15 GSIS v COA

8/3/15 5:30 PMSUPREME COURT REPORTS ANNOTATED VOLUME 170

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VOL. 170, FEBRUARY 23, 1989 533

Government Service Insurance System vs. Court of Appeals

G.R. No. 40824. February 23, 1989.*

GOVERNMENT SERVICE INSURANCE SYSTEM,petitioner, vs. COURT OF APPEALS and MR. & MRS.ISABELO R. RACHO, respondents.

Mercantile Law; Negotiable Instruments; Promissory Note; Thepromissory note and the mortgage deeds in question are notnegotiable instruments because they are neither payable to order norto bearer.This approach of both parties appears to be misdirectedand their reliance misplaced. The promissory note hereinbeforequoted, as well as the mortgage deeds subject of this case, areclearly not negotiable intruments. These documents do not complywith the fourth requisite to be considered as such under Section 1 ofAct No. 2031 because they are neither payable to order nor tobearer. The note is payable to a specified party, the GSIS. Absentthe aforesaid requisite, the provisions of Act No. 2031 would notapply; governance shall be afforded, instead, by the provisions ofthe Civil Code and special laws on mortgages.

Remedial Law; Evidence; Parol Evidence Rule; Theintroduction of the evidence in question falls under the exception tothe parol evidence rule since the complaint filed in the lower courtalleges the failure of the mortgage contracts to express the trueagreement of the parties.The parol evidence rule cannot be usedby petitioner as a shield in this case for it is clear that there was noobjection in the court below regarding the admissibility of thetestimony and documents that were presented to prove that theprivate respondents signed the mortgage papers just toaccommodate their co-owners, the Lagasca spouses. Besides, theintroduction of such evidence falls under the exception to said rule,there being allegations in the complaint of private respondents inthe court below regarding the failure of the mortgage contracts toexpress the true agreement of the parties.

Civil Law; Obligations and Contracts; Mortgage Contracts; The



fact that the loans were contracted solely for the benefit of theLagasca spouses would not invalidate the mortgage with respect toprivate respondents share in the mortgaged property, the latterhaving given a

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* SECOND DIVISION.

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534 SUPREME COURT REPORTS ANNOTATED


valid consent to such mortgage.However, contrary to the holdingof the respondent court, it cannot be said that private respondentsare without liability under the aforesaid mortgage contracts. Thefactual context of this case is precisely what is contemplated in thelast paragraph of Article 2085 of the Civil Code to the effect thatthird persons who are not parties to the principal obligation maysecure the latter by pledging or mortgaging their own property. Solong as valid consent was given, the fact that the loans were solelyfor the benefit of the Lagasca spouses would not invalidate themortgage with respect to private respondents share in the property.In consenting thereto, even assuming that private respondents maynot be assuming personal liability for the debt, their share in theproperty shall nevertheless secure and respond for the performanceof the principal obligation. The parties to the mortgage could nothave intended that the same would apply only to the aliquot portionof the Lagasca spouses in the property, otherwise the consent of theprivate respondents would not have been required.

Remedial Law; Extra-Judicial Foreclosure of Mortgage; Notice;Act No. 3135 does not require personal notice on the mortgagor ofthe extrajudicial foreclosure sale.Coming now to the extrajudicialforeclosure effected by GSIS, We cannot agree with the ruling ofrespondent court that lack of notice to the private respondents of theextrajudicial foreclosure sale impairs the validity thereof. InBonnevie, et al. vs Court of Appeals, et al., the Court ruled that ActNo. 3135, as amended, does not require personal notice on themortgagor, quoting the requirement on notice in such cases asfollows: Section 3. Notice shall be given by posting notices of sale



for not less than twenty days in at least three public places of themunicipality where the property is situated, and if such property isworth more than four hundred pesos, such notice shall also bepublished once a week for at least three consecutive weeks in anewspaper of general circulation in the municipality or city. Thereis no showing that the foregoing requirement on notice was notcomplied with in the foreclosure sale complained of.

PETITION to review the judgment of the Court of Appeals.

The facts are stated in the opinion of the Court. The Government Corporate Counsel for petitioner. Lorenzo A. Sales for private respondents.

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VOL. 170, FEBRUARY 23, 1989 535


REGALADO, J.:

Private respondents, Mr. and Mrs. Isabelo R. Racho,together with the spouses Mr. and Mrs Flaviano Lagasca,executed a deed of mortgage, dated November 13, 1957, infavor of petitioner Government Service Insurance System(hereinafter referred to as GSIS) and subsequently, anotherdeed of mortagage, dated April 14, 1958, in connection withtwo loans granted by the latter in the sums of P11,500.00and P3,000.00, respectively.

1 A parcel of land covered by

Transfer Certificate of Title No. 38989 of the Register ofDeed of Quezon City, co-owned by said mortgagor spouses,was given as security under the aforesaid two deeds.

2 They

also executed a promissory note which states in part:

x x x for value received, we the undersigned . . . JOINTLY,SEVERALLY and SOLIDARILY, promise to pay theGOVERNMENT SERVICE INSURANCE SYSTEM the sum of . . .(P11,500.00) Philippine Currency, with interest at the rate of six(6%) per centum compounded monthly payable in . . . (120) equalmonthly installments of . . .(P127.65) each.

3

On July 11, 1961, the Lagasca spouses executed aninstrument denominated Assumption of Mortgage underwhich they obligated themselves to assume the aforesaidobligation to the GSIS and to secure the release of themortgage covering that portion of the land belonging to



herein private respondents and which was mortgaged to theGSIS.

4 This undertaking was not fulfilled.

5

Upon failure of the mortgagors to comply with theconditions of the mortgage, particularly the payment of theamortizations due, GSIS extrajudicially foreclosed themortgage and caused the mortgaged property to be sold atpublic auction on Decem-

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1 Record on Appeal, 9, 22; Rollo, 54.2 Rollo, 58.3 Ibid., 26.4 Record on Appeal, 27-31; Rollo, 54.5 Rollo, 59.

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ber 3, 1962.6

More than two years thereafter, or on August 23, 1965,herein private respondents filed a complaint against thepetitioner and the Lagasca spouses in the former Court ofFirst Instance of Quezon City,

7 praying that the

extrajudicial foreclosure made on their property and allother documents executed in relation thereto in favor of theGovernment Service Insurance System be declared nulland void. It was further prayed that they be allowed torecover said property, and/or the GSIS be ordered to paythem the value thereof, and/or they be allowed torepurchase the land. Additionally, they asked for actual andmoral damages and attorneys fees.

In their aforesaid complaint, private respondents allegedthat they signed the mortgage contracts not as sureties orguarantors for the Lagasca spouses but they merely gavetheir common property to the said co-owners who weresolely benefited by the loans from the GSIS.

The trial court rendered judgment on February 25, 1968dismissing the complaint for failure to establish a cause ofaction.

8

Said decision was reversed by the respondent Court ofAppeals

9 which held that:



x x x although formally they are co-mortgagors, they are so onlyfor accomodation (sic) in that the GSIS required their consent to themortgage of the entire parcel of land which was covered with onlyone certificate of title, with full knowledge that the loans securedthereby were solely for the benefit of the appellant (sic) spouses whoalone applied for the loan.

x x x xIt is, therefore, clear that as against the GSIS, appellants have a

valid cause for having foreclosed the mortgage without havinggiven sufficient notice to them as required either as to their delin-

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6 Ibid., id.; Record on Appeal, 64.

7 Branch IV, Civil Case No. Q-9418; Record on Appeal, 1-38; Rollo, 54.

8 Record on Appeal, 69-73; ibid.

9 CA-G.R. No. 42193-R; Justice Pacifico P. de Castro, ponente, Justices Luis

B. Reyes and Ramon G. Gaviola, Jr., concurring.

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VOL. 170, FEBRUARY 23, 1989 537


guency in the payment of amortization or as to the subsequentforeclosure of the mortgage by reason of any default in suchpayment. The notice published in the newspaper, Daily Record(Exh. 12) and posted pursuant to Sec. 3 of Act 3135 is not the noticeto which the mortgagor is entitled upon the application being madefor an extrajudicial foreclosure. x x x

10

On the foregoing findings, the respondent courtconsequently decreed that

In view of all the foregoing, the judgment appealed from is herebyreversed, and another one entered (1) declaring the foreclosure ofthe mortgage void insofar as it affects the share of the appellants;(2) directing the GSIS to reconvey to appellants their share of themortgaged property, or the value thereof if already sold to thirdparty, in the sum of P35,000.00, and (3) ordering the appelleesFlaviano Lagasca and Esther Lagasca to pay the appellants thesum of P10,00.00 as moral damages, P5,000.00 as attorneys fees,and costs.

11

The case is now before Us in this petition for review.In submitting their case to this Court, both parties relied



on the provisions of Section 29 of Act No. 2031, otherwiseknown as the Negotiable Instruments Law, which providethat an accommodation party is one who has signed aninstrument as maker, drawer, acceptor of indorser withoutreceiving value therefor, but is held liable on theinstrument to a holder for value although the latter knewhim to be only an accommodation party.

This approach of both parties appears to be misdirectedand their reliance misplaced. The promissory notehereinbefore quoted, as well as the mortgage deeds subjectof this case, are clearly not negotiable instruments. Thesedocuments do not comply with the fourth requisite to beconsidered as such under Section 1 of Act No. 2031 becausethey are neither payable to order nor to bearer. The note ispayable to a specified party, the GSIS. Absent the aforesaidrequisite, the provi-

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10 Rollo, 61-63.11 Ibid., 66.

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sions of Act No. 2031 would not apply; governance shall beafforded, instead, by the provisions of the Civil Code andspecial laws on mortgages.

As earlier indicated, the factual findings of respondentcourt are that private respondents signed the documentsonly to give their consent to the mortgage as required byGSIS, with the latter having full knowledge that the loanssecured thereby were solely for the benefit of the Lagascaspouses.

12 This appears to be duly supported by sufficient

evidence on record. Indeed, it would be unusual for theGSIS to arrange for and deduct the monthly amortizationson the loans from the salary as an army officer of FlavianoLagasca without likewise affecting deductions from thesalary of Isabelo Racho who was also an army sergeant.Then there is also the undisputed fact, as already stated,that the Lagasca spouses executed a so-called Assumptionof Mortgage promising to exclude private respondents andtheir share of the mortgaged property from liability to the



mortgagee. There is no intimation that the former executedsuch instrument for a consideration, thus confirming thatthey did so pursuant to their original agreement.

The parol evidence rule13

cannot be used by petitioner asa shield in this case for it is clear that there was no objectionin the court below regarding the admissibility of thetestimony and documents that were presented to prove thatthe private respondents signed the mortgage papers just toaccommodate their co-owners, the Lagasca spouses. Besides,the introduction of such evidence falls under the exceptionto said rule, there being allegations in the complaint ofprivate respondents in the court below regarding the failureof the mortgage contracts to express the true agreement ofthe parties.

14

However, contrary to the holding of the respondent court,it cannot be said that private respondents are withoutliability under the aforesaid mortgage contracts. The factualcontext of

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12 Ibid., 61.13 Sec. 7, Rule 130, Rules of Court.14 Record on Appeal, 3-4; Rollo, 54.

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VOL. 170, FEBRUARY 23, 1989 539


this case is precisely what is contemplated in the lastparagraph of Article 2085 of the Civil Code to the effect thatthird persons who are not parties to the principal obligationmay secure the latter by pledging or mortgaging their ownproperty.

So long as valid consent was given, the fact that the loanswere solely for the benefit of the Lagasca spouses would notinvalidate the mortgage with respect to private respondentsshare in the property. In consenting thereto, even assumingthat private respondents may not be assuming personalliability for the debt, their share in the property shallnevertheless secure and respond for the performance of theprincipal obligation. The parties to the mortgage could nothave intended that the same would apply only to the aliquotportion of the Lagasca spouses in the property, otherwise



the consent of the private respondents would not have beenrequired.

The supposed requirement of prior demand on theprivate respondents would not be in point here since themortgage contracts created obligations with specific termsfor the compliance thereof. The facts further show that theprivate respondents expressly bound themselves as solidarydebtors in the promisory note hereinbefore quoted.

Coming now to the extrajudicial foreclosure effected byGSIS, We cannot agree with the ruling of respondent courtthat lack of notice to the private respondents of theextrajudicial foreclosure sale impairs the validity thereof. InBonnevie, et al. vs. Court of Appeals, et al.,

15 the Court ruled

that Act No. 3135, as amended, does not require personalnotice on the mortgagor, quoting the requirement on noticein such cases as follows:

Section 3. Notice shall be given by posting notices of sale for notless than twenty days in at least three public places of themunicipality where the property is situated, and if such property isworth more than four hundred pesos, such notice shall also bepublished once a week for at least three consecutive weeks in anewspaper of general circulation in the municipality or city.

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15 125 SCRA 122 (1983).

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Joseph vs. Bautista

There is no showing that the foregoing requirement onnoticewas not complied with in the foreclosure salecomplained of.The respondent court, therefore, erred in annulling themortgage insofar as it affected the share of privaterespondents or in directing reconveyance of their propertyor the payment of the value thereof. Indubitably, whether ornot private respondents herein benefited from the loan, themortgage and the extrajudicial foreclosure proceedings werevalid.

WHEREFORE, judgment is hereby renderedREVERSING the decision of the respondent Court of



Appeals and REINSTATING the decision of the court a quoin Civil Case No. Q-9418 thereof.

SO ORDERED.

Melencio-Herrera, (Chairman), Paras, Padilla andSarmiento, JJ., concur.

Judgment reversed.

Note.Promissory note must be payable to order orbearer to be negotiable. (Consolidated Plywood Industries,Inc. vs. IFC Leasing and Acceptance Corporation, 149 SCRA448.)

o0o

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