Cases-Chapters 1 to 5 - Pledge and Mortgage Antichresis and Chattel Mortgage

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Republic of the PhilippinesSUPREME COURT

Manila

THIRD DivISION

G.R. No. 77465 May 21, 1988

SPOUSES UY TONG & KHO PO GIOK, petitioners, vs.HONORABLE COURT OF APPEALS, HONORABLE BIENVENIDO C. EJERCITO, Judge of the Court of First Instance of Manila, Branch XXXVII and BAYANIHAN AUTOMOTIVE CORPORATION, respondents.

Platon A. Baysa for petitioner.

Manuel T. Ybarra for respondents.

CORTES, J.:

In the present petition, petitioners assail the validity of a deed of assignment over an apartment unit and the leasehold rights over the land on which the building housing the said apartment stands for allegedly being in the nature of a pactum commissorium.

The facts are not disputed.

Petitioners Uy Tong (also known as Henry Uy) and Kho Po Giok (SPOUSES) used to be the owners of Apartment No. 307 of the Ligaya Building, together with the leasehold right for ninety- nine (99) years over the land on which the building stands. The land is registered in the name of Ligaya Investments, Inc. as evidenced by Transfer Certificate of Title No. 79420 of the Registry of Deeds of the City of Manila. It appears that Ligaya Investments, Inc. owned the building which houses the apartment units but sold Apartment No. 307 and leased a portion of the land in which the building stands to the SPOUSES.

In February, 1969, the SPOUSES purchased from private respondent Bayanihan Automotive, Inc. (BAYANIHAN) seven (7) units of motor vehicles for a total amount of P47,700.00 payable in three (3) installments. The transaction was evidenced by a written "Agreement" wherein the terms of payment had been specified as follows:

That immediately upon signing of this Agreement, the VENDEE shall pay unto the VENDOR the amount of Seven Thousand Seven Hundred (P7,000.00) Pesos, Philippine Currency, and the amount of Fifteen Thousand (P15,000.00) Pesos shah be paid on or before March 30, 1969 and the balance of Twenty Five Thousand (P25,000.00) Pesos shall be paid on or before April 30, 1969, the said amount again to be secured by another postdated check with maturity on April 30, 1969 to be drawn by the VENDEE;

That it is fully understood that should the two (2) aforementioned checks be not honored on their respective maturity dates, herein VENDOR will give VENDEE another sixty (60) days from maturity dates, within which to pay or redeem the value of the said checks;

That if for any reason the VENDEE should fail to pay her aforementioned obligation to the VENDOR, the latter shall become automatically the owner of the former's apartment which is located at No. 307, Ligaya Building, Alvarado St., Binondo,

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Manila, with the only obligation on its part to pay unto the VENDEE the amount of Three Thousand Five Hundred Thirty Five (P3,535.00) Pesos, Philippine Currency; and in such event the VENDEE shall execute the corresponding Deed of absolute Sale in favor of the VENDOR and or the Assignment of Leasehold Rights. [emphasis supplied]. (Quoted in Decision in Civil Case No. 80420, Exhibit "A" of Civil Case No. 1315321].

After making a downpayment of P7,700.00, the SPOUSES failed to pay the balance of P40,000.00. Due to these unpaid balances, BAYANIHAN filed an action for specific performance against the SPOUSES docketed as Civil Case No. 80420 with the Court of First Instance of Manila.

On October 28, 1978, after hearing, judgment was rendered in favor of BAYANIHAN in a decision the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered, ordering the defendants, jointly and severally, to pay the plaintiffs, the sum of P40,000.00, with interest at the legal rate from July 1, 1970 until full payment. In the event of their failure to do so within thirty (30) days from notice of this judgment, they are hereby ordered to execute the corresponding deed of absolute sale in favor of the plaintiff and/or the assignment of leasehold rights over the defendant's apartment located at 307 Ligaya Building, Alvarado Street, Binondo, Manila, upon the payment by the plaintiff to the defendants of the sum of P3,535.00. [emphasis supplied].

Pursuant to said judgment, an order for execution pending appeal was issued by the trial court and a deed of assignment dated May 27, 1972, was executed by the SPOUSES [Exhibit "B", CFI Records, p. 127] over Apartment No. 307 of the Ligaya Building together with the leasehold right over the land on which the building stands. The SPOUSES acknowledged receipt of the sum of P3,000.00 more or less, paid by BAYANIHAN pursuant to the said judgment.

Notwithstanding the execution of the deed of assignment the SPOUSES remained in possession of the premises. Subsequently, they were allowed to remain in the premises as lessees for a stipulated monthly rental until November 30,1972.

Despite the expiration of the said period, the SPOUSES failed to surrender possession of the premises in favor of BAYANIHAN. This prompted BAYANIHAN to file an ejectment case against them in the City Court of Manila docketed as Civil Case No. 240019. This action was however dismissed on the ground that BAYANIHAN was not the real party in interest, not being the owner of the building.

On February 7, 1979, after demands to vacate the subject apartment made by BAYANIHAN's counsel was again ignored by the SPOUSES, an action for recovery of possession with damages was filed with the Court of First Instance of Manila, docketed as Civil Case No. 121532 against the SPOUSES and impleading Ligaya Investments, Inc. as party defendant. On March 17, 1981, decision in said case was rendered in favor of BAYANIHAN ordering the following:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants spouses UY TONG and KHO GIOK and defendant Ligaya Investment, Inc., dismissing defendants' counterclaim and ordering:

1. The defendants spouses UY TONG and KHO PO GIOK and any andlor persons claiming right under them, to vacate, surrender and deliver possession of Apartment 307, Ligaya Building, located at 64 Alvarado Street, Binondo, Manila to the plaintiff;

2. Ordering defendant Ligaya Investment, Inc. to recognize the right of ownership and possession of the plaintiff over Apartment No. 307, Ligaya Building;

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3. Ordering Ligaya Investment, Inc. to acknowledge plaintiff as assignee-lessee in liue of defendants spouses Uy Tong and Kho Po Giok over the lot on which the building was constructed;

4. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay to the plaintiff the sum of P200.00 commencing from June, 1971 to November 30, 1972, or a total amount of P3,400.00 as rental for the apartment, and the sum of P200.00 from December 1, 1972 until the premises are finally vacated and surrendered to the plaintiff, as reasonable compensation for the use of the apartment; and

5. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay P3,000.00 as and for attorney's fees to the plaintiff, and the costs of this suit.

Not satisfied with this decision, the SPOUSES appealed to the Court of Appeals. On October 2,1984, the respondent Court of Appeals affirmed in toto the decision appealed from [Petition, Annex "A", Rollo, pp. 15-20]. A motion for reconsideration of the said decision was denied by the respondent Court in a resolution dated February 11, 1987 [Petition, Annex "C", Rollo, pp. 31- 34].

Petitioners-SPOUSES in seeking a reversal of the decision of the Court of Appeals rely on the following reasons:

I. The deed of assignment is null and void because it is in the nature of a pactum commissorium and/or was borne out of the same.

II. The genuineness and due Prosecution of the deed of assignment was not deemed admitted by petitioner.

III. The deed of assignment is unenforceable because the condition for its execution was not complied with.

IV. The refusal of petitioners to vacate and surrender the premises in question to private respondent is justified and warranted by the circumstances obtaining in the instant case.

I. In support of the first argument, petitioners bring to the fore the contract entered into by the parties whereby petitioner Kho Po Giok agreed that the apartment in question will automatically become the property of private respondent BAYANIHAN upon her mere failure to pay her obligation. This agreement, according to the petitioners is in the nature of a pactum commissorium which is null and void, hence, the deed of assignment which was borne out of the same agreement suffers the same fate.

The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code:

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

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period.

A perusal of the terms of the questioned agreement evinces no basis for the application of the pactum commissorium provision. First, there is no indication of 'any contract of mortgage entered into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks.

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Second, there is no case of automatic appropriation of the property by BAYANIHAN. When the SPOUSES defaulted in their payments of the second and third installments of the trucks they purchased, BAYANIHAN filed an action in court for specific performance. The trial court rendered favorable judgment for BAYANIHAN and ordered the SPOUSES to pay the balance of their obligation and in case of failure to do so, to execute a deed of assignment over the property involved in this case. The SPOUSES elected to execute the deed of assignment pursuant to said judgment.

Clearly, there was no automatic vesting of title on BAYANIHAN because it took the intervention of the trial court to exact fulfillment of the obligation, which, by its very nature is ". . anathema to the concept of pacto commissorio" [Northern Motors, Inc. v. Herrera, G.R. No. L-32674, February 22, 1973, 49 SCRA 392]. And even granting that the original agreement between the parties had the badges of pactum commissorium, the deed of assignment does not suffer the same fate as this was executed pursuant to a valid judgment in Civil Case No. 80420 as can be gleaned from its very terms and conditions:

DEED OF ASSIGNMENT

KNOW ALL MEN BY THESE PRESENTS:

This deed made and entered into by Uy Tiong also known as Henry Uy and Kho Po Giok, both of legal age, husband and wife, respectively, and presently residing at 307 Ligaya Bldg., Alvarado St., Binondo, Manila, and hereinafter to be known and called as the ASSIGNORS, in favor of Bayanihan Automotive Corporation, an entity duly organized and existing under the laws of the Philippines, with principal business address at 1690 Otis St., Paco, Manila and hereinafter to be known and called the ASSIGNEE;

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WHEREAS, the ASSIGNEE has filed a civil complaint for "Specific Performance with Damages" against the ASSIGNORS in the Court of First Instance of Manila, Branch V, said case having been docketed as Civil Case No. 80420;

WHEREAS, the ASSIGNEE was able to obtain a judgment against the ASSIGNOR wherein the latter was ordered by the court as follows, to wit:

WHEREFORE, judgment is hereby rendered ordering the defendants, jointly and severally to pay the plaintiff the sum of P40,000.00, with interest at the legal rate from July 31, 1970 until full payment. In the event of their failure to do so within thirty (30) days from notice of this judgment, they are hereby ordered to execute the corresponding deed of absolute sale in favor of the plaintiff and/or the assignment of leasehold, rights over the defendants' apartment located at No. 307 Ligaya Building, Alvarado Street, Binondo, Manila, upon the payment by the plaintiff to the defendants the sum of P 3,535.00. The defendants shall pay the costs.

WHEREAS, the court, upon petition by herein ASSIGNEE and its deposit of sufficient bond, has ordered for the immediate execution of the said decision even pending appeal of the aforesaid decision;

WHEREAS, the ASSIGNORS have elected to just execute the necessary deed of sale and/or assignment of leasehold rights over the apartment mentioned in the decision in favor of the herein ASSIGNEE;

NOW, THEREFORE, for and in consideration of the foregoing premises, the ASSIGNORS have transferred assigned and ceded, and by these presents do hereby transfer, assign and cede all their rights and interests over that place known as

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Apartment No. 307 at the Ligaya Building which is located at No. 864 Alvarado St., Binondo, Manila, together with the corresponding leasehold rights over the lot on which the said building is constructed, in favor of the hererein ASSIGNEE, its heirs or assigns.

IN WITNESS WHEREOF, We have hereunto signed our names this 27th day of May, 1971 at Manila, Philippines.

UY TONG/HENRY UY KHO PO GIOK

Assignor Assignor

ACR-2151166 Manila 1/13/51 ACR-C-001620

Manila March 3, 1965

This being the case, there is no reason to impugn the validity of the said deed of assignment.

II. The SPOUSES take exception to the ruling of the Court of Appeals that their failure to deny the genuineness and due execution of the deed of assignment was deemed an admission thereof. The basis for this exception is the SPOUSES' insistence that the deed of assignment having been borne out of pactum commissorio is not subject to ratification and its invalidity cannot be waived.

There is no compelling reason to reverse the abovementioned ruling of the appellate court. Considering this Court's above conclusion that the deed of assignment is not invalid, it follows that when an action founded on this written instrument is filed, the rule on contesting its genuineness and due execution must be followed.

That facts reveal that the action in Civil Case No. 121532 was founded on the deed of assignment. However, the SPOUSES, in their answer to the complaint, failed to deny under oath and specifically the genuineness and due execution of the said deed. Perforce, under Section 8, Rule 8 of the Revised Rules of Court, the SPOUSES are deemed to have admitted the deed's genuineness and due execution. Besides, they themselves admit that ". . . the contract was duly executed and that the same is genuine" [Sur-Rejoinder, Rollo, p. 67]. They cannot now claim otherwise.

III. The SPOUSES also question the enforceability of the deed of assignment. They contend that the deed is unenforceable because the condition for its execution was not complied with. What petitioners SPOUSES refer to is that portion of the disposition in Civil Case No. 80420 requiring BAYANIHAN to pay the former the sum of P 3,535.00. To buttress their claim of non- compliance, they invoke the following receipt issued by the SPOUSES to show that BAYANIHAN was P535.00 short of the complete payment.

RECEIPT

This is to acknowledge the fact that the amount of THREE THOUSAND (P3,000.00) PESOS, more or less as indicated in the judgment of the Hon. Conrado Vasquez, Presiding Judge of the Court of First Instance of Manila, Branch V, in Civil Case entitled "Bayanihan Automotive Corp. v. Pho (sic) Po Giok, etc." and docketed as Civil Case No. 80420 has been applied for the payment of the previous rentals of the property which is the subject matter of the aforesaid judgment. [emphasis supplied.]

(Sgd.) Pho (sic) Po Glok

(Sgd.) Henry Uy

August 21, 1971

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The issue presented involves a question of fact which is not within this Court's competence to look into. Suffice it to say that this Court is of the view that findings and conclusion of the trial court and the Court of Appeals on the question of whether there was compliance by BAYANIHAN of its obligation under the decision in Civil Case No. 80420 to pay the SPOUSES the sum of P3,535.00 is borne by the evidence on record. The Court finds merit in the following findings of the trial court:

... Defendants 'contention that the P 3,535.00 required in the decision in Civil Case No. 80420 as a condition for the execution of the deed of assignment was not paid by the plaintiff to the defendants is belied by the fact that the defendants acknowledged payment of P3,000.00, more or less, in a receipt dated August 21, 1971. This amount was expressly mentioned in this receipt as indicated in the judgment of the Honorable Conrado Vasquez, presiding Judge of the CFI of Manila, Branch V, in Civil Case entitled Bayanihan Automotive Corp. versus Kho Po Giok, docketed as Civil Case No. 80420, and also expressly mentioned as having been applied for the payment of the previous rentals of the property subject matter of the said judgment. Nothing could be more explicit. The contention that there is still a difference of P535.00 is had to believe because the spouses Kho Po Giok and Uy Tong executed the deed of assignment without first demanding from the plaintiff the payment of P535.00. Indeed, as contended by the plaintiff, for it to refuse to pay this small amount and thus gave defendants a reason not to execute the Deed of Assignment. is hard to believe Defendants further confirm by the joint manifestation of plaintiff and defendants, duly assisted by counsel, Puerto and Associates, dated September, 1971, Exhibit "O", wherein it was stated that plaintiff has fully complied with its obligation to the defendants caused upon it (sic) by the pronouncement of the judgment as a condition for the execution of their (sic) leasehold rights of defendants, as evidenced by the receipt duly executed by the defendants, and which was already submitted in open court for the consideration of the sum of P3,535.00. [Emphasis supplied]. [Decision, Civil Case No. 121532, pp. 3-4].

This Court agrees with private respondent BAYANIHAN's reasoning that inasmuch as the decision in Civil Case No. 80420 imposed upon the parties correlative obligations which were simultaneously demandable so much so that if private respondent refused to comply with its obligation under the judgment to pay the sum of P 3,535.00 then it could not compel petitioners to comply with their own obligation to execute the deed of assignment over the subject premises. The fact that petitioners executed the deed of assignment with the assistance of their counsel leads to no other conclusion that private respondent itself had paid the full amount.

IV. Petitioners attempt to justify their continued refusal to vacate the premises subject of this litigation on the following grounds:

(a) The deed of assingnment is in the nature of a pactum commissorium and, therefore, null and void.

(b) There was no full compliance by private respondent of the condition imposed in the deed of assignment.

(c) Proof that petitioners have been allowed to stay in the premises, is the very admission of private respondent who declared that petitioners were allowed to stay in the premises until November 20, 1972. This admission is very significant. Private respondent merely stated that there was a term-until November 30, 1972-in order to give a semblance of validity to its attempt to dispossess herein petitioners of the subject premises. In short, this is one way of rendering seemingly illegal petitioners 'possession of the premises after November 30, 1972.

The first two classifications are mere reiterations of the arguments presented by the petitioners and which had been passed upon already in this decision. As regards the third ground, it is enough to state

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that the deed of assignment has vested in the private respondent the rights and interests of the SPOUSES over the apartment unit in question including the leasehold rights over the land on which the building stands. BAYANIHAN is therefore entitled to the possession thereof. These are the clear terms of the deed of assignment which cannot be superseded by bare allegations of fact that find no support in the record.

WHEREFORE, the petition is hereby DENIED for lack of merit and the decision of the Court of Appeals is AFFIRMED in toto.

SO ORDERED.

Fernan (Chairman), Gutierrez, Jr., and Feliciano, JJ., concur.

Bidin, took no part

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Manila

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 and AGRIPINA P. CAPERAL, respondents.

DAVIDE, JR., J.:

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-hectares fishpond located in Bolinao, Pangasinan, for being violative of Article 2088 of the Civil Code; (2) the annulment 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.

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 the following 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 under the 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;

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

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6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in question, defendant DBP, in turn, executed a Deed of 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 16, 1984;

15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A on December 28, 1984 by the Ministry of Agriculture and Food.

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 of Article 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.

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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) although the "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 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. The missing 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 the fishpond 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 the conservative 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, plaintiff's 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 and Exh. 21), the Fishpond Lease Agreement No. 2083-A dated December 28, 1984 of defendant Agripina Caperal (Exh. 23) and the Assignment of Leasehold Rights dated February 12, 1985 executed by defendant Agripina Caperal in favor of the defendant Development Bank of the Philippines (Exh. 24) as void ab initio;

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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 Development Bank 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 Code because 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 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 P100,000 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.

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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 a pactum 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 a 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

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.

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.

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

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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 of Agriculture 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 the Assignee may deem convenient to protect its interest. All expenses advanced by the Assignee in connection with purpose above indicated which shall bear the same 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 the balance, 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 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.

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 [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 right 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 in 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 of assignment.

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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 credit or 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 the leasehold rights, being contrary to Article 2088 of the Civil Code and to public policy, cannot be deemed validated by estoppel.

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 of the 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 enforced the assignment of leasehold rights on March 21, 1979 for failure of said spouses [Cuba spouces] 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 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 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 fore closure 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.

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

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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 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 not "inventory of the alleged lost items before the 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 the cultivation 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.

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 of 230,000 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 Ministry of 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 the finding 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 of the 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 the determination of each party's financial obligation to one another.

SO ORDERED.

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Bellosillo, Vitug and Kapunan, JJ., concur.


Manila

FIRST DIVISION

G.R. No. 126800 November 29, 1999

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

R E S O L U T I O N

PARDO, J.:

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.

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

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

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

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

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

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

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

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

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

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

The principal loan and the interest taken together amounted to P152,500.00, leaving a balance of P 47,500.00. 10

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

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

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

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

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

SO ORDERED.

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 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

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On February 9, 1998, we resolved to deny the petition on the ground that there was no reversible error on the part of respondent court in ordering the execution of the necessary deed of sale in conformity the with the parties' stipulated agreement. The contract is the law between the parties thereof (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 an equitable mortgage according to Article 1602 of the Civil Code. 18

On April 21, 1998, respondents filed an opposition to petitioner's motion for reconsideration. They contend that the agreement between the parties was not a sale with right of re-purchase, but a loan with interest at 18% per annum for a period of two years and if petitioner fails to pay, the respondent was given the right to purchase the property or apartment for P200,000.00, which is not contrary to law, morals, good customs, public order or public policy. 19

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

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

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

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

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

We note the eagerness of respondents to acquire the property given as collateral to guarantee the loan. 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:

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

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 for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period. 23

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

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

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

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

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.


Manila

EN BANC

G.R. No. L-19227 February 17, 1968

DIOSDADO YULIONGSIU, plaintiff-appellant, vs.PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.

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Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant. Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee.

BENGZON, J.P., J.:

Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels, namely: The M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-203, valued at P210,672.24, which was purchased by him from the Philippine Shipping Commission, by installment or on account. As of January or February, 1943, plaintiff had paid to the Philippine Shipping Commission only the sum of P76,500 and the balance of the purchase price was payable at P50,000 a year, due on or before the end of the current year. 2

On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine National Bank, Cebu Branch. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its equity in the FS-203 to the defendant bank, as evidenced by the pledge contract, Exhibit "A" & "1-Bank", executed on the same day and duly registered with the office of the Collector of Customs for the Port of Cebu. 3

Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The remaining balance was renewed by the execution of two (2) promissory notes in the bank's favor. The first note, dated December 18, 1947, for P20,000, was due on April 16, 1948 while the second, dated February 26, 1948, for P10,000, was due on June 25, 1948. These two notes were never paid at all by plaintiff on their respective due dates. 4

On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused for estafa thru falsification of commercial documents, because plaintiff had, as last indorsee, deposited with defendant bank, from March 11 to March 31, 1948, seven Bank of the Philippine Islands checks totalling P184,000. The drawer thereof — one of the co-accused — had no funds in the drawee bank. However, in connivance with one employee of defendant bank, plaintiff was able to withdraw the amount credited to him before the discovery of the defraudation on April 2, 1948. Plaintiff and his co-accused were convicted by the trial court and sentenced to indemnify the defendant bank in the sum of P184,000. On appeal, the conviction was affirmed by the Court of Appeals on October 31, 1950. The corresponding writ of execution issued to implement the order for indemnification was returned unsatisfied as plaintiff was totally insolvent. 5

Meanwhile, together with the institution of the criminal action, defendant bank took physical possession of three pledged vessels while they were at the Port of Cebu, and on April 29, 1948, after the first note fell due and was not paid, the Cebu Branch Manager of defendant bank, acting as attorney-in-fact of plaintiff pursuant to the terms of the pledge contract, executed a document of sale, Exhibit "4", transferring the two pledged vessels and plaintiff's equity in FS-203, to defendant bank for P30,042.72. 6

The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping Commission which rescinded the sale to plaintiff on September 8, 1948, for failure to pay the remaining installments on the purchase price thereof. 7 The other two boats, the M/S Surigao and the M/S Don Dino were sold by defendant bank to third parties on March 15, 1951.

On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to recover the three vessels or their value and damages from defendant bank. The latter filed its answer, with a counterclaim for P202,000 plus P5,000 damages. After issues were joined, a pretrial was held resulting in a partial stipulation of facts dated October 2, 1958, reciting most of the facts above-narrated. During the course of the trial, defendant amended its answer reducing its claim from P202,000 to P8,846.01, 8 but increasing its alleged damages to P35,000.

The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's taking of physical possession of the vessels on April 6, 1948 was justified by the pledge contract, Exhibit "A" & "1-Bank" and the law; (b) that the private sale of the pledged vessels by defendant bank to itself without notice to the plaintiff-pledgor as stipulated in the pledge contract was likewise valid; and (c) that the defendant bank should pay to plaintiff the sums of P1,153.99 and P8,000, as his remaining account

document.doc - 22 -

balance, or set-off these sums against the indemnity which plaintiff was ordered to pay to it in the criminal cases.

When his motion for reconsideration and new trial was denied, plaintiff brought the appeal to Us, the amount involved being more than P200,000.00.

In support of the first assignment of error, plaintiff-appellant would have this Court hold that Exhibit "A" & "1-Bank" is a chattel mortgage contract so that the creditor defendant could not take possession of the chattels object thereof until after there has been default. The submission is without merit. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract —

3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank, and the plaintiff obtained and received from the said Bank the sum of P50,000.00, and in order to guarantee the payment of this loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was executed and duly registered with the Office of the Collector of Customs for the Port of Cebu on the date appearing therein; (Emphasis supplied)1äwphï1.ñët

Necessarily, this judicial admission binds the plaintiff. Without any showing that this was made thru palpable mistake, no amount of rationalization can offset it. 9

The defendant bank as pledgee was therefore entitled to the actual possession of the vessels. While it is true that plaintiff continued operating the vessels after the pledge contract was entered into, his possession was expressly made "subject to the order of the pledgee." 10 The provision of Art. 2110 of the present Civil Code 11 being new — cannot apply to the pledge contract here which was entered into on June 30, 1947. On the other hand, there is an authority supporting the proposition that the pledgee can temporarily entrust the physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the pledgee. 12

Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to make pledge effective. He points to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be actual delivery of the chattels pledged. But then there is also Banco Español-Filipino v. Peterson, 7 Phil. 409 ruling that symbolic delivery would suffice. An examination of the peculiar nature of the things pledged in the two cases will readily dispel the apparent contradiction between the two rulings. In Betita v. Ganzon, the objects pledged — carabaos — were easily capable of actual, manual delivery unto the pledgee. In Banco Español-Filipino v. Peterson, the objects pledged — goods contained in a warehouse — were hardly capable of actual, manual delivery in the sense that it was impractical as a whole for the particular transaction and would have been an unreasonable requirement. Thus, for purposes of showing the transfer of control to the pledgee, delivery to him of the keys to the warehouse sufficed. In other words, the type of delivery will depend upon the nature and the peculiar circumstances of each case. The parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said property subject to the order of the pledgee." Considering the circumstances of this case and the nature of the objects pledged, i.e., vessels used in maritime business, such delivery is sufficient.

Since the defendant bank was, pursuant to the terms of pledge contract, in full control of the vessels thru the plaintiff, the former could take actual possession at any time during the life of the pledge to make more effective its security. Its taking of the vessels therefore on April 6, 1948, was not unlawful. Nor was it unjustified considering that plaintiff had just defrauded the defendant bank in the huge sum of P184,000.

The stand We have taken is not without precedent. The Supreme Court of Spain, in a similar case involving Art. 1863 of the old Civil Code, 13 has ruled: 14

Que si bien la naturaleza del contrato de prenda consiste en pasar las cosas a poder del acreedor o de un tercero y no quedar en la del deudor, como ha sucedido en el caso de autos, es lo cierto que todas las partes interesadas, o sean acreedor, deudor y Sociedad,

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convinieron que continuaran los coches en poder del deudor para no suspender el trafico, y el derecho de no uso de la prenda pertenence al deudor, y el de dejar la cosa bajo su responsabilidad al acreedor, y ambos convinieron por creerlo util para las partes contratantes, y estas no reclaman perjuicios no se infringio, entre otros este articulo.

In the second assignment of error imputed to the lower court plaintiff-appellant attacks the validity of the private sale of the pledged vessels in favor of the defendant bank itself. It is contended first, that the cases holding that the statutory requirements as to public sales with prior notice in connection with foreclosure proceedings are waivable, are no longer authoritative in view of the passage of Act 3135, as amended; second, that the charter of defendant bank does not allow it to buy the property object of foreclosure in case of private sales; and third, that the price obtained at the sale is unconscionable.

There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44 Phil. 763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative despite the passage of Act 3135. This law refers only, and is limited, to foreclosure of real estate mortgages. 15 So, whatever formalities there are in Act 3135 do not apply to pledge. Regarding the bank's authority to be the purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747 and 2938 only states that if the sale is public, the bank could purchase the whole or part of the property sold " free from any right of redemption on the part of the mortgagor or pledgor." This even argues against plaintiff's case since the import thereof is this if the sale were private and the bank became the purchaser, the mortgagor or pledgor could redeem the property. Hence, plaintiff could have recovered the vessels by exercising this right of redemption. He is the only one to blame for not doing so.

Regarding the third contention, on the assumption that the purchase price was unconscionable, plaintiff's remedy was to have set aside the sale. He did not avail of this. Moreover, as pointed out by the lower court, plaintiff had at the time an obligation to return the P184,000 fraudulently taken by him from defendant bank.

The last assignment of error has to do with the damages allegedly suffered by plaintiff-appellant by virtue of the taking of the vessels. But in view of the results reached above, there is no more need to discuss the same.

On the whole, We cannot say the lower court erred in disposing of the case as it did. Plaintiff-appellant was not all-too-innocent as he would have Us believe. He did defraud the defendant bank first. If the latter countered with the seizure and sale of the pledged vessels pursuant to the pledge contract, it was only to protect its interests after plaintiff had defaulted in the payment of the first promissory note. Plaintiff-appellant did not come to court with clean hands.

WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs against plaintiff-appellant. So ordered.


Manila

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.

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GANCAYCO, J.:

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.

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 P 80,796.62, 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 P 80,796.62 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 P 80,796.62. He informed the Bernals of the 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.

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 George Litton, 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 (P 80,796.62) the balance of which, in principal, and excluding, interests, costs, damages and attorney's fees now stands at P 76,000.00, P 4,796.62, 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 P 4,796.62 then on deposit with the court. All rights, and interests in said net amount, plus interests

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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 P 4,847.79 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 P 76,000.00, the sum still due, plus damages and attorney's fees. 10

Mendoza seasonably filed an appeal with the Court of Appeals, dockted 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 of action 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 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.

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 1of the deed of assignment states that the cession,assignment, transfer, bond 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).

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"Even considered as a litigations 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 entitle Litton 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 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.

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 the court has the force of res judicata between parties and should not be disturbed except for vices of consent or forgery. 21

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

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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 2097 of 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 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.

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.

Narvasa, Cruz and Griño-Aquino, JJ, concur.


Manila

EN BANC

G.R. No. L-31018 November 6, 1929

CORNELIO CRUZ and CIRIACA SERRANO, plaintiffs-appellants, vs.CHUA A. H. LEE, defendant-appellant.

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Gibbs and McDonough for plaintiff-appellants. Antonio Gonzalez for defendant-appellant.

STREET, J.:

This action was instituted in the Court of First Instance of the City of Manila by Cornelio Cruz and wife, for the purpose of recovering a sum of money from the defendant Chua A.H. Lee, representing the damages alleged to have been sustained by them from the lapsing of certain pawn tickets which they had pledged to the defendant under the circumstances hereinafter stated. Upon hearing the cause the trial court gave judgment in favor of the plaintiffs to recover of the defendant the sum of P1,141, with legal interest from December 16, 1927, and with costs. From this judgment both plaintiffs and defendant appealed.

It appears that prior to June 10, 1926, the plaintiff Cornelio Cruz had pledged valuable jewelry to two different pawnshops in the city of Manila, namely, the Monte de Piedad and Ildefonso Tambunting, receiving therefor twelve pawn tickets showing the terms upon which the articles pledged were held by the pledges. On the date stated the plaintiff, being desirous of obtaining a further loan upon the same and other jewels, presented himself to the defendant Chua A.H Lee and pledged to him six pawn tickets of the Monte de Piedad and a bracelet and the six tickets Lee delivered to the plaintiff a sum of money, for which the plaintiff executed a receipt containing words to the effect that the amount of P3,020, therein stated, represented the value of the bracelet and pawn tickets and that it was understood that Lee would become the absolute owner of the articles pledge if Cruz should not return said sum of money within the period of sixty days. One week thereafter Cruz again presented himself at the place of business of Lee and received the further sum of P3,500, at the same time delivering two pawn tickets of the house of Ildefonso Tambunting and four pawn tickets of the Monte de Piedad. At the same time Cruz signed a further receipt containing a stipulation that the sale of the articles pledge would become absolute unless the amount stated in the receipt should be return within sixty days.

The tickets which form the principal feature in these two pledges represented a pair of diamond earrings previously pledged to Ildefonso Tambunting for P7,000, and several other pieces of jewelry priviously pledged to the Monte de Piedad for the aggregate amount of P2,020. All of these tickets were renewable, according to the custom of pawnbrokers, upon payment from time to time of the sums of money representing the interest accruing upon the debts for which the jewelry was pawned.

The right of repurchasing the jewelry, which was conceded to Cruz in the two receipt above mentioned, was never exercised by him; and on September 25, 1926, Lee filed a complaint against Cruz in the Court of First Instance of Manila (case No. 30569), in which it was allege that the receipts above mentioned had been drawn in the form of a sale with stipulation for repurchase in sixty days but it was understood between the parties that the transaction was a loan and that the jewelry and pawn tickets held by Lee constituted a mere security for the money advanced by him to Cruz. As a consequence Lee asked for judgment against Cruz in the amount of P6,520. On March 31, 1927, judgment in said action was rendered in the Court of First Instance favorably to the plaintiff and, although an attempt was made to get the decision reviewed in the Supreme Court, the judgment was affirmed for failure of the appellants to cause a transcript of the oral testimony to be brought to said court. 1 After affirmance of the judgment in the Supreme Court the cause was returned to the Court of First Instance for execution, but as a result of certain proceedings not necessary to be here recounted, execution in that case was suspended to wait the result of the judgment to be given in this case.

It appears that the defendant Lee on August 18, 1926, renewed the ten pawn tickets issued by the Monte de Piedad by paying the interest necessary to effect the renewal, but these tickets all expired on October 18, 1926, and were never renewed. The pawn tickets issued by the Tambunting's pawnshop on the diamond earrings were dated May 12, 1926, and remained good for one year, having expired on May 12, 1927. Although the pawn tickets issued by the Monte de Piedad expired on October 18, 1926, it is admitted that they could have been renewed or the jewelry redeemed at any time prior to actual sale at public auction, and these jewels were not sold by the Monte de Piedad until in the year 1927, when they

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were, at different dates, brought in by the appraiser of the Monte de Piedad for the amount then due upon the respective jewels. But the jewelry represented by one of these pawn tickets was that thus not sold until August 10, 1928. From this it will be seen that all of the pawned jewelry was still subject to redemption when civil case No. 30569 was first called for trial on January 3, 1927, and apparently the right of redemption on only one piece of jewelry had been foreclosed by sale when the decision was rendered in the same case at the end of March. The record does not show whether or not the earrings pawned to Ildefonso Tambunting were in fact sold after the tickets lapsed on May 12, 1927, but it is proved that the jewelry was not forthcoming when a inquiry was made therefor by the present plaintiff with a view to redemption after judgment had been rendered in the instituted by Lee against him.

The first two errors assigned in the brief of the defendant as appellant raise a question of a preliminary nature, which is, whether the present action can be maintained in view of the fact that the cause of action set out in the present complaint might have been — so the defendant supposes — used as a ground of defense or counterclaim in action No. 30569 of the Court of First Instance of Manila instituted by the present defendant against the present plaintiff. Upon this it is insisted that the trial court should sustained the plea of res judicata interposed in this case by the defendant. This contention is untenable for the reason that the facts which serve as the basis of the present action were not existence at the time of commencement of action No. 30569. Under section 97 of the Code of Civil Procedure the defendant is required to set up his counterclaim as a defense only in those cases where the right out of which the counterclaim arises existed at the time of the commencement of the action.

The principal question requiring decision in the case before us is one of law, namely, whether a person who takes a pawn tickets in pledge is bound to renew the ticket from time to time, by the payment of interest, or premium, as required by the pawnbroker, until the rights of the pledgor are finally foreclosed. In this connection reliance is placed by the attorney for the plaintiff upon article 1867 of the Civil Code, which reads as follows:

The creditor must take care of the thing given in pledge with the diligence of a good father of a family; he shall be entitled to recover any expenses incurred for its preservation and shall be liable for its loss or deterioration, in accordance with the provisions of this code.

In applying this provision to the situation before us it must be borne in mind that the ordinary pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by mere delivery of the ticket; and the contract of the pledge is, therefore, absolvable to bearer. It results that one who takes a pawn ticket in pledge acquires domination over the pledge; and it is the holder who must renew the pledge, if it is to be kept alive. Article 1867 contemplates that the pledgee may have to undergo expenses in order to prevent the pledge from being lost; and this expenses the pledgee is entitled to recover from the pledgor. From this it follows that were, in a case like this, the pledge is lost by the failure of the pledgee to renew the loan, he is liable for the resulting damage. Nor, in this case, was the duty of the pledgee destroyed by the fact that the pledgee had obtained a judgment for the debt of the pledgor which was secured by the pledge. The duty to use the deligence of a good father of the family in caring for the pledge subsists as long as the pledge article remains in the power of the pledgee.

In this connection we quote as follows from a monographic note appended to Griggs vs. Day (32 Am. St. Rep., 718), in which it is said:

As the holder of collateral security is entitled to its possession and to the extent of his interest is substantially the owner thereof, he must, to a certain extent at least, assume the duties of the ownership, and furthermore must protect the interest of his pledgor as well as his own, because the latter, by giving the collateral security, has parted with the power to protect himself. The contract carries with it the implication that the security shall be made available to discharge the obligation': Wheeler vs. Newbould, 16 N.Y., 396. We apprehend that it carries with it the further implication that the property, no matter what its character, shall be lost through the negligence or inattention of the pledgee.

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In commenting upon article 1867 of the Civil Code, the commentator Manresa points out that the predecessor article in the Civil Code of 1851 limited itself to declaring that the creditor should take such care of the pledge thing as the good father of the family, and this led to a lively controversy among the civilians concerning the consequences of the duty of conservation or safekeeping imposed upon the creditor. But this controversy, says the learned author, has largely lost its interest because the authors of the Code put an end to such discussions by defining the responsibility of the creditor in a form so clear and explicit as to leave no room for doubt (Manresa, Codigo Civil. 4426, 427). In the treatise of Colin and Capitant on the Civil Law, it is stated that the creditor who receives an article in pledge must bear all the expenses necessary to secure the conservation of the pledge and that the debtor is bound to reimburse him for such expenses. As an illustration of the duty of the pledgee to exercise diligence in preserving the pledge, he states that a pledgee who fails to renew at the proper time the inscription of a mortgage guaranteeing a credit will be liable for the damage resulting from its loss (opus citat, p. 77). To the same effect is a passage found in the pages of the French commentator Troplong, Droit Civil Explique, Du Gage, sec. 428.

The question of the extent of the duty of the pledgee in caring for the property pledged has often been discussed in connection with pledges of collatteral security. In this case we find the following observation made by the author of the title "Pledge" in 21 Ruling Case Law, to wit:

The rights and duties of parties to a pledge of securities for the payment of the debt may of course be fixed by agreement as to the manner in which they are to be collected, but as a general rule not only is it the right of the holder of collateral security to collect the money thereon and apply it to the principal debt but his duties in this respect are active and he is bound to ordinary diligence to preserve the legal validity and pecuniary value of the pledge, and if by negligence, wrongful act or omission on his part loss is sustained, it must be borne by him. (Pledge, sec. 30.)1awphil.net

The application of the doctrine above expounded to the case in hand leads the conclusion that the defendant Chua A. H. Lee in the case before us in liable for the value of the securities lost by his failure to keep the pledges alive in the extent of their actual value over the amounts for which the same were pledged; and the trial court, in our opinion, committed no error is so holding.

There remains to be considered the question of the proper valuation of the jewelry sacrificed in the manner above stated. Upon this point we are of the opinion that the trial court was too conservative in its estimate; and we find, upon the testimony of Manuel Javier, appraiser of the La Insular Pawnshop, and Francisco Ferrer, a jewelry merchant of Manila supplemented by that of the plaintiff, Cornelio Cruz, that the two diamond earrings represented by the tickets issued by Tambunting's pawnshop were fairly worth P14,000. It is true that Cornelio Cruz testified that these jewels cost him P11,000, but he at the same time stated that they were at the time of the trial in the court below worth at least P15,000. Again, we are of the opinion that the jewels represented by the ten pawn tickets of Monte de Piedad were worth, at a conservation estimate, the sum of P4,040. In fixing these values it must be remembered that it is not the practice of pawnshops to advance more than from thirty-five to fifty per cent of the true value upon pledges of jewels.

From the values of the jewelry, as estimated above, there is of course to be deducted the amounts which had been advanced upon the pledges with interest thereon at the situated rate of 18 per cent per annum until the date when the offer was made by the plaintiff Cornelio Cruz in writing to redeem the jewelry. But it should be noted that the sum of P3,500 which the defendant advanced to Cruz upon the pledge of the pawn tickets covering the earings must not be deducted, because the defendant, in the prior action, has already recovered judgment for that amount.

Upon liquidation of the account between plaintiffs and defendant in conformity with the suggestion above made, it results that the plaintiffs herein were damaged by the sacrifice of the jewelry in question in the total amount of P6,687.56. Also, in order to clarify the appealed decision, it is declared that the plaintiff is entitled to recover the bracelet composed of seventeen diamonds, forming the additional pledge made by the plaintiff to the defendant, upon satisfaction of the judgment in civil case No. 30569.

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The judgment appealed from is therefore modified to the extent above indicated, namely, that the plaintiffs shall recover of the defendant the sum of P6,687.56, with legal interest from December 16, 1927, until the same shall be paid, as well as the bracelet of seventeen diamonds upon satisfaction of the judgment above mentioned. So ordered, without costs.

Avanceña, C.J., Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.


Manila

EN BANC

G.R. No. L-15752 December 29, 1962

RUPERTO SORIANO, ET AL., plaintiffs-appellees, vs.BASILIO BAUTISTA, ET AL., defendants. BASILIO BAUTISTA and SOFIA DE ROSAS, defendants-appellants.

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---------------------------------

G.R. No. L-17457 December 29, 1962

BASILIO BAUTISTA, ET AL., plaintiffs, BASILIO BAUTISTA and SOFIA DE ROSAS, plaintiffs-appellants, vs.RUPERTO SORIANO, ET AL., defendants appellees.

Amado T. Garrovillas, Ananias C. Ona, Norberto A. Ferrera and Pedro N. Belmi for appellants Basilio Bautista and Sofia de Rosas.Javier and Javier for appellees Ruperto Soriano, et al.

MAKALINTAL, J.:

The judgment appealed from, rendered on March 10, 1959 by the Court of First Instance of Rizal, after a joint trial of both cases mentioned in the caption, orders "the spouses Basilio Bautista and Sofia de Rosas to execute a deed of sale covering the property in question in favor of Ruperto Soriano and Olimpia de Jesus upon payment by the latter of P1,650.00 which is the balance of the price agreed upon, that is P3,900.00, and the amount previously received by way of loan by the said spouses from the said Ruperto Soriano and Olimpia de Jesus, to pay the sum of P500.00 by way of attorney's fees, and to pay the costs.

Appellants Basilio Bautista and Sofia de Rosas have adopted in their appeal brief the following factual findings of the trial court:

Spouses Basilio Bautista and Sofia de Rosas are the absolute and registered owners of a parcel of land, situated in the municipality of Teresa, province of Rizal, covered by Original Certificate of Title No. 3905, of the Register of Deeds of Rizal and particularly described as follow:

A parcel of land (lot No. 4980) of the Cadastral Survey of Teresa; situated in the municipality of Teresa; bounded on the NE. by Lot No. 5004; on the SE. by Lots Nos. 5003 and 4958; on the SW. by Lot 4949; and the W. and NW by a creek .... Containing the area of THIRTY THOUSAND TWO HUNDRED TWENTY TWO (30,222) square meters, more or less. Date of Survey, December 1913-June, 1914. (Full technical description appears on Original Certificate of Title No. 3905.)lawphil.net

That, on May 30, 1956, the said spouses for and in consideration of the sum of P1,800, signed a document entitled "Kasulatan Ng Sanglaan" in favor of Ruperto Soriano and Olimpia de Jesus, under the following terms and conditions:

1. Na ang sanglaang ito ay magpapatuloy lamang hanggang dalawang (2) taon pasimula sa araw na lagdaan ang kasunduang ito, at magpapalampas ng dalawang panahong ani o ani agricola.

2. Na ang aanihin ng bukid na isinangla ay mapupunta sa pinagsanglaan bilang pakinabang ng nabanggit na halagang inutang.

3. Na ang buwis sa pamahalaan ng lupang ito ay ang magbabayad ay ang Nagsangla o mayari.

4. Na ang lupang nasanglang ito ay hindi na maaaring isangla pang muli sa ibang tao ng walang pahintulot ang Unang Pinagsanglaan.

5. Na pinagkasunduan din dinatnan na sakaling magkaroon ng kakayahan ang Pinagsanglaan ay maaaring bilhin ng patuluyan ng lupang nasanglang ito kahit

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anong araw sa loob ng taning na dalawang taon ng sanglaan sa halagang Tatlong Libo at Siam na Raan Piso (P3,900.00), salaping Pilipino na pinagkaisahan.

6. Na sakaling ang pagkakataon na ipinagkaloob ng Nagsangla sa sinundang talata ay hindi maisagawa ng Pinagsanglaan sa Kawalan ng maibayad at gayon din naman ang Nagsangla na hindi magbalik ang halagang inutang sa taning na panahon, ang sanglaan ito ay lulutasin alinsunod sa itinatagubilin ng batas sa bagay-bagay ng sanglaan, na ito ay ang tinatawag na (FORECLOSURE OF MORTGAGES, JUDICIAL OR EXTRA JUDICIAL). Maaring makapili ng hakbang ang Pinagsanglaan, alinsunod sa batas o kaya naman ay pagusapan ng dalawang parte ang mabuting paraan ng paglutas ng bagay na ito.

That simultaneously with the signing of the aforementioned deed, the spouses Basilio Bautista and Sofia de Rosas transferred the possession of the said land to Ruperto Soriano and Olimpia de Jesus who have been and are still in possess of the said property and have since that date been and cultivating the said land and have enjoyed and are still enjoying the produce thereof to the exclusion of all other persons. Sometimes after May 30, 1956, the spouses Basilio Bautista and Sofia de Rosas received from Ruperto Soriano and Olimpia de Jesus, the sum of P450.00 pursuant to the condition agreed upon in the aforementioned document for which no receipt issued and which was returned by the spouses sometime on May 31, 1958. On May 13, 1958, a certain Atty. Angel O. Ver wrote a letter to the spouses Bautista whose letter has been marked Annex 'B' of the stipulation of facts informing the said spouses that his clients Ruperto Soriano and Olimpia de Jesus have decided to buy the parcel of land in question pursuant to paragraph 5 of the document in question, Annex "A".

The spouses inspite of the receipt of the letter refused comply with the demand contained therein. On May 31, 1958, Ruperto Soriano and Olimpia de Jesus filed before this Court Civil Case No. 5023, praying that plaintiffs be allowed to consign or deposit with the Clerk of Court the sum of P1,650 as the balance of the purchase price of the parcel of land question and that after due hearing, judgment be rendered considering the defendants to execute an absolute deed of sale of said property in their favor, plus damages.

On June 9, 1958, spouses Basilio Bautista and Sofia Rosas filed a complaint against Ruperto Soriano and Olimpia de Jesus marked as Annexed 'B' of the Stipulation of Facys, which case after hearing was dismissed for lack of jurisdiction On August 5, 1959, the spouses Bautista and De Rosas again filed a case in the Court of First Instance against Soriano and De Jesus asking this Court to order the defendants to accept the payment of the principal obligation and release the mortgage and to make an accounting of the harvest for the harvest seasons (1956-1957). The two cases, were by agreement of the parties assigned to one branch so that they can be tried jointly.

The principal issue in this case is whether, having seasonably advised appellants that they had decided to be the land in question pursuant to paragraph 5 of the instrument of mortgage, appellees are entitled to special performance consisting of the execution by appellants the corresponding deed of sale. As translated, paragraph 5 states: "That it has likewise been agreed that if the financial condition of the mortgagees will permit, they may purchase said land absolutely on any date within the two-year term of this mortgage at the agreed price of P3,900.00."

Appellants contend that, being mortgagors, they can not be deprived of the right to redeem the mortgaged property, because such right is inherent in and inseparable from this kind of contract. The premise of the contention is not entirely accurate. While the transaction is undoubtedly a mortgage and contains the customary stipulation concerning redemption, it carries the added special provision aforequoted, which renders the mortgagors' right to redeem defeasible at the election of the mortgagees. There is nothing illegal or immoral in this. It is simply an option to buy, sanctioned by Article 1479 of the Civil Code, which states: "A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. An accepted unilateral promise to buy or to sell a determinate thing for a price

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certain is binding upon the promissor if the promise is supported by a consideration distinct from the price."

In this case the mortgagor's promise to sell is supported by the same consideration as that of the mortgage itself, which is distinct from that which would support the sale, an additional amount having been agreed upon to make up the entire price of P3,900.00, should the option be exercised. The mortgagors' promise was in the nature of a continuing offer, non-withdrawable during a period of two years, which upon acceptance by the mortgagees gave rise to a perfected contract of purchase and sale. Appellants cite the case of Iñigo vs. Court of Appeals, L-5572, O.G. No. 11, 5281, where we held that a stipulation in a contract of mortgage to sell the property to the mortgagee does not bind the same but creates only a personal obligation on the part of the mortgagor. The citation instead of sustaining appellant's position, confirms that of appellees, who are not here enforcing any real right to the disputed land but are rather seeking to obtain specific performance of a personal obligation, namely, the execution of a deed of sale for the price agreed upon, the corresponding amount to cover which was duly deposited in court upon the filing of the complaint.

Reference is made in appellants' brief to the fact that they tendered the sum of P1,800.00 to redeem mortgage before they filed their complaint in civil case No. 99 in the Justice of the Peace Court of Morong, Rizal. That tender was ineffective for the purpose intended. In the first place it must have been made after the option to purchase had been exercised by appellees (Civil Case No. 99 was filed on June 9, 1958, only to be dismissed for lack of jurisdiction); and secondly, appellants' to redeem could be defeated by appellees' preemptive right to purchase within the period of two years from May 30, 1956. As already noted, such right was availed of appellants were accordingly notified by letter dated May 13, 1958, which was received by them on the following May 22. Offer and acceptance converged and gave to a perfected and binding contract of purchase and sale.

The judgment appealed from is affirmed, with costs.

Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and Regala, JJ., concur.


Manila

EN BANC

G.R. No. L-4008 January 15, 1953

APOLONIA SANTIAGO, applicant-appellee, vs.ANGELA DIONISIO, ET AL., oppositors;ANGELA DIONISIO, oppositor-appellant.

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Vicente J. Francisco for appellant.Santos and Ignacio for appellee.

REYES, J.:

This is an appeal from a decision of the Court of First Instance of Bulacan, decreeing the registration of a parcel of land situated in Obando of said province in the name of Apolonia Santiago. The appeal has been indorsed to this court by the Court of Appeals on the ground that the questions raised are purely legal.

The application for registration was filed on January 9, 1936, and it was opposed by various persons, among them the appellant Angela Dionisio, who claimed title to the land as purchaser in a foreclosure sale. But the claim of the other oppositors need not be discussed since they have not appealed.

The evidence shows that the land in question was bought by the applicant in 1935 from its former owner, Roman San Diego, and the sale was recorded in the office of the register of deeds of Bulacan in accordance with section 194 of the Revised Administrative Code, as amended. It turned out, however, that prior to the sale Roman San Diego had already mortgaged the land to one Eulalia Resurreccion, and as the mortgage was also registered in accordance with the Administrative Code, it had precedence over the sale. As the mortgage debt was not paid, Eulalia Resurreccion had the mortgage foreclosed (civil case No. 5769, Court of First Instance of Bulacan) and the land was sold at public auction to satisfy the judgment and adjudicated to Angela Dionisio as the highest bidder.

On learning of the sale, Apolonia Santiago, who had not been made a party to the foreclosure proceedings, brought an action to annul the judgment rendered therein, including the sale made in favor of Angela Dionisio, and she also intervened in the proceeding for the confirmance of the sale and filed her opposition thereto. Taking the view that the oppositor's claim might well be determined in the action for annulment which she had already filed the court (Judge Pastor Endencia, presiding) confirmed the sale but without prejudice to whatever rights the oppositor might have. No appeal was taken from this resolution.

Thereafter the action for annulment was tried and decided by another judge of the same court, the Hon. Arsenio C. Roldan. The decision concludes:

In view of these considerations, the court finds that the judicial proceedings held in Civil case No. 5769 cannot affect the rights of Apolonia Santiago who was not a party therein and, therefore, any sale of her property or the property in question over which she has rights, in which she has not been a party litigant is null and void and therefore the sale of this property in question made by the sheriff is null and void in civil case No. 5769 with regards to the right of Apolonia Santiago over the same; the ownership acquired by Apolonia Santiago over the land in question in Exhibit A is subject to the mortgage in favor of Eulalia Resurreccion (Exhibit 2). The defendants are sentenced to pay the costs. So ordered.

No appeal appears to have been taken from this decision and the decision must have attained finality because counsel for the present appellant admitted in open court that a bill of cost had already been filed by the winning party.

Concurring in the opinion expressed in that decision Judge Potenciano Pecson, who subsequently heard the present case for registration, declared that the foreclosure sale did not affect the rights of the applicant Apolonia Santiago, who had not been made a party to the proceedings, and decreed the registration of the land in her favor. It is this decision that is now before us on appeal.

In the decision Judge Pecson makes the finding of fact that Apolonia Santiago was not impleaded in the foreclosure suit. And while it is true that her interest in the land in question was subordinate to that of the mortgagee, Eulalia Resurreccion, the rule of procedure in force at the time the foreclosure suit was instituted, which was section 255 of Act 190, required that in an action for foreclosure "all persons

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having or claiming an interest in the premises subordinate in right to that of the holder of the mortgage . . . be made defendants in the action." This rule applied not only to a subordinate lienholder (Sun Life Assurance Co. of Canada vs. Gonzales Diez, 52 Phil., 271), but also to a purchaser of real property already mortgaged to another (De la Paz, et al. vs. McCondray & Co., Inc., 66 Phil., 402), and the effect of the failure to implead a subordinate lienholder or subsequent purchaser or both is to render the foreclosure ineffective as against them, with the result that there remains in their favor the "unforeclosed equity of redemption." But the foreclosure is valid as between the parties to the suit. (Ibid.; 2 Moran's Rules of Court, 3rd ed., p. 239.)

It is argued that Apolonia Santiago did in fact intervene in the foreclosure suit and was therefore bound by its results. But it appears that her intervention consisted merely in opposing the confirmation of the sale upon learning that such a sale had been made. This is not the same as being a party to the suit to the extent of being bound by the judgment. That judgment had already been rendered and was already in the process of execution when the intervention took place. In any event, though the sale was confirmed, the court took pains to specify that the confirmance was to be without prejudice to the rights of Apolonia Santiago.

There is much discussion in the briefs as to whether Judge Roldan's decision in the annulment case has been duly proved with the presentation of what purports to be a carbon copy thereof stamped as follows:

ES COPIA:

M. DE LOS SANTOSEscribano del Juzgado

Por:

(Fdo.) JOSE A. SANTOS Clerk

It appears that the original of the decision is no longer in the record, a great portion of this having been lost as a result of the last war. There is also dispute as to whether the decision, if there was one, has already become final, although it was admitted at the trial that the bill of costs had already been filed in court by the winning party. The appellee's apparent object in urging consideration of said decision is to give it the effect of res judicata on the question of whether the foreclosure sale should be regarded as void or not. But we see no useful purpose in pursuing inquiry in that direction. As we understand it, Judge Roldan did not declare the foreclosure sale entirely void. He did say that it was null and void "with regards to the rights of Apolonia Santiago," but this is only one way of saying that the foreclosure was ineffective as against her although it may be valid as between the parties to the suit. Given this interpretation, the decision accords with the pronouncements of this Court in the cases above cited and does not have the effect of completely nullifying the foreclosure sale in favor of Angela Dionisio. That sale is valid with respect to the parties to the foreclosure suit, though subject to Apolonia Santiago's unforeclosed equity of redemption.

This unforeclosed equity, which Judge Endencia saw fit to protect in his order confirming the foreclosure sale by means of a proviso that the said sale was to be without prejudice to the rights of Apolonia Santiago, still exists and must be recognized.

It has been suggested that one way of giving it recognition is to allow the land to be registered in the name of Apolonia Santiago but subject to the mortgage in favor of Eulalia Resurreccion. Another way is to register the land in the name of the oppositor Angela Dionisio subject to redemption by Apolonia Santiago. To keep to the beaten patch, our preference is for the second method, which has already received the sanction of this Court in the case of De la Paz, et al. vs. McCondray & Co., Inc., supra. In that case the purchaser of land sold at public auction to satisfy the judgment in a foreclosure suit applied for the registration of said land. The application for registration having been opposed by a married couple

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who had previously purchased the land from its owner but had not been impleaded in the foreclosure suit, a situation was presented similar to the one confronting us here. Deciding the case, this Court granted the registration applied for but subject to the prior purchasers' equitable right of redemption, for the exercise of which right they were given a period of three months from the date the decision should become final.

The only difference between that case and the present one is that there the applicant for registration was the purchaser at the foreclosure sale, whereas here the applicant is the previous purchaser. But in principle the two cases are identical and the same solution applies to both. It is not an obstacle to this solution that it is the previous purchaser, Apolonia Santiago, that has applied for the registration of the land. Both by statute and by jurisprudence, registration may be decreed in favor of an oppositor whose ownership has been established (Section 37, Act 496, as amended by Section 2, Act 3621; Balme vs. Sales, 43 Off. Gaz., 3191, 3194; Garchitorena vs. Sotto,* 44 Off. Gaz., 3783), and the more so in the present case where the record shows that the opposition of Angela Dionisio in effect prays for the registration of the land in her favor by asking that she be substituted in place of Apolonia Santiago in the application for registration. Registration of the land in question in the name of Angela Dionisio, the herein oppositor, is thus legally feasible, subject, of course, to Apolonia Santiago's equitable right of redemption.

This, in fact, is the proper solution in the present case. For registration of the land in the name of Apolonia Santiago, who does not become its owner until she has exercised her right to redeem, would be subject to the objection that it is premature, if not altogether anomalous. Her equity of redemption is, of course, registerable, but only as an incumbrance on a registered title of ownership.

Wherefore, it is our decision that the judgment appealed from be revoked and another one entered decreeing the registration of the land in the name of Angela Dionisio, but subject to Apolonia Santiago's equitable right of redemption, which right should be exercised by her within three months from the date this decision becomes final, without special pronouncement as to costs. So ordered.

Paras, C.J., Pablo, Bengzon, Tuason, Bautista Angelo and Labrador, JJ., concur.


Manila

FIRST DIVISION

G.R. No. L-32116 April 2l, 1981

RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR., petitioners, vs.THE COURT OF APPEALS and MAXIMA CASTRO, respondents.

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DE CASTRO, * J.:

This is a petition for review by way of certiorari of the decision 1 of the Court of Appeals in CA-G.R. No. 39760-R entitled "Maxima Castro, plaintiff-appellee, versus Severino Valencia, et al., defendants; Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes, defendants-appellants," which affirmed in toto the decision of the Court of First Instance of Manila in favor of plaintiff- appellee, the herein private respondent Maxima Castro.

On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia, went to the Rural Bank of Caloocan to apply for an industrial loan. It was Severino Valencia who arranged everything about the loan with the bank and who supplied to the latter the personal data required for Castro's loan application. On December 11, 1959, after the bank approved the loan for the amount of P3,000.00, Castro, accompanied by the Valencia spouses, signed a promissory note corresponding to her loan in favor of the bank.

On the same day, December 11, 1959, the Valencia spouses obtained from the bank an equal amount of loan for P3,000.00. They signed a promissory note (Exhibit "2") corresponding to their loan in favor of the bank and had Castro affixed thereon her signature as co-maker.

The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house and lot of 150 square meters, covered by Transfer Certificate of Title No. 7419 of the Office of the Register of Deeds of Manila.

On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff Basilio Magsambol, sent a notice of sheriff's sale addressed to Castro, announcing that her property covered by T.C.T. No. 7419 would be sold at public auction on March 10, 1961 to satisfy the obligation covering the two promissory notes plus interest and attorney's fees.

Upon request by Castro and the Valencias and with conformity of the bank, the auction sale that was scheduled for March 10, 1961 was postponed for April 10, 1961. But when April 10, 1961 was subsequently declared a special holiday, the sheriff of Manila sold the property covered by T.C.T. No. 7419 at a public auction sale that was held on April 11, 1961, which was the next succeeding business day following the special holiday.

Castro alleged that it was only when she received the letter from the Acting Deputy Sheriff on February 13, 1961, when she learned for the first time that the mortgage contract (Exhibit "6") which was an encumbrance on her property was for P6.000.00 and not for P3,000.00 and that she was made to sign as co-maker of the promissory note (Exhibit "2") without her being informed of this.

On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against petitioners Bank and Desiderio, the Spouses Valencia, Basilio Magsambol and Arsenio Reyes as defendants in Civil Case No. 46698 before the Court of First Instance of Manila upon the charge, amongst others, that thru mistake on her part or fraud on the part of Valencias she was induced to sign as co-maker of a promissory note (Exhibit "2") and to constitute a mortgage on her house and lot to secure the questioned note. At the time of filing her complaint, respondent Castro deposited the amount of P3,383.00 with the court a quo in full payment of her personal loan plus interest.

In her amended complaint, Castro prayed, amongst other, for the annulment as far as she is concerned of the promissory note (Exhibit "2") and mortgage (Exhibit "6") insofar as it exceeds P3,000.00; for the discharge of her personal obligation with the bank by reason of a deposit of P3,383.00 with the court a quo upon the filing of her complaint; for the annulment of the foreclosure sale of her property covered by T.C.T. No. 7419 in favor of Arsenio Reyes; and for the award in her favor of attorney's fees, damages and cost.

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In their answers, petitioners interposed counterclaims and prayed for the dismissal of said complaint, with damages, attorney's fees and costs. 2

The pertinent facts arrived from the stipulation of facts entered into by the parties as stated by respondent Court of Appeals are as follows:

Spawning the present litigation are the facts contained in the following stipulation of facts submitted by the parties themselves:

1. That the capacity and addresses of all the parties in this case are admitted .

2. That the plaintiff was the registered owner of a residential house and lot located at Nos. 1268-1270 Carola Street, Sampaloc, Manila, containing an area of one hundred fifty (150) square meters, more or less, covered by T.C.T. No. 7419 of the Office of the Register of Deeds of Manila;

3. That the signatures of the plaintiff appearing on the following documents are genuine:

a) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 7, 1959 in the amount of P3,000.00 attached as Annex A of this partial stipulation of facts;

b) Promissory Note dated December 11, 1959 signed by the plaintiff in favor of the Rural Bank of Caloocan for the amount of P3,000.00 as per Annex B of this partial stipulation of facts;

c) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 11, 1959, signed only by the defendants, Severino Valencia and Catalina Valencia, attached as Annex C, of this partial stipulation of facts;

d) Promissory note in favor of the Rural Bank of Caloocan, dated December 11, 1959 for the amount of P3000.00, signed by the spouses Severino Valencia and Catalina Valencia as borrowers, and plaintiff Maxima Castro, as a co-maker, attached as Annex D of this partial stipulation of facts;

e) Real estate mortgage dated December 11, 1959 executed by plaintiff Maxima Castro, in favor of the Rural Bank of Caloocan, to secure the obligation of P6,000.00 attached herein as Annex E of this partial stipulation of facts;

All the parties herein expressly reserved their right to present any evidence they may desire on the circumstances regarding the execution of the above-mentioned documents.

4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff, Basilio Magsambol, sent a notice of sheriff's sale, address to the plaintiff, dated February 13, 1961, announcing that plaintiff's property covered by TCT No. 7419 of the Register of Deeds of the City of Manila, would be sold at public auction on March 10, 1961 to satisfy the total obligation of P5,728.50, plus interest, attorney's fees, etc., as evidenced by the Notice of Sheriff's Sale and Notice of Extrajudicial Auction Sale of the Mortgaged property, attached herewith as Annexes F and F-1, respectively, of this stipulation of facts;

5. That upon the request of the plaintiff and defendants-spouses Severino Valencia and Catalina Valencia, and with the conformity of the Rural Bank of Caloocan, the

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Sheriff of Manila postponed the auction sale scheduled for March 10, 1961 for thirty (30) days and the sheriff re-set the auction sale for April 10, 1961;

6. That April 10, 1961 was declared a special public holiday; (Note: No. 7 is omitted upon agreement of the parties.)

8. That on April 11, 1961, the Sheriff of Manila, sold at public auction plaintiff's property covered by T.C.T. No. 7419 and defendant, Arsenio Reyes, was the highest bidder and the corresponding certificate of sale was issued to him as per Annex G of this partial stipulation of facts;

9. That on April 16, 1962, the defendant Arsenio Reyes, executed an Affidavit of Consolidation of Ownership, a copy of which is hereto attached as Annex H of this partial stipulation of facts;

10. That on May 9, 1962, the Rural Bank of Caloocan Incorporated executed the final deed of sale in favor of the defendant, Arsenio Reyes, in the amount of P7,000.00, a copy of which is attached as Annex I of this partial stipulation of facts;

11. That the Register of Deeds of the City of Manila issued the Transfer Certificate of Title No. 67297 in favor of the defendant, Arsenio Reyes, in lieu of Transfer Certificate of Title No. 7419 which was in the name of plaintiff, Maxima Castro, which was cancelled;

12. That after defendant, Arsenio Reyes, had consolidated his title to the property as per T.C.T. No. 67299, plaintiff filed a notice of lis pendens with the Register of Deeds of Manila and the same was annotated in the back of T.C.T. No. 67299 as per Annex J of this partial stipulation of facts; and

13. That the parties hereby reserved their rights to present additional evidence on matters not covered by this partial stipulation of facts.

WHEREFORE, it is respectfully prayed that the foregoing partial stipulation of facts be approved and admitted by this Honorable Court.

As for the evidence presented during the trial, We quote from the decision of the Court of Appeals the statement thereof, as follows:

In addition to the foregoing stipulation of facts, plaintiff claims she is a 70-year old widow who cannot read and write the English language; that she can speak the Pampango dialect only; that she has only finished second grade (t.s.n., p. 4, December 11, 1964); that in December 1959, she needed money in the amount of P3,000.00 to invest in the business of the defendant spouses Valencia, who accompanied her to the defendant bank for the purpose of securing a loan of P3,000.00; that while at the defendant bank, an employee handed to her several forms already prepared which she was asked to sign on the places indicated, with no one explaining to her the nature and contents of the documents; that she did not even receive a copy thereof; that she was given a check in the amount of P2,882.85 which she delivered to defendant spouses; that sometime in February 1961, she received a letter from the Acting Deputy Sheriff of Manila, regarding the extrajudicial foreclosure sale of her property; that it was then when she learned for the first time that the mortgage indebtedness secured by the mortgage on her property was P6,000.00 and not P3,000.00; that upon investigation of her lawyer, it was found that the papers she was made to sign were:

(a) Application for a loan of P3,000.00 dated December 7, 1959 (Exh. B-1 and Exh. 1);

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(b) Promissory note dated December 11, 1959 for the said loan of P3,000.00 (Exh- B-2);

(c) Promissory note dated December 11, 1959 for P3,000.00 with the defendants Valencia spouses as borrowers and appellee as co-maker (Exh. B-4 or Exh. 2).

The auction sale set for March 10, 1961 was postponed co April 10, 1961 upon the request of defendant spouses Valencia who needed more time within which to pay their loan of P3,000.00 with the defendant bank; plaintiff claims that when she filed the complaint she deposited with the Clerk of Court the sum of P3,383.00 in full payment of her loan of P3,000.00 with the defendant bank, plus interest at the rate of 12% per annum up to April 3, 1961 (Exh. D).

As additional evidence for the defendant bank, its manager declared that sometime in December, 1959, plaintiff was brought to the Office of the Bank by an employee- (t.s.n., p 4, January 27, 1966). She wept, there to inquire if she could get a loan from the bank. The claims he asked the amount and the purpose of the loan and the security to he given and plaintiff said she would need P3.000.00 to be invested in a drugstore in which she was a partner (t.s.n., p. 811. She offered as security for the loan her lot and house at Carola St., Sampaloc, Manila, which was promptly investigated by the defendant bank's inspector. Then a few days later, plaintiff came back to the bank with the wife of defendant Valencia A date was allegedly set for plaintiff and the defendant spouses for the processing of their application, but on the day fixed, plaintiff came without the defendant spouses. She signed the application and the other papers pertinent to the loan after she was interviewed by the manager of the defendant. After the application of plaintiff was made, defendant spouses had their application for a loan also prepared and signed (see Exh. 13). In his interview of plaintiff and defendant spouses, the manager of the bank was able to gather that plaintiff was in joint venture with the defendant spouses wherein she agreed to invest P3,000.00 as additional capital in the laboratory owned by said spouses (t.s.n., pp. 16-17) 3

The Court of Appeals, upon evaluation of the evidence, affirmed in toto the decision of the Court of First Instance of Manila, the dispositive portion of which reads:

FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment and:

(1) Declares that the promissory note, Exhibit '2', is invalid as against plaintiff herein;

(2) Declares that the contract of mortgage, Exhibit '6', is null and void, in so far as the amount thereof exceeds the sum of P3,000.00 representing the principal obligation of plaintiff, plus the interest thereon at 12% per annum;

(3) Annuls the extrajudicial foreclosure sale at public auction of the mortgaged property held on April 11, 1961, as well as all the process and actuations made in pursuance of or in implementation thereto;

(4) Holds that the total unpaid obligation of plaintiff to defendant Rural Bank of Caloocan, Inc., is only the amount of P3,000.00, plus the interest thereon at 12% per annum, as of April 3, 1961, and orders that plaintiff's deposit of P3,383.00 in the Office of the Clerk of Court be applied to the payment thereof;

(5) Orders defendant Rural Bank of Caloocan, Inc. to return to defendant Arsenio Reyes the purchase price the latter paid for the mortgaged property at the public auction, as well as reimburse him of all the expenses he has incurred relative to the sale thereof;

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(6) Orders defendants spouses Severino D. Valencia and Catalina Valencia to pay defendant Rural Bank of Caloocan, Inc. the amount of P3,000.00 plus the corresponding 12% interest thereon per annum from December 11, 1960 until fully paid; and

Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and spouses Severino D. Valencia and Catalina Valencia to pay plaintiff, jointly and severally, the sum of P600.00 by way of attorney's fees, as well as costs.

In view of the conclusion that the court has thus reached, the counterclaims of defendant Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes are hereby dismissed, as a corollary

The Court further denies the motion of defendant Arsenio Reyes for an Order requiring Maxima Castro to deposit rentals filed on November 16, 1963, resolution of which was held in abeyance pending final determination of the case on the merits, also as a consequence of the conclusion aforesaid. 4

Petitioners Bank and Jose Desiderio moved for the reconsideration 5 of respondent court's decision. The motion having been denied, 6 they now come before this Court in the instant petition, with the following Assignment of Errors, to wit:

I

THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL ANNULMENT OF THE PROMISSORY NOTE, EXHIBIT 2, AND THE MORTGAGE, EXHIBIT 6, INSOFAR AS THEY AFFECT RESPONDENT MAXIMA CASTRO VIS-A-VIS PETITIONER BANK DESPITE THE TOTAL ABSENCE OF EITHER ALLEGATION IN THE COMPLAINT OR COMPETENT PROOF IN THE EVIDENCE OF ANY FRAUD OR OTHER UNLAWFUL CONDUCT COMMITTED OR PARTICIPATED IN BY PETITIONERS IN PROCURING THE EXECUTION OF SAID CONTRACTS FROM RESPONDENT CASTRO.

II

THE COURT OF APPEALS ERRED IN IMPUTING UPON AND CONSIDERING PREJUDICIALLY AGAINST PETITIONERS, AS BASIS FOR THE PARTIAL ANNULMENT OF THE CONTRACTS AFORESAID ITS FINDING OF FRAUD PERPETRATED BY THE VALENCIA SPOUSES UPON RESPONDENT CASTRO IN UTTER VIOLATION OF THE RES INTER ALIOS ACTA RULE.

III

THE COURT OF APPEAL ERRED IN NOT HOLDING THAT, UNDER THE FACTS FOUND BY IT, RESPONDENT CASTRO IS UNDER ESTOPPEL TO IMPUGN THE REGULARITY AND VALIDITY OF HER QUESTIONED TRANSACTION WITH PETITIONER BANK.

IV

THE COURT OF APPEALS ERRED IN NOT FINDING THAT, BETWEEN PETITIONERS AND RESPONDENT CASTRO, THE LATTER SHOULD SUFFER THE CONSEQUENCES OF THE FRAUD PERPETRATED BY THE VALENCIA SPOUSES, IN AS MUCH AS IT WAS THRU RESPONDENT CASTRO'S NEGLIGENCE OR ACQUIESCENSE IF NOT ACTUAL CONNIVANCE THAT THE PERPETRATION OF SAID FRAUD WAS MADE POSSIBLE.

V

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THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF THE DEPOSIT BY RESPONDENT CASTRO OF P3,383.00 WITH THE COURT BELOW AS A TENDER AND CONSIGNATION OF PAYMENT SUFFICIENT TO DISCHARGE SAID RESPONDENT FROM HER OBLIGATION WITH PETITIONER BANK.

VI

THE COURT OF APPEALS ERRED IN NOT DECLARING AS VALID AND BINDING UPON RESPONDENT CASTRO THE HOLDING OF THE SALE ON FORECLOSURE ON THE BUSINESS DAY NEXT FOLLOWING THE ORIGINALLY SCHEDULED DATE THEREFOR WHICH WAS DECLARED A HOLIDAY WITHOUT NECESSITY OF FURTHER NOTICE THEREOF.

The issue raised in the first three (3) assignment of errors is whether or not respondent court correctly affirmed the lower court in declaring the promissory note (Exhibit 2) invalid insofar as they affect respondent Castro vis-a-vis petitioner bank, and the mortgage contract (Exhibit 6) valid up to the amount of P3,000.00 only.

Respondent court declared that the consent of Castro to the promissory note (Exhibit 2) where she signed as co-maker with the Valencias as principal borrowers and her acquiescence to the mortgage contract (Exhibit 6) where she encumbered her property to secure the amount of P6,000.00 was obtained by fraud perpetrated on her by the Valencias who had abused her confidence, taking advantage of her old age and ignorance of her financial need. Respondent court added that "the mandate of fair play decrees that she should be relieved of her obligation under the contract" pursuant to Articles 24 7 and 1332 8 of the Civil Code.

The decision in effect relieved Castro of any liability to the promissory note (Exhibit 2) and the mortgage contract (Exhibit 6) was deemed valid up to the amount of P3,000.00 only which was equivalent to her personal loan to the bank.

Petitioners argued that since the Valencias were solely declared in the decision to be responsible for the fraud against Castro, in the light of the res inter alios acta rule, a finding of fraud perpetrated by the spouses against Castro cannot be taken to operate prejudicially against the bank. Petitioners concluded that respondent court erred in not giving effect to the promissory note (Exhibit 2) insofar as they affect Castro and the bank and in declaring that the mortgage contract (Exhibit 6) was valid only to the extent of Castro's personal loan of P3,000.00.

The records of the case reveal that respondent court's findings of fraud against the Valencias is well supported by evidence. Moreover, the findings of fact by respondent court in the matter is deemed final. 9 The decision declared the Valencias solely responsible for the defraudation of Castro. Petitioners' contention that the decision was silent regarding the participation of the bank in the fraud is, therefore, correct.

We cannot agree with the contention of petitioners that the bank was defrauded by the Valencias. For one, no claim was made on this in the lower court. For another, petitioners did not submit proof to support its contention.

At any rate, We observe that while the Valencias defrauded Castro by making her sign the promissory note (Exhibit 2) and the mortgage contract (Exhibit 6), they also misrepresented to the bank Castro's personal qualifications in order to secure its consent to the loan. This must be the reason which prompted the bank to contend that it was defrauded by the Valencias. But to reiterate, We cannot agree with the contention for reasons above-mentioned. However, if the contention deserves any consideration at all, it is in indicating the admission of petitioners that the bank committed mistake in giving its consent to the contracts.

Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the Valencias both Castro and the bank committed mistake in giving their consents to the contracts. In other

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words, substantial mistake vitiated their consents given. For if Castro had been aware of what she signed and the bank of the true qualifications of the loan applicants, it is evident that they would not have given their consents to the contracts.

Pursuant to Article 1342 of the Civil Code which provides:

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual.

We cannot declare the promissory note (Exhibit 2) valid between the bank and Castro and the mortgage contract (Exhibit 6) binding on Castro beyond the amount of P3,000.00, for while the contracts may not be invalidated insofar as they affect the bank and Castro on the ground of fraud because the bank was not a participant thereto, such may however be invalidated on the ground of substantial mistake mutually committed by them as a consequence of the fraud and misrepresentation inflicted by the Valencias. Thus, in the case of Hill vs. Veloso, 10 this Court declared that a contract may be annulled on the ground of vitiated consent if deceit by a third person, even without connivance or complicity with one of the contracting parties, resulted in mutual error on the part of the parties to the contract.

Petitioners argued that the amended complaint fails to contain even a general averment of fraud or mistake, and its mention in the prayer is definitely not a substantial compliance with the requirement of Section 5, Rule 8 of the Rules of Court. The records of the case, however, will show that the amended complaint contained a particular averment of fraud against the Valencias in full compliance with the provision of the Rules of Court. Although, the amended complaint made no mention of mistake being incurred in by the bank and Castro, such mention is not essential in order that the promissory note (Exhibit 2) may be declared of no binding effect between them and the mortgage (Exhibit 6) valid up to the amount of P3,000.00 only. The reason is that the mistake they mutually suffered was a mere consequence of the fraud perpetrated by the Valencias against them. Thus, the fraud particularly averred in the complaint, having been proven, is deemed sufficient basis for the declaration of the promissory note (Exhibit 2) invalid insofar as it affects Castro vis-a-vis the bank, and the mortgage contract (Exhibit 6) valid only up to the amount of P3,000.00.

The second issue raised in the fourth assignment of errors is who between Castro and the bank should suffer the consequences of the fraud perpetrated by the Valencias.

In attributing to Castro an consequences of the loss, petitioners argue that it was her negligence or acquiescence if not her actual connivance that made the fraud possible.

Petitioners' argument utterly disregards the findings of respondent Court of Appeals wherein petitioners' negligence in the contracts has been aptly demonstrated, to wit:

A witness for the defendant bank, Rodolfo Desiderio claims he had subjected the plaintiff-appellee to several interviews. If this were true why is it that her age was placed at 61 instead of 70; why was she described in the application (Exh. B-1-9) as drug manufacturer when in fact she was not; why was it placed in the application that she has income of P20,000.00 when according to plaintiff-appellee, she his not even given such kind of information -the true fact being that she was being paid P1.20 per picul of the sugarcane production in her hacienda and 500 cavans on the palay production. 11

From the foregoing, it is evident that the bank was as much , guilty as Castro was, of negligence in giving its consent to the contracts. It apparently relied on representations made by the Valencia spouses when it should have directly obtained the needed data from Castro who was the acknowledged owner of the property offered as collateral. Moreover, considering Castro's personal circumstances – her lack of education, ignorance and old age – she cannot be considered utterly neglectful for having been defrauded. On the contrary, it is demanded of petitioners to exercise the highest order of care and prudence in its business dealings with the Valencias considering that it is engaged in a banking business –a business affected with public interest. It should have ascertained Castro's awareness of what she was

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signing or made her understand what obligations she was assuming, considering that she was giving accommodation to, without any consideration from the Valencia spouses.

Petitioners further argue that Castro's act of holding the Valencias as her agent led the bank to believe that they were authorized to speak and bind her. She cannot now be permitted to deny the authority of the Valencias to act as her agent for one who clothes another with apparent authority as her agent is not permitted to deny such authority.

The authority of the Valencias was only to follow-up Castro's loan application with the bank. They were not authorized to borrow for her. This is apparent from the fact that Castro went to the Bank to sign the promissory note for her loan of P3,000.00. If her act had been understood by the Bank to be a grant of an authority to the Valencia to borrow in her behalf, it should have required a special power of attorney executed by Castro in their favor. Since the bank did not, We can rightly assume that it did not entertain the notion, that the Valencia spouses were in any manner acting as an agent of Castro.

When the Valencias borrowed from the Bank a personal loan of P3,000.00 evidenced by a promissory note (Exhibit 2) and mortgaged (Exhibit 6) Castro's property to secure said loan, the Valencias acted for their own behalf. Considering however that for the loan in which the Valencias appeared as principal borrowers, it was the property of Castro that was being mortgaged to secure said loan, the Bank should have exercised due care and prudence by making proper inquiry if Castro's consent to the mortgage was without any taint or defect. The possibility of her not knowing that she signed the promissory note (Exhibit 2) as co-maker with the Valencias and that her property was mortgaged to secure the two loans instead of her own personal loan only, in view of her personal circumstances – ignorance, lack of education and old age – should have placed the Bank on prudent inquiry to protect its interest and that of the public it serves. With the recent occurrence of events that have supposedly affected adversely our banking system, attributable to laxity in the conduct of bank business by its officials, the need of extreme caution and prudence by said officials and employees in the discharge of their functions cannot be over-emphasized.

Question is, likewise, raised as to the propriety of respondent court's decision which declared that Castro's consignation in court of the amount of P3,383.00 was validly made. It is contended that the consignation was made without prior offer or tender of payment to the Bank, and it therefore, not valid. In holding that there is a substantial compliance with the provision of Article 1256 of the Civil Code, respondent court considered the fact that the Bank was holding Castro liable for the sum of P6,000.00 plus 12% interest per annum, while the amount consigned was only P3,000.00 plus 12% interest; that at the time of consignation, the Bank had long foreclosed the mortgage extrajudicially and the sale of the mortgage property had already been scheduled for April 10, 1961 for non-payment of the obligation, and that despite the fact that the Bank already knew of the deposit made by Castro because the receipt of the deposit was attached to the record of the case, said Bank had not made any claim of such deposit, and that therefore, Castro was right in thinking that it was futile and useless for her to make previous offer and tender of payment directly to the Bank only in the aforesaid amount of P3,000.00 plus 12% interest. Under the foregoing circumstances, the consignation made by Castro was valid. if not under the strict provision of the law, under the more liberal considerations of equity.

The final issue raised is the validity or invalidity of the extrajudicial foreclosure sale at public auction of the mortgaged property that was held on April 11, 1961.

Petitioners contended that the public auction sale that was held on April 11, 1961 which was the next business day after the scheduled date of the sale on April 10, 1961, a special public holiday, was permissible and valid pursuant to the provisions of Section 31 of the Revised Administrative Code which ordains:

Pretermission of holiday. – Where the day, or the last day, for doing any act required or permitted by law falls on a holiday, the act may be done on the next succeeding business day.

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Respondent court ruled that the aforesaid sale is null and void, it not having been carried out in accordance with Section 9 of Act No. 3135, which provides:

Section 9. – Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.

We agree with respondent court. The pretermission of a holiday applies only "where the day, or the last day for doing any act required or permitted by law falls on a holiday," or when the last day of a given period for doing an act falls on a holiday. It does not apply to a day fixed by an office or officer of the government for an act to be done, as distinguished from a period of time within which an act should be done, which may be on any day within that specified period. For example, if a party is required by law to file his answer to a complaint within fifteen (15) days from receipt of the summons and the last day falls on a holiday, the last day is deemed moved to the next succeeding business day. But, if the court fixes the trial of a case on a certain day but the said date is subsequently declared a public holiday, the trial thereof is not automatically transferred to the next succeeding business day. Since April 10, 1961 was not the day or the last day set by law for the extrajudicial foreclosure sale, nor the last day of a given period but a date fixed by the deputy sheriff, the aforesaid sale cannot legally be made on the next succeeding business day without the notices of the sale on that day being posted as prescribed in Section 9, Act No. 3135.

WHEREFORE, finding no reversible error in the judgment under review, We affirm the same in toto. No pronouncement as to cost.

SO ORDERED.

Teehankee (Acting, C.J.) Makasiar, Fernandez, Guerrero and Melencio-Herrera, JJ., concur.


Manila

THIRD DIVISION

G.R. No. 81552 May 28, 1990

DIONISIO FIESTAN and JUANITA ARCONADO, petitioners vs.COURT OF APPEALS; DEVELOPMENT BANK OF THE PHILIPPINES, LAOAG CITY BRANCH; PHILIPPINE NATIONAL BANK, VIGAN BRANCH, ILOCOS SUR, FRANCISCO PERIA and REGISTER OF DEEDS OF ILOCOS SUR, respondents.

Pedro Singson Reyes for petitioners.

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The Chief Legal Counsel for PNB.

Public Assistance Office for Francisco Peria.

Ruben O. Fruto, Bonifacio M. Abad and David C. Frez for DBP Laoag Branch.

FERNAN, C.J.:

In this petition for review on certiorari, petitioners spouses Dionisio Fiestan and Juanita Arconada owners of a parcel of land (Lot No. 2B) situated in Ilocos Sur covered by TCT T-13218 which they mortgaged to the Development Bank of the Philippines (DBP) as security for their P22,400.00 loan, seek the reversal of the decision of the Court of Appeals 1 dated June 5, 1987 affirming the dismissal of their complaint filed against the Development Bank of the Philippines, Laoag City Branch, Philippine National Bank, Vigan Branch, Ilocos Sur, Francisco Peria and the Register of Deeds of Ilocos Sur, for annulment of sale, mortgage, and cancellation of transfer certificates of title.

Records show that Lot No. 2-B was acquired by the DBP as the highest bidder at a public auction sale on August 6, 1979 after it was extrajudicially foreclosed by the DBP in accordance with Act No. 3135, as amended by Act No. 4118, for failure of petitioners to pay their mortgage indebtedness. A certificate of sale was subsequently issued by the Provincial Sheriff of Ilocos Sur on the same day and the same was registered on September 28, 1979 in the Office of the Register of Deeds of Ilocos Sur. Earlier, or on September 26, 1979, petitioners executed a Deed of Sale in favor of DBP which was likewise registered on September 28, 1979.

Upon failure of petitioners to redeem the property within the one (1) year period which expired on September 28, 1980, petitioners' TCT T-13218 over Lot No. 2-B was cancelled by the Register of Deeds and in lieu thereof TCT T-19077 was issued to the DBP upon presentation of a duly executed affidavit of consolidation of ownership.

On April 13,1982, the DBP sold the lot to Francisco Peria in a Deed of Absolute Sale and the same was registered on April 15, 1982 in the Office of the Register of Deeds of Ilocos Sur. Subsequently, the DBP's title over the lot was cancelled and in lieu thereof TCT T-19229 was issued to Francisco Peria.

After title over said lot was issued in his name, Francisco Peria secured a tax declaration for said lot and accordingly paid the taxes due thereon. He thereafter mortgaged said lot to the PNB Vigan Branch as security for his loan of P115,000.00 as required by the bank to increase his original loan from P49,000.00 to P66,000.00 until it finally reached the approved amount of P115,000.00. Since petitioners were still in possession of Lot No. 2-B, the Provincial Sheriff ordered them to vacate the premises.

On the other hand, petitioners filed on August 23, 1982 a complaint for annulment of sale, mortgage and cancellation of transfer certificates of title against the DBP-Laoag City, PNB Vigan Branch, Ilocos Sur, Francisco Peria and the Register of Deeds of Ilocos Sur, docketed as Civil Case No. 3447-V before the Regional Trial Court of Vigan, Ilocos Sur.

After trial, the RTC of Vigan, Ilocos Sur, Branch 20, rendered its decision 2 on November 14, 1983 dismissing the complaint, declaring therein, as valid the extrajudicial foreclosure sale of the mortgaged property in favor of the DBP as highest bidder in the public auction sale held on August 6, 1979, and its subsequent sale by DBP to Francisco Peria as well as the real estate mortgage constituted thereon in favor of PNB Vigan as security for the P115,000.00 loan of Francisco Peria.

The Court of Appeals affirmed the decision of the RTC of Vigan, Ilocos Sur on June 20, 1987.

The motion for reconsideration having been denied 3 on January 19, 1988, petitioners filed the instant petition for review on certiorari with this Court. Petitioners seek to annul the extrajudicial foreclosure sale

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of the mortgaged property on August 6, 1979 in favor of the Development Bank of the Philippines (DBP) on the ground that it was conducted by the Provincial Sheriff of Ilocos Sur without first effecting a levy on said property before selling the same at the public auction sale. Petitioners thus maintained that the extrajudicial foreclosure sale being null and void by virtue of lack of a valid levy, the certificate of sale issued by the Provincial Sheriff cannot transfer ownership over the lot in question to the DBP and consequently the deed of sale executed by the DBP in favor of Francisco Peria and the real estate mortgage constituted thereon by the latter in favor of PNB Vigan Branch are likewise null and void.

The Court finds these contentions untenable.

The formalities of a levy, as an essential requisite of a valid execution sale under Section 15 of Rule 39 and a valid attachment lien under Rule 57 of the Rules of Court, are not basic requirements before an extrajudicially foreclosed property can be sold at public auction. At the outset, distinction should be made of the three different kinds of sales under the law, namely: an ordinary execution sale, a judicial foreclosure sale, and an extrajudicial foreclosure sale, because a different set of law applies to each class of sale mentioned. An ordinary execution sale is governed by the pertinent provisions of Rule 39 of the Rules of Court. Rule 68 of the Rules of Court applies in cases of judicial foreclosure sale. On the other hand, Act No. 3135, as amended by Act No. 4118 otherwise known as "An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages" applies in cases of extrajudicial foreclosure sale.

The case at bar, as the facts disclose, involves an extrajudicial foreclosure sale. The public auction sale conducted on August 6, 1979 by the Provincial Sheriff of Ilocos Sur refers to the "sale" mentioned in Section 1 of Act No. 3135, as amended, which was made pursuant to a special power inserted in or attached to a real estate mortgage made as security for the payment of money or the fulfillment of any other obligation. It must be noted that in the mortgage contract, petitioners, as mortgagor, had appointed private respondent DBP, for the purpose of extrajudicial foreclosure, "as his attorney-in-fact to sell the property mortgaged under Act No. 3135, as amended, to sign all documents and perform any act requisite and necessary to accomplish said purpose .... In case of foreclosure, the Mortgagor hereby consents to the appointment of the mortgagee or any of its employees as receiver, without any bond, to take charge of the mortgaged property at once, and to hold possession of the same ... 4

There is no justifiable basis, therefore, to apply by analogy the provisions of Rule 39 of the Rules of Court on ordinary execution sale, particularly Section 15 thereof as well as the jurisprudence under said provision, to an extrajudicial foreclosure sale conducted under the provisions of Act No. 3135, as amended. Act No. 3135, as amended, being a special law governing extrajudicial foreclosure proceedings, the same must govern as against the provisions on ordinary execution sale under Rule 39 of the Rules of Court.

In that sense, the case of Aparri vs. Court Of Appeals, 13 SCRA 611 (1965), cited by petitioners, must be distinguished from the instant case. On the question of what should be done in the event the highest bid made for the property at the extrajudicial foreclosure sale is in excess of the mortgage debt, this Court applied the rule and practice in a judicial foreclosure sale to an extrajudicial foreclosure sale in a similar case considering that the governing provisions of law as mandated by Section 6 of Act No. 3135, as amended, specifically Sections 29, 30 and 34 of Rule 39 of the Rules of Court (previously Sections 464, 465 and 466 of the Code of Civil Procedure) are silent on the matter. The said ruling cannot, however, be construed as the legal basis for applying the requirement of a levy under Section 15 of Rule 39 of the Rules of Court before an extrajudicially foreclosed property can be sold at public auction when none is expressly required under Act No. 3135, as amended.

Levy, as understood under Section 15, Rule 39 of the Rules of Court in relation to execution of money judgments, has been defined by this Court as the act whereby a sheriff sets apart or appropriates for the purpose of satisfying the command of the writ, a part or the whole of the judgment-debtor's property. 5

In extrajudicial foreclosure of mortgage, the property sought to be foreclosed need not be identified or set apart by the sheriff from the whole mass of property of the mortgagor for the purpose of satisfying the mortgage indebtedness. For, the essence of a contract of mortgage indebtedness is that a property

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has been identified or set apart from the mass of the property of the debtor-mortgagor as security for the payment of money or the fulfillment of an obligation to answer the amount of indebtedness, in case of default of payment. By virtue of the special power inserted or attached to the mortgage contract, the mortgagor has authorized the mortgagee-creditor or any other person authorized to act for him to sell said property in accordance with the formalities required under Act No. 3135, as amended.

The Court finds that the formalities prescribed under Sections 2, 3 and 4 of Act No. 3135, as amended, were substantially complied with in the instant case. Records show that the notices of sale were posted by the Provincial Sheriff of Ilocos Sur and the same were published in Ilocos Times, a newspaper of general circulation in the province of Ilocos Sur, setting the date of the auction sale on August 6, 1979 at 10:00 a.m. in the Office of the Sheriff, Vigan, Ilocos Sur. 6

The nullity of the extrajudicial foreclosure sale in the instant case is further sought by petitioners on the ground that the DBP cannot acquire by purchase the mortgaged property at the public auction sale by virtue of par. (2) of Article 1491 and par. (7) of Article 1409 of the Civil Code which prohibits agents from acquiring by purchase, even at a public or judicial auction either in person or through the mediation of another, the property whose administration or sale may have been entrusted to them unless the consent of the principal has been given.

The contention is erroneous.

The prohibition mandated by par. (2) of Article 1491 in relation to Article 1409 of the Civil Code does not apply in the instant case where the sale of the property in dispute was made under a special power inserted in or attached to the real estate mortgage pursuant to Act No. 3135, as amended. It is a familiar rule of statutory construction that, as between a specific statute and general statute, the former must prevail since it evinces the legislative intent more clearly than a general statute does. 7 The Civil Code (R.A. 386) is of general character while Act No. 3135, as amended, is a special enactment and therefore the latter must prevail. 8

Under Act No. 3135, as amended, a mortgagee-creditor is allowed to participate in the bidding and purchase under the same conditions as any other bidder, as in the case at bar, thus:

Section 5. At any sale, the creditor, trustee, or other person authorized to act for the creditor, may participate in the bidding and purchase under the same conditions as any other bidder, unless the contrary has been expressly provided in the mortgage or trust deed under which the sale is made.

In other words, Section 5 of Act No. 3135, as amended, creates and is designed to create an exception to the general rule that a mortgagee or trustee in a mortgage or deed of trust which contains a power of sale on default may not become the purchaser, either directly or through the agency of a third person, at a sale which he himself makes under the power. Under such an exception, the title of the mortgagee-creditor over the property cannot be impeached or defeated on the ground that the mortgagee cannot be a purchaser at his own sale.

Needless to state, the power to foreclose is not an ordinary agency that contemplates exclusively the representation of the principal by the agent but is primarily an authority conferred upon the mortgagee for the latter's own protection. It is an ancillary stipulation supported by the same cause or consideration for the mortgage and forms an essential and inseparable part of that bilateral agreement. 9 Even in the absence of statutory provision, there is authority to hold that a mortgagee may purchase at a sale under his mortgage to protect his own interest or to avoid a loss to himself by a sale to a third person at a price below the mortgage debt. 10 The express mandate of Section 5 of Act No. 3135, as amended, amply protects the interest of the mortgagee in this jurisdiction.

WHEREFORE, in view of the foregoing, the petition is DENIED for lack of merit and the decision of the Court of Appeals dated June 20, 1987 is hereby AFFIRMED. No cost.

SO ORDERED.

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Gutierrez, Jr., Feliciano, Bidin and Cortes JJ., concur.


Manila

EN BANC

G.R. No. L-26575 February 27, 1969

PEDRO DIMASACAT and ERNESTO ROBLES petitioners, vs.THE COURT OF APPEALS, PHILIPPINE NATIONAL BANK and RAFAEL O. LAGDAMEO, respondents.

Alfredo I. Raya and Jose P. Salazar for petitioners. Medina Coruna and Nosce for respondent Phil. National Bank. Job. M. Cabangon for respondent Rafael O. Lagdameo.

CONCEPCION, C.J.:

Petition for review of a decision of the Court of Appeals reversing that of the Court of First Instance of Quezon.

Rafael O. Lagdameo was the registered owner of four (4) contiguous parcels of land, with an aggregate area of about 7,236 sq.m., situated in the poblacion of Tagkawayan, Quezon, and covered by

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TCT No. 17011 of the Office of the Register of Deeds of said province. On June 24, 1946, he mortgaged said land, for P3,500, to the Philippine National Bank, subject to the latter's right of extrajudicial foreclosure should he default in the payment of said amount. The corresponding deed of mortgage was duly registered and anotated on said TCT No. 17011. A little over a year later, or on September 12, 1947, Lagdameo sold to petitioner Ernesto Robles, a portion of about 260 sq.m. of the aforementioned land, for the sum of P1,040. Still later, or on March 6, 1948, Lagmadameo sold to Pedro Dimasacat the other petitioner herein, another portion, of about 381.44 sq.m., of the same land, for the sum of P1,100. The notarial deeds attesting to these sales were not registered. Owing to non-payment of the debt to the Bank, the mortgage was, on April 1, 1955, foreclosed extra-judicially and sold at public auction, by the Provincial Sheriff of Quezon, to the Bank for the amount of said indebtedness. On June 11, 1956, or after the lapse of the statutory period of one-year for the redemption of the property, the Sheriff executed the corresponding deed of absolute sale to the Bank, in favor of which TCT No. 24761 was issued upon registration of said deed of absolute sale and the cancellation of TCT No. 17011.

Prior to the expiration of said period of redemption, or sometime before November, 1955, Robles and Dimasacat urged Lagdameo to repurchase the land to prevent it, particularly the portions sold to them, from becoming property of the Bank, but Lagdameo told them that he would effect the redemption at any time he had money therefor. Thereupon, Robles and Dimasacat offered to repurchase the property from the Bank, which rejected the offer. Thereupon, or on December 5, 1955, Dimasacat and Robles — hereinafter referred to as the plaintiffs — commenced Civil Case No, 33-G of the Court of First Instance of Quezon, against Lagdameo and the Bank, for the purpose of enforcing their alleged right to repurchase said property. On December 7, 1955, plaintiffs, likewise, caused a notice of lis pendens to be registered and annotated on the back of TCT No. 17011. Lagdameo and the Bank were summoned on March 23 and 27, 1956, respectively, or before the expiration of the aforementioned period of redemption. TCT No. 24761, subsequently issued in the name of the Bank, carried the notice of lis pendens annotated on TCT No. 17011.

After appropriate proceedings, said Court of First Instance rendered a decision, dated April 1, 1960, dismissing plaintiffs' complaint and declaring them "without right to repurchase the properties they allegedly acquired from ... Lagdameo, ... but reserving to them ... the right to file suit against" him "to compel performance of their agreement," should he eventually reacquire said properties.

On appeal, taken by plaintiffs, this decision was "reversed" by the Court of Appeals, which held them "to have the right to redeem their respective portions from the Bank," although "the question as to who should be entitled to repurchase the totality of the lots from the Bank" was "reserved for future litigation, if need be, between all the parties." Plaintiffs now seek a review by certiorari of this decision of the Court of Appeals, and pray that said decision be "reversed ... by allowing" them "to redeem ... all the parcels of land" covered by the certificates of title aforementioned, "for the sum of P3,500 ... plus interest of 1% a month from April 1, 1965 to the filing of the present complaint on December 5, 1955."

Plaintiffs maintain that, having been held by the Court of Appeals to be "successors in interest of the mortgage debtor, in part of the property and ... therefore qualified to redeem," said Court should have declared them entitled to repurchase the entirety of said property, in line with Magno v. Viola, 1

instead of limiting their right of redemption to the portions sold by Lagdameo to each of them.

Such was not, however, the issue decided in the Magno case, although it was declared therein that a lawyer who, by reason of his contract of retainer with a former client, had an interest in a land belonging to the latter, may be considered his successor in interest in said land, within the purview of Section 464 of our former Code of Civil Procedure, 2 which is substantially identical to Section 29 of Rule 39 of the Rules of Court. 3

It is true that our decision in said case made reference to some American cases in which it was held that "one who owns a separate part of the land sold" at public auction "or has some interest therein," or "successors in part" of said land "could not redeem at all, except redeeming the whole," but this was not the question adjudicated in that case. On the contrary, it was held therein that said lawyer or his assignee, "had no right to redeem the shares of his former clients" in the land in question, the buyer of said shares being "a part owner" of said land.

document.doc - 52 -

Moreover, the decision in the Magno case, likewise, pointed out that, although a "co-tenant may redeem the entire joint estate ... in so doing he will be deemed to have acted for the benefit of all the co-tenants." This point is particularly relevant to the case at bar, for plaintiffs had bought merely small portions of the land of Lagdameo and had, at best, a personal right to demand from him a status of co-ownership over said property, because the deeds of sale in their favor had not been registered, and the portions covered by said deeds had not been surveyed, so that the precise boundaries thereof had not been delimited by metes and bounds, much less segregated from the mass of Lagdameo's property covered by TCT No. 17011 and then by TCT No. 24761. Hence, even if plaintiffs had succeeded in redeeming the whole land, Lagdameo could have, under said dictum in the Magno case, asserted the right to repurchase from them so much of the land as was not included in said deeds of sale in their favor. Indeed, this was reckoned in plaintiffs' complaint, for they prayed therein that, should they be able to repurchase the parcels of land covered by TCT No. 17011," judgment be rendered "declaring them co-owners of the portions that remain, after deducting the portions" covered by said deeds of sale "subject to the right of defendant Rafael O. Lagdameo or his successor in interest as redemptioner."lawphi1.nêt

In this connection, it appears that, by virtue of another deed of sale, dated July 22, 1962 — or while this case was pending in the Court of Appeals — Lagdameo had repurchased the land from the Bank, for P7,044.74, subject to the conditions set forth in said instrument, particularly the notice of lis pendens annotated on the back, first of TCT No. 17011, and later of TCT No. 24761. Inasmuch as, even if plaintiffs had managed to redeem the whole property, so much thereof as exceeded the portions sold to them by Lagdameo could have been repurchased from them by Lagdameo and the title to said property has meanwhile reverted fully to the latter, it follows that petitioners are now entitled to no more than the consummation of the sales made by him in their favor.

WHEREFORE, the decision of the Court of Appeals should be, as it is hereby modified, in the sense that plaintiffs herein are hereby declared co-owners of the land in question to the extent of the interest conveyed to them by defendant Rafael O. Lagdameo, subject to their right to partition said property and determine the precise boundaries of the share or portion belonging to each, without pronouncement as to costs. It is so ordered.


Manila

FIRST DIVISION

G.R. No. L-40095 July 29, 1985

AMPARO F. LIM and RODRIGO C. LIM, petitioners, vs.THE COURT OF APPEALS, EUGENIO LAMBERANG and THE DIRECTOR OF LANDS, respondents.

Balaba, Lim and Varias for petitioners.

Lood, Diel, Guzman, Calonia & Associates for respondent Lamberang.

MELENCIO-HERRERA, J.:

In this Petition for Review on Certiorari, petitioners assail the Decision of respondent Appellate Court in its Case No. CA-G.R. No. 35006-R. We have decided to reverse on the basis of the facts of the controversy and of considerations hereunder to be expounded:

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1. According to respondent Court: "Mauricio Manasil was the original occupant and claimant of a 100-hectare forest land (t.s.n., Oct. 24, 1963, pp. 11, 13 and 14) situated in barrio Luna, municipality of Claveria, province of Misamis Oriental." 1 The land was occupied for "agricultural" purposes. It became alienable on March 28, 1950, the area being declared alienable and disposable and released as agricultural land under Forestry Administrative Order No. 4-51 (Exhibits "B-1" and "B-2").

2. After the death of Manuel Manasil, his son Mauricio "inherited" the land, declared the same for tax purposes in his name under Tax Declaration No. 4744 issued in 1930, paid realty taxes on the land from 1927, and inheritance tax on September 29, 1953 (Exhibit "5-Intervenor"). He had introduced improvements on the land.

3. It appears that, in 1948, Mauricio sold two parcels within the land, one of 11 hectares and the other of 10 hectares, to Catalino ALEMAN. Those two parcels constitute the Disputed Property in this case.

4. After the sale to him, ALEMAN declared the Disputed Property for tax purposes in his name under Tax Declarations No. 4979 and 4980. On May 31, 1956, he applied for a Free Patent over the Disputed Property (FPA No. 16-1840).

5. On February 1, 1957, ALEMAN mortgaged the Disputed Property (or his "rights") to petitioner Amparo LIM to secure the payment of a loan of P1,300.00 (Exhibit "C"). Due to ALEMAN's failure to pay the loan on due date, upon LIM's complaint in Civil Case No. 1435 of the Court of First Instance of Misamis Oriental, the mortgage was foreclosed. Said respondent Court: "The mortgage was foreclosed on January 17, 1957 (should be January 19,1959) . . . after which she took possession of the two parcels of land." 2

6. On March 3,1960, for the sum of P3,000.00, ALEMAN further sold the Disputed Property to LIM (Exhibit "D") who, on the same day, filed a free patent application in her name (FPA No. 16-6769), ALEMAN's previous application being cancelled. The sale was evidently made to strengthen LIM's rights to the Disputed Property. LIM declared the Disputed Property for taxation purposes in her name on May 6, 1960, and was issued Tax Declarations 8438 and 8439, which cancelled the Tax Declarations in ALEMAN's name.

7. In the meanwhile, on February 29, 1959, the Deputy Sheriff of Misamis Oriental had levied upon and sold the Disputed Property at public auction to satisfy a judgment for P1,471.96, with interest, rendered on June 18, 1956 by the Municipal Court of Cagayan de Oro against ALEMAN in Civil Case No. 302, entitled "Soc Chao vs. Catalino Aleman". The highest bidder was Eugenio LAMBERANG, and the corresponding certificate of sale was executed in his favor.

8. On February 27, 1960, within one year after the auction sale, LIM offered to redeem the Disputed Property, and she deposited the amount of P2,400.00 with the Sheriff, but LAMBERANG refused to accept the same. Later, LIM withdrew the deposit on March 11, 1960, after ALEMAN had 11 sold" the Disputed Property to her. It may be mentioned that after LIM had foreclosed the Disputed Property on January 19, 1959, she acquired the right to redeem, 3 and LAMBERANG was in duty bound to snow her redemption of the Disputed Property.

9. On March 14, 1960, the Sheriff issued a deed of conveyance to LAMBERANG, which was recorded in the Office of the Register of Deeds of Misamis Oriental on March 16, 1960. LAMBERANG obtained a Writ of Possession on April 11, 1960 by virtue of which he entered and occupied the Disputed Property.

10. On October 31, 1960, LIM and her husband filed a case against the Provincial Sheriff for the annulment of the execution sale (Civil Case No. 1856) on the ground that the Disputed Property was still public land at the time of said sale and, therefore, could not be the subject of levy and execution. LAMBERANG was allowed to intervene in the case.

11. Ultimately, the trial Court ruled in favor of LIM on the ground that the Disputed Property was public land and could not be subjected to levy and sale at public auction. LAMBERANG, as Intervenor, brought the case on appeal to respondent Court, which reversed the judgment of the lower Court.

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12. Two important dates were not given full appreciation neither by the trial Court, nor by respondent Court. The latter had expressly found: (a) "The mortgage was foreclosed on January 17, 1957 (should be January 19,1959) . . . after which she (LIM) took possession of the two parcels of land." (b) "On February 28, 1959, the Deputy Sheriff of Misamis Oriental, Jose Velez Yasay, levied and sold at public auction the two parcels of land in question." 4 It should appear clear that when the Disputed Property was sold at public auction on February 28, 1959, ALEMAN, as judgment debtor, was no longer the owner of the Disputed Property, ownership having been acquired by LIM on January 19, 1959. The sale to LAMBERANG could not have been valid.

13. At the very least, LIM should have been allowed to redeem the Disputed Property within the one year period from February 28, 1959, which she offered to do on February 27, 1960. The mortgage in her favor was executed on February 1, 1957, while the judgment against ALEMAN was rendered on June 18, 1956. The mortgage was subsequent to the judgment. 5

14. It is not necessary to rule on whether or not the Disputed Property had already become private property on the date of the public auction. The transactions herein mentioned were in regards to "rights" to the Disputed Property, irrespective of whether the physical property was or was not private property.

WHEREFORE, the Decision of respondent Court in its case CA-G.R. No. 35006-R is SET ASIDE and the judgment of the Court of First Instance of Misamis Oriental, annulling the auction sale of February 28, 1959, is reinstated.

Without costs.

SO ORDERED.

Teehankee (Chairman), Plana, Relova, Gutierrez, Jr., De la Fuente and Alampay, JJ., concur.


Manila

FIRST DIVISION

G.R. No. L-36821 June 22, 1978

JOSE P. DIZON, petitioner, vs.ALFREDO G. GABORRO (Substituted by PACITA DE GUZMAN GABORRO as Judicial Administratrix of the Estate of Alfredo G. Gaborro) and the DEVELOPMENT BANK OF THE PHILIPPINES, respondents.

Leonardo Abola for petitioner.

Carlos J. Antiporda for respondents.

GUERRERO, J.:

Petition for review on certiorari of the decision of the Court Appeals 1 in CA-G.R. No. 46975-R entitled "Jose P. Dizon, Plaintiff-Appellant, vs. Alfredo G. Gaborro (substituted by Pacita de Guzman Gaborro as Judicial Administratrix of the Estate of Alfredo G, Gaborro) trial the Development Bank of the Philippines,

document.doc - 55 -

Defendants-Appellees," affirming with modification the decision of the Court of First Instance of Pampanga, Branch II in Civil Case No. 2184.

The dispositive portion of the decision sought to be reviewed reads:

IN VIEW OF THE FOREGOING, the judgment appealed therefrom is hereby affirmed with modification that the plaintiff-appellant has the right to refund or reimburse the defendant- appellees he sum of P131,831.91 with interest at 8% per annum from October 6, 1959 until full payment, said right to be exercised within one year from the date this judgment becomes final, with the understanding that, if he fails to do so within the said period, then he is deemed to have lost his right over the lands forever. With costs against the appellant. 2

MODIFIED.

The basic issue to be resolved in this case is whether the 'Deed of Sale with Assumption of Mortgage', trial Option to Purchase Real Estate". two instruments executed by trial between Petitioner Jose P. Dizon trial Alfredo G. Gaborro (defendant below) on the same day, October 6, 1959 constitute in truth trial 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, refund or repayment by petitioner Jose P. Dizon of any trial all sums which may have been paid to the Development Bank of the Philippines trial the Philippine National Bank by Alfredo G. Gaborro (later substituted herein by his wife Pacita de Guzman Gaborro as administratrix of the estate of Alfredo G. Gaborro) who had died during the pendency of the case.

A supplementary issue raised is whether or not Gaborro or the respondent administratrix of the estate should account for all the fruits produced trial income received by them from the lands mentioned trial described in the aforesaid "Deed of Sale with Assumption of Mortgage."

The antecedent facts established in the record are not disputed. Petitioner Jose P. Dizon was the owner of the three (3) parcels of land, subject matter of this litigation, situated in Mabalacat, Pampanga with an aggregate area of 130.58 hectares, as evidenced by Transfer Certificate of Title No. 15679. He constituted a first mortgage lien in favor of the Develop. ment Bank of the Philippines in order to secure a loan in the sum of P38,000.00 trial a second mortgage lien in favor of the Philippine National Bank to cure his indebtedness to said bank in the amount of P93,831.91.

Petitioner Dizon having defaulted in the payment of his debt, the Development Bank of the Philippines foreclosed the mortgage extrajudicially pursuant to the provisions of Act No. 3135. On May 26, 1959, the hinds were sold to the DBP for- P31,459.21, which amount covered the loan, interest trial expenses, trial the corresponding "Certificate of Sale," (Exhibit A-2, Exhibit 1b was executed in favor of the said On November 12, 1959, Dizon himself executed the deed of sale (Exhibit Al over the properties in favor of the DBP which deed was recorded in the Office of the Register of Deeds on October 6, 1960.

Sometime prior to October 6, 1959 Alfredo G. Gaborro trial Jose P. Dizon met. Gaborro became interested in the lands of Dizon. Dizon originally intended to lease to Gaborro the property which had been lying idle for some time. But as the mortgage was already foreclosed by the DPB trial the bank in fact purchased the lands at the foreclosure sale on May 26, 1959, they abandoned the projected lease. They then entered into the following contract on October 6, 1959 captioned trial quoted, to wit:

DEED OF SALE WITH ASSUMPTION

OF MORTGAGE


document.doc - 56 -

This DEED OF SALE WITH ASSUMPTION OF MORTGAGE, made trial executed at the City of Manila, Philippines, on this 6th day of October, 1959 by trial between —

JOSE P. DIZON, of legal age, Filipino, married to Norberta Torres, with residence trial postal address at Mabalacat, Pampanga, hereinafter referred to as the VENDOR.

ALFREDO G. GABORRO, likewise of legal age, Filipino, married to Pacita de Guzman, with residence trial postal address at 46, 7th St., Gilmore Avenue, Quezon City, hereinafter referred to as the VENDEE,

W I T N E S S E T H: That —

WHEREAS, the VENDOR is the registered owner of three (3) parcels of land covered by Transfer Certificate of Title No. 15679 of the land records of Pampanga. situated in the Municipality of Mabalacat, Province of Pampanga, trial more particularly described trial bounded as follows:

1. A parcel of land (Lot No. 188 of the Cadastral Survey of Mabalacat), with the improvements thereon, situated in the Municipality of Mabalacat, Bounded on the NE by Lot No 187: on the SE., by Lots Nos. 183, 189, 191 trial 192; on the SW by Lot No. 192 trial on the NW by the unimproved provincial road to Magalang. Containing an area of TWO HUNDRED AND TWENTY ONE THOUSAND ONE HUNDRED SEVENTY TWO SQUARE METERS (221,172), more or less.

2. A parcel of land (Lot No. 193 of the Cadastral Survey of Mabalacat), with the improvements thereon, situated in the Municipality of Mabalacat. Bounded on the NE., by a road trial Lots Nos. 569,570 trial 571; on the SE., by Lot No. 571 trial the unimproved road to Magalang, on the SW by a road; trial on the NE., by a road trial the Sapang Pritil Containing an area of NINE HUNDRED SEVENTY EIGHT THOUSAND SEVEN HUNDRED AND SEVENTEEN SQUARE METERS (978,717), more or less.

3. A parcel of land (Lot No. 568 of the Cadastral Survey of Mabalacat), with the improvements thereon, situated in the Municipality of Mabalacat. Bounded on the NE., by Lot No. 570, on the SE SW trial NW by roads. Containing an area of ONE HUNDRED FIVE THOUSAND NINE HUNDRED AND TWENTY ONE SQUARE METERS (105,921), more or less,

WHEREAS, the above-described properties are presently mortgaged (first mortgage) to the Development Bank of the Philippines (,formerly Rehabilitation Finance Corporation) to secure the payment of a loan, plus interest, of THIRTY EIGHT THOUSAND PESOS ONLY (P38,000.00), Philippine currency, as evidenced by a deed of mortgage for- P... dated ... which deed was ratified trial acknowledged before Notary Public of Manila, Mr. ... as Doc. No. Page No. Reg. No. Series of 196 ... ;

WHEREAS, the aforesaid properties are likewise mortgage (second mortgage) to the Philippine National Bank to secure the payment of a loan of NINETY THREE THOUSAND EIGHT HUNDRED THIRTY ONE PESOS & 91/100 (P93,831.91), Philippine Currency, plus interest up to August 13, 1957, as evidenced by deed of Mortgage for P............. dated................... which deed was ratified trial acknowledged before Notary Public of Manila, Mr, I . I as Doc. No............ Page No.......... Reg. No. Series of 196........... ; WHEREAS, the VENDOR, has offered to sell trial the VENDEE is willing to purchase the above-described properties for ONE HUNDRED THIRTY ONE THOUSAND EIGHT HUNDRED THIRTY ONE PESOS & 91 /100 (P131,831.91), Philippine Currency, under the terms trial conditions herein below set forth;

document.doc - 57 -

NOW, THEREFORE, for- trial in consideration of the above premises trial the amount of ONE HUNDRED THIRTY ONE THOUSAND EIGHT HUNDRED THIRTY ONE PESOS & 91/100 (P131,831.91), Philippine Currency, in hand paid in cash by the VENDEE unto the VENDOR, receipt whereof is hereby acknowledged by the VENDOR to his entire trial full satisfaction, trial the assumption by the VENDEE of the entire mortgage indebtedness, both with the Development Bank of the Philippines trial the Philippine National Bank above mentioned, the VENDOR does by these presents, sell, transfer trial convey, as he had sold, transferred, trial conveyed, by way of absolute sale, perpetually trial forever, unto the VENDEE, his heirs, successors trial assigns. above-described properties, with all the improvements thereon, free from all liens trial encumbrances of whatever nature. except the pre- existing mortgage obligations with the Development Bank of the Philippines trial the Philippine National Bank aforementioned. The VENDOR does hereby warrant title, ownership trial possession over the properties herein sold trial conveyed, trial binds himself to defend the same from any trial all claimants.

That the VENDEE, does by these presents, assume as he has assumed, under the same terms trial conditions of the mortgage contracts dated ... and ... of the mortgage indebtedness of the VENDOR in favor of the Development Bank of the Philippines trial the Philippine National Bank, respectively, as if the aforesaid documents were personally executed by the VENDEE trial states trial reiterates all the terms trial conditions stipulated in said both documents, making them to all intent trial purposes, parts hereof by reference.

IN WITNESS WHEREOF, the VENDOR and the VENDEE together with their instrumental witnesses, have signed this deed of the place, date, month trial year first above written.

(Sgd.) JOSE P. DIZON (Sgd.) ALFREDO G. GABORRO

Vendor Vendee

Signed in the Presence of:

(Sgd.) (Illegible) (Sgd.) (Illegible)

(Acknowledgment Omitted)

The second contract executed the same day, October 6, 1959 is called Option to Purchase Real Estate, trial is in the following wise trial manner:

OPTION TO PURCHASE REAL ESTATE


That 1, ALFREDO G. GABORRO, of legal age, Filipino, married to Pacita de Guzman, with residence trial postal address at 46, 7th St., Gilmore Ave., Quezon City, for- valuable consideration, do hereby give to JOSE P. DIZON, of legal age, Filipino, married to Norberta Torres, resident of Mabalacat, Pampanga, his heirs, successors and assigns, the option of repurchasing the following described properties:

TRANSFER CERTIFICATE OF TITLE

NO. 15679, PROVINCE OF PAMPANGA

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1. A parcel of land (Lot No. 188 of Cadastral Survey of Mabalacat, Pampanga containing an area of (211,172) more or less.

2. A parcel of land (Lot No. 193 of the Cadastral Survey of Mabalacat, Pampanga), containing an area of (978,172) more or less.

3. A parcel of land (Lot No. 568 of the Cadastral Survey of Mabalacat, Pampanga containing an area of (105,921), more or less. which I acquired from the said Jose P. Dizon by purchase by virtue of that document entitled "Deed of Sale with Assumption of Mortgage" dated October 6, 1959, acknowledged by both of us before Notary Public of Manila GREGORIO SUMBILIO as DOC. No. 342, Page No. 70, Reg. No. VII Series of 1959.

Said option shall be valid trial effective within the period comprises from January, 1965 to December 31, 1970, inclusive, upon payment of the amount of ONE HUNDRED THIRTY ONE THOUSAND EIGHT HUNDRED THIRTY ONE PESOS & 91/100 (?131,831.91), Philippine Currency, plus an interest of eight per centum (8%) thereof, per annum. This is without prejudice at any time to the payment by Mr. Dizon of any partial amount to be applied to the principal obligation, without any way disturbing the possession and/or ownership of the above properties since only full payment can effect the necessary change.

In the event that Mr. Jose P. Dizon may be able to find a purchaser for- the foregoing properties on or the fifth year from the date the execution of this document, the GRANTEE, Mr. JOSE P. DIZON, may do so provided that the aggregate amount which was Paid to Development Bank of the Philippines trial to the Philippine National Bank together with the interests thereon at the rate of 8% shall be refunded to the undersigned.

Furthermore, in case Mr. Jose P. Dizon shall be able to find a purchaser for- the said properties, it shall be his duty to first notify the undersigned of the contemplated sale, naming the price trial the purchaser therefor, trial awarding the first preference in the sale hereof to the undersigned.

IN WITNESS WHEREOF, I have hereunto signed these presents at the City of Manila, on this 6th day of October, 1959.

(Sgd.) ALFREDO G. GABORRO

CONFORME:

(Sgd.) JOSE P. DIZON

SIGNED IN THE PRESENCE OF:

(Acknowledgment Omit)

The sum of P131,813.91 which purports to be the consideration of the sale was not actually paid by Alfredo G. Gaborro to the petitioner. The said amount represents the aggregate debts of the petitioner with the Development Bank of the Philippines trial the Philippine National Bank.

After the execution of said contracts, Alfredo G. Gaborro took possession of the three parcels of land in question.

On October 7, 1959, Gaborro wrote the Development Bank of the Philippines a letter (Exh. J), as follows:

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Sir:

This is with reference to your mortgage lien of P38,000.00 more or less over the properties more particularly described in TCT No. 15679 of the land records of Pampanga in the name of Jose P. Dizon. In this connection, we have the honor to inform you that pursuant to a Deed of Sale with Assumption of Mortgage executed on October 6, 1959 by Jose P. Dizon in my favor, copy of which is hereto attached, the ownership of the same has been transferred to me subject of course to your conformity to the assumption of mortgage. As a consequence of the foregoing document, the obligation therefore of paying your goodselves the total amount of indebtedness has shifted to me

Considering that these agricultural properties have not been under cultivation for- quite a long time, I would therefore request that, on the premise that the assumption of mortgage would be agreeable to you, that I be allowed to pay the outstanding obligation, under the same terms trial conditions as embodied in the original contract of mortgage within ten (10) years to be divided in 10 equal annual amortizations. I am enclosing herewith a check in the amount of P3,609.95 representing 10% of the indebtedness of Jose P. Dizon to show my honest intention in assuming the mortgage obligation to you ...

The Board of Governors of the DBP, in its Resolution No. 7066 dated October 21, 1959 approved the offer of Gaborro but said Board required him to pay 20% of the purchase price as initial payment, (Exh. D) Accordingly, on July 11, 1960, the DBP trial Gaborro executed a conditional sale of the properties in consideration of the sum of P36,090.95 (Exh. C) payable 20% down trial the balance in 10 years in the yearly amortization plan at 8% per annum.

On January 7, 1960, Dizon assigned his right of redemption Lo Gaborro in an instrument (Exh. 9) entitled:

ASSIGNMENT OF RIGHT OF REDEMPTION

AND ASSUMPTION OF OBLIGATION


This instrument, made trial executed by trial between JOSE P. DIZON, married to Norberta P. Torres, Filipino, of legal age, with residence trial postal address at Mabalacat, Pampanga. hereinafter referred to as the ASSIGNOR trial ALFREDO G. GABORRO, married to Pacita de Guzman, likewise of legal age, Filipino, with residence trial postal address at 46, 7th Street, Gilmore Ave., Quezon City, hereinafter referred to as the ASSIGNEE,

W I T N E S S E T H :

WHEREAS, the Assignor is the owner trial mortgagor of three (3) parcels agricultural land together with all the improvements existing thereon trial more particularly described trial bounded as follows:

TRANSFER CERTIFICATE OF TITLE NO. 1567

PROVINCE OF PAMPANGA

1. A parcel of land (Lot No. 188 of the Cadastral Survey of Mabalacat), with the improvements thereon, situated in the Municipality of Mabalacat. Bounded on the NE by Lot No. 187: on the SE. by Lots Nos. 183, 189, 191 trial 192; on the SW. by Lot No. 192;

document.doc - 60 -

trial on the NW by the unimproved provincial road to Magalan. Containing an area of two hundred twenty-one thousand one hundred trial seventy two square meters (221,172), more or less.

2. A parcel of land (Lot No. 193 of the Cadastral Survey of Mabalacat), with the improvements thereon, situated in the Municipality of Mabalacat. Bounded on the NE. by a road trial Lots Nos. 569, 570 trial 571; on the SE. by Lot No. 571 trial the unimproved road to Magalan-, on the SW. by a road; trial on the NW by a road trial the Sapang Pritil Containing an area of nine hundred seventy eight thousand seven hundred and seven hundred square meters (978,717), more or less.

3. A parcel of Land (Lot No. 568 of the Cadastral Survey of Mabalacat), with the improvements thereon, situated in the Municipality of Mabalacat, Bounded on the NE. by Lot No. 570; and on the SE., SW. and NW. by roads. Containing an area of one hundred five thousand nine hundred and twenty-one square meters (105,921), more or less.

WHEREAS, the above described properties were mortgaged with the Rehabilitation Finance Corporation, now Development Bank of the Philippines, which mortgage has been foreclosed on May 26, 1959;

AND WHEREAS, the herein Assignor has still the right to redeem the said properties from the said Development Bank of the Philippines within a period of one (1) year counted from the date of foreclosure of the said mortgage.

NOW, THEREFORE, for ......................................... trial other valuable considerations, receipt whereof is hereby acknowledged by the Assignor from the Assignee, The herein Assignor does hereby transfer trial assign to the herein Assignee, his heirs, successors trial assigns the aforesaid right to redeem the aforementioned properties above described.

That with this document the herein Assignor relinquishes any and all rights to the said properties including the improvements existing thereon.

That the Assignee, by these presents, hereby assumes the obligation in favor of the d Development Bank of the Philippines, as Paying whatever legal indebtedness the Assignor has with the d B in connection with the transaction regarding the hove mentioned Properties subject to the file and conditions that the said Bank may require and further recognizes the second mortgage in favor Of the Philippine National Bank.

IN WITNESS WHEREOF, the parties have hereunto set their hands in the City of Manila, Philippines this --------- day of - - - - - -1959.

(Sgd-) JOSE P. DIZON (Sgd.) ALFREDO G. GABORRO

Assignor (Assignee)

(Acknowledgment Omitted)

After the execution of the conditional e to him Gaborro made several payments to the DBP and PNB. He introduced improvements, cultivated the kinds raised sugarcane and other crops and appropriated the produce to himself. He will paid the land taxes thereon.

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On July 5, 1961, Jose P. Dizon through his lawyer, Atty. Leonardo Abola, wrote a letter to Gaborro informing him that he is formally offering reimburse Gaborro Of what he paid to the banks but without, however, tendering any cash, and demanding an accounting of the income and of the pro contending that the transaction they entered into was one of antichresis. Gaborro did not accede to the demands of the petitioner, whereupon, on JULY 30, 1962, Jose P. Dizon instituted a complaint in the Court of First Instance of Pampanga, Gaborro, alleging that the documents Deed of Sale With Assumption of Mortgage and the Option to Purchase Real Estate did not express the true intention and agreement bet. between the parties. Petitioner Dizon, as Plaintiff below, contended that the two deeds constitute in fact a single transaction that their real agreement was not an absolute e of the d of land but merely an equitable mortgage or conveyance by way of security for the reimbursement or refund by Dizon to Gaborro of any and all sums which the latter may have paid on account of the mortgage debts in favor of the DBP and the PNB. Plaintiff prayed that defendant Gaborro be ordered to accept plaintiff's offer to reimburse him of what he paid to the banks; to surrender the possession of the lands to plaintiff; to make an accounting of all the fruits, produce, harvest and other income which he had received from the three (3) parcels of land; and to pay the plaintiff for the loss of two barns and for damages.

In its answer, the DBP specifically denied the material averments of the complaint and stated that on October 6, 1959, the plaintiff Dizon was no longer the owner of the land in question because the DBP acquired them at the extrajudicial foreclosure sale held on May 26, 1959, and that the only right which plaintiff possessed was a mere right to redeem the lands under Act 3135 as amended.

Defendant Alfredo G. Gaborro also answer, denying the material averments of the complaint, stating that the "Deed of Sale with Assumption of Mortgage" expresses the true agreement of the parties "fully, truthfully and religiously" but the Option to Purchase Real Estate" does not express the true intention of the parties because it was made only to protect the reputation of the plaintiff among his townmates, and even in the supposition that said option is valid, the action is premature. He also filed a counterclaim for damages, which plaintiff denied.

The issues having been joined, a pre-trial was held and the following stipulation of facts admitted by the parties was approved by the Court in the following order dated February 22, 1963:

O R D E R

At today's initial trial the following were present: Mr. Leonardo Abola, for the plaintiff; Mr. Carlos Antiporda, for the defendant Alfredo Gaborro; and Mr. Virgillo Fugoso, for the Development Bank of the Philippines:

The parties brave stipulated on the following facts:

1. That Annex A attached to the complaint is marked Exhibit A- Stipulation. The parties have admitted the due execution, authenticity and genuineness of said Exhibit A-Stipulation. This fact has been admitted by all the three parties.

2. That the defendant Gaborro executed Annex B, which is marked Exhibit B-Stipulation. This fact has been admitted only between plaintiff and defendant Gaborro.

3. That the three parcels of land referred to in paragraph 3 of the complaint, on or before October 6, 1959, were subject to a first mortgage lien in favor of the Development Bank of the Philippines, formerly Rehabilitation Finance Corporation, to secure payment of a loan obtained by the plaintiff Jose P. Dizon in the original sum of P38,000.00 plus interest, which has been assumed by defendant Gaborro by virtue of a document, Exhibit A-Stipulation, and also subject to a second mortgage lien in favor of the Philippine National Bank to secure the payment of a loan in the sum of P93,831.91 plus interest up to August 30, 1951, which mortgage liens were

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duly annotated on TCT 15679. This fact has been admitted by the plaintiff and defendant Gaborro.

4. In respect to the foreclosure of the first mortgage referred to above, it was admit that the same was foreclosed on May 26, 1959, the second mortgage has not been admitted nor foreclosed.

5. That the Development Bank of the Philippines admits that the first mortgage referred to above was foreclosed on May 26, 1959 under the provision,,; of Public Act No- 3135, as amended.

6. That subsequently the Development Bank and the defendant Gaborro executed a document entitled Conditional Sale over the same parcels of land referred to in paragraph 3 of the complaint, and copy thereof will be furnished by the Development Bank of the Philippines and marked Exhibit C-Stipulation.

7. That on or before October 6, 1960, TCT No. 15679 of the Register of D of Pampanga in the name of Jose P. Dizon covering the three parcels of land referred to in the complaint was cancelled and in lieu thereof TCT NO. 24292 of the Register of Deeds of Pampanga was issued in the name of the Development Bank of the Philippines. This fact has been admitted by all the parties.

8. That after the execution of the deed of conditional sale, certain payments were made by the defendant Gaborro to the Development Bank, the exact amount to be determined later and receipts of payments to be also exhibited later. This fact has been admitted by all the three parties.

9. That since October 6, 1959, the defendant Gaborro has made several payments to the PNB in the amounts appearing on the receipts which will be shown later, such payments being made on account of the sum of P38,831.91. The payment was assumed by said - defendant Gaborro. This fact has been admitted by plaintiff and defendant Gaborro only.

10. That since the execution of Exhibits A and B-Stipulation, it,, defendant Gaborro has been and still is in the actual possession f the three parcels of land in question and he is actually cultivating the same and that the land taxes thereon have been paid by said defendant Gaborro, the amounts of said taxes appearing on the official receipts to be shown later. This fact has been admitted by plaintiff and defendant Gaborro only.

11. That since defendant Gaborro took possession of the lands in question, he has been appropriating all the fruits produced and income of said lands without giving to the plaintiff any share hereof. This fact has been admitted by plaintiff and defendant Gaborro only.

Let a copy of this order be served upon the plaintiff, defendant Gaborro and the Development Bank of the Philippines with the understanding that, if, within fifteen (15) days, none of the parties questions the correctness of The facts set forth above. this stipulation of facts shall be conclusive upon the parties interested in this case.

Set the trial on the controversial facts on April 18, 1963 at 13:00 clock in the morning.

Paragraphs 3 and 10 of the above quoted order were deleted in an order dated July 26, 1963.

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The records disclose that during the pendency of the case in the trial court, motions were filed by the plaintiff for the appointment of a receiver of the properties but all were denied. plaintiff also reiterated the same motion before the appellate court which, however, dismissed the same, reserving to him the right to file in the trial court. Plaintiff did file but with the same result. certiorari proceedings were resorted to in the Court of Appeals in CA-G.R. No. SP-01403 entitled "Jose P. Dizon vs. Hon. Felipe Buencamino, et al." which the respondent court denied.

After trial the court held that the true agreement between Jose P. Dizon, the plaintiff therein, and the defendant Alfredo G. Gaborro is that the defendant would assume and pay the indebtedness of the plaintiff to the Development Bank of the Philippines and the Philippine National Bank, and in consideration therefor, the defendant was given the possession and enjoyment of the properties in question until the plaintiff shall have reimbursed to defendant fully the amount of P131,831.91 plus 8% interest per annum.

Accordingly, on March 14, 1970, the lower court rendered judgment, the dispositive part of which reads:

IN VIEW OF THE FOREGOING, the documents entitled 'Deed of Sale with Assumption of Mortgage'(Exhibit A-Stipulation) and 'Option to Purchase Real Estate' (Exhibit B-Stipulation) are hereby reformed to the extent indicated above. However, since this action was filed before the period allowed the plaintiff to redeem his property, the prematurity of this action aside from not being principally alleged in the complaint, deters this Court from ordering further reliefs and remedies. The counterclaim of the defendant is dismissed.

The plaintiff's motion for new trial and for reconsideration and motion for admission of supplemental complaint having been denied for lack of merit, on June 6, 1970, plaintiff appealed to the Court of Appeals, which. however, affirmed the decision with the modification that the plaintiff-appellant has the right to refund or reimburse the defendant-appellee the sum of P131,831.91 with interest at 8% per annum from October 6, 1959 until full payment, said right to be exercised within one (1) year from the date the judgment becomes final, with the understanding that, if he fails to do so within the said period, then he is deemed to have lost his right over the lands forever.

Petitioner's motion for reconsideration and/or rehearing having been denied by the Court of Appeals, hence the present petition for review on certiorari. The petitioner assigns the following errors, to wit:

I. The Court of Appeals, like the lower court, erred in not holding that upon established facts and undisputed documentary evidence, the deed of sale with assumption of mortgage (Exhibit A-Stipulation) constitutes an equitable mortgage or conveyance to secure petitioner's obligation to reimburse or refund to defendant Alfredo Gaborro any and all sums to the extent of P131,831.91, paid by said defendant in total or partial satisfaction of petitioner's mortgage debts to the DBP and the PNB. In this connection, the Court of Appeals erred:

(A) In not finding that the petitioner was the lawful owner of the lands in question:

(B) In not finding that the deed of sale in question is not a real and unconditional sale; and

(C) In not holding that the option to purchase real estate (Exhibit B-Stipulation is conclusive evidence that the transaction in question is in fact an equitable mortgage.

II. The Court of Appeals also erred in finding that the instrument entitled 'Assignment of Right of Redemption and Assumption of Obligation' is conclusive evidence that the real transaction Evidenced by the 'Deed of Sale with Assumption

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of Mortgage' is not an equitable mortgage. In this connection the said court also erred or at least committed a grave abuse of discretion:

(A) In not finding that the said deed of assignment is in fact a mere reiteration of the terms and condition of the deed of sale;

(B) In finding that the price or consideration of The aforesaid assignment. of right of redemption consisted of 300 cavans of palay delivered by Mrs. Gaborro to the petitioner; and

(C) In finding that defendant Gaborro purchased the lands in question by virtue of the aforementioned deed of assignment.

III. The, Court of Appeals, like the trial court, also erred in not finding that the estate of Alfredo G. Gaborro is under obligation to render an accounting of all the produce, fruits and other income of the lands in question from October 6, 1959, and to reconvey the said lands to the herein petitioner. In to connection, the said court also erred:

(A) In not holding that as a mortgagee in possession the Gaborro estate has the obligation to either render an accounting of the produce or fruits of the lands, or to pay rentals for the occupation of said lands;

(B) In not finding that the Gaborro estate has the obligations to reconvey the lands in controversy to the herein petitioner, upon payment of the balance due from him after deducting either the net value of the produce or fruits of the Said lands or the rentals thereof,

(C) In not finding that further reliefs or remedies may be granted the herein petitioner; and

(D) In not ordering the admission of herein petitioners 'Supplemental Complaint' dated April 30, 1970.

IV. The Court of Appeals finally erred in not reversing the decision of the trial court, and in not rendering judgment declaring that the deed of sale with assumption of mortgage (Exhibit A Stipulation) is in fact an equitable mortgage; and in not ordering the Gaborro estate either to render an accounting of all the produce or fruits of the lands in question or to pay rentals for the occupation thereof, from October 6, 1959; and in not ordering the estate of Alfredo G. Gaborro to reconvey, transfer and assign unto the petitioner the aforementioned lands.

The two instruments sought to be reformed in this case ap pear to stipulate rights and obligations between the parties thereto Pertaining to and involving parcels of land that had already beer foreclosed and sold extrajudicially, and purchased by the mortgage creditor, a degree party. It becomes, therefore, necessary to determine the legality of said rights and obligation arising from the foreclosure and e pro. proceedings only between the two contracting parties to the instruments executed between them but also in the so far a agreement affects the rights of the degree panty, the purchase Bank.

Act 3135, Section 6 as amended by Act 4118, under which the Properties were extrajudicially foreclosed and sold, provides that:

Sec. 6. In all cases in which an extrajudicial rule is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of e debtor, or any person having a lien on the

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property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term or one year from and after the date of the sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not consistent with the provisions of this Act.

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 v. Verzosa, 26 Phil. 86; Velasco v. Rosenberg's Inc., 32 Phil. 72; Pabico v. Pauco 43 Phil. 572; Power v. PNB, 54 Phil. 54; Gorospe v. Gochangco L-12735, Oct. 30, 1959).

A judgment debtor, whose property is levied on execution, may transfer his right of redemption to any one whom he may desire. The right to redeem land sold under execution within 12 months is a property right and may be sold voluntarily by its owner and may also be attached and sold under execution (Magno v. Viola and Sotto, 61 Phil. 80).

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 only has an inchoate right in 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 allowed for redemption. (Riosa v. Verzosa. 26 Phil, 86; 89; Gonzales v. Calimbas, 51 Phil. 355.)

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.

In legal consequence thereby, respondent Gaborro as transferee of these certain limited rights or interests under Exh. A-Stipulation, cannot grant to petitioner Dizon more that said rights, such ac the option Co purchase the lands as stipulated in the document called Option to Purchase Real Estate (Exhibit B-Stipulation), This is necessarily so for the reason that respondent Gaborro did not purchase or acquire the full title and ownership of the properties by virtue of the Deed of Sale With Assumption of Mortgage (Exh. A Stipulation), earlier executed between them which We have ruled out as an absolute sale. The only legal effect of this Option Deed is the grant to petitioner the right to recover the properties upon reimbursing respondent Gaborro of the total sums of money that the latter may have paid to DBP and PNB on account of the mortgage debts, the said right to be exercised within the stipulated 5 years period.

In the light of the foreclosure proceedings and sale of the properties, a legal point of primary importance here, as well as other relevant facts and circumstances, We agree with the findings of the trial and appellate courts that the true intention of the parties is that respondent Gaborro would assume and pay the indebtedness of petitioner Dizon to DBP and PNB, and in consideration therefor, respondent Gaborro

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was given the possession, the enjoyment and use of the lands until petitioner can reimburse fully the respondent the amounts paid by the latter to DBP and PNB, to accomplish the following ends: (a) payment of the bank obligations; (b) make the lands productive for the benefit of the possessor, respondent Gaborro, (c) assure the return of the land to the original owner, petitioner Dizon, thus rendering equity and fairness to all parties concerned.

In view of all these considerations, the law and Jurisprudence, and the facts established. We find that the agreement between petitioner Dizon and respondent Gaborro is one of those inanimate contracts under Art. 1307 of the New Civil Code whereby petitioner and respondent agreed "to give and to do" certain rights and obligations respecting the lands and the mortgage debts of petitioner which would be acceptable to the bank. but partaking of the nature of the antichresis insofar as the principal parties, petitioner Dizon and respondent Gaborro, are concerned.

Mistake is a ground for the reformation of an instrument which there having been a meeting of the minds of The parties o a contract, their true intention is not expressed in the instrument purporting to embody the agreement, and one of the parries may ask for such reformation to the end that such true intention may be expressed. (Art. 1359, New Civil code). When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed. (Art. 1361, New Civil Code.) It was a mistake for the parties to execute the Deed of Sale With Assumption of Mortgage and the Option to Purchase Real Estate and stand on the literal meaning of the file and stipulations used therein.

The instruments must, therefore, be reformed in accordance with the intention and legal rights and obligations of the parties — the petitioner, the respondent and the Banks. We agree with the reformation decreed by the trial and appellate courts, but in the sense that petitioner Jose P. Dizon has the right to reacquire the three parcels of land within the one-year period indicated below by refunding or reimbursing to respondent Alfredo G. Gaborro or the Judicial Administratrix of his Estate whatever amount the latter has actually paid on account of the principal only, of the loans of Dizon with the DBP and PNB, excluding the interests and land taxes that may have been paid or may have accrued, on duly certified financial statements issued by the said banks.

On the issue of the accounting of the fruits, harvests and other income received from the three parcels of land from October 6, 1959 up to the present, prayed and demanded by Dizon of Gaborro or the Judicial Administratrix of the latter's estate, We hold that in fairness and equity and in the interests of justice that since We have ruled out the obligation of petitioner Dizon to reimburse respondent Gaborro of any interests and land taxes that have accrued or been paid by the latter on the loans of Dizon with DBP and PNB, petitioner Dizon in turn is not entitled to an accounting of the fruits, harvests and other income received by respondent Gaborro from the lands, for certainly, petitioner cannot have both benefits and the two may be said to offset each other.

By virtue of the Option to Purchase Real Estate (Exh. B Stipulation) which on its face granted Dizon the option to purchase the properties which must be exercise within the period from January, 1960 to December 31, 1965 but which We held to be simply the grant of the right to petitioner Dizon to recover his properties within the said period, although already expired by reasons and circumstances beyond his control, petitioner is entitled to a reconveyance of the properties within a reasonable period The period of one year from the date of the finality of this judgment as laid down by the Court of Appeals for the exercise of such right by petitioner Dizon appears fair and reasonable and We approve the same.

Since We are not informed of the status of Dizon's loan of P93,831.91 with the Philippine National Bank which appears to be on a subsisting basis, it is proper to indicate here how petitioner Dizon may exercise the right to a reconveyance of the properties as herein affirmed, as follows:

(a) Dizon is granted the right to a reconveyance of the properties by reimbursing Gaborro (or his estate) whatever amounts) the latter has actually paid on account of the principal only, of Dizon's loans of P38,000.00 and P93,831.91 which the DBP and PNB, respectively, exclusive of the interests that may have accrued thereon or

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may have been paid by Gaborro, on the basis of duly certified statements issued by said banks;

(b) Any outstanding balance due on Dizon's original principal loan of P38,000.00 with the Development Bank of the Philippines assumed by Gaborro and on Dizon's original principal loan of 93,831.91 with the PNB shag be deducted from the above-fixed reconveyance price payable to Gaborro, in order to enable Dizon to pay off the said mortgage loans directly to the said banks, in accordance with file mutually agreed upon with them by Dizon;

(c) In other words, the maximum reconveyance price that Dizon is obligated to pay is the total sum of ?131,831.91 (the sum total of the principals of his two original loans with the DBP and PNB), and should the amounts due to the said banks exceed this total of P131,831.91 (because of delinquent interests and other charges), nothing shall be due Gaborro by way of reimbursement and Dizon will thereupon step into the shoes of Gaborro as owner-mortgagor of the properties and directly arrange with the banks for the settlement of the amounts still due and payable to them, subject to the right of Dizon to recover such amounts in excess of P131,831.91 from Gaborro by writ of execution in this case; and

(d) As already stated, Dizon is not entitled to an accounting of the fruits, harvests and other income received by Gaborro from the land while Gaborro in turn is not entitled to the payment of any interests on any amounts paid by him on account of the principal loans to the banks nor reimbursement of any interests paid by him to the banks.

WHEREFORE, the judgment appealed from is hereby affirmed with the modification that petitioner Dizon is granted the right within one year from finality of this decision to a reconveyance of the properties in litigation upon payment and reimbursement to respondent estate of o G. Gaborro of the amounts actually paid by Gaborro or his estate on account of the principal only of Dizon's original loans with the Development Bank of the Philippines and Philippine National Bank in and up to the total amount of P131,831.91, under the terms and conditions set forth in the preceding paragraph with subparagraphs (a) to (d), which are hereby incorporated by reference as an integral part of this judgment, and upon the exercise of such right, respondent estate shall forthwith execute the corresponding deed of reconveyance in favor of petitioner Dizon and deliver possession of the properties to him. Without pronouncement as to costs.

Teehankee (Chairman), Makasiar, Muñoz Palma and Fernandez, JJ., concur.


Manila

EN BANC

G.R. No. L-25729 November 24, 1926

THE BELGIAN CATHOLIC MISSIONARIES, INC., plaintiff-appellee, vs.MAGALLANES PRESS, INC., ET AL., defendants. JOSE MARIA MEMIJE, appellant.

Antonio M. Opisso, Romualdez Hermanos and Luciano de la Rosa for appellant.Cavanna, Aboitiz & Agan for appellee.

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VILLA-REAL, J.:

This is an appeal by Jose Marie Memije from a judgment of the Court of First Instance of Manila the dispositive part of which is as follows:

For all the foregoing, the court is of the opinion that the plaintiff has a right to the relief prayed for in its complaint. Wherefore, judgment is rendered declaring that Exhibits C and D, that is, the mortgage deeds in question in this proceeding, in so far as they prejudice the rights of the plaintiff, are null and void; that the preliminary injunction issued in this case against the defendant Jose Ma. Memije is final and absolute; and that the plaintiff recover the amount of the fire insurance policies of the defendant "Magallanes Press, Inc.," which, or the representatives of which, is hereby ordered to endorse said insurance policies to the plaintiff, with the costs of the proceedings against the defendants, with the exception of J.P. Heilbronn Co., Inc. It is so ordered.

In support of his appeal, the appellant assigns the following supposed errors as committed by the lower court in its judgment, to wit: (1) The court erred in overruling the demurrer filed by this defendant to the complaint in this action; (2) the trial court erred in giving the plaintiff corporation possession of the property mortgaged to this appellant without following the necessary proceedings or complying with the provisions of the law; (3) the trial court erred in issuing the writ of preliminary injunction against the appellant and E. E. Elser, restraining the former from receiving from the latter, or the latter from delivering to the former, the amount of the insurance policies covering the property mortgaged to the appellant, which was damaged by the fire that occurred in the establishment of the Magallanes Press, Inc; (4) the trial court erred in giving to the unnecessary intervention of the Magallanes Press, Inc., in the execution of the deed Exhibit C an interpretation which is neither based upon law nor upon the contract; (5) the trial court erred in ordering the suspension of the foreclosure of the appellant's mortgage on the property of the Magallanes Press, Inc.; (6) the trial court erred, under the facts proven in this case, in applying article 1297 of the Civil Code; (7) the trial court erred in finding in its decision that the defendant Jose Ma. Memije should not have executed the documents Exhibits C and D without taking into account the rights of the plaintiff corporation, The Belgian Catholic Missionaries, Inc; (8) the trial court erred in declaring Exhibits C and D null and void in so far as they prejudice the rights of the plaintiff, over whose credit that of the herein appellant is preferential; in declaring the writ of preliminary injunction issued against the defendant Jose Ma. Memije final and absolute; in giving judgment for the plaintiff to recover the amount of the fire insurance policies of the defendant the Magallanes Press, Inc; and (9) the trial court erred in not making any pronouncement as to the counterclaim and cross-complaint of the defendant Jose Ma. Memije in this action, nor taking the same into consideration and rendering judgment thereon in favor of said defendant.

The oral evidence has not been forwarded to this court so that we are compelled to base our opinion exclusively upon the documentary evidence and the facts found and stated by the trial court in its judgment.

It appears that on December 1, 1921, the Magallanes Press, through its manager H. Camena, executed a promissory note in favor of J. P. Heilbronn & Co., Inc., for the sum of P3,472.92, with interest at 10 per cent per annum, payable at the rate of P250 a month, plus the interest earned on the unpaid balance, until the whole amount of the indebtedness shall have been paid, the first payment to be made on January 1, 1922, with the condition that upon the failure to pay any monthly installment or the interest earned on the unpaid balance, the whole amount of the indebtedness shall become due, and the maker shall pay the payee an additional sum equivalent to 15 per cent of the total balance, for attorney's fee and expenses of collection, forfeiting all right of exemption.

On the same date, December 1, 1921, the said Magallanes Press, through its managers H. Camena, also executed a promissory note in favor of J. P. Heilbronn & Co., Inc., for the sum of P10,715.77, with interest at 12 per cent per annum, payable at the rate of P500 a month, together with the interest earned on the unpaid balance, until the whole amount of the indebtedness shall have been

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paid, the first payment to be made on January 1, 1922, with the condition that upon the failure to pay any monthly installment or the interest earned on the unpaid balance, the whole amount of the indebtedness shall become due, and the maker shall pay the payee an additional sum equal to 15 per cent of the total balance for attorney's fee and expenses of collection, forfeiting all right of exemption.

To secure the payment of said promissory notes which amounted to a total of P14,188.69, H. Camena, as general manager of the Magallanes Press, executed a chattel mortgage on all of the printing machinery and its accessories, belonging to the said Magallanes Press, in favor of J. P. Heilbronn & Co., Inc.

One June 19, 1922, the Magallanes Press Co., Inc., successor to the Magallanes Press, with all the latter's rights and obligations, through its duly authorized president, E. F. Clemente, executed a chattel mortgage on the same printing machinery ad its accessories in favor of the Belgian Catholic Missionaries Co., Inc., which the Magallanes Press had mortgaged to J. P. Heilbronn & Co., Inc., to secure the payment of a loan of P30,500, with interest at 12 per cent per annum, which the said Magallanes Press & Co., Inc., had obtained from the Belgian Catholic Missionaries Co., Inc., the duration of the mortgage loan being one year from the execution of the mortgage deed.

In December, 1922 the appellant Jose Ma. Memije made a loan in the sum of P2,000 to E. F. Clemente which was paid on account of the indebtedness of the Magallanes Press to J. P. Heilbronn & co., Inc., together with the sum of P1,641 which A. F. Mendoza owed said E. F. Clemente.

On the occasion of the issuance of the writ of attachment in civil cause No. 23818 of the Court of First Instance of Manila, entitled Jose Ma. Cavanna vs. the Magallanes Press Co., Inc., the defendant Jose Ma. Memije, on February 21, 1923, filed an intervention in said case.

All the promissory note executed by the Magallanes Press in favor of J. P. Heilbronn & Co., Inc., having been overdue for non-payment of the installments as well as the respective chattel mortgage, the said J. P. Heilbronn & Co., Inc., transferred all its mortgage credit against the Magallanes Press to Jose Ma. Memije in consideration of the sum of P8,280.90, the balance of said mortgage credit.

On March 14, 1923, Enrique Clemente, as manager of the Megallane Press Co., Inc., executed a deed in favor of Jose Ma. Memije by virtue of which the chattel mortgage which was given by the Magallanes Press in favor of J. P. Heilbronn & Co., Inc., and transferred by the latter to Jose Ma. Memije, was made to cover an additional loan of P5,895.79, which included the sum of P2,000 which said Jose Ma. Memije had advanced said Enrique Clemente in December, 1922.

On April 21, 1923, a fire occurred in the building where the pointing machinery, its accessories and other personal property of the Magallanes Press Co., Inc., were located and which were covered by said chattel mortgages. Said property was insured, and the insurance policies covering it were endorsed to J. P. Heilbronn & Co., Inc., upon the execution of the chattel mortgage thereon in favor of the latter. When J. P. Heilbronn & Co., Inc., transferred its mortgage credit to Jose Ma. Memije it, in turn, endorsed said insurance policies to him. The insurance companies were disposed to pay the respective insurance policies, which amounted to P7,686.45, but due to the issuance of the above-mentioned writ of preliminary injunction, payment could not be made.

Due to the filing of the complaint in the present case on May 9, 1923, and the issuance of the writ of preliminary injunction on May 10th of the same year, Jose Ma. Memije was unable to collect the amount of the insurance policies, and when he was summoned under the complaint on May 14, 1923, he made demand on the Magallanes Press Co., Inc., for the payment of his mortgage credit on the same date the manager of said corporation, E. F. Clemente, permitted the secretary of the said corporation to place the property covered by the mortgage into the hands of the said Jose Ma. Memije in order that the same might be sold, but the sale could not be consummated due to the issuance of the said writ of preliminary injunction.

The first question raised by the defendant and appellant has reference to the overruling of the demurrer filed by him to complaint.

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One of the grounds of said demurrer was that the complaint in this case did not allege facts sufficient to constitute a cause of action against the said defendant, in that, notwithstanding the fact that the said complaint was instituted to annul the document of transfer of the mortgage credit Exhibit C, it was not alleged in the said complaint that the defendant Jose Ma. Memije had any intention to defraud the interests of the plaintiff corporation, which was absolutely impossible due to the nature of the transaction and the preferential character of the mortgage credit of J. P. Heilbronn & Co., Inc.

As to this paragraph of the complaint, the plaintiff company having known of the existence of a chattel mortgage in favor of J. P. Heilbronn & Co., Inc., the latter, either as the first or as the second mortgage, had a perfect right to transfer its mortgage credit, without the knowledge or consent of any other mortgagee, inasmuch as whoever acquired it, would have exactly the same status as the transferor with the same rights and obligations. The fact, therefore, that the Magallanes Press Co., Inc., had consented to the transfer of the mortgage credit of J. P. Heilbronn & Co., Inc., to Jose Ma. Memije, does not constitute a fraud that an vitiate the said transfer, inasmuch as the order of preference of the mortgages has not been altered, and its allegations does not constitute a cause of action to annul the said transfer.

In regard to the allegation contained in the ninth paragraph of the complaint, it is very clear that the increase made by Jose Ma. Memije in the mortgage credit acquired by him from J.P. Heilbronn & Co., Inc., and the extension made by the Magallanes Press, Inc., of the mortgage to said additional credit without the knowledge or consent of the plaintiff company, as second mortgagee, prejudices the credit of the latter, inasmuch as the security for the payment of said credit was reduced as to it, and, therefore, constitute a fraud that vitiates the contract of extension of the mortgage evidence by the deed Exhibit D, rendering it void.lawphil.net

The facts allege in paragraph 9 of the complaint are sufficient to constitute a cause of action of nullity, and the lower court did nor err in overruling the demurrer filed by the defendant Jose Ma. Memije.

In regard to the second assignment of error, it appears that the defendant Jose Ma. Memije having attempted to foreclose the mortgage, by which the mortgage credit acquired by him from J. P. Heilbronn & Co., Inc., was secured, in order to recover not only the original credit but also the increase, the Belgian Catholic Missionaries Co., Inc., filed a complaint, with a petition for a writ of preliminary injunction against the sheriff, in whose hands the foreclosure of the mortgage was placed. The writ of preliminary injunction having been issued, upon the filing of a bond in the sum of P15,000, and there being no person more interested in the conservation and custody of the property covered by the mortgage than said plaintiff company, being the largest creditor, it applied and obtained from the court the possession of the same.

Contrary to the contention of the appellant, this case is not one of replevin but simply a proceeding instituted by the plaintiff for the deposit of the property in litigation, upon the filing of a bond, said plaintiff, acting as a receiver by authority of the court, being the person most interested in the conservation and care of the same (sec. 174, Act No. 190; 11 C. J., 726).

The lower court, therefore, did not err in authorizing the plaintiff company to take possession of the personal property in litigation upon the filing of a bond sufficient to secure the conservation or value thereof.

The third assignment of error raises the question as to the preference of right between the plaintiff company and the defendant over the mortgaged property and the amount of the insurance policies covering a part thereof which was destroyed by fire.

As we have seen in the statement of the pertinent facts necessary for the clear and accurate solution of the questions of law involved in the present appeal, the firm of J. P. Heilbronn & Co., Inc., had a mortgage credit against the Magallanes Press for the sum of P14,186.69, secured by a first chattel mortgage. The plaintiff company, the Belgian Catholic Missionaries Co., Inc., also had a mortgage credit for the amount of P30,500, secured by a second mortgage on the same personal property. After this second mortgage had been executed, the payment of the mortgage credit of J.P. Heilbronn & Co., Inc.,

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became due, which credit had been reduced to the sum of P8,280,90 through partial payments, and the herein defendant-appellant Jose Ma. Memije acquired said mortgage credit and increased it by P5,895.59 of which increase P2,000 was a previous loan.

There is no question but that J. P. Heilbronn & Co., Inc., at the time of the transfer of this mortgage rights to Jose Ma. Memije, had a preferential right over that of the Belgian Catholic Missionaries Co., Inc., for the remainder of the amount of the mortgage credit, that is, P8,280.90. The plaintiff company had a preferential right to the rest of the value of the mortgaged property after deducting the remaining mortgage credit of J. P. Heilbronn & Co., Inc.

The increase of P5,895.59 made by the defendant Jose Ma. Memije in favor of the Magallanes Press Co., Inc., and the extension of the mortgage thereto, are not only subordinate to the mortgage credit of the plaintiff company, being subsequent in time and in registration, but said increase in the security is also void. The increase of the mortgage security becomes a new mortgage in itself, inasmuch as the original mortgage did not contain any stipulation in regard to the increase of the mortgage credit, and even if it did, said increase would take effect only from the date of the increase. A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage (11 C. J., 448; 5 R. C. L., 420-421). In accordance with the provisions of section 5 of Act No. 1508, known as the Chattle Mortgage Law, the parties to the original deeds swore that the same was mortgaged "to secure the obligations specified therein and for no other purpose." Neither the increase in question, nor the extension of the mortgage to secure the payment of the same is specified in the deed, consequently said extension is void. "Where the statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contacted." (11 C. J., 448.)

Briefly, therefore, we have the following:

(a) That Jose Ma. Memije has a preferential right to the value of the chattels mortgage and the amount of the insurance policies up to the sum of P8,280.90;

(b) That the plaintiff corporation, the Belgian Catholic Missionaries Co., Inc., has a right to the remainder of the value of said chattels and the insurance policies up to the amount of P30,500, after deducting the preferential credit of Jose Ma. Memije;

(c) That as to the increase of P5,895.59, the right of the defendant Jose Ma. Memije is that of an ordinary creditor.

In regard to the damages claimed by the defendant in his counterclaim and which is the subject-matter of his remaining assignments of error, said defendant has a right to interest at 12 per cent on the P8,280.90 the amount of the mortgage credit acquired by him from J. P. Heilbronn & Co., Inc., from February 26, 1923, the date of the acquisition until fully paid.

For the foregoing reasons, the judgment appealed from is revoked and it is ordered the another be entered declaring all the mortgages overdue, and the mortgage credit of Jose Ma. Memije preferential over that of the Belgian Catholic Missionaries Co., Inc., up to the amount of P8,280.90, with interest at the rate of 12 per cent per annum from February 26, 1923, until fully paid; the mortgage credit of the Belgian Catholic Missionaries Co., Inc., for the sum of P30,500 with interest at the rate of 12 per cent per annum, from June 19, 1922, until fully paid, plus the sum of P3,000 for attorney's fees, over the additional credit of Jose Ma. Memije for P5,895.59; and ordering the foreclosure of the said mortgages by selling the mortgaged property at public auction, to the proceeds of which shall be added the amount of the insurance policies and the above-mentioned credits in the order of preference above established, without special pronouncement as to costs. So ordered.

Avanceña, C. J., Johnson, Street, Ostrand and Johns, JJ., concur.

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Cases-Chapters 1 to 5 - Pledge and Mortgage Antichresis and Chattel Mortgage

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Transcript of Cases-Chapters 1 to 5 - Pledge and Mortgage Antichresis and Chattel Mortgage