sure, different from and should not be confused with
the right of redemption.

The right of redemption in relation to a mortgage understood in the sense of a prerogative

to re-acquire mortgaged property after registration of the foreclosure sale exists only in
the case of the extrajudicial foreclosure of the mortgage. No such right is recognized in
a judicial foreclosure except only where the mortgagee is the Philippine National Bank or a
bank or banking institution.

Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of
redemption within one (1) year from the registration of the sheriff's certificate of foreclosure
sale.

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Where the foreclosure is judicially effected, however, no equivalent right of redemption
exists. The law declares that a judicial foreclosure sale 'when confirmed be an order of the
court, . . . shall operate to divest the rights of all the parties to the action and to vest their
rights in the purchaser, subject to such rights of redemption as may be allowed by law.'
Such rights exceptionally 'allowed by law' (i.e., even after confirmation by an order of the
court) are those granted by the charter of the Philippine National Bank (Acts No. 2747 and
2938), and the General Banking Act (R.A. 337). These laws confer on the mortgagor, his
successors in interest or any judgment creditor of the mortgagor, the right to redeem the
property sold on foreclosure after confirmation by the court of the foreclosure sale
which right may be exercised within a period of one (1) year, counted from the date of
registration of the certificate of sale in the Registry of Property.

But, to repeat, no such right of redemption exists in case of judicial foreclosure of a

mortgage if the mortgagee is not the PNB or a bank or banking institution. In such a case,
the foreclosure sale, 'when confirmed by an order of the court. . . shall operate to divest the
rights of all the parties to the action and to vest their rights in the purchaser.' There then
exists only what is known as the equity of redemption. This is simply the right of the
defendant mortgagor to extinguish the mortgage and retain ownership of the property by
paying the secured debt within the 90-day period after the judgment becomes final, in
accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation.

Section 2, Rule 68 provides that

'. . . If upon the trial . . . the court shall find the facts set forth in the complaint to be true,
it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation,
including interest and costs, and shall render judgment for the sum so found due and order
the same to be paid into court within a period of not less than ninety (90) days from the
date of the service of such order, and that in default of such payment the property be sold
to realize the mortgage debt and costs.'

This is the mortgagor's equity (not right) of redemption which, as above stated, may be
exercised by him even beyond the 90-day period 'from the date of service of the order,' and
even after the foreclosure sale itself, provided it be before the order of confirmation of the
sale. After such order of confirmation, noredemption can be effected any
longer." 8 (Emphasis supplied)

Petitioner failed to seasonably invoke its purported right under Section 78 of R.A. No. 337.

126
Petitioner avers in its petition that the Intercon, predecessor in interest of the private
respondent, is a credit institution, such that Section 78 of Republic Act No. 337should
apply in this case. Stated differently, it is the submission of petitioner that it should be
allowed to redeem subject properties within one year from the date of sale as a result of the
foreclosure of the mortgage constituted thereon.

The pivot of inquiry here therefore, is whether the petitioner seasonably invoked its asserted
right under Section 78 of R.A. No. 337 to redeem subject properties.

Petitioner theorizes that it invoked its "right" in "timely fashion", that is, after confirmation
by the court of the foreclosure sale, and within one (1) year from the date of registration of
the certificate of sale. Indeed, the facts show that it was only on May 2, 1995 when, in
opposition to the Motion for Issuance of Writ of Possession, did petitioner file a Motion to
Compel Private Respondent to Accept Redemption, invoking for the very first time its alleged
right to redeem subject properties under to Section 78 of R.A. No. 337.

In light of the aforestated facts, it was too late in the day for petitioner to invoke a right to
redeem under Section 78 of R.A. No. 337. Petitioner failed to assert a right to redeem in
several crucial stages of the proceedings.

For instance, on September 7, 1994, when it filed with the trial court an Ex-part Motion for
Clarification, petitioner failed to allege and prove that private respondent's predecessor in
interest was a credit institution and therefore, Section 78 of R.A. No. 337 was applicable.
Petitioner merely asked the trial court to clarify whether the sale of subject properties was
execution sale or judicial foreclosure sale.

So also, when it presented before the trial court an Exception to the Order and Motion to
Set Aside Said Order dated October 13, 1994, petitioner again was silent on its alleged right
under Section 78 of R.A. No. 337, even as it failed to show that private respondent's
predecessor in interest is a credit institution. Petitioner just argued that the aforementioned
Order materially altered the trial court's Decision of April 30, 1992.

Then, too, nothing was heard from petitioner on its alleged right under Section 78
of R.A. No. 337 and of the predecessor in interest of private respondent as a credit
institution, when the trial court came out with an order on February 10, 1995, confirming
the sale of subject properties in favor of private respondent and declaring that all pending
incidents with respect to the Order dated September 26, 1994 had become moot and
academic.

127
Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification with the
Court of Appeals, seeking "clarification" of the date of commencement of the one (1) year
redemption period for the subject properties, petitioner never intimated any alleged right
under Section 78 of R.A. No. 337 nor did it invite attention to its present stance that private
respondent's predecessor-in-interest was a credit institution. Consequently, in its
Resolution dated March 20, 1995, the Court of Appeals ruled on the said motion thus:

"But we never made any pronouncement on the one-year right of redemption of petitioner
because, in the first place, the foreclosure in this case is judicial, and as such. the
mortgagor has only the equity, not the right of redemption, . . . While it may be true that
under Section 78 of R.A. 337 as amended, otherwise known as the General Banking Act, a
mortgagor of a bank, banking or credit institution, whether the foreclosure was
done judicially or extrajudicially, has a period of one year from the auction sale within
which to redeem the foreclosed property, the question of whether the Syndicated
Management Group. Inc., is bank or credit institution was never brought before us
squarely, and it is indeed odd and strange that petitioner would now sarcastically ask a
rhetorical question in its motion for clarification." 9 (Emphasis supplied). AaHcIT

If petitioner were really acting in good faith, it would have ventilated before the Court of
Appeals in CA-G.R. No. 35086 its alleged right under Section 78 of R.A. No. 337; but
petitioner never did do so.

Indeed, at the earliest opportunity, when it submitted its answer to the complaint for
judicial foreclosure, petitioner should have alleged that it was entitled to the beneficial
provisions of Section 78 of R.A. No. 337 but again, it did not make any allegation in its
answer regarding any right thereunder. It bears stressing that the applicability of Section
78 of R.A. No. 337 hinges on the factual question of whether or not private respondent's
predecessor in interest was a credit institution. As was held in Limpin, a judicial foreclosure
sale, "when confirmed by an order of the court, . . . shall operate to divest the rights of all
the parties to the action and to vest their rights in the purchaser, subject to such rights of
redemption as may be allowed by law'," 10 which confer on the mortgagor, his successors in
interest or any judgment creditor of the mortgagor, the right to redeem the property sold on
foreclosure after confirmation by the court of the judicial foreclosure sale. Thus, the claim
that petitioner is entitled to the beneficial provisions of Section 78 of R.A. No. 337 since
private respondent's predecessor-in-interest is a credit institution is in the nature of a
compulsory counterclaim which should have been averred in petitioner's answer to the
compliant for judicial foreclosure.

128
". . . A counterclaim is, most broadly, a cause of action existing in favor of the defendant
against the plaintiff. More narrowly, it is a claim whic, if established, will defeat or in some
way qualify a judgment or relief to which plaintiff is otherwise entitled. It is sometimes
defined as any cause of action arising in contract available against any action also arising
in contract and existing at the time of the commencement of such an action. It is frequently
defined by the codes as a cause of action arising out of the contract or transaction set forth
in the complaint as the foundation of the plaintiff's claim, or connected with the subject of
the action." 11 (emphasis supplied)

"The counterclaim is in itself a distinct and independent cause of action, so that when
properly stated as such, the defendant becomes, in respect to the matters stated by him, an
actor, and there are two simultaneous actions pending between the same parties, wherein
each is at the same time both a plaintiff and a defendant. Counterclaim is an offensive as
well as a defensive plea and is not necessarily confined to the justice of the plaintiff's
claim. It represents the right of the defendant to have the claims of the parties
counterbalanced in whole or in part, and judgment to be entered in excess, if any. A
counterclaim stands on the same footing, and is to be tested by the same rules, as if it were
an independent action." 12 (emphasis supplied)

The very purpose of a counterclaim would have been served had petitioner alleged in its
answer its purported right under Section 78 of R.A. No. 337:

". . . The rules of counterclaim are designed to enable the disposition of a whole controversy
of interested parties' conflicting claims, at one time and in one action, provided all parties'
be brought before the court and the matter decided without prejudicing the rights of any
party." 13

The failure of petitioner to seasonably assert its alleged right under Section 78 of R.A. No.
337 precludes it from so doing at this late stage case. Estoppel may be successfully invoked
if the party fails to raise the question in the early stages of the proceedings. 14 Thus, "a
party to a case who failed to invoke his claim in the main case, while having the
opportunity to do so, will be precluded, subsequently, from invoking his claim, even if it
were true, after the decision has become final, otherwise the judgment may be reduced to a
mockery and the administration of justice may be placed in disrepute." 15

All things viewed in proper perspective, it is decisively clear that the trial court erred in still
allowing petitioner to introduce evidence that private respondent's predecessor-in-interest
was a credit institution, and to thereafter rule that the petitioner was entitled to avail of the
provisions of Section 78 of R.A. No. 337. In effect, the trial court permitted the petitioner to
accomplish what the latter failed to do before the Court of Appeals, that is, to invoke its
129
alleged right under Section 78 of R.A. No. 337 although the Court of Appeals in CA-
G.R. No. 35086 already found that 'the question of whether the Syndicated Management
Council Group, Inc. is a bank or credit institution was never brought before (the Court of
Appeals) squarely." The said pronouncement by the Court of Appeals unerringly signified
that petitioner did not make a timely assertion of any right under Section 78 of R.A. No.
337 in all the stages of the proceedings below.

Verily, the petitioner has only itself to blame for not alleging at the outset that the
predecessor-in-interest of the private respondent is a credit institution. Thus, when the trial
court, and the Court of Appeals repeatedly passed upon the issue of whether or not
petitioner had the right of redemption or equity of redemption over subject properties in the
decisions, resolutions and orders, particularly in Civil Case No. 89-5424, CA-G.R. CV No.
39243, CA-G.R. SP No. 35086, and CA-G.R. SP No. 38747, it was unmistakable that the
petitioner was adjudged to just have the equity of redemption without any qualification
whatsoever, that is, without any right of redemption allowed by law. HCITcA

The "law of case" holds that petitioner has the equity of redemption without any
qualification.

There is, therefore, merit in private respondent's contention that to allow petitioner to
belatedly invoke its right under Section 78 of R.A. No. 337 will disturb the "law of the case."
However, private respondent's statement of what constitutes the "law of the case" is not
entirely accurate. The "law of the case" is not simply that the defendant possesses an equity
of redemption. As the Court has stated, the "law of the case" holds that petitioner has the
equity of the redemption without any qualification whatsoever, that is, without the right of
redemption afforded by Section 78 of R.A. No. 337. Whether or not the "law of the case" is
erroneous is immaterial, it still remains the "law of the case". A contrary rule will contradict
both the letter and spirit of the rulings of the Court of Appeals in CA-G.R. SP No. 35086,
CA-G.R. CV No. 39243, and CA-G.R. 38747, which clearly saw through the repeated
attempts of petitioner to forestall so simple a matter as making the security given for a just
debt to answer for its payment.

Hence, in conformity with the ruling in Limpin, the sale of the subject properties, as
confirmed by the Order dated February 10, 1995 of the trial court in Civil Case No. 89-
5424 operated to divest the rights of all the parties to the action and to vest their rights in
private respondent. There then existed only what is known as the equity of redemption,
which is simply the right of the petitioner to extinguish the mortgage and retain ownership
of the property by paying the secured debt within the 90-day period after the judgment
130
became final. There being an explicit finding on the part of the Court of Appeals in its
Decision of September 30, 1994 in CA-G.R. No. 35086 that the herein petitioner failed to
exercise its equity of redemption within the prescribed period, redemption can no longer be
effected. The confirmation of the sale and the issuance of the transfer certificates of title
covering the subject properties to private respondent was then, in order. The trial court
therefore, has the ministerial duty to place private respondent in the possession of subject
properties. aSTAcH

WHEREFORE, the petition is DENIED, and the assailed decision of the Court of Appeals,
declaring null and void the Order dated 21 July 1995 and Order dated 4 September 1997 of
the Regional Trial Court of Makati City in Civil Case No. 89-5424,
AFFIRMED. No pronouncement as to costs.

SO ORDERED.

SECOND DIVISION

[G.R. No. 91779. February 7, 1991.]

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GRAND FARMS, INC. and PHILIPPINE SHARES CORPORATION, petitioners, vs. COURT OF
APPEALS, JUDGE ADRIAN R. OSORIO, as Presiding Judge of the Regional Trial Court,
Branch 171, Valenzuela Metro Manila; ESPERANZA ECHIVERRI, as Clerk of Court & Ex-
Officio Sheriff of the Regional Trial Court of Valenzuela, Metro Manila; SERGIO CABRERA,
as Deputy Sheriff-in-Charge; and BANCO FILIPINO SAVINGS AND MORTGAGE
BANK,respondents.

Balgos & Perez for petitioners.

Sycip, Salazar, Hernandez & Gatmaitan for private respondent.

DECISION

REGALADO, J p:

The propriety of a summary judgment is raised in issue in the instant petition, with herein
petitioners appealing the decision 1 of respondent court in CA-G.R. SP No. 17535, dated
November 29, 1989, which found no grave abuse of discretion on the part of respondent
judge in denying petitioners' motion for summary judgment. 2

The antecedents of this case are clear and undisputed. Sometime on April 15, 1988,
petitioners filed Civil Case No. 2816-V-88 in the Regional Trial Court of Valenzuela, Metro
Manila for annulment and/or declaration of nullity of the extrajudicial foreclosure
proceedings over their mortgaged properties, with damages, against respondents clerk of
court, deputy sheriff and herein private respondent Banco Filipino Savings and Mortgage
Bank. 3

Soon after private respondent had filed its answer to the complaint, petitioners filed a
request for admission by private respondent of the allegation, inter alia, that noformal
notice of intention to foreclose the real estate mortgage was sent by private respondent to
petitioners. 4

Private respondent, through its deputy liquidator, responded under oath to the request and
countered that petitioners were "notified of the auction sale by the posting of notices and
the publication of notice in the Metropolitan Newsweek, a newspaper of general circulation
in the province where the subject properties are located and in the Philippines on February
13, 20 and 28, 1988." 5

On the basis of the alleged implied admission by private respondent that no formal notice of
foreclosure was sent to petitioners, the latter filed a motion for summary judgment

132
contending that the foreclosure was violative of the provisions of the mortgage contract,
specifically paragraph (k) thereof which provides:

"k) All correspondence relative to this Mortgage, including demand letters, summons,
subpoena or notifications of any judicial or extrajudical actions shall be sent to the
Mortgagor at the address given above or at the address that may hereafter be given in
writing by the Mortgagor to the Mortgagee, and the mere act of sending any correspondence
by mail or by personal delivery to the said address shall be valid and effective notice to the
Mortgagor for all legal purposes, and the fact that any communication is not actually
received by the Mortgagor, or that it has been returned unclaimed to the Mortgagee, or
that no person was found at the address given, or that the address is fictitious, or cannot
be located, shall not excuse or relieve the Mortgagor from the effects of such notice;" 6

The motion was opposed by private respondent which argued that petitioners' reliance on
said paragraph (k) of the mortgage contract fails to consider paragraphs (b) and (d) of the
same contract, which respectively provide as follows:

"b) . . . For the purpose of extra-judicial foreclosure, the Mortgagor (plaintiff) hereby
appoints the Mortgagee (BF) his attorney-in-fact to sell the property mortgaged, to sign all
documents and perform any act requisite and necessary to accomplish said purpose and to
appoint its substitutes as such attorney-in-fact, with the same powers as above-specified.
The Mortgagor hereby expressly waives the term of thirty (30) days or any other term
granted or which may hereafter be granted him by law as the period which must elapse
before the Mortgagee shall be entitled to foreclose this mortgage, it being specifically
understood and agreed that the said Mortgagee may foreclose this mortgage at any time
after the breach of any conditions hereof . . ."

xxx xxx xxx

"d) Effective upon the breach of any conditions of the mortgage and in addition to the
remedies herein stipulated, the Mortgagee is hereby likewise appointed attorney-in-fact of
the Mortgagor with full powers and authority, with the use of force, if necessary, to take
actual possession of the mortgaged property, without the necessity for any judicial order or
any permission of power to collect rents, to eject tenants, to lease or sell the mortgaged
property, or any part thereof, at public or private sale without previous notice or
advertisement of any kind and execute the corresponding bills of sale, lease or other
agreement that may be deemed convenient, to make repairs or improvement to the
mortgaged property and pay for the same and perform any other act which the Mortgagor
may deem convenient . . ." 7

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On February 27, 1989, the trial court issued an order, denying petitioners' motion for
summary judgment. 8 Petitioners' motion for reconsideration was likewise denied by
respondent judge on the ground that genuine and substantial issues exist which require
the presentation of evidence during the trial, to wit: (a) whether or not the loan has
matured; (b) whether or not private respondent notified petitioners of the foreclosure of
their mortgage; (c) whether or not the notice by publication of the foreclosure constitutes
sufficient notice to petitioners under the mortgage contract; (d) whether or not the
applicant for foreclosure of the mortgage was a duly authorized representative of private
respondent; and (e) whether or not the foreclosure was enjoined by a resolution of this
Court. 9

Petitioners thereafter went on a petition for certiorari to respondent court attacking said
orders of denial as having been issued with grave abuse of discretion. As earlier adverted to,
respondent court dismissed the petition, holding that no personal notice was required to
foreclose since private respondent was constituted by petitioners as their attorney-in-fact to
sell the mortgaged property. It further held that paragraph (k) of the mortgage contract
merely specified the address where correspondence should be sent and did not impose an
additional condition on the part of private respondent to notify petitioners personally of the
foreclosure. Respondent court also denied petitioners motion for reconsideration, hence the
instant petition. LibLex

We rule for petitioners.

The Rules of Court authorize the rendition of a summary judgment if the pleadings,
depositions and admissions on file, together with the affidavits, show that, except as to the
amount of damages, there is no issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law. 10 Although an issue may be raised formally by
the pleadings but there is no genuine issue of fact, and all the facts are within the judicial
knowledge of the court, summary judgment may be granted.11

The real test, therefore, of a motion for summary judgment is whether the pleadings,
affidavits and exhibits in support of the motion are sufficient to overcome the opposing
papers and to justify a finding as a matter of law that there is no defense to the action or
that the claim is clearly meritorious. 12

Applying said criteria to the case at bar, we find petitioners' action in the court below for
annulment and/or declaration of nullity of the foreclosure proceedings and damages ripe
for summary judgment. Private respondent tacitly admitted in its answer to petitioners'
request for admission that it did not send any formal notice of foreclosure to petitioners.
Stated otherwise, and as is evident from the records, there has been no denial by private
134
respondent that no personal notice of the extrajudicial foreclosure was ever sent to
petitioners prior thereto. This omission, by itself, rendered the foreclosure defective and
irregular for being contrary to the express provisions of the mortgage contract. There is
thus no further necessity to inquire into the other issues cited by the trial court, for the
foreclosure may be annulled solely on the basis of such defect.

While private respondent was constituted as their attorney-in-fact by petitioners, the

inclusion of the aforequoted paragraph (k) in the mortgage contract nonetheless rendered
personal notice to the latter indispensable. As we stated in Community Savings & Loan
Association, Inc., et al. vs. Court of Appeals, at al., 13 where we had the occasion to
construe an identical provision:

"One other important point that militates against the petitioners' first ground for this
petition is the fact that no notice of the foreclosure proceedings was ever sent by CSLA to
the deceased mortgagor Antonio Esguerra or his heirs in spite of an express stipulation in
the mortgage agreement to that effect. Said Real Estate Mortgage provides, in Sec. 10
thereof that:

'(10) All correspondence relative to this mortgage, including demand letters, summons,
subpoenas, or notifications of any judicial or extrajudicial actions shall be sent to the
Mortgagor at the address given above or at the address that may hereafter be given in
writing by the Mortgagor to the Mortgagee, and the mere act of sending any correspondence
by mail or by personal delivery to the said address shall be valid and effective notice to the
Mortgagor for all legal purposes, . . .' (Emphasis in the original text.)

"The Court of Appeals, in appreciating the foregoing provision ruled that it 'is an additional
stipulation between the parties. As such, it is the law between them and as it not contrary
to law, morals, good customs and public policy, the same should be complied with faithfully
(Article 1306, New Civil Code of the Philippines). Thus, while publication of the foreclosure
proceedings in the newspaper of general circulation was complied with, personal notice is
still required, as in the case at bar, when the same was mutually agreed upon by the
parties as additional condition of the mortgage contract. Failure to comply with this
additional stipulation would render illusory Article 1306 of the New Civil Code of the
Philippines' (p. 37, Rollo).

"On the issue of whether or not CSLA notified the private respondents of the extrajudicial
foreclosure sale in compliance with Sec. 10 of the mortgage agreement the Court of Appeals
found as follows:
135
'As the record is bereft of any evidence which even impliedly indicate that the required
notice of the extrajudicial foreclosure was ever sent to the deceased debtor-mortgagor
Antonio Esguerra or to his heirs, the extrajudicial foreclosure proceedings on the property
in question are fatally defective and are not binding on the deceased debtor-mortgagor or to
his heirs' (p. 37, Rollo)

"Hence, even on the premise that there was no attendant fraud in the proceedings, the
failure of the petitioner bank to comply with the stipulation in the mortgage document is
fatal to the petitioners' cause."

We do not agree with respondent court that paragraph (k) of the mortgage contract in
question was intended merely to indicate the address to which the communications stated
therein should be sent. This interpretation is rejected by the very text of said paragraph as
above construed. We do not see any conceivable reason why the interpretation placed on an
identically worded provision in the mortgage contract involved in Community Savings &
Loan Association, Inc. should not be adopted with respect to the same provision involved in
the case at bar.

Nor may private respondent validly claim that we are supposedly interpreting paragraph (k)
in isolation and without taking into account paragraphs (b) and (d) of the same
contract. There is no irreconcilable conflict between, as in fact a reconciliation should be
made of, the provisions of paragraphs (b) and (d) which appear first in the mortgage
contract and those in paragraph (k) which follow thereafter and necessarily took into
account the provisions of the preceding two paragraphs. 14 The notices respectively
mentioned in paragraphs (d) and (k) are addressed to the particular purposes contemplated
therein. Those mentioned in paragraph (k) are specific and additional requirements
intended for the mortgagors so that, thus apprised, they may take the necessary legal steps
for the protection of their interests such as the payment of the loan to prevent foreclosure
or to subsequently arrange for redemption of the property foreclosed.

What private respondent would want is to have paragraph (k) considered as non-existent
and consequently disregarded, a proposition which palpably does not merit consideration.
Furthermore, it bears mention that private respondent having caused the formulation and
preparation of the printed mortgage contract in question, any obscurity that it imputes
thereto or which supposedly appears therein should not favor it as a contracting party. 15

Now, as earlier discussed, to still require a trial notwithstanding private respondent's

admission of the lack of such requisite notice would be a superfluity and would work
injustice to petitioners whose obtention of the relief to which they are plainly and patently

136
entitled would be further delayed. That undesirable contingency is obviously one of the
reasons why our procedural rules have provided for summary judgments.

WHEREFORE, the decision appealed from is hereby REVERSED and SET ASIDE and this
case is REMANDED to the court of origin for further proceedings in conformity with this
decision. This judgment is immediately executory. prLL

SO ORDERED.

|||

SECOND DIVISION

[G.R. No. 98334. May 8, 1992.]

MANUEL D. MEDIDA, Deputy Sheriff of the Province of Cebu, CITY SAVINGS BANK
(formerly Cebu City Savings and Loan Association, Inc.) and TEOTIMO
ABELLANA, petitioners, vs. COURT OF APPEALS and SPS. ANDRES DOLINO and
PASCUALA DOLINO, respondents.

Gines N. Abellana for petitioner.

Dionisio U. Flores for private respondent.

SYLLABUS

1. REMEDIAL LAW; CIVIL PROCEDURE; EXECUTION OF JUDGMENT; REDEMPTIONER;

DEFINED. A redemptioner is defined as a creditor having a lien by attachment, judgment
or mortgage on the property sold, or on some part thereof, subsequent to the judgment
under which the property was sold. Of course, while in extrajudicial foreclosure the sale
contemplated is not under a judgment but the proceeding pursuant to which the mortgaged
property was sold, a subsequent mortgage could nevertheless be legally constituted
137
thereafter with the subsequent mortgagee becoming and acquiring the rights of a
redemptioner, aside from his right against the mortgagor.

2. ID.; ID.; APPEAL; EFFECT ON PARTY NOT APPEALING FROM THE DECISION OF THE
LOWER COURT. An appellee who has not himself appealed cannot obtain from the
appellate court any affirmative relief other than the ones granted in the decision of the
court below. He cannot impugn the correctness of a judgment not appealed from by him. He
cannot assign such errors as are designed to have the judgment modified. All that said
appellee can do is to make a counter-assignment of errors or to argue on issues raised at
the trial only for the purpose of sustaining the judgment in his favor, even on grounds not
included in the decision of the court a quonor raised in the appellant's assignment of errors
or arguments.

3. CIVIL LAW; SPECIAL CONTRACTS; MORTGAGE; RIGHT OF ABSOLUTE OWNERSHIP

OVER THE MORTGAGED PROPERTY BY MORTGAGOR; REMAINS DURING THE PERIOD
OF REDEMPTION. Since the mortgagor remains as the absolute owner of the property
during the redemption period and has the free disposal of his property, there would be
compliance with the requisites of Article 2085 of the Civil Code for the constitution of
another mortgage on the property. To hold otherwise would create the inequitable situation
wherein the mortgagor would be deprived of the opportunity, which may be his last
recourse, to raise funds wherewith to timely redeem his property through another mortgage
thereon. Coming back to the present controversy, it is undisputed that the real estate
mortgage in favor of petitioner bank was executed by respondent spouses during the period
of redemption. We reiterate that during said period it cannot be said that the mortgagor
is no longer the owner of the foreclosed property since the rule up to now is that the right
of a purchaser at a foreclosure sale is merely inchoate until after the period of redemption
has expired without the right being exercised. The title to land sold under mortgage
foreclosure remains in the mortgagor or his grantee until the expiration of the redemption
period and conveyance by the master's deed. To repeat, the rule has always been that it is
only upon the expiration of the redemption period, without the judgment debtor having
made use of his right of redemption, that the ownership of the land sold becomes
consolidated in the purchaser. Parenthetically, therefore, what actually is effected where
redemption is seasonably exercised by the judgment or mortgage debtor is not the recovery
of ownership of his land, which ownership he never lost, but the elimination from his title
thereto of the lien created by the levy on attachment or judgment or the registration of a
mortgage thereon. The American rule is similarly to the effect that the redemption of
property sold under a foreclosure sale defeats the inchoate right of the purchaser and
restores the property to the same condition as if no sale had been attempted. Further, it

138
does not give to the mortgagor a new title, but merely restores to him the title freed of the
encumbrance of the lien foreclosed.

DECISION

REGALADO, J p:

The core issue in this case is whether or not a mortgagor, whose property has been
extrajudicially foreclosed and sold at the corresponding foreclosure sale, may validly
execute a mortgage contract over the same property in favor of a third party during the
period of redemption.

The present appeal by certiorari assails the decision 1 of respondent Court of Appeals in
CA-G.R. CV No. 12678 where it answered the question posed by the foregoing issue in the
negative and modified the decision 2 of the then Court of First Instance of Cebu in Civil
Case No. R-18616 wherein the validity of said subsequent mortgage was assumed and the
case was otherwise disposed of on other grounds.

The facts which gave rise to the institution of the aforesaid civil case in the trial court, as
found by respondent Court of Appeals, are as follows:

"On October 10, 1974 plaintiff spouses, alarmed of losing their right of redemption over lot
4731 of the Cebu City Cadastre and embraced under TCT No. 14272 from Mr. Juan
Gandioncho, purchaser of the aforesaid lot at the foreclosure sale of the previous mortgage
in favor of Cebu City Development Bank, went to Teotimo Abellana, president of defendant
Association, to obtain a loan of P30,000.00. Prior thereto or on October 3, 1974, their son
Teofredo Dolino filed a similar loan application for Twenty-Five Thousand (P25,000.00)
Pesos with lot No. 4731 offered as security for the Thirty Thousand (P30,000.00) Pesos loan
from defendant association. Subsequently, they executed a promissory note in favor of
defendant association. Both documents indicated that the principal obligation is for Thirty
Thousand (P30,000.00) Pesos payable in one year with interest at twelve (12%) percent per
annum.

"When the loan became due and demandable without plaintiff paying the same, defendant
association caused the extrajudicial foreclosure of the mortgage on March 16, 1976. After
the posting and publication requirements were complied with, the land was sold at public
auction on April 19, 1976 to defendant association being the highest bidder. The certificate
of sale was issued on April 20, 1976 and registered on May 10, 1976 with the Register of
Deeds of Cebu.

139
"On May 24, 1971 (sic, 1977), no redemption having been effected by plaintiff, TCT No.
14272 was cancelled and in lieu thereof TCT No. 68041 was issued in the name of
defendant association." 3

xxx xxx xxx

On October 18, 1979, private respondents filed the aforestated Civil Case No. R-18616 in
the court a quo for the annulment of the sale at public auction conducted on April 19,
1976, as well as the corresponding certificate of sale issued pursuant thereto.

In their complaint, private respondents, as plaintiffs therein, assailed the validity of the
extrajudicial foreclosure sale of their property, claiming that the same was held in violation
of Act No. 3135, as amended, and prayed, inter alia, for the cancellation of Transfer
Certificate of Title No. 68041 issued in favor of therein defendant City Savings and Loan
Association, Inc., now known as City Savings Bank and one of the petitioners herein.

In its answer, the defendant association therein denied the material allegations of the
complaint and averred, among others, that the present private respondent spouses may
still avail of their right of redemption over the land in question.

On January 12, 1983, after trial on the merits, the court below rendered judgment
upholding the validity of the loan and the real estate mortgage, but annulling the
extrajudicial foreclosure sale inasmuch as the same failed to comply with the notice
requirements in Act No. 3135, as amended, under the following dispositive part:

"WHEREFORE, the foregoing premises considered and upon the view taken by the Court of
this case, judgment is hereby rendered, as follows:

1. Declaring ineffective the extrajudicial foreclosure of the mortgage over Lot No. 4731 of
the Cadastral Survey of Cebu;

2. Ordering the cancellation of Transfer Certificate of Title No. 63041 of the Registry of
Deeds of the City of Cebu in the name of defendant Cebu City Savings and Loan
Association, Inc. and the corresponding issuance of a new transfer certificate to contain all
the annotations made in TCT No. 14272 of the plaintiffs Pascuala Sabellano, married to
Andres Dolino;

3. Ordering the plaintiffs aforenamed to pay the defendant Cebu City Savings and Loan
Association, Inc. the unpaid balance of the loan, plus interest; and reimbursing said
defendant the value of any necessary and useful expenditures on the property after
deducting any income derived by said defendant from the property.

140
For this purpose, defendant Association is given 15 days from receipt hereof within which to
submit its statement of the amount due it from the plaintiffs Dolino, with notice to them.
The payment to be made by the plaintiffs shall be within ninety (90) days from their receipt
of the order approving the amount due the defendant Cebu City Savings and Loan
Association, Inc.

No award of damages or costs to either party.

SO ORDERED." 4

Not satisfied therewith, herein private respondents interposed a partial appeal to

respondent court with respect to the second and third paragraphs of the aforequoted
decretal portion, contending that the lower court erred in (1) declaring that the mortgage
executed by the therein plaintiff spouses Dolino is valid; (2) permitting therein Cebu City
Savings and Loan Association, Inc. to collect interest after the same foreclosure proceedings
and auction sale which are null and void from the beginning; (3) not ordering the forfeiture
of the capital or balance of the loan with usurious interest; and (4) not sentencing therein
defendant to pay damages and attorney's fees to plaintiffs. 5

On September 28, 1990, respondent Court of Appeals promulgated its decision modifying
the decision of the lower court, with this adjudication:

"WHEREFORE, PREMISES CONSIDERED, the decision appealed from is hereby MODIFIED

declaring as void and ineffective the real estate mortgage executed by plaintiffs in favor of
defendant association. With this modification, the decision is AFFIRMED in other
respects." 6

Herein petitioners then filed a motion for reconsideration which was denied by respondent
court in its resolution dated March 5, 1991, hence the present petition which, in synthesis,
postulates that respondent court erred in declaring the real estate mortgage void, and also
impugns the judgment of the trial court declaring ineffective the extrajudicial foreclosure of
said mortgage and ordering the cancellation of Transfer Certificate of Title No. 68041 issued
in favor of the predecessor of petitioner bank. 7

The first submission assailing the judgment of respondent Court of Appeals is

meritorious. llcd

Said respondent court declared the real estate mortgage in question null and void for the
reason that the mortgagor spouses, at the time when the said mortgage was executed,

141
were no longer the owners of the lot, having supposedly lost the same when the lot was sold
to a purchaser in the foreclosure sale under the prior mortgage. This holding cannot be
sustained.

Preliminarily, the issue of ownership of the mortgaged property was never alleged in the
complaint nor was the same raised during the trial, hence that issue should not have been
taken cognizance of by the Court of Appeals. An issue which was neither averred in the
complaint nor ventilated during the trial in the court below cannot be raised for the first
time on appeal as it would be offensive to the basic rule of fair play, justice and due
process. 8

Nonetheless, since respondent Court took cognizance thereof and, in fact, anchored its
modificatory judgment on its ratiocination of that issue, we are inclined to liberalize the
rule so that we can in turn pass upon the correctness of its conclusion. We may consider
such procedure as analogous to the rule that an unassigned error closely related to an
error properly assigned, or upon which the determination of the question properly assigned
is dependent, may be considered by an appellate court.9 We adopt this approach since,
after all, both lower courts agreed upon the invalidity of the extrajudicial foreclosure but
differed only on the matter of the validity of the real estate mortgage upon which the
extrajudicial foreclosure was based.

In arriving at its conclusion, respondent court placed full reliance on what obviously is
an obiter dictum laid down in the course of the disquisition in Dizon vs. Gaborro, et al.
which we shall analyze. 10 For, as explicitly stated therein by the Court, "(t)he basic issue
to be resolved in this case is whether the 'Deed of Sale with Assumption of Mortgage' and
the `Option to purchase Real Estate,' two instruments executed by and between petitioner
Jose P. Dizon and Alfredo G. Gaborro (defendant below) on the same day, October 6, 1959,
constitute in truth and in fact an absolute sale of the three parcels of land therein
described or merely an equitable mortgage or conveyance thereof by way of security for
reimbursement or repayment by petitioner Jose P. Dizon of any and all sums which may
have been paid to the Development Bank of the Philippines and the Philippine National
Bank by Alfredo G. Gaborro . . ." Said documents were executed by the parties and the
payments were made by Gaborro for the debt of Dizon to said banks after the Development
Bank of the Philippines had foreclosed the mortgage executed by Dizon and during the
period of redemption after the foreclosure sale of the mortgaged property to said creditor
bank. llcd

The trial court held that the true agreement between the parties therein was that Gaborro
would assume and pay the indebtedness of Dizon to the banks and, in consideration

142
thereof, Gaborro was given the possession and enjoyment of the properties in question until
Dizon shall have reimbursed him for the amount paid to the creditor banks. Accordingly,
the trial court ordered the reformation of the documents to the extent indicated and such
particular relief was affirmed by the Court of Appeals. This Court held that the agreement
between the parties is one of those innominate contracts under Article 1307 of the Civil
Code whereby the parties agreed "to give and to do" certain rights and obligations, but
partaking of the nature of antichresis.

Hence, on appeal to this Court, the judgment of the Court of Appeals in that case was
affirmed but with the following pronouncements:

"The two instruments sought to be reformed in this case appear to stipulate rights and
obligations between the parties thereto pertaining to and involving parcels of land that had
already been foreclosed and sold extrajudicially, and purchased by the mortgage creditor, a
third party. It becomes, therefore, necessary, to determine the legality of said rights and
obligations arising from the foreclosure and sale proceedings not only between the two
contracting parties to the instruments executed between them but also in so far as the
agreement affects the rights of the third party, the purchaser Bank.

xxx xxx xxx

"Under the Revised Rules of Court, Rule 39, Section 33, the judgment debtor remains in
possession of the property foreclosed and sold, during the period of redemption. If the
judgment debtor is in possession of the property sold, he is entitled to retain it, and receive
the fruits, the purchaser not being entitled to such possession. (Riosa vs. Verzosa, 26 Phil.
86; Velasco vs. Rosenberg's, Inc., 32 Phil. 72; Pabico vs. Pauco, 43 Phil. 572; Power vs.
PNB, 54 Phil. 54; Gorospe vs. Gochangco, L-12735, Oct. 30, 1959).

xxx xxx xxx

"Upon foreclosure and sale, the purchaser is entitled to a certificate of sale executed by the
sheriff. (Section 27, Revised Rules of Court). After the termination of the period of
redemption and no redemption having been made, the purchaser is entitled to a deed of
conveyance and to the possession of the properties. (Section 35, Revised Rules of
Court). The weight of authority is to the effect that the purchaser of land sold at public
auction under a writ of execution has only an inchoate right to the property, subject to be
defeated and terminated within the period of 12 months from the date of sale, by a
redemption on the part of the owner. Therefore, the judgment debtor in possession of the
property is entitled to remain therein during the period for redemption. (Riosa vs. Verzosa,
26 Phil. 86, 89; Gonzales vs. Calimbas, 51 Phil. 355).
143
"In the case before Us, after the extrajudicial foreclosure and sale of his properties,
petitioner Dizon retained the right to redeem the lands, the possession, use and enjoyment
of the same during the period of redemption. And these are the only rights that Dizon could
legally transfer, cede and convey unto respondent Gaborro under the instrument captioned
Deed of Sale with Assumption of Mortgage (Exh. A-Stipulation), likewise the same rights
that said respondent could acquire in consideration of the latter's promise to pay and
assume the loan of petitioner Dizon with DBP and PNB.

"Such an instrument cannot be legally considered a real and unconditional sale of the
parcels of land, firstly, because there was absolutely no money consideration therefor, as
admittedly stipulated, the sum of P131,831.91 mentioned in the document as the
consideration `receipt of which was acknowledged' was not actually paid; and, secondly,
because the properties had already been previously sold by the sheriff at the foreclosure
sale, thereby divesting the petitioner of his full right as owner thereof to dispose and sell
the lands." (Emphasis ours.)

It was apparently the second reason stated by the Court in said case which was relied upon
by respondent court in the present case on which to premise its conclusion. Yet, as
demonstrated by the relevant excerpts above quoted, not only was that obiter therein
unnecessary since evidently no sale was concluded, but even inaccurate, if not
inconsistent, when considered in the context of the discussion in its entirety. If, as
admitted, the purchaser at the foreclosure sale merely acquired an inchoate right to the
property which could ripen into ownership only upon the lapse of the redemption period
without his credit having been discharged, it is illogical to hold that during that same
period of twelve months the mortgagor was "divested" of his ownership, since the absurd
result would be that the land will consequently be without an owner although it remains
registered in the name of the mortgagor.

That is why the discussion in said case carefully and felicitously states that what is
divested from the mortgagor is only his "full right as owner thereof to dispose (of) and sell
the lands," in effect, merely clarifying that the mortgagor does not have the unconditional
power to absolutely sell the land since the same is encumbered by a lien of a third person
which, if unsatisfied, could result in a consolidation of ownership in the lienholder but only
after the lapse of the period of redemption. Even on that score, it may plausibly be argued
that what is delimited is not the mortgagor's jus disponendi, as an attribute of ownership,
but merely the rights conferred by such act of disposal which may correspondingly be
restricted.

144
At any rate, even the foregoing considerations and arguments would have no application in
the case at bar and need not here be resolved since what is presently involved is a
mortgage, not a sale, to petitioner bank. Such mortgage does not involve a transfer, cession
or conveyance of the property but only constitutes a lien thereon. There is no obstacle to
the legal creation of such a lien even after the auction sale of the property but during the
redemption period, since no distinction is made between a mortgage constituted over the
property before or after the auction sale thereof.

Thus, a redemptioner is defined as a creditor having a lien by attachment, judgment

or mortgage on the property sold, or on some part thereof, subsequent to the judgment
under which the property was sold. 11 Of course, while in extrajudicial foreclosure the sale
contemplated is not under a judgment but the proceeding pursuant to which the mortgaged
property was sold, a subsequent mortgage could nevertheless be legally constituted
thereafter with the subsequent mortgagee becoming and acquiring the rights of a
redemptioner, aside from his right against the mortgagor. prcd

In either case, what bears attention is that since the mortgagor remains as the absolute
owner of the property during the redemption period and has the free disposal of his
property, there would be compliance with the requisites of Article 2085 of the Civil Code for
the constitution of another mortgage on the property. To hold otherwise would create the
inequitable situation wherein the mortgagor would be deprived of the opportunity, which
may be his last recourse, to raise funds wherewith to timely redeem his property through
another mortgage thereon.

Coming back to the present controversy, it is undisputed that the real estate mortgage in
favor of petitioner bank was executed by respondent spouses during the period of
redemption. We reiterate that during said period it cannot be said that the mortgagor
is no longer the owner of the foreclosed property since the rule up to now is that the right
of a purchaser at a foreclosure sale is merely inchoate until after the period of redemption
has expired without the right being exercised. 12 The title to land sold under mortgage
foreclosure remains in the mortgagor or his grantee until the expiration of the redemption
period and conveyance by the master's deed. 13 To repeat, the rule has always been that it
is only upon the expiration of the redemption period, without the judgment debtor having
made use of his right of redemption, that the ownership of the land sold becomes
consolidated in the purchaser. 14

Parenthetically, therefore, what actually is effected where redemption is seasonably

exercised by the judgment or mortgage debtor is not the recovery of ownership of his land,
145
which ownership he never lost, but the elimination from his title thereto of the lien created
by the levy on attachment or judgment or the registration of a mortgage thereon. The
American rule is similarly to the effect that the redemption of property sold under a
foreclosure sale defeats the inchoate right of the purchaser and restores the property to the
same condition as if no sale had been attempted. Further, it does not give to the mortgagor
a new title, but merely restores to him the title freed of the encumbrance of the lien
foreclosed. 15

We cannot rule on the plaint of petitioners that the trial court erred in declaring ineffective
the extrajudicial foreclosure and the sale of the property to petitioner bank. The court below
spelled out at length in its decision the facts which it considered as violative of the
provisions of Act No. 3135, as amended, by reason of which it nullified the extrajudicial
foreclosure proceeding and its effects. Such findings and ruling of the trial court are
already final and binding on petitioners and can no longer be modified, petitioners having
failed to appeal therefrom. prLL

An appellee who has not himself appealed cannot obtain from the appellate court any
affirmative relief other than the ones granted in the decision of the court below. 16He
cannot impugn the correctness of a judgment not appealed from by him. He cannot assign
such errors as are designed to have the judgment modified. All that said appellee can do is
to make a counter-assignment of errors or to argue on issues raised at the trial only for the
purpose of sustaining the judgment in his favor, even on grounds not included in the
decision of the court a quo nor raised in the appellant's assignment of errors or
arguments. 17

WHEREFORE, the decision of respondent Court of Appeals, insofar as it modifies the

judgment of the trial court, is REVERSED and SET ASIDE. The judgment of said trial court
in Civil Case No. R-18616, dated January 12, 1983, is hereby REINSTATED.

SO ORDERED.

146
THIRD DIVISION

[G.R. No. 170215. August 28, 2007.]

SPS. ESMERALDO and ELIZABETH SUICO, petitioners, vs. PHILIPPINE NATIONAL BANK
and HON. COURT OF APPEALS, respondents.

DECISION

CHICO-NAZARIO, J p:

Herein petitioners, Spouses Esmeraldo and Elizabeth Suico, obtained a loan from the
Philippine National Bank (PNB) secured by a real estate mortgage 1 on real properties in the
name of the former. The petitioners were unable to pay their obligation prompting the PNB
to extrajudicially foreclose the mortgage over the subject properties before the City Sheriff
of Mandaue City under EJF Case No. 92-5-15.

The petitioners thereafter filed a Complaint against the PNB before the Regional Trial Court
(RTC) of Mandaue City, Branch 55, docketed as Civil Case No. MAN-2793 for Declaration of
Nullity of Extrajudicial Foreclosure of Mortgage. 2
147
The Complaint alleged that on 6 May 1992, PNB filed with the Office of the Mandaue City
Sheriff a petition for the extrajudicial foreclosure of mortgage constituted on the petitioners'
properties (subject properties) for an outstanding loan obligation amounting to
P1,991,770.38 as of 10 March 1992. The foreclosure case before the Office of the Mandaue
City Sheriff, which was docketed as EJF Case No. 92-5-15, covered the following properties:

TCT NO. 13196

"A parcel of land (Lot 701, plan 11-5121 Amd-2) situated at Mandaue City, bounded on the
NE., and SE., by lot no. 700; on the SW. by lots nos. 688 and 702; on the NW. by lot no.
714, containing an area of 2,078 sq. m. more or less."

TAX DECL. NO. 00553

"A parcel of land situated at Tabok, Mandaue City, Cad. Lot No. 700-C-1; bounded on the
North by Lot No. 701 & 700-B; on the South by Lot No. 700-C-3; on the East by lot no. 700-
C-3 and on the West by Lot no. 688, containing an area of 200 square meters, more or
less." HTaIAC

TAX DECL. NO. 00721

"Two (2) parcels of land situated at Tabok, Mandaue City, Cad. lot nos. 700-C-3 and 700-C-
2; bounded on the North by Lot Nos. 700-C-1 and 700-B; on the South by Lot No. 700-D;
on the East by Lot Nos. 695 and 694; and on the West by Lot Nos. 688 and 700-C-1,
containing an aggregate area of 1,683 sq. m. more or less."IDaEHS

TAX DECL. NO. 0237

"A parcel of land situated at Tabok, Mandaue City, Cad. Lot no. 700-B. Bounded on the NE.
by (Lot 699) 109, (Lot No. 69) 110, on the SE (Lot 700-C) 115, on the NW. (Lot 700-A) 112
and on the SW. (Lot 701) 113; containing an area of .1785 HA more or less." AaEcHC

TAX DECL. NO. 9267

"A parcel of land situated at Tabok, Mandaue City, Cad. Lot no. 700-A. Bounded on the NE.
by (Lot 699) 109, on the South West by (Lot 701) 113, on the SE. by (Lot 700-B) 111, and
on the NW. by (lot 714) 040039; containing an area of .1785 HA more or less." 3

Petitioners claimed that during the foreclosure sale of the subject properties held on 30
October 1992, PNB, as the lone bidder, offered a bid in the amount of P8,511,000.00. By
virtue of the said bid, a Certificate of Sale of the subject properties was issued by the
Mandaue City Sheriff in favor of PNB. PNB did not pay to the Sheriff who conducted the

148
auction sale the amount of its bid which was P8,511,000.00 or give an accounting of how
said amount was applied against petitioners' outstanding loan, which, as of 10 March 1992,
amounted only to P1,991,770.38. Since the amount of the bid grossly exceeded the amount
of petitioners' outstanding obligation as stated in the extrajudicial foreclosure of mortgage,
it was the legal duty of the winning bidder, PNB, to deliver to the Mandaue City Sheriff the
bid price or what was left thereof after deducting the amount of petitioners' outstanding
obligation. PNB failed to deliver the amount of their bid to the Mandaue City Sheriff or, at
the very least, the amount of such bid in excess of petitioners' outstanding obligation.

One year after the issuance of the Certificate of Sale, PNB secured a Certificate of Final Sale
from the Mandaue City Sheriff and, as a result, PNB transferred registration of all the
subject properties to its name. HDAaIc

Owing to the failure of PNB as the winning bidder to deliver to the petitioners the amount of
its bid or even just the amount in excess of petitioners' obligation, the latter averred that
the extrajudicial foreclosure conducted over the subject properties by the Mandaue City
Sheriff, as well as the Certificate of Sale and the Certificate of Finality of Sale of the subject
properties issued by the Mandaue City Sheriff, in favor of PNB, were all null and void.

Petitioners, in their Complaint in Civil Case No. MAN-2793, prayed for: caSDCA

a) Declaring the Nullity of Extra-judicial Foreclosure of Mortgage under EJF Case No. 92-5-
15 including the certificate of sale and the final deed of sale of the properties affected;

b) Order[ing] the cancellation of the certificates of titles and tax declaration already in the
name of [herein respondent] PNB and revert the same back to herein [petitioners']
name; CAaSED

c) Ordering the [PNB] to pay [petitioners] moral damages amounting to more than
P1,000,000.00; Exemplary damages of P500,000.00; Litigation expenses of P100,000.00
and attorney's fees of P300,000.00. 4

PNB filed a Motion to Dismiss 5 Civil Case No. MAN-2793 citing the pendency of another
action between the same parties, specifically Civil Case No. CEB-15236 before the RTC of
Cebu City entitled, PNB v. Sps. Esmeraldo and Elizabeth Suico where PNB was seeking the
payment of the balance of petitioners' obligation not covered by the proceeds of the auction
sale held on 30 October 1992. PNB argued that these two cases involve the same parties.
Petitioners opposed the Motion to Dismiss filed by PNB. 6 Subsequently, the Motion to
Dismiss Civil Case No. MAN-2793 was denied in the Order of the RTC dated 15 July
1997; 7 thus, PNB was constrained to file its Answer. 8

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PNB disputed petitioners' factual narration. PNB asserted that petitioners had other loans
which had likewise become due. Petitioners' outstanding obligation of P1,991,770.38 as of
10 March 1992 was exclusive of attorney's fees, and other export related obligations which
it did not consider due and demandable as of said date. PNB maintained that the
outstanding obligation of the petitioners under their regular and export-related loans was
already more than the bid price of P8,511,000.00, contradicting the claim of surplus
proceeds due the petitioners. Petitioners were well aware that their total principal
outstanding obligation on the date of the auction sale was P5,503,293.21. TIHCcA

PNB admitted the non-delivery of the bid price to the sheriff and the execution of the final
deed of sale, but claimed that it had not transferred in its name all the foreclosed properties
because the petition to register in its name Transfer Certificates of Title (TCT) No. 37029
and No. 13196 were still pending.

On 2 February 1999, the RTC rendered its Decision 9 in Civil Case No. MAN-2793 for the
declaration of nullity of the extrajudicial foreclosure of mortgage, the dispositive portion of
which states: CTSDAI

WHEREFORE, based on the foregoing, judgment is rendered in favor of [herein petitioners]

Sps. Esmeraldo & Elizabeth Suico and against [herein respondent], Philippine National
Bank (PNB), declaring the nullity of Extrajudicial Foreclosure of Mortgage under EJF
Case No. 92-5-15, including the certificate of sale and the final deed of sale of the subject
properties; ordering the cancellation of the certificates of titles and tax declaration already
in the name of [respondent] PNB, if any, and revert the same back to the [petitioners']
name; ordering [respondent] PNB to cause a new foreclosure proceeding, either judicially or
extra-judicially.

Furnish parties thru counsels copy of this order. 10 DSETcC

In granting the nullification of the extrajudicial foreclosure of mortgage, the RTC reasoned
that given that petitioners had other loan obligations which had not yet matured on 10
March 1992 but became due by the date of the auction sale on 30 October 1992, it does not
justify the shortcut taken by PNB and will not excuse it from paying to the Sheriff who
conducted the auction sale the excess bid in the foreclosure sale. To allow PNB to do so
would constitute fraud, for not only is the filing fee in the said foreclosure inadequate but,
worse, the same constitutes a misrepresentation regarding the amount of the indebtedness
to be paid in the foreclosure sale as posted and published in the notice of sale. 11 Such
misrepresentation is fatal because in an extrajudicial foreclosure of mortgage, notice of sale
is jurisdictional. Any error in the notice of sale is fatal and invalidates the notice. 12

150
When the PNB appealed its case to the Court of Appeals, 13 the appellate court rendered a
Decision 14 dated 12 April 2005, the fallo of which provides: ADCIca

WHEREFORE, premises considered, the instant appeal is GRANTED. The questioned

decision of the Regional Trial Court of Mandaue City, Branch 55 dated February 2, 1999 is
hereby REVERSED and SET ASIDE. Accordingly, the extra judicial foreclosure of mortgage
under EJF 92-5-15 including the certificate of sale and final deed of sale executed
appurtenant thereto are hereby declared to be valid and binding. 15

In justifying reversal, the Court of Appeals held: DSacAE

A careful scrutiny of the evidence extant on record would show that in a letter dated
January 12, 1994, [petitioners] expressly admitted that their outstanding principal
obligation amounted to P5.4 Million and in fact offered to redeem the properties at P6.5
Million. They eventually increased their offer at P7.5 Million as evidenced by that letter
dated February 4, 1994. And finally on May 16, 1994, they offered to redeem the foreclosed
properties by paying the whole amount of the obligation by installment in a period of six
years. All those offers made by the [petitioners] not only contradicted their very assertion
that their obligation is merely that amount appearing on the petition for foreclosure but are
also indicative of the fact that they have admitted the validity of the extra judicial
foreclosure proceedings and in effect have cured the impugned defect. Thus, for the
[petitioners] to insist that their obligation is only over a million is unworthy of belief. Oddly
enough, it is evident from their acts that they themselves likewise believe otherwise.

Even assuming that indeed there was a surplus and the [PNB] is retaining more than the
proceeds of the sale than it is entitled, this fact alone will not affect the validity of the sale
but simply gives the [petitioners] a cause of action to recover such surplus. In fine, the
failure of the [PNB] to remit the surplus, if any, is not tantamount to a non-compliance of
statutory requisites that could constitute a jurisdictional defect invalidating the sale. This
situation only gives rise to a cause of action on the part of the [petitioners] to recover the
alleged surplus from the [PNB]. This ruling is in harmony with the decisional rule that in
suing for the return of the surplus proceeds, the mortgagor is deemed to have affirmed the
validity of the sale since nothing is due if no valid sale has been made. 16 aIHCSA

Petitioners filed a Motion for Reconsideration 17 of the foregoing Decision, but the Court of
Appeals was not persuaded. It maintained the validity of the foreclosure sale and, in its
Amended Decision dated 28 September 2005, it merely directed PNB to pay the deficiency
in the filing fees, holding thus:
151
WHEREFORE, Our decision dated April 12, 2005 is hereby AMENDED. [Herein respondent
PNB] is hereby required to pay the deficiency in the filing fees due on the petition for extra
judicial foreclosure sale to be based on the actual amount of mortgage debts at the time of
filing thereof. In all other respects, Our decision subject of herein petitioners'] motion for
reconsideration is hereby AFFIRMED. 18 cda

Unflinching, petitioners elevated the case before this Court via the present Petition for
Review essentially seeking the nullification of the extrajudicial foreclosure of the mortgage
constituted on the subject properties. Petitioners forward two reasons for declaring null and
void the said extrajudicial foreclosure: (1) the alleged defect or misrepresentation in the
notice of sheriff's sale; and/or (2) failure of PNB to pay and tender the price of its bid or the
surplus thereof to the sheriff.

Petitioners argue that since the Notice of Sheriff's Sale stated that their obligation was only
P1,991,770.38 and PNB bidded P8,511,000.00, the said Notice as well as the consequent
sale of the subject properties were null and void. SEIcAD

It is true that 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. 19 Nonetheless, we must not also
lose sight of the fact that the purpose of the publication of the Notice of Sheriff's Sale is to
inform all interested parties of the date, time and place of the foreclosure sale of the real
property subject thereof. Logically, this not only requires that the correct date, time and
place of the foreclosure sale appear in the notice, but also that any and all interested
parties be able to determine that what is about to be sold at the foreclosure sale is the real
property in which they have an interest. 20

Considering the purpose behind the Notice of Sheriff's Sale, we disagree with the finding of
the RTC that the discrepancy between the amount of petitioners' obligation as reflected in
the Notice of Sale and the amount actually due and collected from the petitioners at the
time of the auction sale constitute fraud which renders the extrajudicial foreclosure sale
null and void. DTEAHI

Notices are given for the purpose of securing bidders and to prevent a sacrifice of the
property. If these objects are attained, immaterial errors and mistakes will not affect the
sufficiency of the notice; but if mistakes or omissions occur in the notices of sale, which are
calculated to deter or mislead bidders, to depreciate the value of the property, or to prevent
it from bringing a fair price, such mistakes or omissions will be fatal to the validity of the
notice, and also to the sale made pursuant thereto. 21

152
All these considered, we are of the view that the Notice of Sale in this case is valid.
Petitioners failed to convince this Court that the difference between the amount stated in
the Notice of Sale and the amount of PNB's bid resulted in discouraging or misleading
bidders, depreciated the value of the property or prevented it from commanding a fair
price. DaScCH

The cases cited by the RTC in its Decision do not apply herein. San Jose v. Court of
Appeals 22 refers to a Notice of Sheriff's Sale which did not state the correct number of the
transfer certificates of title of the property to be sold. This Court considered the oversight as
a substantial and fatal error which resulted in invalidating the entire notice. The case
of Community Savings and Loan Association, Inc. v. Court of Appeals 23 is also
inapplicable, because the said case refers to an extrajudicial foreclosure tainted with fraud
committed by therein petitioners, which denied therein respondents the right to redeem the
property. It actually has no reference to a Notice of Sale.

We now proceed to the effect of the non-delivery by PNB of the bid price or the surplus to
the petitioners. ISTECA

The following antecedents are not disputed:

For failure to pay their loan obligation secured by a real estate mortgage on the subject
properties, PNB foreclosed the said mortgage. In its petition for foreclosure sale
under ACT No. 3135 filed before the Mandaue City Sheriff, PNB stated therein that
petitioners' total outstanding obligation amounted to P1,991,770.38. 24 PNB bidded the
amount of P8,511,000.00. Admittedly, PNB did not pay its bid in cash or deliver the excess
either to the City Sheriff who conducted the bid or to the petitioners after deducting the
difference between the amount of its bid and the amount of petitioners' obligation in the
Notice of Sale. The petitioners then sought to declare the nullity of the foreclosure, alleging
that their loan obligation amounted only to P1,991,770.38 in the Notice of Sale, and that
PNB did not pay its bid in cash or deliver to petitioner the surplus, which is required under
the law. 25 DTaSIc

On the other hand, PNB claims that petitioners' loan obligation reflected in the Notice of
Sale dated 10 March 1992 did not include their other obligations, which became due at the
date of the auction sale on 10 October 1992; as well as interests, penalties, other charges,
and attorney's fees due on the said obligation. 26

Pertinent provisions under Rule 39 of the Rules of Court on extrajudicial foreclosure sale
provide: DHTECc

153
SEC. 21. Judgment obligee as purchaser. When the purchaser is the judgment obligee,
and no third-party claim has been filed, he need not pay the amount of the bid if it does not
exceed the amount of his judgment. If it does, he shall pay only the excess. (Emphasis
supplied.)

SEC. 39. Obligor may pay execution against obligee. After a writ of execution against
property has been issued, a person indebted to the judgment obligor may pay to the sheriff
holding the writ of execution the amount of his debt or so much thereof as may be
necessary to satisfy the judgment, in the manner prescribed in section 9 of this Rule, and
the sheriff's receipt shall be a sufficient discharge for the amount so paid or directed to be
credited by the judgment obligee on the execution. EICScD

Conspicuously emphasized under Section 21 of Rule 39 is that if the amount of the loan is
equal to the amount of the bid, there is no need to pay the amount in cash. Same provision
mandates that in the absence of a third-party claim, the purchaser in an execution sale
need not pay his bid if it does not exceed the amount of the judgment; otherwise, he shall
pay only the excess. 27

The raison de etre is that it would obviously be senseless for the Sheriff or the Notary
Public conducting the foreclosure sale to go through the idle ceremony of receiving the
money and paying it back to the creditor, under the truism that the lawmaking body did
not contemplate such a pointless application of the law in requiring that the creditor must
bid under the same conditions as any other bidder. It bears stressing that the rule holds
true only where the amount of the bid represents the total amount of the mortgage
debt. 28 CDAHIT

The question that needs to be addressed in this case is: considering the amount of PNB's
bid of P8,511,000.00 as against the amount of the petitioners' obligation of P1,991,770.38
in the Notice of Sale, is the PNB obliged to deliver the excess? ACETSa

Petitioners insist that the PNB should deliver the excess. On the other hand PNB counters
that on the date of the auction sale on 30 October 1992, petitioners' other loan obligation
already exceeded the amount of P1,991,770.38 in the Notice of Sale.

Rule 68, Section 4 of the Rules of Court provides: CDHacE

SEC. 4. Disposition of proceeds of sale. The amount realized from the foreclosure sale of
the mortgaged property shall, after deducting the costs of the sale, be paid to the person
foreclosing the mortgage, and when there shall be any balance or residue, after paying off
the mortgage debt due, the same shall be paid to junior encumbrancers in the order of

154
their priority, to be ascertained by the court, or if there be no such encumbrancers or there
be a balance or residue after payment to them, then to the mortgagor or his duly
authorized agent, or to the person entitled to it.

Under the above rule, the disposition of the proceeds of the sale in foreclosure shall be as
follows: TICAcD

(a) first, pay the costs

(b) secondly, pay off the mortgage debt SCDaET

(c) thirdly, pay the junior encumbrancers, if any in the order of priority

(d) fourthly, give the balance to the mortgagor, his agent or the person entitled to
it. 29 EHScCA

Based on the foregoing, after payment of the costs of suit and satisfaction of the claim of
the first mortgagee/senior mortgagee, the claim of the second mortgagee/junior mortgagee
may be satisfied from the surplus proceeds. The application of the proceeds from the sale of
the mortgaged property to the mortgagor's obligation is an act of payment, not payment
by dacion; hence, it is the mortgagee's duty to return any surplus in the selling price to the
mortgagor. Perforce, a mortgagee who exercises the power of sale contained in a mortgage is
considered a custodian of the fund and, being bound to apply it properly, is liable to the
persons entitled thereto if he fails to do so. And even though the mortgagee is not strictly
considered a trustee in a purely equitable sense, but as far as concerns the unconsumed
balance, the mortgagee is deemed a trustee for the mortgagor or owner of the equity of
redemption. 30

Thus it has been held that if the mortgagee is retaining more of the proceeds of the sale
than he is entitled to, this fact alone will not affect the validity of the sale but simply give
the mortgagor a cause of action to recover such surplus. 31 ECDaAc

In the case before us, PNB claims that petitioners' loan obligations on the date of the
auction sale were already more than the amount of P1,991,770.38 in the Notice of Sale. In
fact, PNB claims that on the date of the auction sale, petitioners' principal obligation, plus
penalties, interests, attorneys fees and other charges were already beyond the amount of its
bid of P8,511,000.00.

After a careful review of the evidence on record, we find that the same is insufficient to
support PNB's claim. Instead, what is available on record is petitioner's Statement of
155
Account as prepared by PNB and attached as Annex A 32 to its Answer with
counterclaim. 33 In this Statement of Account, petitioners' principal obligation with
interest/penalty and attorney's fees as of 30 October 1992 already amounted to
P6,409,814.92. cdphil

Although petitioners denied the amounts reflected in the Statement of Account from PNB,
they did not interpose any defense to refute the computations therein. Petitioners' mere
denials, far from being compelling, had nothing to offer by way of evidence. This then
enfeebles the foundation of petitioners' protestation and will not suffice to overcome the
computation of their loan obligations as presented in the Statement of Account submitted
by PNB. 34

Noticeably, this Statement of Account is the only piece of evidence available before us from
which we can determine the outstanding obligations of petitioners to PNB as of the date of
the auction sale on 10 October 1992. CaHAcT

It did not escape the attention of this Court that petitioners wrote a number of letters to
PNB almost two years after the auction sale, 35 in which they offered to redeem the
property. In their last letter, petitioners offered to redeem their foreclosed properties for
P9,500,000.00. However, these letters by themselves cannot be used as bases to support
PNB's claim that petitioners' obligation is more than its bid of P8,500,000.00, without any
other evidence. There was no computation presented to show how petitioners' obligation
already reached P9,500,000.00. Petitioners could very well have offered such an amount on
the basis of the value of the foreclosed properties rather than their total obligation to PNB.
We cannot take petitioners' offer to redeem their properties in the amount of P9,500,000.00
on its face as an admission of the amount of their obligation to PNB without any supporting
evidence.

Given that the Statement of Account from PNB, being the only existing documentary
evidence to support its claim, shows that petitioners' loan obligations to PNB as of 30
October 1992 amounted to P6,409,814.92, and considering that the amount of PNB's bid is
P8,511,000.00, there is clearly an excess in the bid price which PNB must return, together
with the interest computed in accordance with the guidelines laid down by the court
in Eastern Shipping Lines v. Court of Appeals, 36 regarding the manner of computing legal
interest, viz: HIaTDS

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:

156
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. cDIHES

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.

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 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit. IEHaSc

In Philippine National Bank v. Court of Appeals, 37 it was held that:

The rate of 12% interest referred to in Cir. 416 applies only to: CAcEaS

Loan or forbearance of money, or to cases where money is transferred from one person to
another and the obligation to return the same or a portion thereof is adjudged. Any other
monetary judgment which does not involve or which has nothing to do with loans or
forbearance of any, money, goods or credit does not fall within its coverage for such
imposition is not within the ambit of the authority granted to the Central Bank. When an
obligation not constituting a loan or forbearance of money is breached then an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate
of 6% per annum in accordance with Art. 2209 of the Civil Code. Indeed, the monetary
judgment in favor of private respondent does not involve a loan or forbearance of money,
hence the proper imposable rate of interest is six (6%) per cent.

157
Using the above rule as yardstick, since the responsibility of PNB arises not from a loan or
forbearance of money which bears an interest rate of 12%, the proper rate of interest for the
amount which PNB must return to the petitioners is only 6%. This interest according
to Eastern Shipping shall be computed from the time of the filing of the complaint.
However, once the judgment becomes final and executory, the "interim period from the
finality of judgment awarding a monetary claim and until payment thereof, is deemed to be
equivalent to a forbearance of credit." Thus, in accordance with the pronouncement
in Eastern Shipping, the rate of 12% per annumshould be imposed, to be computed from
the time the judgment becomes final and executory until fully satisfied. CIaHDc

It must be emphasized, however, that our holding in this case does not preclude PNB from
proving and recovering in a proper proceeding any deficiency in the amount of petitioners'
loan obligation that may have accrued after the date of the auction sale.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated 12 April
2005 is MODIFIED in that the PNB is directed to return to the petitioners the amount of
P2,101,185.08 with interest computed at 6% per annum from the time of the filing of the
complaint until its full payment before finality of judgment. Thereafter, if the amount
adjudged remains unpaid, the interest rate shall be 12% per annum computed from the
time the judgment became final and executory until fully satisfied. Costs against private
respondent. cDCSET

SO ORDERED.

|||

SECOND DIVISION

[G.R. No. 176019. January 12, 2011.]

BPI FAMILY SAVINGS BANK, INC., petitioner, vs. GOLDEN POWER DIESEL SALES
CENTER, INC. and RENATO C. TAN, respondents.
158
DECISION

CARPIO, J p:

The Case

This is a petition for review 1 of the 13 March 2006 Decision 2 and 19 December 2006
Resolution 3 of the Court of Appeals in CA-G.R. SP No. 78626. In its 13 March 2006
Decision, the Court of Appeals denied petitioner BPI Family Savings Bank, Inc.'s (BPI
Family) petition for mandamus and certiorari. In its 19 December 2006 Resolution, the
Court of Appeals denied BPI Family's motion for reconsideration.

The Facts

On 26 October 1994, CEDEC Transport, Inc. (CEDEC) mortgaged two parcels of land
covered by Transfer Certificate of Title (TCT) Nos. 134327 and 134328 situated in Malibay,
Pasay City, including all the improvements thereon (properties), in favor of BPI Family to
secure a loan of P6,570,000. On the same day, the mortgage was duly annotated on the
titles under Entry No. 94-2878. On 5 April and 27 November 1995, CEDEC obtained from
BPI Family additional loans of P2,160,000 and P1,140,000, respectively, and again
mortgaged the same properties. These latter mortgages were duly annotated on the titles
under Entry Nos. 95-6861 and 95-11041, respectively, on the same day the loans were
obtained.

Despite demand, CEDEC defaulted in its mortgage obligations. On 12 October 1998, BPI
Family filed with the ex-officio sheriff of the Regional Trial Court of Pasay City (RTC) a
verified petition for extrajudicial foreclosure of real estate mortgage over the properties
under Act No. 3135, as amended. 4

On 10 December 1998, after due notice and publication, the sheriff sold the properties at
public auction. BPI Family, as the highest bidder, acquired the properties for
P13,793,705.31. On 14 May 1999, the Certificate of Sheriff's Sale, dated 24 February 1999,
was duly annotated on the titles covering the properties.

On 15 May 1999, the one-year redemption period expired without CEDEC redeeming the
properties. Thus, the titles to the properties were consolidated in the name of BPI Family.
On 13 September 2000, the Registry of Deeds of Pasay City issued new titles, TCT Nos.
142935 and 142936, in the name of BPI Family.

However, despite several demand letters, CEDEC refused to vacate the properties and to
surrender possession to BPI Family. On 31 January 2002, BPI Family filed an Ex-

159
Parte Petition for Writ of Possession over the properties with Branch 114 of the Regional
Trial Court of Pasay City (trial court). In its 27 June 2002 Decision, the trial court granted
BPI Family's petition. 5 On 12 July 2002, the trial court issued the Writ of
Possession. TcEAIH

On 29 July 2002, respondents Golden Power Diesel Sales Center, Inc. and Renato C.
Tan 6 (respondents) filed a Motion to Hold Implementation of the Writ of
Possession. 7 Respondents alleged that they are in possession of the properties which they
acquired from CEDEC on 10 September 1998 pursuant to the Deed of Absolute Sale with
Assumption of Mortgage (Deed of Sale). 8 Respondents argued that they are third persons
claiming rights adverse to CEDEC, the judgment obligor and they cannot be deprived of
possession over the properties. Respondents also disclosed that they filed a complaint
before Branch 111 of the Regional Trial Court of Pasay City, docketed as Civil Case No. 99-
0360, for the cancellation of the Sheriff's Certificate of Sale and an order to direct BPI
Family to honor and accept the Deed of Absolute Sale between CEDEC and respondents. 9

On 12 September 2002, the trial court denied respondents' motion. 10 Thereafter, the trial
court issued an alias writ of possession which was served upon CEDEC and all other
persons claiming rights under them.

However, the writ of possession expired without being implemented. On 22 January 2003,
BPI Family filed an Urgent Ex-Parte Motion to Order the Honorable Branch Clerk of Court
to Issue Alias Writ of Possession. In an Order dated 27 January 2003, the trial court
granted BPI Family's motion.

Before the alias writ could be implemented, respondent Renato C. Tan filed with the trial
court an Affidavit of Third Party Claim 11 on the properties. Instead of implementing the
writ, the sheriff referred the matter to the trial court for resolution.

On 11 February 2003, BPI Family filed an Urgent Motion to Compel Honorable Sheriff
and/or his Deputy to Enforce Writ of Possession and to Break Open the properties. In its 7
March 2003 Resolution, the trial court denied BPI Family's motion and ordered the sheriff
to suspend the implementation of the alias writ of possession. 12 According to the trial
court, "the order granting the alias writ of possession should not affect third persons
holding adverse rights to the judgment obligor." The trial court admitted that in issuing the
first writ of possession it failed to take into consideration respondents' complaint before
Branch 111 claiming ownership of the property. The trial court also noted that respondents
were in actual possession of the properties and had been updating the payment of CEDEC's
loan balances with BPI Family. Thus, the trial court found it necessary to amend its 12

160
September 2002 Order and suspend the implementation of the writ of possession until Civil
Case No. 99-0360 is resolved.

BPI Family filed a motion for reconsideration. In its 20 June 2003 Resolution, the trial
court denied the motion. 13

BPI Family then filed a petition for mandamus and certiorari with application for a
temporary restraining order or preliminary injunction before the Court of Appeals. BPI
Family argued that the trial court acted with grave abuse of discretion amounting to lack or
excess of jurisdiction when it ordered the suspension of the implementation of the alias
writ of possession. According to BPI Family, it was the ministerial duty of the trial court to
grant the writ of possession in its favor considering that it was now the owner of the
properties and that once issued, the writ should be implemented without delay.

The Court of Appeals dismissed BPI Family's petition. The dispositive portion of the 13
March 2006 Decision reads:

WHEREFORE, the instant Petition for Writ of Mandamus and Writ of Certiorari with
Application for a TRO and/or Preliminary Injunction is hereby DENIED. The
twin Resolutions dated March 7, 2003 and June 20, 2003, both issued by the public
respondent in LRC Case No. 02-0003, ordering the sheriff to suspend the implementation
of the Alias Writ of Possession issued in favor of the petitioner, and denying its Urgent
Omnibus Motion thereof, respectively, are herebyAFFIRMED.

SO ORDERED. 14

BPI Family filed a motion for reconsideration. In its 19 December 2006 Resolution, the
Court of Appeals denied the motion. CaAIES

The Ruling of the Court of Appeals

The Court of Appeals ruled that the trial court did not commit grave abuse of discretion in
suspending the implementation of the alias writ of possession because respondents were in
actual possession of the properties and are claiming rights adverse to CEDEC, the
judgment obligor. According to the Court of Appeals, the principle that the implementation
of the writ of possession is a mere ministerial function of the trial court is not without
exception. The Court of Appeals held that the obligation of the court to issue an ex
parte writ of possession in favor of the purchaser in an extrajudicial foreclosure sale ceases
to be ministerial once it appears that there is a third party in possession of the property
who is claiming a right adverse to that of the debtor or mortgagor.

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The Issues

BPI Family raises the following issues:

A.

The Honorable Court of Appeals seriously erred in upholding the finding of the Honorable
Regional Trial Court that despite the fact that private respondents merely stepped into the
shoes of mortgagor CEDEC, being the vendee of the properties in question, they are
categorized as third persons in possession thereof who are claiming a right adverse to that
of the debtor/mortgagor CEDEC.

B.

The Honorable Court of Appeals gravely erred in sustaining the aforementioned twin orders
suspending the implementation of the writ of possession on the ground that the annulment
case filed by private respondents is still pending despite the established ruling that
pendency of a case questioning the legality of a mortgage or auction sale cannot be a
ground for the non-issuance and/or non-implementation of a writ of possession. 15

The Ruling of the Court

The petition is meritorious.

BPI Family argues that respondents cannot be considered "a third party who is claiming a
right adverse to that of the debtor or mortgagor" because respondents, as vendee, merely
stepped into the shoes of CEDEC, the vendor and judgment obligor. According to BPI
Family, respondents are mere extensions or successors-in-interest of CEDEC. BPI Family
also argues that the pendency of an action questioning the validity of a mortgage or auction
sale cannot be a ground to oppose the implementation of a writ of possession.

On the other hand, respondents insist that they are third persons who claim rights over the
properties adverse to CEDEC. Respondents argue that the obligation of the court to issue
an ex parte writ of possession in favor of the purchaser in an extrajudicial foreclosure sale
ceases to be ministerial once it appears that there is a third party in possession of the
property who is claiming a right adverse to that of the judgment obligor.

In extrajudicial foreclosures of real estate mortgages, the issuance of a writ of possession is

governed by Section 7 of Act No. 3135, as amended, which provides:

SECTION 7. In any sale made under the provisions of this Act, the purchaser may petition
the Court of First Instance (Regional Trial Court) of the province or place where the

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property or any part thereof is situated, to give him possession thereof during the
redemption period, furnishing bond in an amount equivalent to the use of the property for
a period of twelve months, to indemnify the debtor in case it be shown that the sale was
made without violating the mortgage or without complying with the requirements of this
Act. Such petition shall be made under oath and filed in form of an ex parte motion in the
registration or cadastral proceedings if the property is registered, or in special proceedings
in the case of property registered under the Mortgage Law or under section one hundred
and ninety-four of the Administrative Code, or of any other real property encumbered with a
mortgage duly registered in the office of any register of deeds in accordance with any
existing law, and in each case the clerk of the court shall, upon the filing of such petition,
collect the fees specified in paragraph eleven of section one hundred and fourteen of Act
Numbered Four hundred and ninety-six, as amended by Act Numbered Twenty-eight
hundred and sixty-six, and the court shall, upon approval of the bond, order that a writ of
possession issue, addressed to the sheriff of the province in which the property is situated,
who shall execute said order immediately. AcIaST

This procedure may also be availed of by the purchaser seeking possession of the foreclosed
property bought at the public auction sale after the redemption period has expired without
redemption having been made. 16

In China Banking Corporation v. Lozada, 17 we ruled:

It is thus settled that the buyer in a foreclosure sale becomes the absolute owner of the
property purchased if it is not redeemed during the period of one year after the registration
of the sale. As such, he is entitled to the possession of the said property and can demand it
at any time following the consolidation of ownership in his name and the issuance to him of
a new transfer certificate of title. The buyer can in fact demand possession of the land even
during the redemption period except that he has to post a bond in accordance with Section
7 of Act No. 3135, as amended. No such bond is required after the redemption period if the
property is not redeemed. Possession of the land then becomes an absolute right of the
purchaser as confirmed owner. Upon proper application and proof of title, the issuance of
the writ of possession becomes a ministerial duty of the court. 18 (Emphasis supplied)

Thus, the general rule is that a purchaser in a public auction sale of a foreclosed property
is entitled to a writ of possession and, upon an ex parte petition of the purchaser, it is
ministerial upon the trial court to issue the writ of possession in favor of the purchaser.

There is, however, an exception. Section 33, Rule 39 of the Rules of Court provides:

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Section 33. Deed and possession to be given at expiration of redemption period; by whom
executed or given. . . .

Upon the expiration of the right of redemption, the purchaser or redemptioner shall be
substituted to and acquire all the rights, title, interest and claim of the judgment obligor to
the property as of the time of the levy. The possession of the property shall be given to the
purchaser or last redemptioner by the same officer unless a third party is actually holding
the property adversely to the judgment obligor. (Emphasis supplied)

Therefore, in an extrajudicial foreclosure of real property, when the foreclosed property is in

the possession of a third party holding the same adversely to the judgment obligor, the
issuance by the trial court of a writ of possession in favor of the purchaser of said real
property ceases to be ministerial and may no longer be done ex parte. 19 The procedure is
for the trial court to order a hearing to determine the nature of the adverse
possession. 20 For the exception to apply, however, the property need not only be possessed
by a third party, but also held by the third party adversely to the judgment obligor.

In this case, BPI Family invokes the general rule that they are entitled to a writ of
possession because respondents are mere successors-in-interest of CEDEC and do not
possess the properties adversely to CEDEC. Respondents, on the other hand, assert the
exception and insist that they hold the properties adversely to CEDEC and that their
possession is a sufficient obstacle to the ex parte issuance of a writ of possession in favor of
BPI Family.

Respondents' argument fails to persuade the Court. It is clear that respondents acquired
possession over the properties pursuant to the Deed of Sale which provides that for
P15,000,000 CEDEC will "sell, transfer and convey" to respondents the properties "free
from all liens and encumbrances excepting the mortgage as may be subsisting in favor of
the BPI FAMILY SAVINGS BANK." 21 Moreover, the Deed of Sale provides that respondents
bind themselves to assume "the payment of the unpaid balance of the mortgage
indebtedness of the VENDOR (CEDEC) amounting to P7,889,472.48, as of July 31, 1998,
in favor of the aforementioned mortgagee (BPI Family) by the mortgage instruments and
does hereby further agree to be bound by the precise terms and conditions therein
contained." 22 THEDCA

In Roxas v. Buan, 23 we ruled:

It will be recalled that Roxas' possession of the property was premised on its alleged sale to
him by Valentin for the amount of P100,000.00. Assuming this to be true, it is readily
apparent that Roxas holds title to and possesses the property as Valentin's transferee. Any
164
right he has to the property is necessarily derived from that of Valentin. As transferee, he
steps into the latter's shoes. Thus, in the instant case, considering that the property had
already been sold at public auction pursuant to an extrajudicial foreclosure, the only
interest that may be transferred by Valentin to Roxas is the right to redeem it within the
period prescribed by law. Roxas is therefore the successor-in-interest of Valentin, to whom
the latter had conveyed his interest in the property for the purpose of redemption.
Consequently, Roxas' occupancy of the property cannot be considered adverse to
Valentin. 24

In this case, respondents' possession of the properties was premised on the sale to them by
CEDEC for the amount of P15,000,000. Therefore, respondents hold title to and possess
the properties as CEDEC's transferees and any right they have over the properties is
derived from CEDEC. As transferees of CEDEC, respondents merely stepped into CEDEC's
shoes and are necessarily bound to acknowledge and respect the mortgage CEDEC had
earlier executed in favor of BPI Family. 25 Respondents are the successors-in-interest of
CEDEC and thus, respondents' occupancy over the properties cannot be considered
adverse to CEDEC.

Moreover, in China Bank v. Lozada, 26 we discussed the meaning of "a third party who is
actually holding the property adversely to the judgment obligor." We stated:

The exception provided under Section 33 of Rule 39 of the Revised Rules of Court
contemplates a situation in which a third party holds the property by adverse title or right,
such as that of a co-owner, tenant or usufructuary. The co-owner, agricultural tenant, and
usufructuary possess the property in their own right, and they are not merely the
successor or transferee of the right of possession of another co-owner or the owner of the
property. 27

In this case, respondents cannot claim that their right to possession over the properties is
analogous to any of these. Respondents cannot assert that their right of possession is
adverse to that of CEDEC when they have no independent right of possession other than
what they acquired from CEDEC. Since respondents are not holding the properties
adversely to CEDEC, being the latter's successors-in-interest, there was no reason for the
trial court to order the suspension of the implementation of the writ of possession.

Furthermore, it is settled that a pending action for annulment of mortgage or foreclosure

sale does not stay the issuance of the writ of possession. 28 The trial court, where the
application for a writ of possession is filed, does not need to look into the validity of the
mortgage or the manner of its foreclosure. 29 The purchaser is entitled to a writ of
possession without prejudice to the outcome of the pending annulment case. 30
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In this case, the trial court erred in issuing its 7 March 2003 Order suspending the
implementation of the alias writ of possession. Despite the pendency of Civil Case No. 99-
0360, the trial court should not have ordered the sheriff to suspend the implementation of
the writ of possession. BPI Family, as purchaser in the foreclosure sale, is entitled to a writ
of possession without prejudice to the outcome of Civil Case No. 99-0360.

WHEREFORE, we GRANT the petition. We SET ASIDE the 13 March 2006 Decision and the
19 December 2006 Resolution of the Court of Appeals in CA-G.R. SPNo. 78626. We SET
ASIDE the 7 March and 20 June 2003 Resolutions of the Regional Trial Court, Branch 114,
Pasay City. We ORDER the sheriff to proceed with the implementation of the writ of
possession without prejudice to the outcome of Civil Case No. 99-0360.

SO ORDERED. Hc

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