Civil Code Cases.jan16

8/8/2019 Civil Code Cases.jan16

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ROMAGO ELECTRIC CO., INC., Petitioner, vs . HONORABLE COURT

OF APPEALS, SOLEDAD C. CAC,JOEPHIL BIEN, RENATO

CUNANAN and DELFIN INCIONG, Respondents .

The CaseThis is a petition for review on certiorari under Rule 45 of the Rules of Court, seeking thereversal of the decision [1] of the Court of Appeals dated 31 July 1997 and its resolutiondated 16 September 1997 in CA-G.R. CV No.28608. The Court of Appeals affirmed thedecision [2] dated 29 June 1990 of the RegionalTrial Court (RTC), Branch 19, Cauayan, Isabela,in Civil Case No. 19-300 in favor of herein

private respondents for collection of a sum of money with damages.

The Facts

In 1982, the National Power Corporation (NPC)entered into an agreement with ROMAGOELECTRIC CO., INC. (ROMAGO), under Contract No. Sp80DLC-502, for the erection andinstallation of NPC's 69 KV 3-PhaseTransmission Lines from Santiago-Jones, Jones-Saguday and Cauayan-Roxas, Isabela, for anagreed consideration of P2,657,856.40.

Subsequently, on 07 June 1982, ROMAGOsubcontracted the project to BICC Construction,an unregistered loose partnership composed of Soledad Cac, Delfin Inciong, Joephil Bien andRenato Cunanan, for and in consideration of thesum of P1,614,387.99. Under the subcontractagreement, the following documents,

collectively termed therein as 'ContractDocuments, were incorporated into and made

part of the contract 'as though fully written outand set forth herein, to wit:

ARTICLE I

DOCUMENTS COMPRISING THE

CONTRACTThe following documents are herebyincorporated and made part of thisContract as though fully written outand set forth herein insofar as they arenot inconsistent with the terms thereof:

1. National Power Corporation'sSpecification No. Sp80DLc ' 502

2. Any and all plans, drawings, andschedules prepared by NationalPower Corporation.

3. SUB-CONTRACTOR'S proposaldated March 8, 1982.

The documents mentioned above shallcollectively be referred to as ContractDocuments.[3]chanroblesvirtuallawlibrary

Also in the aforementioned agreement, thesubcontractor's obligations are defined in its

Article II, to wit:SUB-CONTRACTOR shall, inaccordance with the provisions of thisContract and Contract Documents,fully and faithfully furnish all labor,tools, equipment and necessarymaterials (except NPC supplied) and

proceed to completely perform theErection and Installation of the 69 KV,3 Phases Transmission Lines

(Schedule II) under the 7 th Power Loan.

SUB-CONTRACTOR shallcommence the work starting March23, 1982 and shall complete the samewithin two hundred forty (240)calendar days plus any extension of

time duly granted by National Power Corporation under the provisions of the Contract Documents.

Except as otherwise provided for herein, all provisions of the NationalPower Corporation's Specifications

No. Sp80DLc-502, with reference toobligations, responsibilities of Contractor thereunder are hereby madeapplicable to the SUB-

CONTRACTOR under this Contract.[4]chanroblesvirtuallawlibrary

In the course of the construction, the NPCgranted ROMAGO a Contract Price Adjustment(CPA) amounting to P250,778.65.

Under the provision governing the CPA, asembodied in GP-08 [5] of the 'Plans andSpecifications' :

GP-08 CONTRACT PRICEADJUSTMENT

Adjustment of contract prices will bemade should any or both of thefollowing conditions occur asembodied in P.D. No. 454 as amended

by PD No. 459.

(a) If during the effectivity of thecontract, the cost of labor, materials,equipment rentals and supplies for construction should increase or

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decrease due to the direct acts of thePhilippine Government. The increaseof prices of gasoline and other fueloils, and of cement shall be consideredas direct acts of the PhilippineGovernment.

(b) If during the effectivity of the

contract, the costs of labor, equipmentrentals, construction materials andsupplies used in the project shouldcause the sum total of the prices of biditems to increase or decrease by morethan five percent (5%) compared withthe total contract price.

The increased amount in the contract price shall be determined byapplication of appropriate officialindices, complied and issued by theCentral Bank of the Philippines.

The additive or deductive adjustmentshall be added or deducted from theunit prices every six (6) months

beginning from the date of bidding.[6]chanroblesvirtuallawlibrary

When the project was completed, there appearedto be an outstanding balance due to BICCConstruction from ROMAGO, part of which

was the former's share in the CPA amounting to70% of the NPC-ROMAGO contract or P175,545.05.

Mrs. Soledad Cac, one of the owners of BICCConstruction, wrote NPC to hold its payment toROMAGO of the aforementioned CPAamounting to P250,778.65. Payment wasnonetheless released to ROMAGO by virtue of asworn affidavit executed by ROMAGO's VicePresident for Finance Eduardo Cruz who

certified that 'there does not exist any lien or encumbrances against the said NPC-ROMAGOcontract.

It appears that on 04 October 1983, MarianoCac, authorized representative and husband of Soledad Cac, one of the partners of BICCConstruction, was paid the amount of

P38,712.70 'in full payment of accountsincluding retention of various works at NPC-Isabela under defendant's Cash DisbursementVoucher No. 23162 dated 03 October 1983.

When BICC's demands for payment wereignored by ROMAGO, the partners, thru Mrs.Soledad Cac as lone plaintiff, filed a complaintfor collection of sum of money with damages.

In its pre-trial order of 23 November 1988, thelower court summed up the issues agreed upon

by the parties, as follows:

1. Whether or not plaintiffs, as sub-contractors of the projects mentioned in Exhibit C (i.e., NPC-ROMAGOcontract)are entitled to the price cost adjustment under said contract obtained by the defendant from the

NPC; and

2. Whether or not all obligationsand/or indebtedness of the defendant to the plaintiffs were already paid and/or released upon the execution of Mariano Cac of the defendant's Exh. A(sic; it should be Exh. 4).

On 29 June 1990, the trial court rendered itsdecision, the dispositive portion of which reads:

WHEREFORE, in view of theforegoing considerations, judgment ishereby rendered:

1. Declaring that the venue of this casecould be before this Court at theoption of the plaintiffs;

2. Declaring that all contract priceadjustments (CPA) under contract

No. Sp 80DLc-502-(b) of the NPCinured to the benefit of the

plaintiffs and not to the defendant;3. Ordering the defendant to pay the

plaintiffs said CPA in the amountof P250,778.65 excludingtherefrom any tax lawfully paid bythe defendant to the PhilippineGovernment supported by authenticofficial receipts;

4. Ordering the defendant to payinterest on said amount at the legalrate from August 12, 1983 untilfully paid; and

5. Ordering the defendant to pay the plaintiffs the sum of P10,000.00 asattorney's fees.

Costs further taxed against thedefendant.[7]chanroblesvirtuallawlibrary

From the foregoing decision, defendant

ROMAGO filed a notice of appeal [8] on 26 July1990.

Thereafter, the Court of Appeals rendered theassailed decision [9] on 31 July 1997.

The Court of Appeals found the claim of privaterespondents to be meritorious. Consequently, thedispositive portion of the assailed decision of theappellate court pronounced that:

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WHEREFORE, with the modificationthat appellant is hereby ordered to paythe appellees the sum of P175,545.05representing 70% of the total contract

price adjustment of P250,778.65, withinterest thereon at the legal rate fromAugust 12, 1983 until fully paid butdeducting therefrom any lawful taxappellant may have paid thegovernment, the decision appealedfrom is hereby AFFIRMED in all other respects and the instant appeal

DISMISSED .

With costs against appellant. [10]

The Issues

Its motion to reconsider the said decision having been denied by the Court of Appeals in aResolution dated 16 September 1997, petitioner ROMAGO filed the instant petition for review

predicated on the following issues:

I.

WHETHER OR NOT THEHONORABLE COURT OFAPPEALS ERRED IN ITSINTERPRETATION OF THE SUB-CONTRACT IN RELATION TO

NATIONAL POWER CORPORATION'S (NPC) 'PLANSAND SPECIFICATION . . . BYFINDING THAT THE CONTRACTPRICE ADJUSTMENT (CPA)OBTAINED BY PETITIONER INURES TO THE BENEFIT OFPRIVATE RESPONDENTS;

II.

WHETHER OR NOT THEHONORABLE COURT ERREDWHEN IT APPLIED THEPRINCIPLE OF EQUITY TOJUSTIFY PAYMENT TO PRIVATERESPONDENTS OF THE

CONTRACT PRICE ADJUSTMENT(CPA) WHEN THE CLEAR TERMSOF THE SUBCONTRACT AND THELAW PRECLUDES (SIC) SUCHAPPLICATION;

III.

WHETHER OR NOT THEHONORABLE COURT OFAPPEALS ERRED WHEN ITINTERPRETED THAT THEPARTICULARS OF PETITIONER'SCASH DISBURSEMENT VOUCHER

NO. 23162 WHICH STATES 'FULLPAYMENT OF ACCOUNTSINCLUDING RETENTION FOR VARIOUS WORKS AT NPC-ISABELA AS ATTACHEDPHP37,712.70 SIGNED BYPRIVATE RESPONDENT'SAUTHORIZEDREPRESENTATIVE / AGENTACKNOWLEDGING RECEIPT OFSAID AMOUNT DID NOTEXTINGUISH, RELIEVE, RELEASEANY AND ALL CLAIMSINCLUDING CONTRACT PRICEADJUSTMENT (CPA) WHICHPRIVATE RESPONDENTS MAYHAVE AGAINST PETITIONER ONTHE SUBCONTRACT;

IV.

WHETHER OR NOT THEHONORABLE COURT OFAPPEALS ERRED WHEN IT HELDTHAT MARIANO CAC WAS NOTCLOTHED WITH AUTHORITY BYPRIVATE RESPONDENTS TORENOUNCE OR WAIVEWHATEVER CLAIMS INCLUDINGCPA THAT PRIVATERESPONDENTS MAY HAVEAGAINST PETITIONER;

V.

WHETHER OR NOT, GRANTINGGRATIS ARGUENDO THATPRIVATE RESPONDENTS AREENTITLED TO SHARE IN THECONTRACT PRICE ADJUSTMENT(CPA) GRANTED BY NPC TOPETITIONER THE HONORABLECOURT OF APPEALS ERRED INAWARDING PHP175,545.05THEREOF, TO PRIVATERESPONDENTS SINCE IT HAS NOBASIS AND CONTRARY TOEVIDENCE OF PRIVATERESPONDENTS WHICH ONLYCLAIM AN AMOUNT OFPHP134,755.10 MINUS WHATEVER LEGAL DEDUCTIONS, IF ANY. [11]

The Court's Ruling

The petition is not meritorious.

The first two issues can be stated in one concisestatement, that is, whether or not the private

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respondents are entitled to the CPA accorded tothe petitioner by NPC.

Petitioner posits that by virtue of its contractwith NPC, it is exclusively entitled to the CPAand 'no amount of strained interpretation couldthe CPA be deemed extended to privaterespondents. [12]chanroblesvirtuallawlibrary

The petitioner contends that under its contractwith the private respondents, only the provisionsof the NPC-ROMAGO Contract pertaining toROMAGO's 'obligations and responsibilities'[13] thereunder were made applicable to the

private respondents. 'While it is true that National Power Corporation's Specification No.Sp80DLC-502 were among those ContractDocuments forming part of the Subcontract. . .,it would be gross judicial error to read the grantof the CPA in the Subcontract. These ContractDocuments were incorporated in the Subcontractfor the purpose of binding private respondents infulfilling the obligations and responsibilities of

petitioner in the latter's contract with NPC. . . .[14]chanroblesvirtuallawlibrary

The petitioner further hypothesizes that '(h)adthe parties intended that private respondentsshall be entitled to share in the CPA that may begranted by NPC to petitioner, the Subcontractcould have expressly stipulated. But it did not. 'Moreover, in Art. I of the Subcontract, it

provides that the Contract Documentsincorporated shall only be considered fullywritten insofar as they are not inconsistent withthe terms thereof. NPC Contract No. Sp80DLC-502 being inconsistent to the unequivocalsilence of the Subcontract with respect to thegrant of CPA, private respondents are notentitled to grant of the CPA.[15]chanroblesvirtuallawlibrary

For its part, however, the Court of Appeals ruledthat the private respondents' claim under theCPA is meritorious.

The appellate court clarified that the provisionof the CPA is not found in the NPC-ROMAGOcontract, [16] but in the NPC's 'Plans andSpecifications. [17] On the other hand, the

'obligations and responsibilities' averred to bythe petitioner 'are, in appellant's own words,those flowing from 'the provisions of the x x xcontract entered into between NPC andROMAGO Thus, the phrase 'obligations andresponsibilities' should only qualify the maincontract and not the other Contract Documents.

The records of the present case sustain thefindings of the Court of Appeals. Thus, the

petition must fail.

Contrary to the petitioner's asseverations that theCPA was not intended to be made applicable tothe ROMAGO-BICC subcontract, it must beremembered that the petitioner and the privaterespondents expressly agreed what documentswere going to be incorporated in the principalsubcontract. We agree with the appellate courtthat the qualifying phrase 'obligations andresponsibilities' contained in the ROMAGO-BICC subcontract was applicable only to the

NPC-ROMAGO contract. What is more, theCPA is not found in the NPC-ROMAGOcontract, [18] but in the NPC's 'Plans andSpecifications' [19] which was expresslyincluded as part of the 'Contract Documents, towit:

ARTICLE I

DOCUMENTS COMPRISING THECONTRACT

The following documents are herebyincorporated and made part of thisContract as though fully written outand set forth herein insofar as they arenot inconsistent with the terms thereof:

1. National Power Corporation'sSpecification No. Sp80DLc ' 502

2. Any and all plans, drawings, and schedules prepared by National Power Corporation.

3. SUB-CONTRACTOR'S proposaldated March 8, 1982.

The documents mentioned above shallcollectively be referred to as ContractDocuments .[20] [Emphasis supplied.]

As propitiously pointed out by the Court of Appeals, the NPC prepared a document entitled,'Plans and Specifications, paragraph GP-O8 of which deals with contract price adjustment:

It must be stressed herein that amongthe documents which wereincorporated into and made part of theROMAGO-BICC contract (Exh. 'D')'as though fully written out and setforth therein are '[A]ny and all plans,drawings, and schedules prepared by

the National Power Corporation.Relative thereto, appellant makes nodenial of the fact that in connectionwith the project in question, there was

prepared by the NPC a documententitled 'Plans and Specifications'(Exhs. 'E to 'E-5'), paragraph GP-O8 of which deals on uallawlibrary

And assuming for the sake of argument that thequalifying phrase obligations and

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responsibilities' applies to the other ContractDocuments, upon closer inspection of the

provisions granting the CPA, it is quite evidentthat said provision consequently requires anobligation or responsibility on the part of the

petitioner that in the event of a decrease in thecost of labor, materials, equipment rentals andsupplies for construction, etc., the reduction of the contract price will be for the account of the

petitioner. The provision respecting the grant of CPA does not merely provide for the probabilityof receipt of additional payment, but it alsoinvolves an obligation on the part of the

petitioner and the private respondents to returnany excess payment received from the NPC inthe event of any decrease in the cost of labor,materials, equipment rentals and supplies for theconstruction of said transmission lines.

The petitioner's view that the CPA provision isinconsistent with the tenor of the subcontract isindefensible. In contrast, the inverse is true.Contrary to the petitioner's assertions, there isnothing in the subcontract that supports theclaimed inconsistency. Had the parties to thesubcontract intended to restrict the application of the CPA provision, they would have particularlystated so. Alas, they only made a sweepingstatement as to what documents were to bedeemed read into the subcontract. To borrow the

words of the petitioner, the unequivocal silenceof the subcontract with respect to the non-applicability of the CPA necessitates theentitlement of the private respondents to saidadjustment.

Finally, the petitioner relies heavily on the caseof MC Engineering, Inc. v. Court of Appeals, et al .[22] In said case, we held that:

In a subcontract transaction, the benefit of a main contractor is notunjust even if it does less work, andearns more profit, than thesubcontractor. The subcontractor should be satisfied with its own profit,even though less than the maincontractor's , because that is what it

bargained for and contracted with themain contractor. Article 22 of the CivilCode is not intended to insure thatevery party to a commercialtransaction receives a profitcorresponding to its effort andcontribution. If a subcontractor knowingly agrees to receive a profitless than its proportionate contribution,that is its own lookout. The fact that asubcontractor accepts less does notmake it dumb for that may be the onlyway to beat its competitors. Thewinning subcontractor cannot beallowed to later on demand a higher

price after bagging the contract and beating competitors who asked for higher prices. Even if thesubcontractor incurs a loss because of its low price, it cannot invoke Article22 of the Civil Code to save it fromfinancial loss. Article 22 is not a safetynet against bad or overly bold businessdecisions.[23]chanroblesvirtuallawlibrary

Its reliance is misplaced. Upon a thoroughreview of the facts of the above-quoted case, it isquite evident that its particulars are not on allfours with the circumstances of the case at bar.

In the case of MC Engineering, Inc. , MCEngineering, Inc. and Surigao Coconut

Development Corporation entered into a contractfor the restoration of the latter's building, landimprovement, electrical and mechanical workswhich were damaged by a strong typhoon. Thenext day, MC Engineering, Inc. entered into asubcontract agreement with Gerent Builders.The subcontracted work covered only therestoration of the building and improvement

portion of the original contract. Two monthslater, Surigao and MC Engineering, Inc., enteredinto another agreement amending Section 7 of the original contract by increasing the price of the civil works, i.e. , building and landimprovement, to P854,851.51. When thesubcontracted work was completed,subcontractor Gerent received the payment of the works done under the subcontract.Subsequently, however, Gerent claimed anadditional P632,590.13 as its shares in theadjusted contract price pertaining to the civilworks, alleging that the subcontract is subject tothe re-adjustment provided for in Section 7, asamended, plus P166,252.00 for additional worksoutside the scope of the subcontract. MCEngineering, Inc. refused to pay Gerent, thus,the latter filed a complaint in court.

This Court ruled in favor of MC Engineering,Inc., as it found that the main contract betweenMC Engineering, Inc. and Surigao clearly

provides that 'as a condition precedent for anyupward or downward adjustment in the contract

price, there must first be a true valuation of thematerials and labor costs to be determinedthrough evaluation and inspection byrepresentatives of petitioner and Sucodeco. Asimilar provision is found in the subcontractrequiring, before any change in the subcontract

price, for a true valuation to be determined bySucodeco, petitioner and respondent Gerent. Therecords establish that respondent Gerent was

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responsible for making the estimates of theactual cost of the civil works which served as

basis for the original price of the main contract.[24] The evidence adduced, however, revealedthat the parties did not undertake any truevaluation of the cost of civil works. We held:

. . . The price increase could not have

been based on a true valuation becauseno true valuation was ever made asrequired by the main contract andsubcontract. There is no substantialevidence to support respondentGerent's assertion that the priceincrease was based on a secondestimate that Gerent allegedly supplied

petitioner.[25]chanroblesvirtuallawlibrary

In the case at bar, though, the provisions pertaining to the CPA are quite clear theadjustment in the contract price, i.e. , increase or decrease, is dependent on the application of appropriate official indices, as compiled andissued by the Central Bank of the Philippines,and not on the acts of any of the parties to thecontract or subcontract. In fact, there is no issueas to the occurrence of any of the scenariosenvisioned under the provisions of GP-08 thatnecessitated the increase as stated in the contractas well as in the subcontract.

Anent the third and fourth assigned errors, the petitioner asserts that whatever claims the private respondents may have against it,including the CPA, has been extinguished whenMariano Cac received from the petitioner acheck for P38,712.70 representing 'full paymentof accounts including retention for variousworks at NPC-Isabela. This is so due to the factthat said authorized representative or agent had

the authority to bind the private respondents. Bysigning and receiving, he released the petitioner from whatever claims private respondents hadagainst the former in connection with thesubcontract, including the CPA.

Petitioner ROMAGOs position is untenable.

The very same petition that the petitioner filedwith the Court clearly negates its position. Said

pleading expressly states that the CPA is notincluded in the computation. This is precisely

because the petitioner believes that the privaterespondents are not entitled to the CPA, hence,there is no basis for including it.

Said CPA not being part of the subcontract priceof P1,614,387.99, the release mentioned in thecash voucher cannot, therefore, be construed as arelease of the CPA. In fact, nowhere in thecomputation prepared by petitioner's financemanager, Narita Chalak, provides for the

payment of the CPA, to wit:

RE: BICC CONSTRUCTION

Total Actual Billing of BICC to

Romago - - - - - - - - - - - - - - - - - -P1,355,713.22

Less:

(1) Withholding tax .0045% - P6,100.70(2) Total payments made -1,143,387.76(3) Material Accountability - 8,076.61(4) NPC Material Acct.

Local - P14,631.75Foreign - 64,373.79Surcharge fee - 16,093.44

95,098.98

Penalty for 33 days 64,337.46(P1,317,000.55)Total Balance Due BICC includingRetention -- P 38,712.71

======

(Paid per CDV #23162 ) '10-3-83.

[26]chanroblesvirtuallawlibraryAs to the final issue regarding the amount of CPA the private respondents are entitled to, wedisagree with the petitioner that the privaterespondents are only entitled to the amount of P134,755.10 representing 70% of the CPAclaimed by petitioner ROMAGO from NPC lesstax due thereon and P38,712.70, the amountreceived by BICC contained in CashDisbursement Voucher No. 23162. The

petitioner's computation is incorrect. Asestablished above, the amount received by the

private respondents under said voucher does notin any way represent a single centavo of theCPA. As evidenced again by the computation

prepared by the petitioner's own financemanager, Ms. Narita Chalak, the P38,712.71was arrived at as follows:

RE: BICC CONSTRUCTIONTotal Actual Billing of BICC toRomago - - - - - - - - - - - - - - - - - -P1,355,713.22Less:

(1) Withholding tax .0045% - P6,100.70(2) Total payments made -1,143,387.76(3) Material Accountability - 8,076.61(4) NPC Material Acct.

Local - P14,631.75

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Foreign - 64,373.79Surcharge fee - 16,093.44

95,098.98

Penalty for 33 days 64,337.46(P1,317,000.55)

Total Balance Due BICC includingRetention -- P 38,712.71

============

(Paid per CDV #23162 ) '10-3-83. [27]

As seen from the above-quoted computation,therefore, the sum of P38,712.71, representingthe total balance due to BICC under its originalcontract with ROMAGO excluding the CPA,should not be deducted from P175,545.05,BICC's share of the CPA received by ROMAGOfrom NPC.

In fine, private respondents are entitled to theCPA as embodied in the subcontract. Basic isthe rule that parties are bound by the terms of their contract which is the law between them.[28]chanroblesvirtuallawlibrary

WHEREFORE , premises considered, theinstant petition is DENIED for lack of merit.The questioned Decision dated 31 July 1997, of the Court of Appeals and its Resolution dated 16September 1997, in CA-G.R. CV No. 28608 arehereby AFFIRMED.

With costs against the petitioner.

SO ORDERED.

HEIRS OF EDUARDO MANLAPAT,- versus' - AUSTRIA-MARTINEZ,

Acting Chairman,CALLEJO, SR.,TINGA, andHON. COURT OF APPEALS, 'RURAL BANK OF SAN PASCUAL, INC., and JOSE B. SALAZAR,CONSUELO CRUZ and Promulgated:ROSALINA CRUZ-BAUTISTA,and the REGISTER OF DEEDS of

D E C I S I O N

TINGA, J. :

Before this Court is a Rule 45 petition assailingthe Decision [1] dated 29 September 1994 of theCourt of Appeals that reversed the Decision [2] dated 30 April 1991 of the Regional Trial Court(RTC) of Bulacan, Branch 6, Malolos. The trialcourt declared Transfer Certificates of Title(TCTs) No. T-9326-P(M) and No. T-9327-P(M)as void ab initio and ordered the restoration of

Original Certificate of Title (OCT) No. P-153(M) in the name of Eduardo Manlapat(Eduardo), petitioners' predecessor-in-interest. The controversy involves Lot No. 2204, a parcelof land with an area of 1,058 square meters,located at Panghulo, Obando, Bulacan. The

property had been originally in the possession of Jose Alvarez, Eduardo's grandfather, until hisdemise in 1916. It remained unregistered until 8October 1976 when OCT No. P-153(M) wasissued in the name of Eduardo pursuant to a free

patent issued in Eduardo's name [3] that wasentered in the Registry of Deeds of Meycauayan,Bulacan. [4] The subject lot is adjacent to afishpond owned by one

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Ricardo Cruz (Ricardo), predecessor-in-interestof respondents Consuelo Cruz and RosalinaCruz-Bautista (Cruzes) .[5] On 19 December 1954, before the subject lotwas titled, Eduardo sold a portion thereof withan area of 553 square meters to Ricardo. Thesale is evidenced by a deed of sale entitled' Kasulatan ng Bilihang Tuluyan ng Lupang Walang Titulo (Kasulatan) [6] which was signed

by Eduardo himself as vendor and his wifeEngracia Aniceto with a certain SantiagoEnriquez signing as witness. The deed wasnotarized by Notary Public Manolo Cruz. [7] On4 April 1963, the Kasulatan was registered withthe Register of Deeds of Bulacan .[8] On 18 March 1981, another Deed of Sale [9] conveying another portion of the subject lotconsisting of 50 square meters as right of waywas executed by Eduardo in favor of Ricardo inorder to reach the portion covered by the firstsale executed in 1954 and to have access to hisfishpond from the provincial road. [10] The deedwas signed by Eduardo himself and his wifeEngracia Aniceto, together with EduardoManlapat, Jr. and Patricio Manlapat. The samewas also duly notarized on 18 July 1981 by

Notary Public Arsenio Guevarra .[11]

In December 1981, Leon Banaag, Jr. (Banaag),as attorney-in-fact of his father-in-law Eduardo,executed a mortgage with the Rural Bank of SanPascual, Obando Branch (RBSP), for P100,000.00 with the subject lot as collateral.Banaag deposited the owner's duplicatecertificate of OCT No. P-153(M) with the bank.

On 31 August 1986, Ricardo died withoutlearning of the prior issuance of OCT No. P-153(M) in the name of Eduardo. [12] His heirs,the Cruzes, were not immediately aware of theconsummated sale between Eduardo andRicardo. Eduardo himself died on 4 April 1987. He wassurvived by his heirs, Engracia Aniceto, hisspouse; and children, Patricio, Bonifacio,Eduardo, Corazon, Anselmo, Teresita andGloria, all surnamed Manlapat. [13] Neither didthe heirs of Eduardo (petitioners) inform theCruzes of the prior sale in favor of their

predecessor-in-interest, Ricardo. Yetsubsequently, the Cruzes came to learn about thesale and the issuance of the OCT in the name of Eduardo. Upon learning of their right to the subject lot,the Cruzes immediately tried to confront

petitioners on the mortgage and obtain thesurrender of the OCT. The Cruzes, however,were thwarted in their bid to see the heirs. Onthe advice of the Bureau of Lands, NCR Office,they brought the matter to the barangay captainof Barangay Panghulo, Obando, Bulacan.During the hearing, petitioners were informedthat the Cruzes had a legal right to the propertycovered by OCT and needed the OCT for the

purpose of securing a separate title to cover theinterest of Ricardo. Petitioners, however, wereunwilling to surrender the OCT .[14] Having failed to physically obtain the title from

petitioners, in July 1989, the Cruzes insteadwent to RBSP which had custody of the owner'sduplicate certificate of the OCT, earlier surrendered as a consequence of the mortgage.Transacting with RBSP's manager, Jose Salazar

(Salazar), the Cruzes sought to borrow theowner's duplicate certificate for the purpose of

photocopying the same and thereafter showing acopy thereof to the Register of Deeds. Salazar allowed the Cruzes to bring the owner'sduplicate certificate outside the bank premiseswhen the latter showed the Kasulatan .[15] TheCruzes returned the owner's duplicate certificateon the same day after having copied the same.They then brought the copy of the OCT toRegister of Deeds Jose Flores (Flores) of Meycauayan and showed the same to him tosecure his legal opinion as to how the Cruzescould legally protect their interest in the

property and register the same. [16] Floressuggested the preparation of a subdivision planto be able to segregate the area purchased byRicardo from Eduardo and have the samecovered by a separate title .[17] Thereafter, the Cruzes solicited the opinion of Ricardo Arandilla (Arandilla), Land RegistrationOfficer, Director III, Legal Affairs Department,Land Registration Authority at Quezon City,who agreed with the advice given by Flores. [18] Relying on the suggestions of Flores andArandilla, the Cruzes hired two geodeticengineers to prepare the correspondingsubdivision plan. The subdivision plan was

presented to the Land Management Bureau,Region III, and there it was approved by acertain Mr. Pambid of said office on 21 July1989.

After securing the approval of the subdivision plan, the Cruzes went back to RBSP and againasked for the owner's duplicate certificate fromSalazar. The Cruzes informed him that the

presentation of the owner's duplicate certificatewas necessary, per advise of the Register of

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Deeds, for the cancellation of the OCT and theissuance in lieu thereof of two separate titles inthe names of Ricardo and Eduardo in accordancewith the approved subdivision plan .[19] Beforegiving the owner's duplicate certificate, Salazar required the Cruzes to see Atty. Renato Santiago(Atty. Santiago), legal counsel of RBSP, tosecure from the latter a clearance to borrow thetitle. Atty. Santiago would give the clearance onthe condition that only Cruzes put up a substitutecollateral, which they did. [20] As a result, theCruzes got hold again of the owner's duplicatecertificate. After the Cruzes presented the owner's duplicatecertificate, along with the deeds of sale and thesubdivision plan, the Register of Deedscancelled the OCT and issued in lieu thereof TCT No. T-9326-P(M) covering 603 squaremeters of Lot No. 2204 in the name of Ricardoand TCT No. T-9327-P(M) covering theremaining 455 square meters in the name of Eduardo. [21] On 9 August 1989, the Cruzes went back to the

bank and surrendered to Salazar TCT No. 9327-P(M) in the name of Eduardo and retrieved thetitle they had earlier given as substitutecollateral. After securing the new separate titles,the Cruzes furnished petitioners with a copy of TCT No. 9327-P(M) through the barangaycaptain and paid the real property tax for 1989.[22] The Cruzes also sent a formal letter to GuillermoReyes, Jr., Director, Supervision Sector,Department III of the Central Bank of thePhilippines, inquiring whether they committedany violation of existing bank laws under thecircumstances. A certain Zosimo Topacio, Jr. of

the Supervision Sector sent a reply letter advising the Cruzes, since the matter is betweenthem and the bank, to get in touch with the bank for the final settlement of the case .[23]

In October of 1989, Banaag went to RBSP,intending to tender full payment of the mortgageobligation. It was only then that he learned of the dealings of the Cruzes with the bank whicheventually led to the subdivision of the subjectlot and the issuance of two separate titlesthereon. In exchange for the full payment of theloan, RBSP tried to persuade petitioners toaccept TCT No. T-9327-P(M) in the name of Eduardo. [24] As a result, three (3) cases were lodged, later consolidated, with the trial court, all involvingthe issuance of the TCTs, to wit:

(1) Civil Case No. 650-M-89,for reconveyance with damagesfiled by the heirs of EduardoManlapat against ConsueloCruz, Rosalina Cruz-Bautista,Rural Bank of San Pascual, JoseSalazar and Jose Flores, in hiscapacity as Deputy Registrar,Meycauayan Branch of theRegistry of Deeds of Bulacan;

(2) Civil Case No. 141-M-90 for damages filed by Jose Salazar against Consuelo Cruz, et. [sic]al.; and

(3) Civil Case No. 644-M-89,for declaration of nullity of titlewith damages filed by RuralBank of San Pascual, Inc.

against the spouses RicardoCruz and Consuelo Cruz, et al.[25]

After trial of the consolidated cases, the RTC of Malolos rendered a decision in favor of the heirsof Eduardo, the dispositive portion of whichreads:

WHEREFORE, premised fromthe foregoing, judgment ishereby rendered:

1.Declaring Transfer Certificates of Title

Nos. T-9326-P(M)and T-9327-P(M) asvoid ab initio andordering the Register of Deeds,Meycauayan Branchto cancel said titlesand to restore OriginalCertificate of Title

No. P-153(M) in thename of plaintiffs'

predecessor-in-interestEduardo Manlapat; 2.-Ordering thedefendants RuralBank of San Pascual,Jose Salazar,Consuelo Cruz andRosalina Cruz-Bautista, to pay the

plaintiffs Heirs of Eduardo Manlapat,

jointly and severally,the following:

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a)P200,000.00as moraldamages;

b)P50,000.00as exemplarydamages;c)P20,000.00as attorney'sfees; andd)the costs of the suit. 3.Dismissingthecounterclaims.

SO ORDERED .[26]

The trial court found that petitioners wereentitled to the reliefs of reconveyance anddamages. On this matter, it ruled that petitionerswere bona fide mortgagors of an unclouded title

bearing no annotation of any lien and/or encumbrance. This fact, according to the trialcourt, was confirmed by the bank when itaccepted the mortgage unconditionally on 25

November 1981. It found that petitioners werecomplacent and unperturbed, believing that thetitle to their property, while serving as securityfor a loan, was safely vaulted in theimpermeable confines of RBSP. To their surprise and prejudice, said title was subdividedinto two portions, leaving them a portion of 455square meters from the original total area of 1,058 square meters, all because of thefraudulent and negligent acts of respondents andRBSP. The trial court ratiocinated that evenassuming that a portion of the subject lot was

sold by Eduardo to Ricardo, petitioners werestill not privy to the transaction between the

bank and the Cruzes which eventually led to thesubdivision of the OCT into TCTs No. T-9326-P(M) and No. T-9327-P(M), clearly to thedamage and prejudice of petitioners .[27] Concerning the claims for damages, the trialcourt found the same to be bereft of merit. Itruled that although the act of the Cruzes could

be deemed fraudulent, still it would notconstitute intrinsic fraud. Salazar, nonetheless,was clearly guilty of negligence in letting theCruzes borrow the owner's duplicate certificateof the OCT. Neither the bank nor its manager had business entrusting to strangers titlesmortgaged to it by other persons for whatever reason. It was a clear violation of the mortgageand banking laws, the trial court concluded.

The trial court also ruled that although Salazar was personally responsible for allowing the titleto be borrowed, the bank could not escapeliability for it was guilty of contributorynegligence. The evidence showed that RBSP'slegal counsel was sought for advice regardingrespondents' request. This could only mean thatRBSP through its lawyer if not through itsmanager had known in advance of the Cruzes'intention and still it did nothing to prevent theeventuality. Salazar was not even summarilydismissed by the bank if he was indeed the sole

person to blame. Hence, the bank's claim for damages must necessarily fail .[28]

The trial court granted the prayer for theannulment of the TCTs as a necessaryconsequence of its declaration that reconveyancewas in order. As to Flores, his work beingministerial as Deputy Register of the Bulacan

Registry of Deeds, the trial court absolved himof any liability with a stern warning that heshould deal with his future transactions morecarefully and in the strictest sense as aresponsible government official. [29] Aggrieved by the decision of the trial court,RBSP, Salazar and the Cruzes appealed to theCourt of Appeals. The appellate court, however,reversed the decision of the RTC. The decretaltext of the decision reads:

THE FOREGOINGCONSIDERED, the appealeddecision is hereby reversed andset aside, with costs against theappellees. SO ORDERED .[30]

The appellate court ruled that petitioners werenot bona fide mortgagors since as early as 1954or before the 1981 mortgage, Eduardo alreadysold to Ricardo a portion of the subject lot withan area of 553 square meters. This fact, theCourt of Appeals noted, is even supported by adocument of sale signed by Eduardo Jr. andEngracia Aniceto, the surviving spouse of Eduardo, and registered with the Register of Deeds of Bulacan. The appellate court alsofound that on 18 March 1981, for the secondtime, Eduardo sold to Ricardo a separate areacontaining 50 square meters, as a road right-of-way. [31] Clearly, the OCT was issued only after the first sale. It also noted that the title wasgiven to the Cruzes by RBSP voluntarily, withknowledge even of the bank's counsel. [32] Hence, the imposition of damages cannot be

justified, the Cruzes themselves being theowners of the property. Certainly, Eduardo

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misled the bank into accepting the entire area asa collateral since the 603-square meter portiondid not anymore belong to him. The appellatecourt, however, concluded that there was noconspiracy between the bank and Salazar. [33]

Hence, this petition for review on certiorari. Petitioners ascribe errors to the appellate court

by asking the following questions, to wit: (a) cana mortgagor be compelled to receive from themortgagee a smaller portion of the originallyencumbered title partitioned during thesubsistence of the mortgage, without theknowledge of, or authority derived from, theregistered owner; (b) can the mortgagee questionthe veracity of the registered title of themortgagor, as noted in the owner's duplicatecertificate, and thus, deliver the certificate tosuch third persons, invoking an adverse, prior,and unregistered claim against the registeredtitle of the mortgagor; (c) can an adverse prior claim against a registered title be noted,registered and entered without a competent courtorder; and (d) can belief of ownership justify thetaking of property without due process of law?[34]

The kernel of the controversy boils down to theissue of whether the cancellation of the OCT inthe name of the petitioners' predecessor-in-interest and its splitting into two separate titles,one for the petitioners and the other for theCruzes, may be accorded legal recognition giventhe peculiar factual backdrop of the case. Werule in the affirmative.

Private respondents (Cruzes) own

the portion titled in their names

Consonant with law and justice, the ultimatedenouement of the property dispute lies in thedetermination of the respective bases of thewarring claims. Here, as in other legal disputes,what is written generally deserves credence. A careful perusal of the evidence on recordreveals that the Cruzes have sufficiently proventheir claim of ownership over the portion of Lot

No. 2204 with an area of 553 square meters. Theduly notarized instrument of conveyance wasexecuted in 1954 to which no less than Eduardowas a signatory. The execution of the deed of sale was rendered beyond doubt by Eduardo'sadmission in his Sinumpaang Salaysay dated 24April 1963 .[35] These documents make theaffirmance of the right of the Cruzes ineluctable.The apparent irregularity, however, in theobtention of the owner's duplicate certificatefrom the bank, later to be presented to theRegister of Deeds to secure the issuance of twonew TCTs in place of the OCT, is another matter.

Petitioners argue that the 1954 deed of sale wasnot annotated on the OCT which was issued in1976 in favor of Eduardo; thus, the Cruzes'claim of ownership based on the sale would nothold water. The Court is not persuaded.

Registration is not a requirement for validity of the contract as between the parties, for the effectof registration serves chiefly to bind third

persons .[36] The principal purpose of registration is merely to notify other persons not

parties to a contract that a transaction involvingthe property had been entered into. Where the

party has knowledge of a prior existing interest

which is unregistered at the time he acquired aright to the same land, his knowledge of that

prior unregistered interest has the effect of registration as to him. [37] Further, the heirs of Eduardo cannot beconsidered third persons for purposes of applying the rule. The conveyance shall not bevalid against any person unless registered,except (1) the grantor, (2) his heirs and devisees,and (3) third persons having actual notice or knowledge thereof. [38] Not only are petitionersthe heirs of Eduardo, some of them wereactually parties to the Kasulatan executed infavor of Ricardo. Thus, the annotation of theadverse claim of the Cruzes on the OCT is nolonger required to bind the heirs of Eduardo,

petitioners herein.

Petitioners had no right to constitutemortgage over disputed portion The requirements of a valid mortgage are clearlylaid down in Article 2085 of the New CivilCode, viz:

ART. 2085. Thefollowing requisitesare essential to thecontracts of pledgeand mortgage: (1) That they be

constituted tosecure thefulfillment of a

principalobligation;

(2) That the pledgor or

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mortgagor bethe absoluteowner of thething pledgedor mortgaged;

(3) That the personsconstituting the

pledge or mortgage havethe freedisposal of their property,and in theabsencethereof, that they be legallyauthorized for the purpose.

Third persons whoare not parties to the

principal obligationmay secure the latter

by pledging or mortgaging their own property.(emphasis supplied)

For a person to validly constitute a validmortgage on real estate, he must be the absoluteowner thereof as required by Article 2085 of the

New Civil Code. [39] The mortgagor must be theowner, otherwise the mortgage is void. [40] In acontract of mortgage, the mortgagor remains to

be the owner of the property although the property is subjected to a lien. [41] A mortgageis regarded as nothing more than a mere lien,encumbrance, or security for a debt, and passes

no title or estate to the mortgagee and gives himno right or claim to the possession of the

property. [42] In this kind of contract, the property mortgaged is merely delivered to themortgagee to secure the fulfillment of the

principal obligation. [43] Such delivery does notempower the mortgagee to convey any portionthereof in favor of another person as the right todispose is an attribute of ownership. [44] Theright to dispose includes the right to donate, tosell, to pledge or mortgage. Thus, themortgagee, not being the owner of the property,cannot dispose of the whole or part thereof nor cause the impairment of the security in anymanner without violating the foregoing rule. [45] The mortgagee only owns the mortgage credit,not the property itself. [46] Petitioners submit as an issue whether amortgagor may be compelled to receive from themortgagee a smaller portion of the lot covered

by the originally encumbered title, which lotwas' partitioned during the subsistence of themortgage without the knowledge or authority of the mortgagor as registered owner. Thisformulation is disingenuous, baselesslyassuming, as it does, as an admitted fact that themortgagor is the owner of the mortgaged

property in its entirety. Indeed, it has not become a salient issue in this case since themortgagor was not the owner of the entiremortgaged property in the first place.

Issuance of OCT No. P-153(M), improper It is a glaring fact that OCT No. P-153(M)covering the property mortgaged was in thename of Eduardo, without any annotation of any

prior disposition or encumbrance. However, the property was sufficiently shown to be not

entirely owned by Eduardo as evidenced by the Kasulatan . Readily apparent upon perusal of therecords is that the OCT was issued in 1976, longafter the Kasulatan was executed way back in1954. Thus, a portion of the property registeredin Eduardo's name arising from the grant of free

patent did not actually belong to him. Theutilization of the Torrens system to perpetratefraud cannot be accorded judicial sanction. Time and again, this Court has ruled that the

principle of indefeasibility of a Torrens titledoes not apply where fraud attended the issuanceof the title, as was conclusively established inthis case. The Torrens title does not furnish ashied for fraud. [47] Registration does not vesttitle. It is not a mode of acquiring ownership butis merely evidence of such title over a particular

property. It does not give the holder any better right than what he actually has, especially if theregistration was done in bad faith. The effect isthat it is as if no registration was made at all. [48] In fact, this Court has ruled that a decree of registration cut off or extinguished a rightacquired by a person when such right refers to alien or encumbrance on the landnot to the rightof ownership thereofwhich was not annotated onthe certificate of title issued thereon. [49]

Issuance of TCT Nos. T-9326-P(M)and T-9327-P(M), Valid

The validity of the issuance of two TCTs, onefor the portion sold to the predecessor-in-interestof the Cruzes and the other for the portionretained by petitioners, is readily apparent fromSection 53 of the Presidential Decree (P.D.) No.1529 or the Property Registration Decree. It

provides:

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SEC 53. Presentation of owner's duplicate upon entry of new certificate . ' No voluntaryinstrument shall be registered bythe Register of Deeds, unlessthe owner's duplicate certificateis presented with suchinstrument, except in casesexpressly provided for in thisDecree or upon order of thecourt, for cause shown. The production of the owner'sduplicate certificate, wheneverany voluntary instrument ispresented for registration,shall be conclusive authorityfrom the registered owner tothe Register of Deeds to entera new certificate or to make amemorandum of registrationin accordance with suchinstrument , and the newcertificate or memorandum shall

be binding upon the registeredowner and upon all personsclaiming under him, in favor of every purchaser for value and ingood faith. In all cases of registration

procured by fraud, the owner may pursue all his legal andequitable remedies against the

parties to such fraud without prejudice, however, to the rightsof any innocent holder of thedecree of registration on theoriginal petition or application,

any subsequent registration procured by the presentation of a forged duplicate certificate of title, or a forged deed or instrument, shall be null andvoid. (emphasis supplied)

Petitioners argue that the issuance of the TCTsviolated the third paragraph of Section 53 of P.D. No. 1529. The argument is baseless. It must

be noted that the provision speaks of forged duplicate certificate of title and forged deed or instrument . Neither instance obtains in this case.What the Cruzes presented before the Register of Deeds was the very genuine owner's duplicatecertificate earlier deposited by Banaag,Eduardo's attorney-in-fact, with RBSP.Likewise, the instruments of conveyance areauthentic, not forged. Section 53 has never beenclearer on the point that as long as the owner'sduplicate certificate is presented to the Register of Deeds together with the instrument of conveyance, such presentation serves asconclusive authority to the Register of Deeds toissue a transfer certificate or make amemorandum of registration in accordance withthe instrument.

The records of the case show that despite theefforts made by the Cruzes in persuading theheirs of Eduardo to allow them to secure aseparate TCT on the claimed portion, their ownership being amply evidenced by the

Kasulatan and Sinumpaang Salaysay whereEduardo himself acknowledged the sales infavor of Ricardo, the heirs adamantly rejectedthe notion of separate titling. This prompted theCruzes to approach the bank manager of RBSPfor the purpose of protecting their property right.

They succeeded in persuading the latter to lendthe owner's duplicate certificate. Despite theapparent irregularity in allowing the Cruzes toget hold of the owner's duplicate certificate, the

bank officers consented to the Cruzes' plan toregister the deeds of sale and secure two newseparate titles, without notifying the heirs of Eduardo about it.

Further, the law on the matter, specifically P.D. No. 1529, has no explicit requirement as to themanner of acquiring the owner's duplicate for

purposes of issuing a TCT. This led the Register of Deeds of Meycauayan as well as the CentralBank officer, in rendering an opinion on thelegal feasibility of the process resorted to by theCruzes. Section 53 of P.D. No. 1529 simplyrequires the production of the owner's duplicatecertificate, whenever any voluntary instrument is

presented for registration, and the same shall beconclusive authority from the registered owner to the Register of Deeds to enter a newcertificate or to make a memorandum of registration in accordance with such instrument,and the new certificate or memorandum shall be

binding upon the registered owner and upon all persons claiming under him, in favor of every purchaser for value and in good faith.Quite interesting, however, is the contention of the heirs of Eduardo that the surreptitiouslending of the owner's duplicate certificateconstitutes fraud within the ambit of the third

paragraph of Section 53 which could nullify theeventual issuance of the TCTs. Yet we cannotsubscribe to their position.Impelled by the inaction of the heirs of Eduardoas to their claim, the Cruzes went to the bank where the property was mortgaged. Through itsmanager and legal officer, they were assured of recovery of the claimed parcel of land since they

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are the successors-in-interest of the real owner thereof. Relying on the bank officers' opinion asto the legality of the means sought to beemployed by them and the suggestion of theCentral Bank officer that the matter could be

best settled between them and the bank, theCruzes pursued the titling of the claimed portionin the name of Ricardo. The Register of Deedseventually issued the disputed TCTs.

The Cruzes resorted to such means to protecttheir interest in the property that rightfully

belongs to them only because of the bank officers' acquiescence thereto. The Cruzes couldnot have secured a separate TCT in the name of Ricardo without the bank's approval. Banks,their business being impressed with publicinterest, are expected to exercise more care and

prudence than private individuals in their dealings, even those involving registered lands.[50] The highest degree of diligence is expected,and high standards of integrity and performanceare even required of it. [51] Indeed, petitioners contend that the mortgageecannot question the veracity of the registeredtitle of the mortgagor as noted in the owner'sduplicate certificate, and, thus, he cannot deliver the certificate to such third persons invoking anadverse, prior, and unregistered claim againstthe registered title of the mortgagor. Thestrength of this argument is diluted by the

peculiar factual milieu of the case. A mortgagee can rely on what appears on thecertificate of title presented by the mortgagor and an innocent mortgagee is not expected toconduct an exhaustive investigation on thehistory of the mortgagor's title. This rule isstrictly applied to banking institutions. A

mortgagee-bank must exercise due diligence before entering into said contract. Judicial noticeis taken of the standard practice for banks,

before approving a loan, to send representativesto the premises of the land offered as collateraland to investigate who the real owners thereof are.[52]

Banks, indeed, should exercise more care and prudence in dealing even with registered lands,than private individuals, as their business is oneaffected with public interest. Banks' keep in trustmoney belonging to their depositors, which theyshould guard against loss by not committing anyact of negligence that amounts to lack of goodfaith. Absent good faith, banks would be deniedthe protective mantle of the land registrationstatute, Act 496, which extends only to

purchasers for value and good faith, as well as tomortgagees of the same character anddescription. [53] Thus, this Court clarified thatthe rule that persons dealing with registeredlands can rely solely on the certificate of titledoes not apply to banks .[54]

Bank Liable for Nominal Damages Of deep concern to this Court, however, is thefact that the bank lent the owner's duplicate of the OCT to the Cruzes when the latter presentedthe instruments of conveyance as basis of their claim of ownership over a portion of landcovered by the title. Simple rationalizationwould dictate that a mortgagee-bank has no rightto deliver to any stranger any property entrustedto it other than to those contractually and legallyentitled to its possession. Although we cannotdismiss the bank's acknowledgment of theCruzes' claim as legitimized by instruments of conveyance in their possession, we nonetheless

cannot sanction how the bank was inveigled todo the bidding of virtual strangers. Undoubtedly,the bank's cooperative stance facilitated theissuance of the TCTs. To make matters worse,the bank did not even notify the heirs of Eduardo. The conduct of the bank is asdangerous as it is unthinkably negligent.However, the aspect does not impair the right of the Cruzes to be recognized as legitimate ownersof their portion of the property.

Undoubtedly, in the absence of the bank's participation, the Register of Deeds could nothave issued the disputed TCTs. We cannot findfault on the part of the Register of Deeds inissuing the TCTs as his authority to issue thesame is clearly sanctioned by law. It is thusministerial on the part of the Register of Deedsto issue TCT if the deed of conveyance and theoriginal owner's duplicate are presented to himas there appears on theface of the instruments'no badge of irregularity or nullity .[55] If there is someone to blame for theshortcut resorted to by the Cruzes, it would bethe bank itself whose manager and legal officer helped the Cruzes to facilitate the issuance of theTCTs. The bank should not have allowed completestrangers to take possession of the owner'sduplicate certificate even if the purpose ismerely for photocopying for a danger of losingthe same is more than imminent. They should beaware of the conclusive presumption inSection 53. Such act constitutes manifestnegligence on the part of the bank which wouldnecessarily hold it liable for damages under Article 1170 and other relevant provisions of theCivil Code. [56]

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In the absence of evidence, the damages thatmay be awarded may be in the form of nominaldamages. Nominal damages are adjudicated inorder that a right of the plaintiff, which has beenviolated or invaded by the defendant, may bevindicated or recognized, and not for the

purpose of indemnifying the plaintiff for anyloss suffered by him .[57] This award rests on themortgagor's right to rely on the bank'sobservance of the highest diligence in theconduct of its business. The act of RBSP of entrusting to respondents the owner's duplicatecertificate entrusted to it by the mortgagor without even notifying the mortgagor and absentany prior investigation on the veracity of respondents' claim and character is a patentfailure to foresee the risk created by the act inview of the provisions of Section 53 of P.D. No.1529. This act runs afoul of every bank'smandate to observe the highest degree of diligence in dealing with its clients. Moreover, amortgagor has also the right to be afforded due

process before deprivation or diminution of his property is effected as the OCT was still in thename of Eduardo. Notice and hearing areindispensable elements of this right which the

bank miserably ignored. Under the circumstances, the Court believes theaward of P50,000.00 as nominal damages isappropriate.

Five-Year Prohibition against alienationor encumbrance under the Public Land Act

One vital point. Apparently glossed over by thecourts below and the parties is an aspect whichis essential, spread as it is all over the record and

intertwined with the crux of the controversy,relating as it does to the validity of thedispositions of the subject property and themortgage thereon. Eduardo was issued a title in1976 on the basis of his free patent application.Such application implies the recognition of the

public dominion character of the land and,hence, the five (5)-year prohibition imposed bythe Public Land Act against alienation or encumbrance of the land covered by a free

patent or homestead [58] should have beenconsidered. The deed of sale covering the fifty (50)-squaremeter right of way executed by Eduardo on 18March 1981 is obviously covered by the

proscription, the free patent having been issuedon 8 October 1976. However, petitioners mayrecover the portion sold since the prohibitionwas imposed in favor of the free patent holder.In Philippine National Bank v. De los Reyes ,[59] this Court ruled squarely on the point, thus:

While the law bars recovery in acase where the object of thecontract is contrary to law andone or both parties acted in badfaith, we cannot here apply thedoctrine of in pari delicto whichadmits of an exception, namely,that when the contract is merely

prohibited by law, not illegal per se , and the prohibition isdesigned for the protection of the party seeking to recover, heis entitled to the relief prayedfor whenever public policy isenhanced thereby. Under thePublic Land Act, the prohibitionto alienate is predicated on the

fundamental policy of the Stateto preserve and keep in thefamily of the homesteader that

portion of public land which theState has gratuitously given tohim, and recovery is allowedeven where the land acquiredunder the Public Land Act wassold and not merelyencumbered, within the

prohibited period. [60]

The sale of the 553 square meter portion is adifferent story. It was executed in 1954, twenty-two (22) years before the issuance of the patentin 1976. Apparently, Eduardo disposed of the

portion even before he thought of applying for afree patent. Where the sale or transfer took place

before the filing of the free patent application,whether by the vendor or the vendee, the

prohibition should not be applied. In suchsituation, neither the prohibition nor therationale therefor which isto keep in the family of the patentee that portionof the public land which the government hasgratuitously given him, by shielding him fromthe temptation to dispose of his landholding,could be relevant. Precisely, he had disposed of his rights to the lot even before the governmentcould give the title to him. The mortgage executed in favor of RBSP is also

beyond the pale of the prohibition, as it wasforged in December 1981 a few months past the

period of prohibition. WHEREFORE, the Decision of the Court of Appeals is AFFIRMED, subject to themodifications herein. Respondent Rural Bank of

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San Pascual is hereby ORDERED to PAY petitioners Fifty Thousand Pesos (P50,000.00) by way of nominal damages. RespondentsConsuelo Cruz and Rosalina Cruz-Bautista arehereby DIVESTED of title to, and respondentRegister of Deeds of Meycauayan, Bulacan isaccordingly ORDERED to segregate, the portionof fifty (50) square meters of the subject Lot No.2204, as depicted in the approved plan coveringthe lot, marked as Exhibit 'A', and to issue a newtitle covering the said portion in the name of the

petitioners at the expense of the petitioners. Nocosts.

SO ORDERED.

G.R. No. 156447. April 26, 2005]

JUAN AGAS and RUSTICA AGAS, Petitioners , vs. CARIDAD SABICO,respondent .

DECISION

This is a petition for review on certiorari under Rule 45 of the Rules of Civil Procedure, asamended, of the Decision [1] of the Court of Appeals (CA) in CA-G.R. CV No. 25980, aswell as its resolution denying the motion for reconsideration thereof. The CA affirmed in totothe Decision [2] of the Regional Trial Court(RTC) of Quezon City, Branch 85, in Civil Case

No. Q-49506. [3]chanroblesvirtuallawlibrary

Respondent Caridad Sabico and the spousesUlpiano and Concordia Paulo (spouses Paulo)filed an application to acquire a parcel of land,Lot 24, Block 151, Psd-68807, before the nowdefunct People's Homesite and HousingCorporation (PHHC). The subject lot had an

area of 400 square meters, located at EastAvenue Subdivision, Quezon City, covered byTransfer Certificate of Title (TCT) No. 66994.The respondent had her house constructed on the

property. She was widowed and worked as alaundrywoman of the petitioners, Juan Agas, alawyer, and his wife Rustica Agas. Therespondent considered Rustica's mother, Irenedela Pea, as her second mother. Petitioner JuanAgas was also one of the wedding sponsors of Thelma Sabico, one of the respondent'sdaughters, and the latter even borrowed P141.00from petitioner Juan Agas on October 1, 1963.[4]chanroblesvirtuallawlibrary

The PHHC granted the application of therespondent and that of the spouses Paulo, andawarded the lot to them. However, they wererequired to make a downpayment of P 420.00 for

the lot upon the execution of a conditionalcontract to sell, and the balance thereof payablein installments.

Since the respondent had no means to pay therequired downpayment for the property, shewent to the house of the petitioners atGastambide, Sampaloc, , to borrow the money.The respondent was with her daughter, MariaLuz. Petitioner Juan Agas agreed to lendP250.00 to Sabico, but required her to sign anunnotarized 'Agreement/ Kasunduan in whichshe obliged herself to sell to the lawyer theundivided one-half portion of the subject

property for P2,500.00, payable on such termsand conditions as they may agree upon, but notless than P50.00 a month. The following

principal terms and conditions were, likewise,stated in the agreement: (a) petitioner Juan Agaswould remit to the respondent the total amountof P250.00 upon the execution of the deed; (b)the respondent would return the amount she

received from the petitioner to the PHHC, and incase she refused to consummate the agreement,she would be liable for the interest andliquidated damages; and (c) the respondentwould continue to reside in the property for a

period of ten years. The agreement alsocontained the following stipulation:

9. That once ownership becomesabsolute in the first party to said lot,which shall be done at the earliestopportunity, said first party will,within the thirty-day from issuance of ownership papers to her, execute anabsolute CONTRACT OF SALE INFAVOR OF SECOND PARTY OR HIS LEGAL REPRESENTATIVESPAYMENTS WHATSOEVER EXCEPT EXPENSES FOR the

issuance of the corresponding torrenstitle and its registration in the name of first party.[5]chanroblesvirtuallawlibrary

The respondent had not finished first grade,could write only her name and did not knowhow to read nor understand the Englishlanguage. Nevertheless, she signed theagreement .[6]chanroblesvirtuallawlibrary

On May 14, 1964, the PHHC executed a

Conditional Contract to Sell [7] in favor of therespondent and the spouses Paulo over Lot 24,Block 151, Psd-68807 for the price of P4,200.00. The transferees bound and obligedthemselves, jointly and severally, to make adownpayment of P 420.00 upon the execution of the contract, the balance of the purchase price

payable within a period of 10 years, in 120 equalmonthly installments of P 41.97 at an annualinterest of 6%. They also agreed not to sell,

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assign, encumber, mortgage, lease or sublease,the property without the written consent of thePHHC.

The respondent had been borrowing money fromAgas from time to time, and her indebtednesshad totalled to P5,000.00. [8] In August 1964, aContract to Sell was executed by and between

the respondent and the petitioners which wasduly notarized by Notary Public Efren Barangan.[9] The contract, however, was merely areiteration of the agreement previously entered,with a modification that the respondent boundherself to mortgage her undivided share of the

property to the petitioners later as security of the payment of the amount remitted by Agas to thePHHC, as well as damages and interest:

g) That to secure or guarantee the payment of principal, interest anddamages as mentioned in the two

preceding paragraphs (e and f)VENDOR binds herself toMORTGAGE THE LOT describedabove or any reasonable real or

personal property owned or may beowned by VENDOR at the selection or discretion of PURCHASER in favor of PURCHASER or her legalrepresentatives without additionalobligation of PURCHASER in the

proper execution or accomplishmentof required documents.[10]chanroblesvirtuallawlibrary

After full payment of the purchase price of the property by Sabico and the spouses Paulo, thePHHC executed a Deed of Sale [11] datedAugust 5, 1975 over the property in their favor.On November 14, 1975, TCT No. 215624 [12] was issued in the names of the respondent and

the spouses Paulo as pro indiviso ownersthereof. [13] At the dorsal portion of the title wasan annotation prohibiting the registered ownersfrom selling, leasing or encumbering the

property within one year from the issuance of the said title.

Almost a month after the issuance of TCT No.

215624, the respondent delivered her owner'sduplicate copy of the said title to petitioner JuanAgas. Notwithstanding this, the property wasstill declared for taxation purposes in the namesof the respondent and the spouses Paulo from1978 until 1986 .[14] chanroblesvirtuallawlibrary

Meanwhile, on October 3, 1978, the respondentexecuted an Absolute Deed of Sale of RealProperty [15] in favor of petitioner Juan Agasover the south portion of the property, her one-half undivided share, with a total area of 200square meters for the price of P20,000.00. Thecontract of sale was notarized by Atty. EvelynRespicio. However, the deed was not filed withthe Office of the Register of Deeds.

On June 12, 1979, petitioner Juan Agas notifiedthe respondent of his desire to construct a two-unit residential apartment on the property andrequired the latter to pay a nominal monthlyrental of P25.00 in exchange for her continuedstay in the subject premises. [16] The petitioner

claimed that a portion of the rental fee was to beapplied to the payment of realty taxes since thetax declarations were still in the names of therespondent and the spouses Paulo.

Thereafter, in a Letter [17] dated January 8,1980, petitioner Juan Agas informed therespondent of the construction of the apartment

building, with a request that she move her house(barong-barong ) to the eastern rear portion of the property. The area of the lot given to the

respondent was four meters in width and eightmeters in length. She was told that she could usethe said lot for the next 15 years subject torenewal upon mutual agreement. The petitioner asked the respondent to affix her signature onthe said letter, but the latter refused to do so. [18] The respondent likewise refused to move her house as requested by the petitioner. The

petitioner then executed an Affidavit of AdverseClaim over the property and had it annotated atthe dorsal portion of TCT No. 215624. [19] Theconstruction of a two-door apartment buildingon the property proceeded in 1981, and another four-unit apartment structure was built on the lotin 1985.

In the meantime, the respondent continued paying the realty taxes on the property. OnOctober 9, 1986, the Deed of Absolute Sale

executed by her on October 3, 1978 was filedwith the Office of the Register of Deeds. TCT No. 215624 was cancelled, and TCT No.350542 [20] was thereafter issued in the namesof the spouses Paulo and the petitioners as co-owners.

On December 4, 1986, the respondent institutedan action against the petitioners for Declarationof Nullity of Deeds and Title with Damages

before the RTC of Quezon City, Branch 85. Inher complaint, the respondent alleged that shewas the true and lawful owner of the undividedone-half portion of the disputed property, andthat practically all the in

Civil Code Cases.jan16

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Transcript of Civil Code Cases.jan16