Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17870

September 29, 1962

MINDANAO BUS COMPANY, petitioner,

vs.
THE CITY ASSESSOR & TREASURER and the BOARD OF TAX APPEALS of
Cagayan de Oro City,respondents.
Binamira, Barria and Irabagon for petitioner.
Vicente E. Sabellina for respondents.

LABRADOR, J.:
This is a petition for the review of the decision of the Court of Tax Appeals in C.T.A.
Case No. 710 holding that the petitioner Mindanao Bus Company is liable to the payment
of the realty tax on its maintenance and repair equipment hereunder referred to.
Respondent City Assessor of Cagayan de Oro City assessed at P4,400 petitioner's abovementioned equipment. Petitioner appealed the assessment to the respondent Board of Tax
Appeals on the ground that the same are not realty. The Board of Tax Appeals of the City
sustained the city assessor, so petitioner herein filed with the Court of Tax Appeals a
petition for the review of the assessment.
In the Court of Tax Appeals the parties submitted the following stipulation of facts:
Petitioner and respondents, thru their respective counsels agreed to the following
stipulation of facts:
1. That petitioner is a public utility solely engaged in transporting passengers and cargoes
by motor trucks, over its authorized lines in the Island of Mindanao, collecting rates
approved by the Public Service Commission;
2. That petitioner has its main office and shop at Cagayan de Oro City. It maintains
Branch Offices and/or stations at Iligan City, Lanao; Pagadian, Zamboanga del Sur;
Davao City and Kibawe, Bukidnon Province;
3. That the machineries sought to be assessed by the respondent as real properties are the
following:
(a) Hobart Electric Welder Machine, appearing in the attached photograph, marked
Annex "A";
(b) Storm Boring Machine, appearing in the attached photograph, marked Annex "B";
(c) Lathe machine with motor, appearing in the attached photograph, marked Annex "C";
(d) Black and Decker Grinder, appearing in the attached photograph, marked Annex "D";
(e) PEMCO Hydraulic Press, appearing in the attached photograph, marked Annex "E";
(f) Battery charger (Tungar charge machine) appearing in the attached photograph,
marked Annex "F"; and
(g) D-Engine Waukesha-M-Fuel, appearing in the attached photograph, marked Annex
"G".

4. That these machineries are sitting on cement or wooden platforms as may be seen in
the attached photographs which form part of this agreed stipulation of facts;
5. That petitioner is the owner of the land where it maintains and operates a garage for its
TPU motor trucks; a repair shop; blacksmith and carpentry shops, and with these
machineries which are placed therein, its TPU trucks are made; body constructed; and
same are repaired in a condition to be serviceable in the TPU land transportation business
it operates;
6. That these machineries have never been or were never used as industrial equipments to
produce finished products for sale, nor to repair machineries, parts and the like offered to
the general public indiscriminately for business or commercial purposes for which
petitioner has never engaged in, to date.1awphl.nt
The Court of Tax Appeals having sustained the respondent city assessor's ruling, and
having denied a motion for reconsideration, petitioner brought the case to this Court
assigning the following errors:
1. The Honorable Court of Tax Appeals erred in upholding respondents' contention that
the questioned assessments are valid; and that said tools, equipments or machineries are
immovable taxable real properties.
2. The Tax Court erred in its interpretation of paragraph 5 of Article 415 of the New Civil
Code, and holding that pursuant thereto the movable equipments are taxable realties, by
reason of their being intended or destined for use in an industry.
3. The Court of Tax Appeals erred in denying petitioner's contention that the respondent
City Assessor's power to assess and levy real estate taxes on machineries is further
restricted by section 31, paragraph (c) of Republic Act No. 521; and
4. The Tax Court erred in denying petitioner's motion for reconsideration.
Respondents contend that said equipments, tho movable, are immobilized by destination,
in accordance with paragraph 5 of Article 415 of the New Civil Code which provides:
Art. 415. The following are immovable properties:
xxx

xxx

xxx

(5) Machinery, receptacles, instruments or implements intended by the owner of the

tenement for an industry or works which may be carried on in a building or on a piece of
land, and which tend directly to meet the needs of the said industry or works. (Emphasis
ours.)
Note that the stipulation expressly states that the equipment are placed on wooden or
cement platforms. They can be moved around and about in petitioner's repair shop. In the
case of B. H. Berkenkotter vs. Cu Unjieng, 61 Phil. 663, the Supreme Court said:
Article 344 (Now Art. 415), paragraph (5) of the Civil Code, gives the character of real
property to "machinery, liquid containers, instruments or implements intended by the
owner of any building or land for use in connection with any industry or trade being
carried on therein and which are expressly adapted to meet the requirements of such
trade or industry."
If the installation of the machinery and equipment in question in the central of the
Mabalacat Sugar Co., Inc., in lieu of the other of less capacity existing therein, for its
sugar and industry, converted them into real property by reason of their purpose, it
cannot be said that their incorporation therewith was not permanent in character
because, as essential and principle elements of a sugar central, without them the sugar
central would be unable to function or carry on the industrial purpose for which it was
established. Inasmuch as the central is permanent in character, the necessary machinery

and equipment installed for carrying on the sugar industry for which it has been
established must necessarily be permanent. (Emphasis ours.)
So that movable equipments to be immobilized in contemplation of the law must first be
"essential and principal elements" of an industry or works without which such industry or
works would be "unable to function or carry on the industrial purpose for which it was
established." We may here distinguish, therefore, those movable which become
immobilized by destination because they are essential and principal elements in the
industry for those which may not be so considered immobilized because they are merely
incidental, not essential and principal. Thus, cash registers, typewriters, etc., usually
found and used in hotels, restaurants, theaters, etc. are merely incidentals and are not and
should not be considered immobilized by destination, for these businesses can continue
or carry on their functions without these equity comments. Airline companies use
forklifts, jeep-wagons, pressure pumps, IBM machines, etc. which are incidentals, not
essentials, and thus retain their movable nature. On the other hand, machineries of
breweries used in the manufacture of liquor and soft drinks, though movable in nature,
are immobilized because they are essential to said industries; but the delivery trucks and
adding machines which they usually own and use and are found within their industrial
compounds are merely incidental and retain their movable nature.
Similarly, the tools and equipments in question in this instant case are, by their nature,
not essential and principle municipal elements of petitioner's business of transporting
passengers and cargoes by motor trucks. They are merely incidentals acquired as
movables and used only for expediency to facilitate and/or improve its service. Even
without such tools and equipments, its business may be carried on, as petitioner has
carried on, without such equipments, before the war. The transportation business could
be carried on without the repair or service shop if its rolling equipment is repaired or
serviced in another shop belonging to another.
The law that governs the determination of the question at issue is as follows:
Art. 415. The following are immovable property:
xxx

xxx

xxx

(5) Machinery, receptacles, instruments or implements intended by the owner of the

tenement for an industry or works which may be carried on in a building or on a piece of
land, and which tend directly to meet the needs of the said industry or works; (Civil Code
of the Phil.)
Aside from the element of essentiality the above-quoted provision also requires that the
industry or works be carried on in a building or on a piece of land. Thus in the case
of Berkenkotter vs. Cu Unjieng, supra, the "machinery, liquid containers, and instruments
or implements" are found in a building constructed on the land. A sawmill would also be
installed in a building on land more or less permanently, and the sawing is conducted in
the land or building.
But in the case at bar the equipments in question are destined only to repair or service the
transportation business, which is not carried on in a building or permanently on a piece
of land, as demanded by the law. Said equipments may not, therefore, be deemed real
property.
Resuming what we have set forth above, we hold that the equipments in question are not
absolutely essential to the petitioner's transportation business, and petitioner's business is
not carried on in a building, tenement or on a specified land, so said equipment may not
be considered real estate within the meaning of Article 415 (c) of the Civil Code.
WHEREFORE, the decision subject of the petition for review is hereby set aside and the
equipment in question declared not subject to assessment as real estate for the purposes
of the real estate tax. Without costs.
So ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-11139

April 23, 1958

SANTOS EVANGELISTA, petitioner,

vs.
ALTO SURETY & INSURANCE CO., INC., respondent.
Gonzalo D. David for petitioner.
Raul A. Aristorenas and Benjamin Relova for respondent.
CONCEPCION, J.:
This is an appeal by certiorari from a decision of the Court of Appeals.
Briefly, the facts are: On June 4, 1949, petitioner herein, Santos Evangelista, instituted
Civil Case No. 8235 of the Court of First, Instance of Manila entitled " Santos
Evangelista vs. Ricardo Rivera," for a sum of money. On the same date, he obtained a
writ of attachment, which levied upon a house, built by Rivera on a land situated in
Manila and leased to him, by filing copy of said writ and the corresponding notice of
attachment with the Office of the Register of Deeds of Manila, on June 8, 1949. In due
course, judgment was rendered in favor of Evangelista, who, on October 8, 1951, bought
the house at public auction held in compliance with the writ of execution issued in said
case. The corresponding definite deed of sale was issued to him on October 22, 1952,
upon expiration of the period of redemption. When Evangelista sought to take possession
of the house, Rivera refused to surrender it, upon the ground that he had leased the
property from the Alto Surety & Insurance Co., Inc. respondent herein and that the
latter is now the true owner of said property. It appears that on May 10, 1952, a definite
deed of sale of the same house had been issued to respondent, as the highest bidder at an
auction sale held, on September 29, 1950, in compliance with a writ of execution issued
in Civil Case No. 6268 of the same court, entitled "Alto Surety & Insurance Co.,
Inc. vs. Maximo Quiambao, Rosario Guevara and Ricardo Rivera," in which judgment,
for the sum of money, had been rendered in favor respondent herein, as plaintiff therein.
Hence, on June 13, 1953, Evangelista instituted the present action against respondent and
Ricardo Rivera, for the purpose of establishing his (Evangelista) title over said house,
securing possession thereof, apart from recovering damages.
In its answer, respondent alleged, in substance, that it has a better right to the house,
because the sale made, and the definite deed of sale executed, in its favor, on September
29, 1950 and May 10, 1952, respectively, precede the sale to Evangelista (October 8,
1951) and the definite deed of sale in his favor (October 22, 1952). It, also, made some
special defenses which are discussed hereafter. Rivera, in effect, joined forces with
respondent. After due trial, the Court of First Instance of Manila rendered judgment for
Evangelista, sentencing Rivera and respondent to deliver the house in question to
petitioner herein and to pay him, jointly and severally, forty pesos (P40.00) a month from
October, 1952, until said delivery, plus costs.
On appeal taken by respondent, this decision was reversed by the Court of Appeals,
which absolved said respondent from the complaint, upon the ground that, although the
writ of attachment in favor of Evangelista had been filed with the Register of Deeds of
Manila prior to the sale in favor of respondent, Evangelista did not acquire thereby a
preferential lien, the attachment having been levied as if the house in question were
immovable property, although in the opinion of the Court of Appeals, it is "ostensibly a
personal property." As such, the Court of Appeals held, "the order of attachment . . .
should have been served in the manner provided in subsection (e) of section 7 of Rule
59," of the Rules of Court, reading:

The property of the defendant shall be attached by the officer executing the order in the
following manner:
(e) Debts and credits, and other personal property not capable of manual delivery, by
leaving with the person owing such debts, or having in his possession or under his
control, such credits or other personal property, or with, his agent, a copy of the order,
and a notice that the debts owing by him to the defendant, and the credits and other
personal property in his possession, or under his control, belonging to the defendant, are
attached in pursuance of such order. (Emphasis ours.)
However, the Court of Appeals seems to have been of the opinion, also, that the house of
Rivera should have been attached in accordance with subsection (c) of said section 7, as
"personal property capable of manual delivery, by taking and safely keeping in his
custody", for it declared that "Evangelists could not have . . . validly purchased Ricardo
Rivera's house from the sheriff as the latter was not in possession thereof at the time he
sold it at a public auction."
Evangelista now seeks a review, by certiorari, of this decision of the Court of Appeals. In
this connection, it is not disputed that although the sale to the respondent preceded that
made to Evangelists, the latter would have a better right if the writ of attachment, issued
in his favor before the sale to the respondent, had been properly executed or enforced.
This question, in turn, depends upon whether the house of Ricardo Rivera is real property
or not. In the affirmative case, the applicable provision would be subsection (a) of
section 7, Rule 59 of the Rules of Court, pursuant to which the attachment should be
made "by filing with the registrar of deeds a copy of the order, together with a
description of the property attached, and a notice that it is attached, and by leaving a
copy of such order, description, and notice with the occupant of the property, if any there
be."
Respondent maintains, however, and the Court of Appeals held, that Rivera's house is
personal property, the levy upon which must be made in conformity with subsections (c)
and (e) of said section 7 of Rule 59. Hence, the main issue before us is whether a house,
constructed the lessee of the land on which it is built, should be dealt with, for purpose,
of attachment, as immovable property, or as personal property.
It is, our considered opinion that said house is not personal property, much less a debt,
credit or other personal property not capable of manual delivery, but immovable property.
As explicitly held, in Laddera vs. Hodges (48 Off. Gaz., 5374), "a true building (not
merely superimposed on the soil) is immovable or real property, whether it is erected by
the owner of the land or by usufructuary or lessee. This is the doctrine of our Supreme
Court in Leung Yee vs. Strong Machinery Company, 37 Phil., 644. And it is amply
supported by the rulings of the French Court. . . ."
It is true that the parties to a deed of chattel mortgage may agree to consider a house as
personal property for purposes of said contract (Luna vs. Encarnacion, * 48 Off. Gaz.,
2664; Standard Oil Co. of New York vs. Jaramillo, 44 Phil., 630; De Jesus vs. Juan Dee
Co., Inc., 72 Phil., 464). However, this view is good only insofar as thecontracting
parties are concerned. It is based, partly, upon the principle of estoppel. Neither this
principle, nor said view, is applicable to strangers to said contract. Much less is it in point
where there has been no contractwhatsoever, with respect to the status of the house
involved, as in the case at bar. Apart from this, in Manarang vs. Ofilada (99 Phil., 108;
52 Off. Gaz., 3954), we held:
The question now before us, however, is: Does the fact that the parties entering into a
contract regarding a house gave said property the consideration of personal property in
their contract, bind the sheriff in advertising the property's sale at public auction as
personal property? It is to be remembered that in the case at bar the action was to collect
a loan secured by a chattel mortgage on the house. It is also to be remembered that in
practice it is the judgment creditor who points out to the sheriff the properties that the
sheriff is to levy upon in execution, and the judgment creditor in the case at bar is the
party in whose favor the owner of the house had conveyed it by way of chattel mortgage
and, therefore, knew its consideration as personal property.

These considerations notwithstanding, we hold that the rules on execution do not allow,
and, we should notinterpret them in such a way as to allow, the special consideration that
parties to a contract may have desired to impart to real estate, for example, as personal
property, when they are, not ordinarily so. Sales on execution affect the public and third
persons. The regulation governing sales on execution are for public officials to follow.
The form of proceedings prescribed for each kind of property is suited to its character,
not to the character, which the parties have given to it or desire to give it. When the rules
speak of personal property, property which is ordinarily so considered is meant; and
when real property is spoken of, it means property which is generally known as real
property. The regulations were never intended to suit the consideration that parties may
have privately given to the property levied upon. Enforcement of regulations would be
difficult were the convenience or agreement of private parties to determine or govern the
nature of the proceedings. We therefore hold that the mere fact that a house was the
subject of the chattel mortgage and was considered as personal property by the parties
does not make said house personal property for purposes of the notice to be given for its
sale of public auction. This ruling is demanded by the need for a definite, orderly and
well defined regulation for official and public guidance and would prevent confusion and
misunderstanding.
We, therefore, declare that the house of mixed materials levied upon on execution,
although subject of a contract of chattel mortgage between the owner and a third
person, is real property within the purview of Rule 39, section 16, of the Rules of Court
as it has become a permanent fixture of the land, which, is real property. (42 Am. Jur.
199-200; Leung Yee vs. Strong Machinery Co., 37 Phil., 644; Republic vs. Ceniza, et al.,
90 Phil., 544; Ladera,, et al. vs. Hodges, et al., [C.A.] Off. Gaz. 5374.)" (Emphasis ours.)
The foregoing considerations apply, with equal force, to the conditions for the levy of
attachment, for it similarly affects the public and third persons.
It is argued, however, that, even if the house in question were immovable property, its
attachment by Evangelista was void or ineffective, because, in the language of the Court
of Appeals, "after presenting a Copy of the order of attachment in the Office of the
Register of Deeds, the person who might then be in possession of the house, the sheriff
took no pains to serve Ricardo Rivera, or other copies thereof." This finding of the Court
of Appeals is neither conclusive upon us, nor accurate.
The Record on Appeal, annexed to the petition for Certiorari, shows that petitioner
alleged, in paragraph 3 of the complaint, that he acquired the house in question "as a
consequence of the levy of an attachment and execution of the judgment in Civil Case
No. 8235" of the Court of First Instance of Manila. In his answer (paragraph 2), Ricardo
Rivera admitted said attachment execution of judgment. He alleged, however, by way a
of special defense, that the title of respondent "is superior to that of plaintiff because it is
based on a public instrument," whereas Evangelista relied upon a "promissory note"
which "is only a private instrument"; that said Public instrument in favor of respondent
"is superior also to the judgment in Civil Case No. 8235"; and that plaintiff's claim
against Rivera amounted only to P866, "which is much below the real value" of said
house, for which reason it would be "grossly unjust to acquire the property for such an
inadequate consideration." Thus, Rivera impliedly admitted that his house had been
attached, that the house had been sold to Evangelista in accordance with the requisite
formalities, and that said attachment was valid, although allegedly inferior to the rights of
respondent, and the consideration for the sale to Evangelista was claimed to
be inadequate.
Respondent, in turn, denied the allegation in said paragraph 3 of the complaint, but only
" for the reasons stated in its special defenses" namely: (1) that by virtue of the sale at
public auction, and the final deed executed by the sheriff in favor of respondent, the same
became the "legitimate owner of the house" in question; (2) that respondent "is a buyer in
good faith and for value"; (3) that respondent "took possession and control of said
house"; (4) that "there was no valid attachment by the plaintiff and/or the Sheriff of
Manila of the property in question as neither took actual or constructive possession or
control of the property at any time"; and (5) "that the alleged registration of plaintiff's
attachment, certificate of sale and final deed in the Office of Register of Deeds, Manila,

if there was any, is likewise, not valid as there is no registry of transactions covering
houses erected on land belonging to or leased from another." In this manner, respondent
claimed a better right, merely under the theory that, in case of double sale of immovable
property, the purchaser who first obtains possession in good faith, acquires title, if the
sale has not been "recorded . . . in the Registry of Property" (Art. 1544, Civil Code of the
Philippines), and that the writ of attachment and the notice of attachment in favor of
Evangelista should be considered unregistered, "as there is no registry of transactions
covering houses erected on land belonging to or leased from another." In fact, said article
1544 of the Civil Code of the Philippines, governing double sales, was quoted on page 15
of the brief for respondent in the Court of Appeals, in support of its fourth assignment of
error therein, to the effect that it "has preference or priority over the sale of the same
property" to Evangelista.
In other words, there was no issue on whether copy of the writ and notice of attachment
had been served on Rivera. No evidence whatsoever, to the effect that Rivera had not
been served with copies of said writ and notice, was introduced in the Court of First
Instance. In its brief in the Court of Appeals, respondent did not aver, or even, intimate,
that no such copies were served by the sheriff upon Rivera. Service thereof on Rivera had
been impliedly admitted by the defendants, in their respective answers, and by their
behaviour throughout the proceedings in the Court of First Instance, and, as regards
respondent, in the Court of Appeals. In fact, petitioner asserts in his brief herein (p. 26)
that copies of said writ and notice were delivered to Rivera, simultaneously with copies
of the complaint, upon service of summons, prior to the filing of copies of said writ and
notice with the register deeds, and the truth of this assertion has not been directly and
positively challenged or denied in the brief filed before us by respondent herein. The
latter did not dare therein to go beyond making a statement for the first time in the
course of these proceedings, begun almost five (5) years ago (June 18, 1953)
reproducing substantially the aforementioned finding of the Court of Appeals and then
quoting the same.
Considering, therefore, that neither the pleadings, nor the briefs in the Court of Appeals,
raised an issue on whether or not copies of the writ of attachment and notice of
attachment had been served upon Rivera; that the defendants had impliedly admitted-in
said pleadings and briefs, as well as by their conduct during the entire proceedings,
prior to the rendition of the decision of the Court of Appeals that Rivera had received
copies of said documents; and that, for this reason, evidently, no proof was introduced
thereon, we, are of the opinion, and so hold that the finding of the Court of Appeals to the
effect that said copies had not been served upon Rivera is based upon a misapprehension
of the specific issues involved therein and goes beyond the range of such issues, apart
from being contrary to the aforementioned admission by the parties, and that,
accordingly, a grave abuse of discretion was committed in making said finding, which is,
furthermore, inaccurate.
Wherefore, the decision of the Court of Appeals is hereby reversed, and another one shall
be entered affirming that of the Court of First Instance of Manila, with the costs of this
instance against respondent, the Alto Surety and Insurance Co., Inc. It is so ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. Nos. L-10817-18

February 28, 1958

ENRIQUE LOPEZ, petitioner,

vs.
VICENTE OROSA, JR., and PLAZA THEATRE, INC., respondents.

Nicolas Belmonte and Benjamin T. de Peralta for petitioner.

Tolentino & Garcia and D. R. Cruz for respondent Luzon Surety Co., Inc. Jose B.
Macatangay for respondent Plaza Theatre, Inc.
FELIX, J.:
Enrique Lopez is a resident of Balayan, Batangas, doing business under the trade name
of Lopez-Castelo Sawmill. Sometime in May, 1946, Vicente Orosa, Jr., also a resident of
the same province, dropped at Lopez' house and invited him to make an investment in the
theatre business. It was intimated that Orosa, his family and close friends were
organizing a corporation to be known as Plaza Theatre, Inc., that would engage in such
venture. Although Lopez expressed his unwillingness to invest of the same, he agreed to
supply the lumber necessary for the construction of the proposed theatre, and at Orosa's
behest and assurance that the latter would be personally liable for any account that the
said construction might incur, Lopez further agreed that payment therefor would be on
demand and not cash on delivery basis. Pursuant to said verbal agreement, Lopez
delivered the lumber which was used for the construction of the Plaza Theatre on May
17, 1946, up to December 4 of the same year. But of the total cost of the materials
amounting to P62,255.85, Lopez was paid only P20,848.50, thus leaving a balance of
P41,771.35.
We may state at this juncture that the Plaza Theatre was erected on a piece of land with
an area of 679.17 square meters formerly owned by Vicente Orosa, Jr., and was acquired
by the corporation on September 25, 1946, for P6,000. As Lopez was pressing Orosa for
payment of the remaining unpaid obligation, the latter and Belarmino Rustia, the
president of the corporation, promised to obtain a bank loan by mortgaging the properties
of the Plaza Theatre., out of which said amount of P41,771.35 would be satisfied, to
which assurance Lopez had to accede. Unknown to him, however, as early as November,
1946, the corporation already got a loan for P30,000 from the Philippine National Bank
with the Luzon Surety Company as surety, and the corporation in turn executed a
mortgage on the land and building in favor of said company as counter-security. As the
land at that time was not yet brought under the operation of the Torrens System, the
mortgage on the same was registered on November 16, 1946, under Act No. 3344.
Subsequently, when the corporation applied for the registration of the land under Act
496, such mortgage was not revealed and thus Original Certificate of Title No. O-391
was correspondingly issued on October 25, 1947, without any encumbrance appearing
thereon.
Persistent demand from Lopez for the payment of the amount due him caused Vicente
Orosa, Jr. to execute on March 17, 1947, an alleged "deed of assignment" of his 420
shares of stock of the Plaza Theater, Inc., at P100 per share or with a total value of
P42,000 in favor of the creditor, and as the obligation still remained unsettled, Lopez
filed on November 12, 1947, a complaint with the Court of First Instance of Batangas
(Civil Case No. 4501 which later became R-57) against Vicente Orosa, Jr. and Plaza
Theater, Inc., praying that defendants be sentenced to pay him jointly and severally the
sum of P41,771.35, with legal interest from the firing of the action; that in case
defendants fail to pay the same, that the building and the land covered by OCT No. O391 owned by the corporation be sold at public auction and the proceeds thereof be
applied to said indebtedness; or that the 420 shares of the capital stock of the Plaza
Theatre, Inc., assigned by Vicente Orosa, Jr., to said plaintiff be sold at public auction for
the same purpose; and for such other remedies as may be warranted by the
circumstances. Plaintiff also caused the annotation of a notice of lis pendens on said
properties with the Register of Deeds.
Defendants Vicente Orosa, Jr. and Plaza Theatre, Inc., filed separate answers, the first
denying that the materials were delivered to him as a promoter and later treasurer of the
corporation, because he had purchased and received the same on his personal account;
that the land on which the movie house was constructed was not charged with a lien to
secure the payment of the aforementioned unpaid obligation; and that the 420 shares of
stock of the Plaza Theatre, Inc., was not assigned to plaintiff as collaterals but as direct
security for the payment of his indebtedness. As special defense, this defendant
contended that as the 420 shares of stock assigned and conveyed by the assignor and

accepted by Lopez as direct security for the payment of the amount of P41,771.35 were
personal properties, plaintiff was barred from recovering any deficiency if the proceeds
of the sale thereof at public auction would not be sufficient to cover and satisfy the
obligation. It was thus prayed that he be declared exempted from the payment of any
deficiency in case the proceeds from the sale of said personal properties would not be
enough to cover the amount sought to be collected.
Defendant Plaza Theatre, Inc., on the other hand, practically set up the same line of
defense by alleging that the building materials delivered to Orosa were on the latter's
personal account; and that there was no understanding that said materials would be paid
jointly and severally by Orosa and the corporation, nor was a lien charged on the
properties of the latter to secure payment of the same obligation. As special defense,
defendant corporation averred that while it was true that the materials purchased by
Orosa were sold by the latter to the corporation, such transactions were in good faith and
for valuable consideration thus when plaintiff failed to claim said materials within 30
days from the time of removal thereof from Orosa, lumber became a different and
distinct specie and plaintiff lost whatever rights he might have in the same and
consequently had no recourse against the Plaza Theatre, Inc., that the claim could not
have been refectionary credit, for such kind of obligation referred to an indebtedness
incurred in the repair or reconstruction of something already existing and this concept did
not include an entirely new work; and that the Plaza Theatre, Inc., having been
incorporated on October 14, 1946, it could not have contracted any obligation prior to
said date. It was, therefore, prayed that the complaint be dismissed; that said defendant
be awarded the sum P 5,000 for damages, and such other relief as may be just and proper
in the premises.
The surety company, in the meantime, upon discovery that the land was already
registered under the Torrens System and that there was a notice of lis pendens thereon,
filed on August 17, 1948, or within the 1-year period after the issuance of the certificate
of title, a petition for review of the decree of the land registration court dated October 18,
1947, which was made the basis of OCT No. O-319, in order to annotate the rights and
interests of the surety company over said properties (Land Registration Case No. 17
GLRO Rec. No. 296). Opposition thereto was offered by Enrique Lopez, asserting that
the amount demanded by him constituted a preferred lien over the properties of the
obligors; that the surety company was guilty of negligence when it failed to present an
opposition to the application for registration of the property; and that if any violation of
the rights and interest of said surety would ever be made, same must be subject to the
lien in his favor.
The two cases were heard jointly and in a decision dated October 30, 1952, the lower
Court, after making an exhaustive and detailed analysis of the respective stands of the
parties and the evidence adduced at the trial, held that defendants Vicente Orosa, Jr., and
the Plaza Theatre, Inc., were jointly liable for the unpaid balance of the cost of lumber
used in the construction of the building and the plaintiff thus acquired the materialman's
lien over the same. In making the pronouncement that the lien was merely confined to
the building and did not extend to the land on which the construction was made, the trial
judge took into consideration the fact that when plaintiff started the delivery of lumber in
May, 1946, the land was not yet owned by the corporation; that the mortgage in favor of
Luzon Surety Company was previously registered under Act No. 3344; that the codal
provision (Art. 1923 of the old Spanish Civil Code) specifying that refection credits are
preferred could refer only to buildings which are also classified as real properties, upon
which said refection was made. It was, however, declared that plaintiff's lien on the
building was superior to the right of the surety company. And finding that the Plaza
Theatre, Inc., had no objection to the review of the decree issued in its favor by the land
registration court and the inclusion in the title of the encumbrance in favor of the surety
company, the court a quo granted the petition filed by the latter company. Defendants
Orosa and the Plaza Theatre, Inc., were thus required to pay jointly the amount of
P41,771.35 with legal interest and costs within 90 days from notice of said decision; that
in case of default, the 420 shares of stock assigned by Orosa to plaintiff be sold at public
auction and the proceeds thereof be applied to the payment of the amount due the
plaintiff, plus interest and costs; and that the encumbrance in favor of the surety company

be endorsed at the back of OCT No. O-391, with notation I that with respect to the
building, said mortgage was subject to the materialman's lien in favor of Enrique Lopez.
Plaintiff tried to secure a modification of the decision in so far as it declared that the
obligation of therein defendants was joint instead of solidary, and that the lien did not
extend to the land, but same was denied by order the court of December 23, 1952. The
matter was thus appealed to the Court of appeals, which affirmed the lower court's ruling,
and then to this Tribunal. In this instance, plaintiff-appellant raises 2 issues: (1) whether a
materialman's lien for the value of the materials used in the construction of a building
attaches to said structure alone and does not extend to the land on which the building is
adhered to; and (2) whether the lower court and the Court of Appeals erred in not
providing that the material mans liens is superior to the mortgage executed in favor
surety company not only on the building but also on the land.
It is to be noted in this appeal that Enrique Lopez has not raised any question against the
part of the decision sentencing defendants Orosa and Plaza Theatre, Inc., to
pay jointly the sum of P41,771.35, so We will not take up or consider anything on that
point. Appellant, however, contends that the lien created in favor of the furnisher of the
materials used for the construction, repair or refection of a building, is also extended to
the land which the construction was made, and in support thereof he relies on Article
1923 of the Spanish Civil Code, pertinent law on the matter, which reads as follows:
ART. 1923. With respect to determinate real property and real rights of the debtor, the
following are preferred:
xxx

xxx

xxx

5. Credits for refection, not entered or recorded, with respect to the estate upon which the
refection was made, and only with respect to other credits different from those mentioned
in four preceding paragraphs.
It is argued that in view of the employment of the phrase real estate, or immovable
property, and inasmuch as said provision does not contain any specification delimiting
the lien to the building, said article must be construed as to embrace both the land and the
building or structure adhering thereto. We cannot subscribe to this view, for while it is
true that generally, real estate connotes the land and the building constructed thereon, it is
obvious that the inclusion of the building, separate and distinct from the land, in the
enumeration of what may constitute real properties 1 could mean only one thing that a
building is by itself an immovable property, a doctrine already pronounced by this Court
in the case of Leung Yee vs. Strong Machinery Co., 37 Phil., 644. Moreover, and in view
of the absence of any specific provision of law to the contrary, a building is an
immovable property, irrespective of whether or not said structure and the land on which
it is adhered to belong to the same owner.
A close examination of the provision of the Civil Code invoked by appellant reveals that
the law gives preference to unregistered refectionary credits only with respect to the real
estate upon which the refection or work was made. This being so, the inevitable
conclusion must be that the lien so created attaches merely to the immovable property for
the construction or repair of which the obligation was incurred. Evidently, therefore, the
lien in favor of appellant for the unpaid value of the lumber used in the construction of
the building attaches only to said structure and to no other property of the obligors.
Considering the conclusion thus arrived at, i.e., that the materialman's lien could be
charged only to the building for which the credit was made or which received the benefit
of refection, the lower court was right in, holding at the interest of the mortgagee over
the land is superior and cannot be made subject to the said materialman's lien.
Wherefore, and on the strength of the foregoing considerations, the decision appealed
from is hereby affirmed, with costs against appellant. It is so ordered.
Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L. and Endencia, JJ., concur.

Footnotes
1

Article 415 of the new Civil Code (Art. 334 of the old) enumerates what are considered
immovable property, among which are land, buildings, roads and constructions of all
kinds adhered to the soil.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17500

May 16, 1967

PEOPLE'S BANK AND TRUST CO. and ATLANTIC GULF AND PACIFIC CO.
OF MANILA, plaintiffs-appellants,
vs.
DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER
CORPORATION and CONNELL BROS. CO. (PHIL.), defendants-appellants.
Angel S. Gamboa for defendants-appellants.
Laurel Law Offices for plaintiffs-appellants.
DIZON, J.:
On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia
corporation licensed to do business in the Philippines hereinafter referred to as
ATLANTIC sold and assigned all its rights in the Dahican Lumber concession to
Dahican Lumber Company hereinafter referred to as DALCO for the total sum of
$500,000.00, of which only the amount of $50,000.00 was paid. Thereafter, to develop
the concession, DALCO obtained various loans from the People's Bank & Trust
Company hereinafter referred to as the BANK amounting, as of July 13, 1950, to
P200,000.00. In addition, DALCO obtained, through the BANK, a loan of $250,000.00
from the Export-Import Bank of Washington D.C., evidenced by five promissory notes of
$50,000.00 each, maturing on different dates, executed by both DALCO and the Dahican
America Lumber Corporation, a foreign corporation and a stockholder of DALCO,
hereinafter referred to as DAMCO, all payable to the BANK or its order.
As security for the payment of the abovementioned loans, on July 13, 1950 DALCO
executed in favor of the BANK the latter acting for itself and as trustee for the ExportImport Bank of Washington D.C. a deed of mortgage covering five parcels of land
situated in the province of Camarines Norte together with all the buildings and other
improvements existing thereon and all the personal properties of the mortgagor located in
its place of business in the municipalities of Mambulao and Capalonga, Camarines Norte
(Exhibit D). On the same date, DALCO executed a second mortgage on the same
properties in favor of ATLANTIC to secure payment of the unpaid balance of the sale
price of the lumber concession amounting to the sum of $450,000.00 (Exhibit G). Both
deeds contained the following provision extending the mortgage lien to properties to be
subsequently acquired referred to hereafter as "after acquired properties" by the
mortgagor:
All property of every nature and description taken in exchange or replacement, and all
buildings, machinery, fixtures, tools equipment and other property which the Mortgagor
may hereafter acquire, construct, install, attach, or use in, to, upon, or in connection with
the premises, shall immediately be and become subject to the lien of this mortgage in the
same manner and to the same extent as if now included therein, and the Mortgagor shall

from time to time during the existence of this mortgage furnish the Mortgagee with an
accurate inventory of such substituted and subsequently acquired property.
Both mortgages were registered in the Office of the Register of Deeds of Camarines
Norte. In addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of
stock of DALCO and 9,286 shares of DAMCO to secure the same obligations.
Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity,
the BANK paid the same to the Export-Import Bank of Washington D.C., and the latter
assigned to the former its credit and the first mortgage securing it. Subsequently, the
BANK gave DALCO and DAMCO up to April 1, 1953 to pay the overdue promissory
note.
After July 13, 1950 the date of execution of the mortgages mentioned above
DALCO purchased various machineries, equipment, spare parts and supplies in addition
to, or in replacement of some of those already owned and used by it on the date
aforesaid. Pursuant to the provision of the mortgage deeds quoted theretofore regarding
"after acquired properties," the BANK requested DALCO to submit complete lists of
said properties but the latter failed to do so. In connection with these purchases, there
appeared in the books of DALCO as due to Connell Bros. Company (Philippines) a
domestic corporation who was acting as the general purchasing agent of DALCO
thereinafter called CONNELL the sum of P452,860.55 and to DAMCO, the sum of
P2,151,678.34.
On December 16, 1952, the Board of Directors of DALCO, in a special meeting called
for the purpose, passed a resolution agreeing to rescind the alleged sales of equipment,
spare parts and supplies by CONNELL and DAMCO to it. Thereafter, the corresponding
agreements of rescission of sale were executed between DALCO and DAMCO, on the
one hand and between DALCO and CONNELL, on the other.
On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded
that said agreements be cancelled but CONNELL and DAMCO refused to do so. As a
result, on February 12, 1953; ATLANTIC and the BANK, commenced foreclosure
proceedings in the Court of First Instance of Camarines Norte against DALCO and
DAMCO. On the same date they filed an ex-parte application for the appointment of a
Receiver and/or for the issuance of a writ of preliminary injunction to restrain DALCO
from removing its properties. The court granted both remedies and appointed George H.
Evans as Receiver. Upon defendants' motion, however, the court, in its order of February
21, 1953, discharged the Receiver.
On March 2, 1953, defendants filed their answer denying the material allegations of the
complaint and alleging several affirmative defenses and a counterclaim.
On March 4 of the same year, CONNELL, filed a motion for intervention alleging that it
was the owner and possessor of some of the equipments, spare parts and supplies which
DALCO had acquired subsequent to the execution of the mortgages sought to be
foreclosed and which plaintiffs claimed were covered by the lien. In its order of March
18,1953 the Court granted the motion, as well as plaintiffs' motion to set aside the order
discharging the Receiver. Consequently, Evans was reinstated.
On April 1, 1953, CONNELL filed its answer denying the material averment of the
complaint, and asserting affirmative defenses and a counterclaim.
Upon motion of the parties the Court, on September 30, 1953, issued an order
transferring the venue of the action to the Court of First Instance of Manila where it was
docketed as Civil Case No. 20987.
On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the
machineries, equipment and supplies of DALCO, and the same were subsequently sold
for a total consideration of P175,000.00 which was deposited in court pending final
determination of the action. By a similar agreement one-half (P87,500.00) of this amount
was considered as representing the proceeds obtained from the sale of the "undebated

properties" (those not claimed by DAMCO and CONNELL), and the other half as
representing those obtained from the sale of the "after acquired properties".
After due trial, the Court, on July 15, 1960, rendered judgment as follows:
IN VIEW WHEREFORE, the Court:
1. Condemns Dahican Lumber Co. to pay unto People's Bank the sum of P200,000,00
with 7% interest per annum from July 13, 1950, Plus another sum of P100,000.00 with
5% interest per annum from July 13, 1950; plus 10% on both principal sums as attorney's
fees;
2. Condemns Dahican Lumber Co. to pay unto Atlantic Gulf the sum of P900,000.00
with 4% interest per annum from July 3, 1950, plus 10% on both principal as attorney's
fees;
3. Condemns Dahican Lumber Co. to pay unto Connell Bros, the sum of P425,860.55,
and to pay unto Dahican American Lumber Co. the sum of P2,151,678.24 both with legal
interest from the date of the filing of the respective answers of those parties, 10% of the
principals as attorney's fees;
4. Orders that of the sum realized from the sale of the properties of P175,000.00, after
deducting the recognized expenses, one-half thereof be adjudicated unto plaintiffs, the
court no longer specifying the share of each because of that announced intention under
the stipulation of facts to "pool their resources"; as to the other one-half, the same should
be adjudicated unto both plaintiffs, and defendant Dahican American and Connell Bros.
in the proportion already set forth on page 9, lines 21, 22 and 23 of the body of this
decision; but with the understanding that whatever plaintiffs and Dahican American and
Connell Bros. should receive from the P175,000.00 deposited in the Court shall be
applied to the judgments particularly rendered in favor of each;
5. No other pronouncement as to costs; but the costs of the receivership as to the debated
properties shall be borne by People's Bank, Atlantic Gulf, Connell Bros., and Dahican
American Lumber Co., pro-rata.
On the following day, the Court issued the following supplementary decision:
IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in order to
add the following paragraph 6:
6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90) days, the
Court orders the sale at public auction of the lands object of the mortgages to satisfy the
said mortgages and costs of foreclosure.
From the above-quoted decision, all the parties appealed.
Main contentions of plaintiffs as appellants are the following: that the "after acquired
properties" were subject to the deeds of mortgage mentioned heretofore; that said
properties were acquired from suppliers other than DAMCO and CONNELL; that even
granting that DAMCO and CONNELL were the real suppliers, the rescission of the sales
to DALCO could not prejudice the mortgage lien in favor of plaintiffs; that considering
the foregoing, the proceeds obtained from the sale of the "after acquired properties" as
well as those obtained from the sale of the "undebated properties" in the total sum of
P175,000.00 should have been awarded exclusively to plaintiffs by reason of the
mortgage lien they had thereon; that damages should have been awarded to plaintiffs
against defendants, all of them being guilty of an attempt to defraud the former when
they sought to rescind the sales already mentioned for the purpose of defeating their
mortgage lien, and finally, that defendants should have been made to bear all the
expenses of the receivership, costs and attorney's fees.
On the other hand, defendants-appellants contend that the trial court erred: firstly, in not
holding that plaintiffs had no cause of action against them because the promissory note

sued upon was not yet due when the action to foreclose the mortgages was commenced;
secondly, in not holding that the mortgages aforesaid were null and void as regards the
"after acquired properties" of DALCO because they were not registered in accordance
with the Chattel Mortgage Law, the court erring, as a consequence, in holding that said
properties were subject to the mortgage lien in favor of plaintiffs; thirdly, in not holding
that the provision of the fourth paragraph of each of said mortgages did not automatically
make subject to such mortgages the "after acquired properties", the only meaning thereof
being that the mortgagor was willing to constitute a lien over such properties; fourthly, in
not ruling that said stipulation was void as against DAMCO and CONNELL and in not
awarding the proceeds obtained from the sale of the "after acquired properties" to the
latter exclusively; fifthly, in appointing a Receiver and in holding that the damages
suffered by DAMCO and CONNELL by reason of the depreciation or loss in value of the
"after acquired properties" placed under receivership was damnum absque injuria and,
consequently, in not awarding, to said parties the corresponding damages claimed in their
counterclaim; lastly, in sentencing DALCO and DAMCO to pay attorney's fees and in
requiring DAMCO and CONNELL to pay the costs of the Receivership, instead of
sentencing plaintiffs to pay attorney's fees.
Plaintiffs' brief as appellants submit six assignments of error, while that of defendants
also as appellants submit a total of seventeen. However, the multifarious issues thus
before Us may be resolved, directly or indirectly, by deciding the following issues:
Firstly, are the so-called "after acquired properties" covered by and subject to the deeds
of mortgage subject of foreclosure?; secondly, assuming that they are subject thereto, are
the mortgages valid and binding on the properties aforesaid inspite of the fact that they
were not registered in accordance with the provisions of the Chattel Mortgage Law?;
thirdly, assuming again that the mortgages are valid and binding upon the "after acquired
properties", what is the effect thereon, if any, of the rescission of sales entered into, on
the one hand, between DAMCO and DALCO, and between DALCO and CONNELL, on
the other?; and lastly, was the action to foreclose the mortgages premature?
A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all
property of every nature and description taken in exchange or replacement, as well as all
buildings, machineries, fixtures, tools, equipments, and other property that the mortgagor
may acquire, construct, install, attach; or use in, to upon, or in connection with the
premises that is, its lumber concession "shall immediately be and become subject
to the lien" of both mortgages in the same manner and to the same extent as if already
included therein at the time of their execution. As the language thus used leaves no room
for doubt as to the intention of the parties, We see no useful purpose in discussing the
matter extensively. Suffice it to say that the stipulation referred to is common, and We
might say logical, in all cases where the properties given as collateral are perishable or
subject to inevitable wear and tear or were intended to be sold, or to be used thus
becoming subject to the inevitable wear and tear but with the understanding
express or implied that they shall be replaced with others to be thereafter acquired by
the mortgagor. Such stipulation is neither unlawful nor immoral, its obvious purpose
being to maintain, to the extent allowed by circumstances, the original value of the
properties given as security. Indeed, if such properties were of the nature already referred
to, it would be poor judgment on the part of the creditor who does not see to it that a
similar provision is included in the contract.
B. But defendants contend that, granting without admitting, that the deeds of mortgage in
question cover the "after acquired properties" of DALCO, the same are void and
ineffectual because they were not registered in accordance with the Chattel Mortgage
Law. In support of this and of the proposition that, even if said mortgages were valid,
they should not prejudice them, the defendants argue (1) that the deeds do not describe
the mortgaged chattels specifically, nor were they registered in accordance with the
Chattel Mortgage Law; (2) that the stipulation contained in the fourth paragraph thereof
constitutes "mere executory agreements to give a lien" over the "after acquired
properties" upon their acquisition; and (3) that any mortgage stipulation concerning
"after acquired properties" should not prejudice creditors and other third persons such as
DAMCO and CONNELL.

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

hereinbefore, it states that all property of every nature, building, machinery etc. taken in
exchange or replacement by the mortgagor "shall immediately be and become subject to
the lien of this mortgage in the same manner and to the same extent as if now included
therein". No clearer language could have been chosen.
Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third
persons, a chattel mortgage must be registered and must describe the mortgaged chattels
or personal properties sufficiently to enable the parties and any other person to identify
them, We say that such law does not apply to this case.
As the mortgages in question were executed on July 13, 1950 with the old Civil Code
still in force, there can be no doubt that the provisions of said code must govern their
interpretation and the question of their validity. It happens however, that Articles 334 and
1877 of the old Civil Code are substantially reproduced in Articles 415 and 2127,
respectively, of the new Civil Code. It is, therefore, immaterial in this case whether we
take the former or the latter as guide in deciding the point under consideration.
Article 415 does not define real property but enumerates what are considered as such,
among them being machinery, receptacles, instruments or replacements intended by
owner of the tenement for an industry or works which may be carried on in a building or
on a piece of land, and shall tend directly to meet the needs of the said industry or works.
On the strength of the above-quoted legal provisions, the lower court held that inasmuch
as "the chattels were placed in the real properties mortgaged to plaintiffs, they came
within the operation of Art. 415, paragraph 5 and Art. 2127 of the New Civil Code".
We find the above ruling in agreement with our decisions on the subject:
(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph 5 of
the Civil Code (old) gives the character of real property to machinery, liquid containers,
instruments or replacements intended by the owner of any building or land for use in
connection with any industry or trade being carried on therein and which are expressly
adapted to meet the requirements of such trade or industry.
(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held that a
mortgage constituted on a sugar central includes not only the land on which it is built but
also the buildings, machinery and accessories installed at the time the mortgage was
constituted as well as the buildings, machinery and accessories belonging to the
mortgagor, installed after the constitution thereof .
It is not disputed in the case at bar that the "after acquired properties" were purchased by
DALCO in connection with, and for use in the development of its lumber concession and
that they were purchased in addition to, or in replacement of those already existing in the
premises on July 13, 1950. In Law, therefore, they must be deemed to have
been immobilized, with the result that the real estate mortgages involved herein which
were registered as such did not have to be registered a second time as chattel
mortgages in order to bind the "after acquired properties" and affect third parties.
But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61 Phil. 709,
claim that the "after acquired properties" did not become immobilized because DALCO
did not own the whole area of its lumber concession all over which said properties were
scattered.
The facts in the Davao Sawmill case, however, are not on all fours with the ones
obtaining in the present. In the former, the Davao Sawmill Company, Inc., had repeatedly
treated the machinery therein involved as personal property by executing chattel
mortgages thereon in favor of third parties, while in the present case the parties had
treated the "after acquired properties" as real properties by expressly and unequivocally
agreeing that they shall automatically become subject to the lien of the real estate
mortgages executed by them. In the Davao Sawmill decision it was, in fact, stated that
"the characterization of the property as chattels by the appellant is indicative of intention

and impresses upon the property the character determined by the parties" (61 Phil. 112,
emphasis supplied). In the present case, the characterization of the "after acquired
properties" as real property was made not only by one but by both interested parties.
There is, therefore, more reason to hold that such consensus impresses upon the
properties the character determined by the parties who must now be held in estoppel to
question it.
Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central Altagracia,
Inc. (225 U.S. 58) where it was held that while under the general law of Puerto Rico,
machinery placed on property by a tenant does not become immobilized, yet, when the
tenant places it there pursuant to contract that it shall belong to the owner, it then
becomes immobilized as to that tenant and even as against his assignees and creditors
who had sufficient notice of such stipulation. In the case at bar it is not disputed that
DALCO purchased the "after acquired properties" to be placed on, and be used in the
development of its lumber concession, and agreed further that the same shall become
immediately subject to the lien constituted by the questioned mortgages. There is also
abundant evidence in the record that DAMCO and CONNELL had full notice of such
stipulation and had never thought of disputed validity until the present case was filed.
Consequently all of them must be deemed barred from denying that the properties in
question had become immobilized.
What We have said heretofore sufficiently disposes all the arguments adduced by
defendants in support their contention that the mortgages under foreclosure are void, and,
that, even if valid, are ineffectual as against DAMCO and CONNELL.
Now to the question of whether or not DAMCO CONNELL have rights over the "after
acquired properties" superior to the mortgage lien constituted thereon in favor of
plaintiffs. It is defendants' contention that in relation to said properties they are "unpaid
sellers"; that as such they had not only a superior lien on the "after acquired properties"
but also the right to rescind the sales thereof to DALCO.
This contention it is obvious would have validity only if it were true that DAMCO
and CONNELL were the suppliers or vendors of the "after acquired properties".
According to the record, plaintiffs did not know their exact identity and description prior
to the filing of the case bar because DALCO, in violation of its obligation under the
mortgages, had failed and refused theretofore to submit a complete list thereof. In the
course of the proceedings, however, when defendants moved to dissolve the order of
receivership and the writ of preliminary injunction issued by the lower court, they
attached to their motion the lists marked as Exhibits 1, 2 and 3 describing the properties
aforesaid. Later on, the parties agreed to consider said lists as identifying and describing
the "after acquire properties," and engaged the services of auditors to examine the books
of DALCO so as to bring out the details thereof. The report of the auditors and its
annexes (Exhibits V, V-1 V4) show that neither DAMCO nor CONNELL had supplied
any of the goods of which they respective claimed to be the unpaid seller; that all items
were supplied by different parties, neither of whom appeared to be DAMCO or
CONNELL that, in fact, CONNELL collected a 5% service charge on the net value of all
items it claims to have sold to DALCO and which, in truth, it had purchased for DALCO
as the latter's general agent; that CONNELL had to issue its own invoices in addition to
those o f the real suppliers in order to collect and justify such service charge.
Taking into account the above circumstances together with the fact that DAMCO was a
stockholder and CONNELL was not only a stockholder but the general agent of DALCO,
their claim to be the suppliers of the "after acquired required properties" would seem to
be preposterous. The most that can be claimed on the basis of the evidence is that
DAMCO and CONNELL probably financed some of the purchases. But if DALCO still
owes them any amount in this connection, it is clear that, as financiers, they can not
claim any right over the "after acquired properties" superior to the lien constituted
thereon by virtue of the deeds of mortgage under foreclosure. Indeed, the execution of
the rescission of sales mentioned heretofore appears to be but a desperate attempt to
better or improve DAMCO and CONNELL's position by enabling them to assume the
role of "unpaid suppliers" and thus claim a vendor's lien over the "after acquired
properties". The attempt, of course, is utterly ineffectual, not only because they are not

the "unpaid sellers" they claim to be but also because there is abundant evidence in the
record showing that both DAMCO and CONNELL had known and admitted from the
beginning that the "after acquired properties" of DALCO were meant to be included in
the first and second mortgages under foreclosure.
The claim that Belden, of ATLANTIC, had given his consent to the rescission, expressly
or otherwise, is of no consequence and does not make the rescission valid and legally
effective. It must be stated clearly, however, in justice to Belden, that, as a member of the
Board of Directors of DALCO, he opposed the resolution of December 15, 1952 passed
by said Board and the subsequent rescission of the sales.
Finally, defendants claim that the action to foreclose the mortgages filed on February 12,
1953 was premature because the promissory note sued upon did not fall due until April 1
of the same year, concluding from this that, when the action was commenced, the
plaintiffs had no cause of action. Upon this question the lower court says the following in
the appealed judgment;
The other is the defense of prematurity of the causes of action in that plaintiffs, as a
matter of grace, conceded an extension of time to pay up to 1 April, 1953 while the
action was filed on 12 February, 1953, but, as to this, the Court taking it that there is
absolutely no debate that Dahican Lumber Co., was insolvent as of the date of the filing
of the complaint, it should follow that the debtor thereby lost the benefit to the period.
x x x unless he gives a guaranty or security for the debt . . . (Art. 1198, New Civil Code);
and as the guaranty was plainly inadequate since the claim of plaintiffs reached in the
aggregate, P1,200,000 excluding interest while the aggregate price of the "afteracquired" chattels claimed by Connell under the rescission contracts was P1,614,675.94,
Exh. 1, Exh. V, report of auditors, and as a matter of fact, almost all the properties were
sold afterwards for only P175,000.00, page 47, Vol. IV, and the Court understanding that
when the law permits the debtor to enjoy the benefits of the period notwithstanding that
he is insolvent by his giving a guaranty for the debt, that must mean a new and efficient
guaranty, must concede that the causes of action for collection of the notes were not
premature.
Very little need be added to the above. Defendants, however, contend that the lower court
had no basis for finding that, when the action was commenced, DALCO was insolvent
for purposes related to Article 1198, paragraph 1 of the Civil Code. We find, however,
that the finding of the trial court is sufficiently supported by the evidence particularly the
resolution marked as Exhibit K, which shows that on December 16, 1952 in the words
of the Chairman of the Board DALCO was "without funds, neither does it expect to
have any funds in the foreseeable future." (p. 64, record on appeal).
The remaining issues, namely, whether or not the proceeds obtained from the sale of the
"after acquired properties" should have been awarded exclusively to the plaintiffs or to
DAMCO and CONNELL, and if in law they should be distributed among said parties,
whether or not the distribution should be pro-rata or otherwise; whether or not plaintiffs
are entitled to damages; and, lastly, whether or not the expenses incidental to the
Receivership should be borne by all the parties on a pro-rata basis or exclusively by one
or some of them are of a secondary nature as they are already impliedly resolved by what
has been said heretofore.
As regard the proceeds obtained from the sale of the of after acquired properties" and the
"undebated properties", it is clear, in view of our opinion sustaining the validity of the
mortgages in relation thereto, that said proceeds should be awarded exclusively to the
plaintiffs in payment of the money obligations secured by the mortgages under
foreclosure.
On the question of plaintiffs' right to recover damages from the defendants, the law
(Articles 1313 and 1314 of the New Civil Code) provides that creditors are protected in
cases of contracts intended to defraud them; and that any third person who induces
another to violate his contract shall be liable for damages to the other contracting party.

Similar liability is demandable under Arts. 20 and 21 which may be given retroactive
effect (Arts. 225253) or under Arts. 1902 and 2176 of the Old Civil Code.
The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO, after
failing to pay the fifth promissory note upon its maturity, conspired jointly with
CONNELL to violate the provisions of the fourth paragraph of the mortgages under
foreclosure by attempting to defeat plaintiffs' mortgage lien on the "after acquired
properties". As a result, the plaintiffs had to go to court to protect their rights thus
jeopardized. Defendants' liability for damages is therefore clear.
However, the measure of the damages suffered by the plaintiffs is not what the latter
claim, namely, the difference between the alleged total obligation secured by the
mortgages amounting to around P1,200,000.00, plus the stipulated interest and attorney's
fees, on the one hand, and the proceeds obtained from the sale of "after acquired
properties", and of those that were not claimed neither by DAMCO nor CONNELL, on
the other. Considering that the sale of the real properties subject to the mortgages under
foreclosure has not been effected, and considering further the lack of evidence showing
that the true value of all the properties already sold was not realized because their sale
was under stress, We feel that We do not have before Us the true elements or factors that
should determine the amount of damages that plaintiffs are entitled recover from
defendants. It is, however, our considered opinion that, upon the facts established, all the
expenses of the Receivership, which was deemed necessary to safeguard the rights of the
plaintiffs, should be borne by the defendants, jointly and severally, in the same manner
that all of them should pay to the plaintiffs, jointly a severally, attorney's fees awarded in
the appealed judgment.
In consonance with the portion of this decision concerning the damages that the plaintiffs
are entitled to recover from the defendants, the record of this case shall be remanded
below for the corresponding proceedings.
Modified as above indicated, the appealed judgment is affirmed in all other respects.
With costs.
Concepcion, C.J., Reyes, J.B.L., Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez
and Castro, JJ., concur.

EN BANC

[G. R. No. 133250. May 6, 2003]

FRANCISCO I. CHAVEZ, petitioner, vs. PUBLIC ESTATES AUTHORITY and

AMARI COASTAL BAY DEVELOPMENT CORPORATION, respondents.
RE S O LUTI ON
CARPIO, J.:
For resolution of the Court are the following motions: (1) Motion to Inhibit and for
Re-Deliberation filed by respondent Amari Coastal Bay Development Corporation
(Amari for brevity) on September 13, 2002; (2) Motion to Set Case for Hearing on Oral
Argument filed by Amari on August 20, 2002; (3) Motion for Reconsideration and
Supplement to Motion for Reconsideration filed by Amari on July 26, 2002 and August
20, 2002, respectively; (4) Motion for Reconsideration and Supplement to Motion for
Reconsideration filed by respondent Public Estates Authority (PEA for brevity) on July
26, 2002 and August 8, 2002, respectively; and (5) Motion for Reconsideration and/or

Clarification filed by the Office of the Solicitor General on July 25, 2002. Petitioner
Francisco I. Chavez filed on November 13, 2002 his Consolidated Opposition to the
main and supplemental motions for reconsideration.
To recall, the Courts decision of July 9, 2002 (Decision for brevity) on the instant
case states in its summary:
We can now summarize our conclusions as follows:
1. The 157.84 hectares of reclaimed lands comprising the Freedom Islands, now
covered by certificates of title in the name of PEA, are alienable lands of the
public domain. PEA may lease these lands to private corporations but may
not sell or transfer ownership of these lands to private corporations. PEA
may only sell these lands to Philippine citizens, subject to the ownership
limitations in the 1987 Constitution and existing laws.
2. The 592.15 hectares of submerged areas of Manila Bay remain inalienable
natural resources of the public domain until classified as alienable or
disposable lands open to disposition and declared no longer needed for
public service. The government can make such classification and declaration
only after PEA has reclaimed these submerged areas. Only then can these
lands qualify as agricultural lands of the public domain, which are the only
natural resources the government can alienate. In their present state, the
592.15 hectares of submerged areas are inalienable and outside the
commerce of man.
3. Since the Amended JVA seeks to transfer to AMARI, a private corporation,
ownership of 77.34 hectares of the Freedom Islands, such transfer is void for
being contrary to Section 3, Article XII of the 1987 Constitution which
prohibits private corporations from acquiring any kind of alienable land of
the public domain.
4. Since the Amended JVA also seeks to transfer to AMARI ownership of
290.156 hectares of still submerged areas of Manila Bay, such transfer is
void for being contrary to Section 2, Article XII of the 1987 Constitution
which prohibits the alienation of natural resources other than agricultural
lands of the public domain. PEA may reclaim these submerged areas.
Thereafter, the government can classify the reclaimed lands as alienable or
disposable, and further declare them no longer needed for public service.
Still, the transfer of such reclaimed alienable lands of the public domain to
AMARI will be void in view of Section 3, Article XII of the 1987
Constitution which prohibits private corporations from acquiring any kind of
alienable land of the public domain.
Clearly, the Amended JVA violates glaringly Sections 2 and 3, Article XII of the 1987
Constitution. Under Article 1409 of the Civil Code, contracts whose object or purpose is
contrary to law, or whose object is outside the commerce of men, are inexistent and void
from the beginning. The Court must perform its duty to defend and uphold the
Constitution, and therefore declares the Amended JVA null and void ab initio.
Amari seeks the inhibition of Justice Antonio T. Carpio, ponente of the Decision, on
the ground that Justice Carpio, before his appointment to the Court, wrote in his Manila
Timescolumn of July 1, 1997, I have always maintained that the law requires the public
bidding of reclamation projects. Justice Carpio, then a private law practitioner, also
stated in the same column, The Amari-PEA reclamation contract is legally flawed
because it was not bid out by the PEA. Amari claims that because of these statements
Justice Carpio should inhibit himself on the grounds of bias and prejudgment and that the
instant case should be re-deliberated after being assigned to a new ponente.
The motion to inhibit Justice Carpio must be denied for three reasons. First, the
motion to inhibit came after Justice Carpio had already rendered his opinion on the
merits of the case. The rule is that a motion to inhibit must be denied if filed after a
member of the Court had already given an opinion on the merits of the case, [1] the
rationale being that a litigant cannot be permitted to speculate upon the action of the

Court xxx (only to) raise an objection of this sort after a decision has been
rendered. Second, as can be readily gleaned from the summary of the Decision quoted
above, the absence of public bidding is not one of the ratio decidendi of the Decision
which is anchored on violation of specific provisions of the Constitution. The absence of
public bidding was not raised as an issue by the parties. The absence of public bidding
was mentioned in the Decision only to complete the discussion on the law affecting
reclamation contracts for the guidance of public officials. At any rate, the Office of the
Solicitor General in its Motion for Reconsideration concedes that the absence of public
bidding in the disposition of the Freedom Islands rendered the Amended JVA null and
void.[2] Third, judges and justices are not disqualified from participating in a case just
because they have written legal articles on the law involved in the case. As stated by the
Court in Republic v. Cocofed,[3] The mere fact that, as a former columnist, Justice Carpio has written on the coconut levy
will not disqualify him, in the same manner that jurists will not be disqualified just
because they may have given their opinions as textbook writers on the question involved
in a case.
Besides, the subject and title of the column in question was The CCP reclamation project
and the column referred to the Amari-PEA contract only in passing in one sentence.
Amaris motion to set the case for oral argument must also be denied since the
pleadings of the parties have discussed exhaustively the issues involved in the case.
The motions for reconsideration reiterate mainly the arguments already discussed in
the Decision. We shall consider in this Resolution only the new arguments raised by
respondents.
In its Supplement to Motion for Reconsideration, Amari argues that the Decision
should be made to apply prospectively, not retroactively to cover the Amended JVA.
Amari argues that the existence of a statute or executive order prior to its being adjudged
void is an operative fact to which legal consequences are attached, citing De Agbayani v.
PNB,[4] thus:
x x x. It does not admit of doubt that prior to the declaration of nullity such challenged
legislative or executive act must have been in force and had to be complied with. This is
so as until after the judiciary, in an appropriate case, declares its invalidity, it is entitled to
obedience and respect. Parties may have acted under it and may have changed their
positions. What could be more fitting than that in a subsequent litigation regard be had to
what has been done while such legislative or executive act was in operation and
presumed to be valid in all respects. It is now accepted as a doctrine that prior to its being
nullified, its existence as a fact must be reckoned with. This is merely to reflect
awareness that precisely because the judiciary is the governmental organ which has the
final say on whether or not a legislative or executive measure is valid, a period of time
may have elapsed before it can exercise the power of judicial review that may lead to a
declaration of nullity. It would be to deprive the law of its quality of fairness and justice
then, if there be no recognition of what had transpired prior to such adjudication.
In the language of an American Supreme Court decision: "The actual existence of a
statute, prior to such a determination [of unconstitutionality], is an operative fact and
may have consequences which cannot justly be ignored. The past cannot always be
erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity
may have to be considered in various aspects, - with respect to particular relations,
individual and corporate, and particular conduct, private and official." This language has
been quoted with approval in a resolution in Araneta v. Hill and the decision in Manila
Motor Co., Inc. v. Flores. x x x.
xxx
x x x That before the decision they were not constitutionally infirm was admitted
expressly. There is all the more reason then to yield assent to the now prevailing principle
that the existence of a statute or executive order prior to its being adjudged void is an
operative fact to which legal consequences are attached.

Amari now claims that assuming arguendo that Presidential Decree Nos. 1084 and 1085,
and Executive Order Nos. 525 and 654 are inconsistent with the 1987 Constitution, the
limitation imposed by the Decision on these decrees and executive orders should only be
applied prospectively from the finality of the Decision.
Amari likewise asserts that a new doctrine of the Court cannot operate retroactively
if it impairs vested rights. Amari maintains that the new doctrine embodied in the
Decision cannot apply retroactively on those who relied on the old doctrine in good faith,
citing Spouses Benzonan v. Court of Appeals,[5] thus:
At that time, the prevailing jurisprudence interpreting section 119 of R.A. 141 as
amended was that enunciated in Monge and Tupas cited above. The petitioners Benzonan
and respondent Pe and the DBP are bound by these decisions for pursuant to Article 8 of
the Civil Code "judicial decisions applying or interpreting the laws or the Constitution
shall form a part of the legal system of the Philippines." But while our decisions form
part of the law of the land, they are also subject to Article 4 of the Civil Code which
provides that "laws shall have no retroactive effect unless the contrary is provided." This
is expressed in the familiar legal maxim lex prospicit, non respicit, the law looks forward
not backward. The rationale against retroactivity is easy to perceive. The retroactive
application of a law usually divests rights that have already become vested or impairs the
obligations of contract and hence, is unconstitutional (Francisco v. Certeza, 3 SCRA 565
[1961]).
The same consideration underlies our rulings giving only prospective effect to decisions
enunciating new doctrines. Thus, we emphasized in People v. Jabinal, 55 SCRA 607
[1974] "x x x when a doctrine of this Court is overruled and a different view is adopted,
the new doctrine should be applied prospectively and should not apply to parties who had
relied on the old doctrine and acted on the faith thereof.
There may be special cases where weighty considerations of equity and social justice will
warrant a retroactive application of doctrine to temper the harshness of statutory law as it
applies to poor farmers or their widows and orphans. In the present petitions, however,
we find no such equitable considerations. Not only did the private respondent apply for
free agricultural land when he did not need it and he had no intentions of applying it to
the noble purposes behind the law, he would now repurchase for only P327,995.00, the
property purchased by the petitioners in good faith for P1,650,000.00 in 1979 and which,
because of improvements and the appreciating value of land must be worth more than
that amount now.
The buyers in good faith from DBP had a right to rely on our rulings
in Monge and Tupas when they purchased the property from DBP in 1979 or thirteen
(13) years ago. Under the rulings in these two cases, the period to repurchase the
disputed lot given to respondent Pe expired on June 18, 1982. He failed to exercise his
right. His lost right cannot be revived by relying on the 1988 case of Belisario. The right
of petitioners over the subject lot had already become vested as of that time and cannot
be impaired by the retroactive application of the Belisario ruling.
Amaris reliance on De Agbayani and Spouses Benzonan is misplaced. These cases
would apply if the prevailing law or doctrine at the time of the signing of the Amended
JVA was that a private corporation could acquire alienable lands of the public domain,
and the Decision annulled the law or reversed this doctrine. Obviously, this is not the
case here.
Under the 1935 Constitution, private corporations were allowed to acquire alienable
lands of the public domain. But since the effectivity of the 1973 Constitution, private
corporations were banned from holding, except by lease, alienable lands of the public
domain. The 1987 Constitution continued this constitutional prohibition. The prevailing
law before, during and after the signing of the Amended JVA is that private corporations
cannot hold, except by lease, alienable lands of the public domain. The Decision has not
annulled or in any way changed the law on this matter. The Decision, whether made
retroactive or not, does not change the law since the Decision merely reiterates the law
that prevailed since the effectivity of the 1973 Constitution. Thus, De Agbayani, which

refers to a law that is invalidated by a decision of the Court, has no application to the
instant case.
Likewise, Spouses Benzonan is inapplicable because it refers to a doctrine of the
Court that is overruled by a subsequent decision which adopts a new doctrine. In the
instant case, there is no previous doctrine that is overruled by the Decision. Since the
case of Manila Electric Company v. Judge Castro-Bartolome,[6] decided on June 29,
1982, the Court has applied consistently the constitutional provision that private
corporations cannot hold, except by lease, alienable lands of the public domain. The
Court reiterated this in numerous cases, and the only dispute in the application of this
constitutional provision is whether the land in question had already become private
property before the effectivity of the 1973 Constitution.[7] If the land was already private
land before the 1973 Constitution because the corporation had possessed it openly,
continuously, exclusively and adversely for at least thirty years since June 12, 1945 or
earlier, then the corporation could apply for judicial confirmation of its imperfect title.
But if the land remained public land upon the effectivity of the 1973 Constitution, then
the corporation could never hold, except by lease, such public land. Indisputably, the
Decision does not overrule any previous doctrine of the Court.
The prevailing doctrine before, during and after the signing of the Amended JVA is
that private corporations cannot hold, except by lease, alienable lands of the public
domain. This is one of the two main reasons why the Decision annulled the Amended
JVA. The other main reason is that submerged areas of Manila Bay, being part of the sea,
are inalienable and beyond the commerce of man, a doctrine that has remained
immutable since the Spanish Law on Waters of 1886. Clearly, the Decision merely
reiterates, and does not overrule, any existing judicial doctrine.
Even on the characterization of foreshore lands reclaimed by the government, the
Decision does not overrule existing law or doctrine. Since the adoption of the Regalian
doctrine in this jurisdiction, the sea and its foreshore areas have always been part of the
public domain. And since the enactment of Act No. 1654 on May 18, 1907 until the
effectivity of the 1973 Constitution, statutory law never allowed foreshore lands
reclaimed by the government to be sold to private corporations. The 1973 and 1987
Constitution enshrined and expanded the ban to include any alienable land of the public
domain.
There are, of course, decisions of the Court which, while recognizing a violation of
the law or Constitution, hold that the sale or transfer of the land may no longer be
invalidated because of weighty considerations of equity and social justice. [8] The
invalidation of the sale or transfer may also be superfluous if the purpose of the statutory
or constitutional ban has been achieved. But none of these cases apply to Amari.
Thus, the Court has ruled consistently that where a Filipino citizen sells land to an
alien who later sells the land to a Filipino, the invalidity of the first transfer is corrected
by the subsequent sale to a citizen.[9] Similarly, where the alien who buys the land
subsequently acquires Philippine citizenship, the sale is validated since the purpose of the
constitutional ban to limit land ownership to Filipinos has been achieved. [10] In short, the
law disregards the constitutional disqualification of the buyer to hold land if the land is
subsequently transferred to a qualified party, or the buyer himself becomes a qualified
party. In the instant case, however, Amari has not transferred the Freedom Islands, or any
portion of it, to any qualified party. In fact, Amari admits that title to the Freedom Islands
still remains with PEA.[11]
The Court has also ruled consistently that a sale or transfer of the land may no longer
be questioned under the principle of res judicata, provided the requisites for res
judicata are present.[12] Under this principle, the courts and the parties are bound by a
prior final decision, otherwise there will be no end to litigation. As the Court declared
in Toledo-Banaga v. Court of Appeals,[13] once a judgement has become final and
executory, it can no longer be disturbed no matter how erroneous it may be. In the instant
case, there is no prior final decision adjudicating the Freedom Islands to Amari.
There are, moreover, special circumstances that disqualify Amari from invoking
equity principles. Amari cannot claim good faith because even before Amari signed the
Amended JVA on March 30, 1999, petitioner had already filed the instant case on April
27, 1998 questioning precisely the qualification of Amari to acquire the Freedom Islands.

Even before the filing of this petition, two Senate Committees [14] had already approved
on September 16, 1997 Senate Committee Report No. 560. This Report concluded, after
a well-publicized investigation into PEAs sale of the Freedom Islands to Amari, that the
Freedom Islands are inalienable lands of the public domain. Thus, Amari signed the
Amended JVA knowing and assuming all the attendant risks, including the annulment of
the Amended JVA.
Amari has also not paid to PEA the full reimbursement cost incurred by PEA in
reclaiming the Freedom Islands. Amari states that it has paid PEA
only P300,000,000.00[15] out of theP1,894,129,200.00 total reimbursement cost agreed
upon in the Amended JVA. Moreover, Amari does not claim to have even initiated the
reclamation of the 592.15 hectares of submerged areas covered in the Amended JVA, or
to have started to construct any permanent infrastructure on the Freedom Islands. In
short, Amari does not claim to have introduced any physical improvement or
development on the reclamation project that is the subject of the Amended JVA. And yet
Amari claims that it had already spent a whopping P9,876,108,638.00 as its total
development cost as of June 30, 2002.[16] Amari does not explain how it spent the rest of
the P9,876,108,638.00 total project cost after paying PEA P300,000,000.00. Certainly,
Amari cannot claim to be an innocent purchaser in good faith and for value.
In its Supplement to Motion for Reconsideration, PEA claims that it is similarly
situated as the Bases Conversion Development Authority (BCDA) which under R.A. No.
7227 is tasked to sell portions of the Metro Manila military camps and other military
reservations. PEAs comparison is incorrect. The Decision states as follows:
As the central implementing agency tasked to undertake reclamation projects nationwide,
with authority to sell reclaimed lands, PEA took the place of DENR as the government
agency charged with leasing or selling reclaimed lands of the public domain. The
reclaimed lands being leased or sold by PEA are not private lands, in the same manner
that DENR, when it disposes of other alienable lands, does not dispose of private lands
but alienable lands of the public domain. Only when qualified private parties acquire
these lands will the lands become private lands. In the hands of the government agency
tasked and authorized to dispose of alienable or disposable lands of the public domain,
these lands are still public, not private lands.
PEA is the central implementing agency tasked to undertake reclamation
projects nationwide. PEA took the place of Department of Environment and Natural
Resources (DENR for brevity) as the government agency charged with leasing or
selling all reclaimed lands of the public domain. In the hands of PEA, which took over
the leasing and selling functions of DENR, reclaimed foreshore lands are public
lands in the same manner that these same lands would have been public lands in the
hands of DENR. BCDA is an entirely different government entity. BCDA is authorized
by law to sell specific government lands that have long been declared by presidential
proclamations as military reservations for use by the different services of the armed
forces under the Department of National Defense. BCDAs mandate is specific and
limited in area, while PEAs mandate is general and national. BCDA holds government
lands that have been granted to end-user government entities the military services of the
armed forces. In contrast, under Executive Order No. 525, PEA holds the reclaimed
public lands, not as an end-user entity, but as the government agency primarily
responsible for integrating, directing, and coordinating all reclamation projects for and
on behalf of the National Government.
In Laurel v. Garcia,[17] cited in the Decision, the Court ruled that land devoted to
public use by the Department of Foreign Affairs, when no longer needed for public use,
may be declared patrimonial property for sale to private parties provided there is a law
authorizing such act. Well-settled is the doctrine that public land granted to an end-user
government agency for a specific public use may subsequently be withdrawn by
Congress from public use and declared patrimonial property to be sold to private parties.
R.A. No. 7227 creating the BCDA is a law that declares specific military reservations no
longer needed for defense or military purposes and reclassifies such lands as patrimonial
property for sale to private parties.
Government owned lands, as long they are patrimonial property, can be sold to
private parties, whether Filipino citizens or qualified private corporations. Thus, the so-

called Friar Lands acquired by the government under Act No. 1120 are patrimonial
property[18] which even private corporations can acquire by purchase. Likewise,
reclaimed alienable lands of the public domain if sold or transferred to a public or
municipal corporation for a monetary consideration become patrimonial property in the
hands of the public or municipal corporation. Once converted to patrimonial property, the
land may be sold by the public or municipal corporation to private parties, whether
Filipino citizens or qualified private corporations.
We reiterate what we stated in the Decision is the rationale for treating PEA in the
same manner as DENR with respect to reclaimed foreshore lands, thus:
To allow vast areas of reclaimed lands of the public domain to be transferred to PEA as
private lands will sanction a gross violation of the constitutional ban on private
corporations from acquiring any kind of alienable land of the public domain. PEA will
simply turn around, as PEA has now done under the Amended JVA, and transfer several
hundreds of hectares of these reclaimed and still to be reclaimed lands to a single private
corporation in only one transaction. This scheme will effectively nullify the
constitutional ban in Section 3, Article XII of the 1987 Constitution which was intended
to diffuse equitably the ownership of alienable lands of the public domain among
Filipinos, now numbering over 80 million strong.
This scheme, if allowed, can even be applied to alienable agricultural lands of the public
domain since PEA can acquire x x x any and all kinds of lands. This will open the
floodgates to corporations and even individuals acquiring hundreds, if not thousands, of
hectares of alienable lands of the public domain under the guise that in the hands of PEA
these lands are private lands. This will result in corporations amassing huge landholdings
never before seen in this country - creating the very evil that the constitutional ban was
designed to prevent. This will completely reverse the clear direction of constitutional
development in this country. The 1935 Constitution allowed private corporations to
acquire not more than 1,024 hectares of public lands. The 1973 Constitution prohibited
private corporations from acquiring any kind of public land, and the 1987 Constitution
has unequivocally reiterated this prohibition.
Finally, the Office of the Solicitor General and PEA argue that the cost of reclaiming
deeply submerged areas is enormous and it would be difficult for PEA to accomplish
such project without the participation of private corporations.[19] The Decision does not
bar private corporations from participating in reclamation projects and being paid for
their services in reclaiming lands. What the Decision prohibits, following the explicit
constitutional mandate, is for private corporations to acquire reclaimed lands of the
public domain. There is no prohibition on the directors, officers and stockholders of
private corporations, if they are Filipino citizens, from acquiring at public auction
reclaimed alienable lands of the public domain. They can acquire not more than 12
hectares per individual, and the land thus acquired becomes private land.
Despite the nullity of the Amended JVA, Amari is not precluded from recovering
from PEA in the proper proceedings, on a quantum meruit basis, whatever Amari may
have incurred in implementing the Amended JVA prior to its declaration of nullity.
WHEREFORE, finding the Motions for Reconsideration to be without merit, the
same are hereby DENIED with FINALITY. The Motion to Inhibit and for ReDeliberation and the Motion to Set Case for Hearing on Oral Argument are likewise
DENIED.
SO ORDERED.

[G.R. No. 136438. November 11, 2004]

TEOFILO C. VILLARICO, petitioner, vs. VIVENCIO SARMIENTO, SPOUSES

BESSIE SARMIENTO-DEL MUNDO & BETH DEL MUNDO, ANDOKS
LITSON CORPORATION and MARITES CARINDERIA, respondents.

DECISION
SANDOVAL-GUTIERREZ, J.:
Before us is a petition for review on certiorari of the Decision[1] of the Court of
Appeals dated December 7, 1998 in CA-G.R. CV No. 54883, affirming in toto the
Decision[2] of the Regional Trial Court (RTC) of Paraaque City, Branch 259, dated
November 14, 1996, in Civil Case No. 95-044.
The facts of this case, as gleaned from the findings of the Court of Appeals, are:
Teofilo C. Villarico, petitioner, is the owner of a lot in La Huerta, Paraaque City,
Metro Manila with an area of sixty-six (66) square meters and covered by Transfer
Certificate of Title (T.C.T.) No. 95453 issued by the Registry of Deeds, same city.
Petitioners lot is separated from the Ninoy Aquino Avenue (highway) by a strip of
land belonging to the government. As this highway was elevated by four (4) meters and
therefore higher than the adjoining areas, the Department of Public Works and Highways
(DPWH) constructed stairways at several portions of this strip of public land to enable
the people to have access to the highway.
Sometime in 1991, Vivencio Sarmiento, his daughter Bessie Sarmiento and her
husband Beth Del Mundo, respondents herein, had a building constructed on a portion of
said government land. In November that same year, a part thereof was occupied by
Andoks Litson Corporation and Marites Carinderia, also impleaded as respondents.
In 1993, by means of a Deed of Exchange of Real Property, petitioner acquired a
74.30 square meter portion of the same area owned by the government. The property was
registered in his name as T.C.T. No. 74430 in the Registry of Deeds of Paraaque City.
In 1995, petitioner filed with the RTC, Branch 259, Paraaque City, a complaint
for accion publiciana against respondents, docketed as Civil Case No. 95-044. He
alleged inter alia that respondents structures on the government land closed his right of
way to the Ninoy Aquino Avenue; and encroached on a portion of his lot covered by
T.C.T. No. 74430.
Respondents, in their answer, specifically denied petitioners allegations, claiming
that they have been issued licenses and permits by Paraaque City to construct their
buildings on the area; and that petitioner has no right over the subject property as it
belongs to the government.
After trial, the RTC rendered its Decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered:
1.

Declaring the defendants to have a better right of possession over the

subject land except the portion thereof covered by Transfer Certificate of
Title No. 74430 of the Register of Deeds of Paraaque;

2.

Ordering the defendants to vacate the portion of the subject premises

described in Transfer Certificate of Title No. 74430 and gives its
possession to plaintiff; and

3.

Dismissing the claim for damages of the plaintiff against the

defendants, and likewise dismissing the claim for attorneys fees of the
latter against the former.

Without pronouncement as to costs.

SO ORDERED.[3]
The trial court found that petitioner has never been in possession of any portion of
the public land in question. On the contrary, the defendants are the ones who have been
in actual possession of the area. According to the trial court, petitioner was not deprived
of his right of way as he could use the Kapitan Tinoy Street as passageway to the
highway.

On appeal by petitioner, the Court of Appeals issued its Decision affirming the trial
courts Decision in toto, thus:
WHEREFORE, the judgment hereby appealed from is hereby AFFIRMED in toto, with
costs against the plaintiff-appellant.
SO ORDERED.[4]
In this petition, petitioner ascribes to the Court of Appeals the following assignments
of error:
I
THE FINDINGS OF FACT OF THE HON. COURT OF APPEALS CONTAINED A
CONCLUSION WITHOUT CITATION OF SPECIFIC EVIDENCE ON WHICH THE
SAME WAS BASED.

II
THE HON. COURT OF APPEALS ERRED IN CONSIDERING THAT THE ONLY
ISSUE IN THIS CASE IS WHETHER OR NOT THE PLAINTIFF-APPELLANT HAS
ACQUIRED A RIGHT OF WAY OVER THE LAND OF THE GOVERNMENT
WHICH IS BETWEEN HIS PROPERTY AND THE NINOY AQUINO AVENUE.

III
THE HON. COURT OF APPEALS ERRED IN CONCLUDING THAT ACCION
PUBLICIANA IS NOT THE PROPER REMEDY IN THE CASE AT BAR.
IV
THE HON. COURT OF APPEALS ERRED IN CONCLUDING THAT THE
EXISTENCE OF THE PLAINTIFF-APPELLANTS RIGHT OF WAY DOES NOT
CARRY POSSESSION OVER THE SAME.
V
THE HON. COURT OF APPEALS ERRED IN NOT RESOLVING THE ISSUE OF
WHO HAS THE BETTER RIGHT OF POSSESSION OVER THE SUBJECT LAND
BETWEEN THE PLAINTIFF-APPELLANT AND THE DEFENDANT-APPELLEES. [5]
In their comment, respondents maintain that the Court of Appeals did not err in
ruling that petitioners action for accion publiciana is not the proper remedy in asserting
his right of way on a lot owned by the government.
Here, petitioner claims that respondents, by constructing their buildings on the lot in
question, have deprived him of his right of way and his right of possession over a
considerable portion of the same lot, which portion is covered by his T.C.T. No. 74430 he
acquired by means of exchange of real property.
It is not disputed that the lot on which petitioners alleged right of way exists belongs
to the state or property of public dominion. Property of public dominion is defined by
Article 420 of the Civil Code as follows:
ART. 420. The following things are property of public dominion:
(1) Those intended for public use such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and other of similar character.

(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth.
Public use is use that is not confined to privileged individuals, but is open to the
indefinite public.[6] Records show that the lot on which the stairways were built is for the
use of the people as passageway to the highway. Consequently, it is a property of public
dominion.
Property of public dominion is outside the commerce of man and hence it: (1) cannot
be alienated or leased or otherwise be the subject matter of contracts; (2) cannot be
acquired by prescription against the State; (3) is not subject to attachment and execution;
and (4) cannot be burdened by any voluntary easement.[7]
Considering that the lot on which the stairways were constructed is a property of
public dominion, it can not be burdened by a voluntary easement of right of way in favor
of herein petitioner. In fact, its use by the public is by mere tolerance of the government
through the DPWH. Petitioner cannot appropriate it for himself. Verily, he can not claim
any right of possession over it. This is clear from Article 530 of the Civil Code which
provides:

ART. 530. Only things and rights which are susceptible of being appropriated may be the
object of possession.

Accordingly, both the trial court and the Court of Appeals erred in ruling that
respondents have better right of possession over the subject lot.
However, the trial court and the Court of Appeals found that defendants buildings
were constructed on the portion of the same lot now covered by T.C.T. No. 74430 in
petitioners name. Being its owner, he is entitled to its possession.
WHEREFORE, the petition is DENIED. The assailed Decision of the Court of
Appeals dated December 7, 1998 in CA-G.R. CV No. 54883 is AFFIRMED with
MODIFICATION in the sense that neither petitioner nor respondents have a right of
possession over the disputed lot where the stairways were built as it is a property of
public dominion. Costs against petitioner.
SO ORDERED.

[G.R. No. 100709. November 14, 1997]

REPUBLIC OF THE PHILIPPINES, represented by the DIRECTOR OF

LANDS, petitioner, vs. COURT OF APPEALS, JOSEFINA L. MORATO,
SPOUSES NENITA CO and ANTONIO QUILATAN AND THE REGISTER
OF DEEDS OF QUEZON PROVINCE, respondents.
DECISION
PANGANIBAN, J.:
Will the lease and/or mortgage of a portion of a realty acquired through free patent
constitute sufficient ground for the nullification of such land grant? Should such property
revert to the State once it is invaded by the sea and thus becomes foreshore land?

The Case
These are the two questions raised in the petition before us assailing the Court of
Appeals[1] Decision in CA-G.R. CV No. 02667 promulgated on June 13, 1991 which
answered the said questions in the negative.[2] Respondent Courts Decision
dismissed[3] petitioners appeal and affirmed in toto the decision of the Regional Trial
Court[4] of Calauag, Quezon, dated December 28, 1983 in Civil Case No. C-608. In turn,
the Regional Trial Courts decision dismissed petitioners complaint for cancellation of the
Torrens Certificate of Title of Respondent Morato and for reversion of the parcel of land
subject thereof to the public domain.
The Facts
The petition of the solicitor general, representing the Republic of the Philippines,
recites the following facts:[5]
Sometime in December, 1972, respondent Morato filed a Free Patent Application No. III3-8186-B on a parcel of land with an area of 1,265 square meters situated at
Pinagtalleran, Calauag, Quezon. On January 16, 1974, the patent was approved and the
Register of Deeds of Quezon at Lucena City issued on February 4, 1974 Original
Certificate of Title No. P-17789. Both the free patent and the title specifically mandate
that the land shall not be alienated nor encumbered within five (5) years from the date of
the issuance of the patent (Sections 118 and 124 of CA No. 141, as amended).
Subsequently, the District Land Officer in Lucena City, acting upon reports that
respondent Morato had encumbered the land in violation of the condition of the patent,
conducted an investigation. Thereafter, it was established that the subject land is a
portion of the Calauag Bay, five (5) to six (6) feet deep under water during high tide and
two (2) feet deep at low tide, and not suitable to vegetation. Moreover, on October 24,
1974, a portion of the land was mortgaged by respondent Morato to respondents Nenita
Co and Antonio Quilatan for P10,000.00 (pp. 2, 25, Folder of Exhibits). The spouses
Quilatan constructed a house on the land. Another portion of the land was leased to
Perfecto Advincula on February 2, 1976 at P100.00 a month, where a warehouse was
constructed.
On November 5, 1978, petitioner filed an amended complaint against respondents
Morato, spouses Nenita Co and Antonio Quilatan, and the Register of Deeds of Quezon
for the cancellation of title and reversion of a parcel of land to the public domain, subject
of a free patent in favor of respondent Morato, on the grounds that the land is a foreshore
land and was mortgaged and leased within the five-year prohibitory period (p. 46,
Records).
After trial, the lower court, on December 28, 1983, rendered a decision dismissing
petitioners complaint. In finding for private respondents, the lower court ruled that there
was no violation of the 5-year period ban against alienating or encumbering the land,
because the land was merely leased and not alienated. It also found that the mortgage to
Nenita Co and Antonio Quilatan covered only the improvement and not the land itself.
On appeal, the Court of Appeals affirmed the decision of the trial court. Thereafter,
the Republic of the Philippines filed the present petition.[6]
The Issues
Petitioner alleges that the following errors were committed by Respondent Court:[7]
I

Respondent Court erred in holding that the patent granted and certificate of title issued to
Respondent Morato cannot be cancelled and annulled since the certificate of title
becomes indefeasible after one year from the issuance of the title.
II
Respondent Court erred in holding that the questioned land is part of a disposable public
land and not a foreshore land.
The Courts Ruling
The petition is meritorious.
First Issue: Indefeasibility of a Free Patent Title
In resolving the first issue against petitioner, Respondent Court held:[8]
x x x. As ruled in Heirs of Gregorio Tengco vs. Heirs of Jose Alivalas, 168 SCRA 198. x
x. The rule is well-settled that an original certificate of title issued on the strength of a
homestead patent partakes of the nature of a certificate of title issued in a judicial
proceeding, as long as the land disposed of is really part of the disposable land of the
public domain, and becomes indefeasible and incontrovertible upon the expiration of one
year from the date of promulgation of the order of the Director of Lands for the issuance
of the patent. (Republic v. Heirs of Carle, 105 Phil. 1227 (1959); Ingaran v. Ramelo, 107
Phil. 498 (1960); Lopez v. Padilla, (G.R. No. L-27559, May 18, 1972, 45 SCRA 44). A
homestead patent, one registered under the Land Registration Act, becomes as
indefeasible as a Torrens Title. (Pamintuan v.San Agustin, 43 Phil. 558 (1982); El Hogar
Filipino v. Olviga, 60 Phil. 17 (1934); Duran v. Oliva, 113 Phil. 144 (1961); Pajomayo
v. Manipon, G.R. No. L-33676, June 30, 1971, 39 SCRA 676). (p. 203).
Again, in Lopez vs. Court of Appeals, 169 SCRA 271, citing Iglesia ni Cristo v. Hon.
Judge, CFI of Nueva Ecija, Branch I, (123 SCRA 516 (1983) and Pajomayo, et al. v.
Manipon, et al. (39 SCRA 676 (1971) held that once a homestead patent granted in
accordance with the Public Land Act is registered pursuant to Section 122 of Act 496, the
certificate of title issued in virtue of said patent has the force and effect of a Torrens Title
issued under the Land Registration Act.
Indefeasibility of the title, however, may not bar the State, thru the Solicitor General,
from filing an action for reversion, as ruled in Heirs of Gregorio Tengo v. Heirs of Jose
Aliwalas, (supra), as follows:
But, as correctly pointed out by the respondent Court of Appeals, Dr. Aliwalas title to the
property having become incontrovertible, such may no longer be collaterally attacked. If
indeed there had been any fraud or misrepresentation in obtaining the title, an action for
reversion instituted by the Solicitor General would be the proper remedy (Sec. 101, C.A.
No. 141; Director of Lands v. Jugado, G.R. No. L-14702, May 21, 1961, 2 SCRA 32;
Lopez v. Padilla, supra). (p. 204).
Petitioner contends that the grant of Free Patent (IV-3) 275 and the subsequent
issuance of Original Certificate of Title No. P-17789 to Respondent Josefina L. Morato
were subject to the conditions provided for in Commonwealth Act (CA) No. 141. It
alleges that on October 24, 1974, or nine (9) months and eight (8) days after the grant of
the patent, Respondent Morato, in violation of the terms of the patent, mortgaged a
portion of the land to Respondent Nenita Co, who thereafter constructed a house
thereon. Likewise, on February 2, 1976 and within the five-year prohibitory period,
Respondent Morato leased a portion of the land to Perfecto Advincula at a monthly rent
of P100.00 who, shortly thereafter, constructed a house of concrete materials on the
subject land.[9] Further, petitioner argues that the defense of indefeasibility of title is
inaccurate. The original certificate of title issued to Respondent Morato contains the

seeds of its own cancellation: such certificate specifically states on its face that it is
subject to the provisions of Sections 118, 119, 121, 122, 124 of CA No. 141, as amended.
[10]

Respondent Morato counters by stating that although a portion of the land was
previously leased, it resulted from the fact that Perfecto Advincula built a warehouse in
the subject land without [her] prior consent. The mortgage executed over the
improvement cannot be considered a violation of the said grant since it can never affect
the ownership.[11] She states further:
x x x. the appeal of the petitioner was dismissed not because of the principle of
indefeasibility of title but mainly due to failure of the latter to support and prove the
alleged violations of respondent Morato.The records of this case will readily show that
although petitioner was able to establish that Morato committed some acts during the
prohibitory period of 5 years, a perusal thereof will also show that what petitioner was
able to prove never constituted a violation of the grant.[12]
Respondent-Spouses Quilatan, on the other hand, state that the mortgage contract
they entered into with Respondent Morato can never be considered as [an] alienation
inasmuch as the ownership over the property remains with the owner.[13] Besides, it is the
director of lands and not the Republic of the Philippines who is the real party in interest
in this case, contrary to the provision of the Public Land Act which states that actions for
reversion should be instituted by the solicitor general in the name of Republic of the
Philippines.[14]
We find for petitioner.
Quoted below are relevant sections of Commonwealth Act No. 141, otherwise
known as the Public Land Act:
Sec. 118. Except in favor of the Government or any of its branches, units or institutions,
or legally constituted banking corporations, lands acquired under free patent or
homestead provisions shall not be subject to encumbrance or alienation from the date of
the approval of the application and for a term of five years from and after the date of
issuance of the patent or grant nor shall they become liable to the satisfaction of any debt
contracted prior to the expiration of said period; but the improvements or crops on the
land may be mortgaged or pledged to qualified persons, associations, or corporations.
No alienation, transfer, or conveyance of any homestead after five years and before
twenty-five years after issuance of title shall be valid without the approval of the
Secretary of Agriculture and Natural Resources, which approval shall not be denied
except on constitutional and legal grounds. (As amended by Com. Act No. 456, approved
June 8, 1939.)
xxxxxxxxx
Sec. 121. Except with the consent of the grantee and the approval of the Secretary of
Agriculture and Natural Resources, and solely for educational, religious, or charitable
purposes or for a right of way, no corporation, association, or partnership may acquire or
have any right, title, interest, or property right whatsoever to any land granted under the
free patent, homestead, or individual sale provisions of this Act or to any permanent
improvement on such land. (As amended by Com. Act No. 615, approved May 5, 1941)
Sec. 122. No land originally acquired in any manner under the provisions of this Act, nor
any permanent improvement on such land, shall be encumbered, alienated or transferred,
except to persons, corporations, association, or partnerships who may acquire lands of
the public domain under this Act or to corporations organized in the Philippines
authorized therefore by their charters.
Except in cases of hereditary successions, no land or any portion thereof originally
acquired under the free patent, homestead, or individual sale provisions of this Act, or
any permanent improvement on such land, shall be transferred or assigned to any
individual, nor shall such land or any permanent improvement thereon be leased to such

individual, when the area of said land, added to that of his own, shall exceed one hundred
and forty-four hectares. Any transfer, assignment, or lease made in violation hereto shall
be null and void. (As amended by Com. Act No. 615, Id.)
xxxxxxxxx
Sec. 124. Any acquisition, conveyance, alienation, transfer, or other contract made or
executed in violation of any of the provisions of sections one hundred and eighteen, one
hundred and twenty, one hundred and twenty-one, one hundred and twenty-two, and one
hundred and twenty-three of this Act shall be unlawful and null and void from its
execution and shall produce the effect of annulling and cancelling the grant, title, patent,
or permit originally issued, recognized or confirmed, actually or presumptively, and
cause the reversion of the property and its improvements to the State. (Underscoring
supplied.)
The foregoing legal provisions clearly proscribe the encumbrance of a parcel of land
acquired under a free patent or homestead within five years from the grant of such patent.
Furthermore, such encumbrance results in the cancellation of the grant and the reversion
of the land to the public domain. Encumbrance has been defined as [a]nything that
impairs the use or transfer of property; anything which constitutes a burden on the title; a
burden or charge upon property; a claim or lien upon property. It may be a legal claim on
an estate for the discharge of which the estate is liable; an embarrassment of the estate or
property so that it cannot be disposed of without being subject to it; an estate, interest, or
right in lands, diminishing their value to the general owner; a liability resting upon an
estate.[15] Do the contracts of lease and mortgage executed within five (5) years from the
issuance of the patent constitute an encumbrance and violate the terms and conditions of
such patent? Respondent Court answered in the negative:[16]
From the evidence adduced by both parties, it has been proved that the area of the portion
of the land, subject matter of the lease contract (Exh. B) executed by and between
Perfecto Advincula and Josefina L. Morato is only 10 x 12 square meters, whereas the
total area of the land granted to Morato is 1,265 square meters. It is clear from this that
the portion of the land leased by Advincula does not significantly affect Moratos
ownership and possession. Above all, the circumstances under which the lease was
executed do not reflect a voluntary and blatant intent to violate the conditions provided
for in the patent issued in her favor. On the contrary, Morato was compelled to enter into
that contract of lease out of sympathy and the goodness of her heart to accommodate a
fellow man. x x x
It is indisputable, however, that Respondent Morato cannot fully use or enjoy the
land during the duration of the lease contract. This restriction on the enjoyment of her
property sufficiently meets the definition of an encumbrance under Section 118 of the
Public Land Act, because such contract impairs the use of the property by the grantee. In
a contract of lease which is consensual, bilateral, onerous and commutative, the owner
temporarily grants the use of his or her property to another who undertakes to pay rent
therefor.[17] During the term of the lease, the grantee of the patent cannot enjoy the
beneficial use of the land leased. As already observed, the Public Land Act does not
permit a grantee of a free patent from encumbering any portion of such land. Such
encumbrance is a ground for the nullification of the award.
Moratos resort to equity, i.e. that the lease was executed allegedly out of the
goodness of her heart without any intention of violating the law, cannot help her. Equity,
which has been aptly described as justice outside legality, is applied only in the absence
of, and never against, statutory law or judicial rules of procedure. Positive rules prevail
over all abstract arguments based on equity contra legem.[18]
Respondents failed to justify their position that the mortgage should not be
considered an encumbrance. Indeed, we do not find any support for such contention. The
questioned mortgage falls squarely within the term encumbrance proscribed by Section
118 of the Public Land Act.[19] Verily, a mortgage constitutes a legal limitation on the
estate, and the foreclosure of such mortgage would necessarily result in the auction of the
property.[20]

Even if only part of the property has been sold or alienated within the prohibited
period of five years from the issuance of the patent, such alienation is a sufficient cause
for the reversion of the whole estate to the State. As a condition for the grant of a free
patent to an applicant, the law requires that the land should not be encumbered, sold or
alienated within five years from the issuance of the patent. The sale or the alienation of
part of the homestead violates that condition.[21]
The prohibition against the encumbrance -- lease and mortgage included -- of a
homestead which, by analogy applies to a free patent, is mandated by the rationale for the
grant, viz.:[22]
It is well-known that the homestead laws were designed to distribute disposable
agricultural lots of the State to land-destitute citizens for their home and
cultivation. Pursuant to such benevolent intention the State prohibits the sale or
encumbrance of the homestead (Section 116) within five years after the grant of the
patent. After that five-year period the law impliedly permits alienation of the homestead;
but in line with the primordial purpose to favor the homesteader and his family the
statute provides that such alienation or conveyance (Section 117) shall be subject to the
right of repurchase by the homesteader, his widow or heirs within five years. This section
117 is undoubtedly a complement of section 116. It aims to preserve and keep in the
family of the homesteader that portion of public land which the State had gratuitously
given to him. It would, therefore, be in keeping with this fundamental idea to hold, as we
hold, that the right to repurchase exists not only when the original homesteader makes
the conveyance, but also when it is made by his widow or heirs. This construction is
clearly deducible from the terms of the statute.
By express provision of Section 118 of Commonwealth Act 141 and in conformity
with the policy of the law, any transfer or alienation of a free patent or homestead within
five years from the issuance of the patent is proscribed. Such transfer nullifies said
alienation and constitutes a cause for the reversion of the property to the State.
The prohibition against any alienation or encumbrance of the land grant is a proviso
attached to the approval of every application. [23] Prior to the fulfillment of the
requirements of law, Respondent Morato had only an inchoate right to the property; such
property remained part of the public domain and, therefore, not susceptible to alienation
or encumbrance. Conversely, when a homesteader has complied with all the terms and
conditions which entitled him to a patent for [a] particular tract of public land, he
acquires a vested interest therein and has to be regarded an equitable owner thereof.
[24]
However, for Respondent Moratos title of ownership over the patented land to be
perfected, she should have complied with the requirements of the law, one of which was
to keep the property for herself and her family within the prescribed period of five (5)
years. Prior to the fulfillment of all requirements of the law, Respondent Moratos title
over the property was incomplete. Accordingly, if the requirements are not complied
with, the State as the grantor could petition for the annulment of the patent and the
cancellation of the title.
Respondent Morato cannot use the doctrine of the indefeasibility of her Torrens title
to bar the state from questioning its transfer or encumbrance. The certificate of title
issued to her clearly stipulated that its award was subject to the conditions provided for in
Sections 118, 119, 121, 122 and 124 of Commonwealth Act (CA) No. 141. Because she
violated Section 118, the reversion of the property to the public domain necessarily
follows, pursuant to Section 124.
Second Issue: Foreshore Land Reverts to the Public Domain
There is yet another reason for granting this petition.
Although Respondent Court found that the subject land was foreshore land, it
nevertheless sustained the award thereof to Respondent Morato:[25]

First of all, the issue here is whether the land in question, is really part of the foreshore
lands. The Supreme Court defines foreshore land in the case of Republic vs. Alagad, 169
SCRA 455, 464, as follows:
Otherwise, where the rise in water level is due to, the extraordinary action of nature,
rainful, for instance, the portions inundated thereby are not considered part of the bed or
basin of the body of water in question. It cannot therefore be said to be foreshore land but
land outside of the public dominion, and land capable of registration as private property.
A foreshore land, on the other hand has been defined as follows:
... that part of (the land) which is between high and low water and left dry by the flux and
reflux of the tides x x x x (Republic vs. C.A., Nos. L-43105, L-43190, August 31, 1984,
131 SCRA 532; Government vs. Colegio de San Jose, 53 Phil 423)
The strip of land that lies between the high and low water marks and that is alternatively
wet and dry according to the flow of the tide. (Rep. vs. CA, supra, 539).
The factual findings of the lower court regarding the nature of the parcel of land in
question reads:
Evidence disclose that the marginal area of the land radically changed sometime in 1937
up to 1955 due to a strong earthquake followed by frequent storms eventually eroding the
land. From 1955 to 1968, however, gradual reclamation was undertaken by the lumber
company owned by the Moratos. Having thus restored the land thru mostly human hands
employed by the lumber company, the area continued to be utilized by the owner of the
sawmill up to the time of his death in 1965. On or about March 17, 1973, there again was
a strong earthquake unfortunately causing destruction to hundreds of residential houses
fronting the Calauag Bay including the Santiago Building, a cinema house constructed of
concrete materials. The catastrophe totally caused the sinking of a concrete bridge at
Sumulong river also in the municipality of Calauag, Quezon.
On November 13, 1977 a typhoon code named Unding wrought havoc as it lashed the
main land of Calauag, Quezon causing again great erosion this time than that which the
area suffered in 1937. The Court noted with the significance of the newspaper clipping
entitled Baryo ng Mangingisda Kinain ng Dagat (Exh. 11).
xxxxxxxxx
Evidently this was the condition of the land when on or about December 5, 1972
defendant Josefina L. Morato filed with the Bureau of Lands her free patent
application. The defendant Josefina Morato having taken possession of the land after the
demise of Don Tomas Morato, she introduced improvement and continued developing
the area, planted it to coconut trees. Having applied for a free patent, defendant had the
land area surveyed and an approved plan (Exh. 9) based on the cadastral survey as early
as 1927 (Exh. 10) was secured. The area was declared for taxation purposes in the name
of defendant Josefina Morato denominated as Tax Declaration No. 4115 (Exh. 8) and the
corresponding realty taxes religiously paid as shown by Exh. 8-A). (pp. 12-14,
DECISION).
Being supported by substantial evidence and for failure of the appellant to show cause
which would warrant disturbance, the afore-cited findings of the lower court, must be
respected.
Petitioner correctly contends, however, that Private Respondent Morato cannot own
foreshore land:
Through the encroachment or erosion by the ebb and flow of the tide, a portion of the
subject land was invaded by the waves and sea advances. During high tide, at least half
of the land (632.5 square meters) is 6 feet deep under water and three (3) feet deep
during low tide. The Calauag Bay shore has extended up to a portion of the questioned
land.

While at the time of the grant of free patent to respondent Morato, the land was not
reached by the water, however, due to gradual sinking of the land caused by natural
calamities, the sea advances had permanently invaded a portion of subject land. As
disclosed at the trial, through the testimony of the court-appointed commissioner, Engr.
Abraham B. Pili, the land was under water during high tide in the month of August
1978. The water margin covers half of the property, but during low tide, the water is
about a kilometer (TSN, July 19, 1979, p. 12). Also, in 1974, after the grant of the patent,
the land was covered with vegetation, but it disappeared in 1978 when the land was
reached by the tides (Exhs. E-1; E-14). In fact, in its decision dated December 28, 1983,
the lower court observed that the erosion of the land was caused by natural calamities
that struck the place in 1977 (Cf. Decision, pp. 17-18).[26]
Respondent-Spouses Quilatan argue, however, that it is unfair and unjust if Josefina
Morato will be deprived of the whole property just because a portion thereof was
immersed in water for reasons not her own doing.[27]
As a general rule, findings of facts of the Court of Appeals are binding and
conclusive upon this Court, unless such factual findings are palpably unsupported by the
evidence on record or unless the judgment itself is based on a misapprehension of facts.
[28]
The application for a free patent was made in 1972. From the undisputed factual
findings of the Court of Appeals, however, the land has since become
foreshore. Accordingly, it can no longer be subject of a free patent under the Public Land
Act. Government of the Philippine Islands vs. Cabagis [29]explained the rationale for this
proscription:
Article 339, subsection 1, of the Civil Code, reads:
Art. 339. Property of public ownership is
1. That devoted to public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, riverbanks, shores, roadsteads, and that of a similar character.
********
Article 1, case 3, of the Law of Waters of August 3, 1866, provides as follows:
ARTICLE 1. The following are part of the national domain open to public use:
********
3. The Shores. By the shore is understood that space covered and uncovered by the
movement of the tide. Its interior or terrestrial limit is the line reached by the highest
equinoctal tides. Where the tides are not appreciable, the shore begins on the land side at
the line reached by the sea during ordinary storms or tempests.
In the case of Aragon vs. Insular Government (19 Phil. 223), with reference to article 339
of the Civil Code just quoted, this Court said:
We should not be understood, by this decision, to hold that in a case of gradual
encroachment or erosion by the ebb and flow of the tide, private property may not
become property of public ownership. as defined in article 339 of the code, where it
appear that the owner has to all intents and purposes abandoned it and permitted it to be
totally destroyed, so as to become a part of the playa (shore of the sea), rada (roadstead),
or the like. * * *
In the Enciclopedia Jurdica Espaola, volume XII, page 558, we read the following:
With relative frequency the opposite phenomenon occurs; that is, the sea advances and
private properties are permanently invaded by the waves, and in this case they become
part of the shore or beach. They then pass to the public domain, but the owner thus
dispossessed does not retain any right to the natural products resulting from their new
nature; it is a de facto case of eminent domain, and not subject to indemnity.

In comparison, Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports
and bridges constructed by the State, banks, shores, roadsteads, and others of
similar character;
(2) Those which belong to the State, without being for public use, and are
intended for some public service or for the development of the national
wealth.
When the sea moved towards the estate and the tide invaded it, the invaded property
became foreshore land and passed to the realm of the public domain. In fact, the Court
inGovernment vs. Cabangis[30] annulled the registration of land subject of cadastral
proceedings when the parcel subsequently became foreshore land. [31] In another case, the
Court voided the registration decree of a trial court and held that said court had no
jurisdiction to award foreshore land to any private person or entity.[32] The subject land in
this case, being foreshore land, should therefore be returned to the public domain.
WHEREFORE,
the
petition
is
GRANTED. This
Court
hereby REVERSES and SETS ASIDE the assailed Decision of Respondent Court
and ORDERS the CANCELLATION of Free Patent No. (IV-3) 275 issued to Respondent
Morato and the subsequent Original Certificate of Title No. P-17789. The subject land
therefore REVERTS to the State. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-24440

March 28, 1968

THE PROVINCE OF ZAMBOANGA DEL NORTE, plaintiff-appellee,

vs.
CITY OF ZAMBOANGA, SECRETARY OF FINANCE and COMMISSIONER
OF INTERNAL REVENUE,defendants-appellants.
Fortugaleza, Lood, Sarmiento, M. T. Yap & Associates for plaintiff-appellee.
Office of the Solicitor General for defendants-appellants.
BENGZON, J.P., J.:
Prior to its incorporation as a chartered city, the Municipality of Zamboanga used
to be the provincial capital of the then Zamboanga Province. On October 12, 1936,
Commonwealth Act 39 was approved converting the Municipality of Zamboanga into
Zamboanga City. Sec. 50 of the Act also provided that
Buildings and properties which the province shall abandon upon the transfer of the
capital to another place will be acquired and paid for by the City of Zamboanga at a price
to be fixed by the Auditor General.
The properties and buildings referred to consisted of 50 lots and some buildings
constructed thereon, located in the City of Zamboanga and covered individually by
Torrens certificates of title in the name of Zamboanga Province. As far as can be gleaned
from the records, 1 said properties were being utilized as follows

No. of Lots
Use
1 ................................................ Capitol Site
3 ................................................ School Site
3 ................................................ Hospital Site
3 ................................................ Leprosarium
1 ................................................ Curuan School
1 ................................................ Trade School
2 ................................................ Burleigh School
2 ................................................ High School Playground
9 ................................................ Burleighs
1 ................................................ Hydro-Electric Site (Magay)
1 ................................................ San Roque
23 ................................................ vacant
It appears that in 1945, the capital of Zamboanga Province was transferred to
Dipolog. 2 Subsequently, or on June 16, 1948, Republic Act 286 was approved creating
the municipality of Molave and making it the capital of Zamboanga Province.
On May 26, 1949, the Appraisal Committee formed by the Auditor General,
pursuant to Commonwealth Act 39, fixed the value of the properties and buildings in
question left by Zamboanga Province in Zamboanga City at P1,294,244.00. 3
On June 6, 1952, Republic Act 711 was approved dividing the province of
Zamboanga into two (2): Zamboanga del Norte and Zamboanga del Sur. As to how the
assets and obligations of the old province were to be divided between the two new ones,
Sec. 6 of that law provided:
Upon the approval of this Act, the funds, assets and other properties and the
obligations of the province of Zamboanga shall be divided equitably between the
Province of Zamboanga del Norte and the Province of Zamboanga del Sur by the
President of the Philippines, upon the recommendation of the Auditor General.
Pursuant thereto, the Auditor General, on January 11, 1955, apportioned the assets
and obligations of the defunct Province of Zamboanga as follows: 54.39% for
Zamboanga del Norte and 45.61% for Zamboanga del Sur. Zamboanga del Norte
therefore became entitled to 54.39% of P1,294,244.00, the total value of the lots and
buildings in question, or P704,220.05 payable by Zamboanga City.
On March 17, 1959, the Executive Secretary, by order of the President, issued a
ruling 4 holding that Zamboanga del Norte had a vested right as owner (should be coowner pro-indiviso) of the properties mentioned in Sec. 50 of Commonwealth Act 39,
and is entitled to the price thereof, payable by Zamboanga City. This ruling revoked the
previous Cabinet Resolution of July 13, 1951 conveying all the said 50 lots and buildings
thereon to Zamboanga City for P1.00, effective as of 1945, when the provincial capital of
the then Zamboanga Province was transferred to Dipolog.
The Secretary of Finance then authorized the Commissioner of Internal Revenue to
deduct an amount equal to 25% of the regular internal revenue allotment for the City of
Zamboanga for the quarter ending March 31, 1960, then for the quarter ending June 30,
1960, and again for the first quarter of the fiscal year 1960-1961. The deductions, all
aggregating P57,373.46, was credited to the province of Zamboanga del Norte, in partial
payment of the P764,220.05 due it.
However, on June 17, 1961, Republic Act 3039 was approved amending Sec. 50 of
Commonwealth Act 39 by providing that
All buildings, properties and assets belonging to the former province of
Zamboanga and located within the City of Zamboanga are hereby transferred, free of
charge, in favor of the said City of Zamboanga. (Stressed for emphasis).

Consequently, the Secretary of Finance, on July 12, 1961, ordered the

Commissioner of Internal Revenue to stop from effecting further payments to
Zamboanga del Norte and to return to Zamboanga City the sum of P57,373.46 taken
from it out of the internal revenue allotment of Zamboanga del Norte. Zamboanga City
admits that since the enactment of Republic Act 3039, P43,030.11 of the P57,373.46 has
already been returned to it.
This constrained plaintiff-appellee Zamboanga del Norte to file on March 5, 1962,
a complaint entitled "Declaratory Relief with Preliminary Mandatory Injunction" in the
Court of First Instance of Zamboanga del Norte against defendants-appellants
Zamboanga City, the Secretary of Finance and the Commissioner of Internal Revenue. It
was prayed that: (a) Republic Act 3039 be declared unconstitutional for depriving
plaintiff province of property without due process and just compensation; (b) Plaintiff's
rights and obligations under said law be declared; (c) The Secretary of Finance and the
Internal Revenue Commissioner be enjoined from reimbursing the sum of P57,373.46 to
defendant City; and (d) The latter be ordered to continue paying the balance of
P704,220.05 in quarterly installments of 25% of its internal revenue allotments.
On June 4, 1962, the lower court ordered the issuance of preliminary injunction as
prayed for. After defendants filed their respective answers, trial was held. On August 12,
1963, judgment was rendered, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered declaring Republic Act No. 3039
unconstitutional insofar as it deprives plaintiff Zamboanga del Norte of its private
properties, consisting of 50 parcels of land and the improvements thereon under
certificates of title (Exhibits "A" to "A-49") in the name of the defunct province of
Zamboanga; ordering defendant City of Zamboanga to pay to the plaintiff the sum of
P704,220.05 payment thereof to be deducted from its regular quarterly internal revenue
allotment equivalent to 25% thereof every quarter until said amount shall have been fully
paid; ordering defendant Secretary of Finance to direct defendant Commissioner of
Internal Revenue to deduct 25% from the regular quarterly internal revenue allotment for
defendant City of Zamboanga and to remit the same to plaintiff Zamboanga del Norte
until said sum of P704,220.05 shall have been fully paid; ordering plaintiff Zamboanga
del Norte to execute through its proper officials the corresponding public instrument
deeding to defendant City of Zamboanga the 50 parcels of land and the improvements
thereon under the certificates of title (Exhibits "A" to "A-49") upon payment by the latter
of the aforesaid sum of P704,220.05 in full; dismissing the counterclaim of defendant
City of Zamboanga; and declaring permanent the preliminary mandatory injunction
issued on June 8, 1962, pursuant to the order of the Court dated June 4, 1962. No costs
are assessed against the defendants.
It is SO ORDERED.
Subsequently, but prior to the perfection of defendants' appeal, plaintiff province
filed a motion to reconsider praying that Zamboanga City be ordered instead to pay the
P704,220.05 in lump sum with 6% interest per annum. Over defendants' opposition, the
lower court granted plaintiff province's motion.
The defendants then brought the case before Us on appeal.
Brushing aside the procedural point concerning the property of declaratory relief
filed in the lower court on the assertion that the law had already been violated and that
plaintiff sought to give it coercive effect, since assuming the same to be true, the Rules
anyway authorize the conversion of the proceedings to an ordinary action, 5 We proceed
to the more important and principal question of the validity of Republic Act 3039.
The validity of the law ultimately depends on the nature of the 50 lots and
buildings thereon in question. For, the matter involved here is the extent of legislative
control over the properties of a municipal corporation, of which a province is one. The
principle itself is simple: If the property is owned by the municipality (meaning
municipal corporation) in its public and governmental capacity, the property is public and
Congress has absolute control over it. But if the property is owned in its private or

proprietary capacity, then it is patrimonial and Congress has no absolute control. The
municipality cannot be deprived of it without due process and payment of just
compensation. 6
The capacity in which the property is held is, however, dependent on the use to
which it is intended and devoted. Now, which of two norms, i.e., that of the Civil Code or
that obtaining under the law of Municipal Corporations, must be used in classifying the
properties in question?
The Civil Code classification is embodied in its Arts. 423 and 424 which
provide:1wph1.t
ART. 423. The property of provinces, cities, and municipalities is divided into
property for public use and patrimonial property.
ART. 424. Property for public use, in the provinces, cities, and municipalities,
consists of the provincial roads, city streets, municipal streets, the squares, fountains,
public waters, promenades, and public works for public service paid for by said
provinces, cities, or municipalities.
All other property possessed by any of them is patrimonial and shall be governed by this
Code, without prejudice to the provisions of special laws. (Stressed for emphasis).
Applying the above cited norm, all the properties in question, except the two (2)
lots used as High School playgrounds, could be considered as patrimonial properties of
the former Zamboanga province. Even the capital site, the hospital and leprosarium sites,
and the school sites will be considered patrimonial for they are not for public use. They
would fall under the phrase "public works for public service" for it has been held that
under theejusdem generis rule, such public works must be for free and indiscriminate use
by anyone, just like the preceding enumerated properties in the first paragraph of Art
424. 7 The playgrounds, however, would fit into this category.
This was the norm applied by the lower court. And it cannot be said that its
actuation was without jurisprudential precedent for in Municipality of Catbalogan v.
Director of Lands, 8 and in Municipality of Tacloban v. Director of Lands, 9 it was held
that the capitol site and the school sites in municipalities constitute their patrimonial
properties. This result is understandable because, unlike in the classification regarding
State properties, properties for public service in the municipalities are not classified as
public. Assuming then the Civil Code classification to be the chosen norm, the lower
court must be affirmed except with regard to the two (2) lots used as playgrounds.
On the other hand, applying the norm obtaining under the principles constituting
the law of Municipal Corporations, all those of the 50 properties in question which are
devoted to public service are deemed public; the rest remain patrimonial. Under this
norm, to be considered public, it is enough that the property be held and, devoted for
governmental purposes like local administration, public education, public health, etc. 10
Supporting jurisprudence are found in the following cases: (1) HINUNANGAN V.
DIRECTOR OF LANDS, 11where it was stated that "... where the municipality has
occupied lands distinctly for public purposes, such as for the municipal court house, the
public school, the public market, or other necessary municipal building, we will, in the
absence of proof to the contrary, presume a grant from the States in favor of the
municipality; but, as indicated by the wording, that rule may be invoked only as to
property which is used distinctly for public purposes...." (2) VIUDA DE TANTOCO V.
MUNICIPAL COUNCIL OF ILOILO 12 held that municipal properties necessary for
governmental purposes are public in nature. Thus, the auto trucks used by the
municipality for street sprinkling, the police patrol automobile, police stations and
concrete structures with the corresponding lots used as markets were declared exempt
from execution and attachment since they were not patrimonial properties. (3)
MUNICIPALITY OF BATANGAS VS. CANTOS 13 held squarely that a municipal lot
which had always been devoted to school purposes is one dedicated to public use and is
not patrimonial property of a municipality.

Following this classification, Republic Act 3039 is valid insofar as it affects the
lots used as capitol site, school sites and its grounds, hospital and leprosarium sites and
the high school playground sites a total of 24 lots since these were held by the
former Zamboanga province in its governmental capacity and therefore are subject to the
absolute control of Congress. Said lots considered as public property are the following:
TCT
Number
2200
2816
3281
3282
3283
3748
5406

......................................
......................................
......................................
......................................
......................................
......................................
......................................

4-B
149
1224
1226
1225
434-A-1
171

......................................
......................................
......................................
......................................
......................................
......................................
......................................

5564

......................................

168

......................................

5567

......................................

157 &
158

......................................

5583

......................................

167

......................................

6181
11942
11943
11944

......................................
......................................
......................................
......................................

(O.C.T.)
926
927
925

......................................
......................................
......................................
......................................

5557

......................................

170

......................................

5562

......................................

180

......................................

5565
5570
5571
5572
5573
5585
5586
5587

......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................

172-B
171-A
172-C
174
178
171-B
173
172-A

......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................

Lot Number

Use
Capitol Site
School Site
Hospital Site
Hospital Site
Hospital Site
School Site
School Site
High School
Play-ground
Trade School
High School
Play-ground
Curuan School
Leprosarium
Leprosarium
Leprosarium
Burleigh
School
Burleigh
School
Burleigh
Burleigh
Burleigh
Burleigh
Burleigh
Burleigh
Burleigh
Burleigh

We noticed that the eight Burleigh lots above described are adjoining each other
and in turn are between the two lots wherein the Burleigh schools are built, as per records
appearing herein and in the Bureau of Lands. Hence, there is sufficient basis for holding
that said eight lots constitute the appurtenant grounds of the Burleigh schools, and
partake of the nature of the same.
Regarding the several buildings existing on the lots above-mentioned, the records
do not disclose whether they were constructed at the expense of the former Province of
Zamboanga. Considering however the fact that said buildings must have been erected
even before 1936 when Commonwealth Act 39 was enacted and the further fact that
provinces then had no power to authorize construction of buildings such as those in the
case at bar at their own expense, 14 it can be assumed that said buildings were erected by
the National Government, using national funds. Hence, Congress could very well dispose
of said buildings in the same manner that it did with the lots in question.
But even assuming that provincial funds were used, still the buildings constitute
mere accessories to the lands, which are public in nature, and so, they follow the nature
of said lands, i.e., public. Moreover, said buildings, though located in the city, will not be
for the exclusive use and benefit of city residents for they could be availed of also by the
provincial residents. The province then and its successors-in-interest are not really
deprived of the benefits thereof.

But Republic Act 3039 cannot be applied to deprive Zamboanga del Norte of its
share in the value of the rest of the 26 remaining lots which are patrimonial properties
since they are not being utilized for distinctly, governmental purposes. Said lots are:
TCT Number
5577 ......................................
13198 ......................................
5569 ......................................
5558 ......................................
5559 ......................................
5560 ......................................
5561 ......................................
5563 ......................................
5566 ......................................
5568 ......................................
5574 ......................................
5575 ......................................
5576 ......................................
5578 ......................................
5579 ......................................
5580 ......................................
5581 ......................................
5582 ......................................
5584 ......................................
5588 ......................................
5589 ......................................
5590 ......................................
5591 ......................................
5592 ......................................
5593 ......................................
7379 ......................................

177
127-0
169
175
188
183
186
191
176
179
196
181-A
181-B
182
197
195
159-B
194
190
184
187
189
192
193
185
4147

Lot Number
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................

Use
Mydro, Magay
San Roque
Burleigh 15
Vacant
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"

Moreover, the fact that these 26 lots are registered strengthens the proposition that
they are truly private in nature. On the other hand, that the 24 lots used for governmental
purposes are also registered is of no significance since registration cannot convert public
property to private. 16
We are more inclined to uphold this latter view. The controversy here is more
along the domains of the Law of Municipal Corporations State vs. Province than
along that of Civil Law. Moreover, this Court is not inclined to hold that municipal
property held and devoted to public service is in the same category as ordinary private
property. The consequences are dire. As ordinary private properties, they can be levied
upon and attached. They can even be acquired thru adverse possession all these to the
detriment of the local community. Lastly, the classification of properties other than those
for public use in the municipalities as patrimonial under Art. 424 of the Civil Code is
"... without prejudice to the provisions of special laws." For purpose of this article, the
principles, obtaining under the Law of Municipal Corporations can be considered as
"special laws". Hence, the classification of municipal property devoted for distinctly
governmental purposes as public should prevail over the Civil Code classification in this
particular case.
Defendants' claim that plaintiff and its predecessor-in-interest are "guilty of laches
is without merit. Under Commonwealth Act 39, Sec. 50, the cause of action in favor of
the defunct Zamboanga Province arose only in 1949 after the Auditor General fixed the
value of the properties in question. While in 1951, the Cabinet resolved transfer said
properties practically for free to Zamboanga City, a reconsideration thereof was
seasonably sought. In 1952, the old province was dissolved. As successor-in-interest to
more than half of the properties involved, Zamboanga del Norte was able to get a
reconsideration of the Cabinet Resolution in 1959. In fact, partial payments were effected

subsequently and it was only after the passage of Republic Act 3039 in 1961 that the
present controversy arose. Plaintiff brought suit in 1962. All the foregoing, negative
laches.
It results then that Zamboanga del Norte is still entitled to collect from the City of
Zamboanga the former's 54.39% share in the 26 properties which are patrimonial in
nature, said share to computed on the basis of the valuation of said 26 properties as
contained in Resolution No. 7, dated March 26, 1949, of the Appraisal Committee
formed by the Auditor General.
Plaintiff's share, however, cannot be paid in lump sum, except as to the P43,030.11
already returned to defendant City. The return of said amount to defendant was without
legal basis. Republic Act 3039 took effect only on June 17, 1961 after a partial payment
of P57,373.46 had already been made. Since the law did not provide for retroactivity, it
could not have validly affected a completed act. Hence, the amount of P43,030.11 should
be immediately returned by defendant City to plaintiff province. The remaining balance,
if any, in the amount of plaintiff's 54.39% share in the 26 lots should then be paid by
defendant City in the same manner originally adopted by the Secretary of Finance and
the Commissioner of Internal Revenue, and not in lump sum. Plaintiff's prayer,
particularly pars. 5 and 6, read together with pars. 10 and 11 of the first cause of action
recited in the complaint 17 clearly shows that the relief sought was merely the continuance
of the quarterly payments from the internal revenue allotments of defendant City. Art.
1169 of the Civil Code on reciprocal obligations invoked by plaintiff to justify lump sum
payment is inapplicable since there has been so far in legal contemplation no complete
delivery of the lots in question. The titles to the registered lots are not yet in the name of
defendant Zamboanga City.
WHEREFORE, the decision appealed from is hereby set aside and another
judgment is hereby entered as follows:.
(1) Defendant Zamboanga City is hereby ordered to return to plaintiff Zamboanga
del Norte in lump sum the amount of P43,030.11 which the former took back from the
latter out of the sum of P57,373.46 previously paid to the latter; and
(2) Defendants are hereby ordered to effect payments in favor of plaintiff of
whatever balance remains of plaintiff's 54.39% share in the 26 patrimonial properties,
after deducting therefrom the sum of P57,373.46, on the basis of Resolution No. 7 dated
March 26, 1949 of the Appraisal Committee formed by the Auditor General, by way of
quarterly payments from the allotments of defendant City, in the manner originally
adopted by the Secretary of Finance and the Commissioner of Internal Revenue. No
costs. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. L-24661 February 28, 1974

BENJAMIN RABUCO, VENANCIO G. GUIRNALDA, LEODEGARIO ALOBA,
ELEUTERIO IBAES, ROGELIO ARAGONES, ASENCIO ABANCO,
BENEDICTO BAUTISTA, MAXIMO AQUINO, PAULINA DALUMIAS, NENITA
RAMOS, GUILLERMO VARIAS, EMELDA ARELLANO, PEDRO BILBAO,

ERNESTO BONBALES, ROSITA OCA BAUTISTA, TERESITA ESTEBAN, JOSE

BENJAMIN, LORENZO BELDEVER, LEODEGARIO TUMLOS, PATRICIO
MALATE, ANSELMO CORTEJOS, ANACLETA ADUCA, SALOME
BARCELONA, ENRICO CELSO, IRENE CAMBA, MARIA COLLADO,
RUFINO CANTIL, ANANIAS CANILLO, MAXIMO DE CASTRO, CEFERINO
SALAZAR, PATRIA ANAYA, FELISA VELASCO, IGNACIO SARASPI, FLAVIO
DINAGUIT, REMEDIOS BAROMETRO, PEDRO GEBANIA, RUBEN
GEGABALEN, EMETRIO EDAO, LUCIANO ARAGONES, ADRIANO
ESTRELLADO, BONIFACIO EVARISTO, ISIDORO EDORIA, TIMOTEA
ECARUAN, BIENVENIDO COLLADO, CENON DAJUYA, RAFAELA
FERNANDEZ, ALFONSO FAUSTINO, AVELINO GARCIA, RICARDO
GUIRNALDA, FRANCISCO HENERAL, CARMEN KIONESALA, FELICIANO
LUMACTOD, DOLORES VILLACAMPA, NARCISO LIM, EUFEMIO
LEGASPI, MATILDE MABAQUIAO, EULOGIO VIA, MACARIO ANTONIO,
JEREMIAS DE LA CRUZ, MARTIN MANGABAN, SIMEON MANGABA T.,
CARIDAD MER MILLA, FELIX MAHINAY, NAPOLEON MARZAN, ISAIAS
MANALASTAS, JOSEFA CORVERA, JOSE APRUEDO, ARSENIO REYES,
EUGENIA A. ONO, CORNELIO OPOLENCIA, SEDECIAS PASCUA, ABUNDIO
PAGUNTALAN, ESPERANZA DE QUIROS, CRESENCIO SALEM, MOISES
FERNANDEZ, FORTUNATO GONZALES, SOCORRO R. VALEN, RODOLFO
COLLADO, VENERIO CELSO, GREGORIO DE LA CRUZ, CELSO ALCERA,
NICOLAS ARAGONES, JOSEFINA MANANSALA, ADELAIDA CALASIN ,
JOSE AGUSTIN, TOMAS JOSEPH, MANUEL DADOR, SERGIO LIPATON,
ERNESTO SUMAYDING, MARCELINO DIOSO, MIGUEL ALCERA,
CRISANTA ENAMER, JUAN VIADO HILARION CHIOCO, EUROPIA
CABAHUG, VICTORIA DUERO, CONSORCIO ENOC, MAMERTO
GAMONIDO, BONIFACIO SABADO, MARIA INTROLIZO, HENRY ENOLBA,
REYNALDO LIM, FORTUNATO LIPON, ERNESTO MALLOS, FLORENTINA
PATRICIO, MAMERTO PALAPALA, RAMON DE PERALTA, JOSE PARRAS,
APOLINARIO YAP, JUAN ROQUE, FELIX ROQUE, GLICERIA SALAZAR,
MIGUELA SABIO, AGAPITO SAYAS, PAULINO SARROZA, PACIFICO
JUANICO, LIBERADO TULAWAN, LIGAYA LAUS, ERNESTO VERZOSA,
LEOPOLDO BERNALES, JAIME VISTA, ISAIAS AMURAO, BENITA M.
BARENG, and BRIGIDA SANCHEZ, petitioners,
vs.
HON. ANTONIO J. VILLEGAS substituted by HON. RAMON BAGATSING as
CITY MAYOR OF MANILA, HON. LADISLAO J. TOLENTINO, City Engineer of
Manila, their agents, employees, assistants and all persons acting under them;
HON. BENJAMIN GOZON, Administrator, Land Reform Authority substituted by
HON CONRADO ESTRELLA as Secretary of the Department of Agrarian
Reforms and his agents, employees, assistants and all persons acting under his
orders, respondent. 1
G.R. No. L-24915 February 28, 1974
BENJAMIN RABUCO, et al., (the same co-petitioners in L-24661), petitioners,
vs.
HON. ANTONIO J. VILLEGAS substituted by HON. RAMON BAGATSING as
CITY MAYOR OF MANILA, et al., (the same co-respondents in L24661), respondents.
G.R. No. L-24916 February 28, 1974
BENJAMIN RABUCO, et al. (the same co-petitioners in L-24661), petitionersappellants,
vs.
HON. ANTONIO J. VILLEGAS substituted by HON. RAMON BAGATSING as
CITY MAYOR OF MANILA, et al., (the same co-respondents in L24661), respondents-appellees.
Manuel D. Melotindos and Ricardo M. Guirnalda for petitioners.

Second Assistant City Fiscal Manuel T. Reyes for respondents.

TEEHANKEE, J.:p
The Court herein upholds the constitutionality of Republic Act 3120 on the strength of
the established doctrine that the subdivision of communal land of the State (although
titled in the name of the municipal corporation) and conveyance of the resulting
subdivision lots by sale on installment basis to bona fide occupants by Congressional
authorization and disposition does not constitute infringements of the due process clause
or the eminent domain provisions of the Constitution but operates simply as a
manifestation of the legislature's right of control and power to deal with State property.
The origin and background of the cases at bar which deal with the decisive issue of
constitutionality of Republic Act 3120 enacted on June 17, 1961, as raised by respondent
mayor of Manila in resisting petitioners' pleas that respondent mayor not only lacks the
authority to demolish their houses or eject them as tenants and bona fide occupants of a
parcel of land in San Andres, Malate 2 but is also expressly prohibited from doing so by
section 2 of the Act, may be summarized from the Court of Appeals' 3 certification of
resolution of May 31, 1965 as follows:
Case L-24916 involves petitioners' appeal to the Court of Appeals 4 from the decision of
the Manila court of first instance dismissing their petition for injunction
and mandamus to enjoin the demolition of their houses and the ejectment from the public
lots in question and to direct respondent administrator of the Land Authority (now
Secretary of Agrarian Reform) to implement the provisions of Republic Act 3120 for the
subdivision and sale on installment basis of the subdivided lots to them as the tenants and
bona fide occupants thereof, and instead ordering their ejectment.
Case L-24915 involves petitioners' independent petition for injunction filed directly with
the Court of Appeals January 29, 1965 5 to forestall the demolition overnight of their
houses pursuant to the order of demolition set for January 30, 1965 at 8 a.m. issued by
respondents city officials pending the elevation of their appeal. The appellate court gave
due course thereto and issued the writ of preliminary injunction as prayed for.
The two cases were ordered "consolidated into one" since they were "unavoidably
interlaced." The appellate court, finding that the constitutionality of Republic Act 3120
was "the dominant and inextricable issue in the appeal" over which it had no jurisdiction
and that the trial court incorrectly "sidetracked" the issue, thereafter certified the said
cases to this Court, as follows:
The validity of Republic Act 3120 which was seasonably posed in issue in the court
below was sidetracked by the trial court, thus:
The constitutionality of Republic Act No. 3120 need not be passed upon as the principal
question in issue is whether the houses of the petitioners are public nuisances, which the
court resolved in the affirmative. As a matter of fact even if the petitioners were already
the owners of the land on which their respected houses are erected, the respondent city
officials could cause the removal thereof as they were constructed in violation of city
ordinances and constitute public nuisance.
It is significant to note, however, that what is sought by the respondent City Mayor and
City Engineer of Manila is not only the demolition of the petitioners' houses in the
premises in controversy, but their ejectment as well. Moreover, Republic Act 3120 does
intend not only the dismissal of the ejectment proceedings against the petitioners from
the land in controversy upon their motion, but as well that any demolition order issued
against them shall also have to be dismissed. The law says:
Upon approval of this Act no ejectment proceedings against any tenants or bona fide
occupant shall be instituted and any proceedings against any such tenant or bona
fideoccupant shall be dismissed upon motion of the defendant. Provided, That any

demolition order directed against any tenant or bona fide occupant thereof, shall be
dismissed. (Sec. 2, R. A. 3120).
Indeed, the petitioners-appellants, who contended in the court below that it was not
necessary to decide on the validity or constitutionality of the law, now asseverate that
'Republic Act No. 3120 expressly prohibits ejectment and demolition of petitioners'
home.' The petitioners' argument in their appeal to this Court runs as follows:
1. Petitioners-appellants are entitled to the remedies of injunction and mandamus, being
vested with lawful possession over Lot 21-B, Block 610, granted by law, Republic Act
No. 3120.
2. Civil Case No. 56092 has not been barred by any prior judgment, as wrongly claimed
by respondents-appellees.
3. Ejectment and demolition against petitioners-appellants are unlawful and clearly
prohibited by Republic Act No. 3120.
The defense of the respondents Mayor and City Engineer of Manila to arguments 2 and 3
is the invalidity of the said Republic Act 3120 for being in violation of the Constitutional
prohibition against the deprivation of property without due process of law and without
just compensation. So that even if argument 2 interposed by the petitioners-appellants
should be rejected, still they may claim a right, by virtue of the aforesaid provisions of
Republic Act 3120, to continue possession and occupation of the premises and the lifting
of the order of demolition issued against them. The constitutionality of the said Republic
Act 3120, therefore, becomes the dominant and inextricable issue of the appeal.
Case L-24661 for the continuation and maintenance of the writ of preliminary injunction
previously issued by the Court of Appeals for preservation of the status quo was filed by
petitioners directly with this Court on June 21, 1965, pending transmittal of the records
of Cases L-24915 and L-24916 to this Court as certified by the Court of Appeals which
declared itself without jurisdiction over the principal and decisive issue of
constitutionality of Republic Act 3120.
The Court gave due course thereto and on August 17, 1965 issued upon a P1,000 bond
the writ of preliminary injunction as prayed for enjoining respondents "from demolishing
and/or continuing to demolish the houses of herein petitioners situated in Lot No. 21-B,
Block No. 610 of the Cadastral Survey of the City of Manila, or from performing any act
constituting an interference in or disturbance of their present possession."
The records of two cases certified by the appellate court, L-24915 and L-24916, were
eventually forwarded to this Court which per its resolution of August 24, 1965 ordered
that they be docketed and be considered together with case L-24661.
In the early morning of April 19, 1970, a large fire of undetermined origin gutted the
Malate area including the lot on which petitioners had built their homes and dwellings.
Respondents city officials then took over the lot and kept petitioners from reconstructing
or repairing their burned dwellings. At petitioners' instance, the Court issued on June 17,
1970 a temporary restraining order enjoining respondents city officials "from performing
any act constituting an interference in or disturbance of herein petitioners' possession of
Lot No. 21-B, Block No. 610, of the Cadastral Survey of the City of Manila" as
safeguarded them under the Court's subsisting preliminary injunction of August 17, 1965.
The "dominant and inextricable issue" at bar, as correctly perceived by the appellate
court is the constitutionality of Republic Act 3120 whereby Congress converted the lot in
question together with another lot in San Andres, Malate "which are reserved as
communal property" into "disposable or alienable lands of the State to be placed under
the administration and disposal of the Land Tenure Administration" for subdivision into
small lots not exceeding 120 square meters per lot for sale on installment basis to the
tenants or bona fide occupants thereof 6and expressly prohibited ejectment and
demolition of petitioners' homes under section 2 of the Act as quoted in the appellate
court's certification resolution, supra.

The incidental issue seized upon by the trial court as a main issue for "sidetracking" the
decisive issue of constitutionality, to wit, that petitioners' houses as they stood at the time
of its judgment in 1965 "were constructed in violation of city ordinances and constituted
public nuisances" whose removal could be ordered "even if petitioners were already the
owners of the land on which their respective houses are erected" has become moot with
the burning down of the petitioners' houses in the fire of April 19, 1970.
If the Act is invalid and unconstitutional for constituting deprivation of property without
due process of law and without just compensation as contended by respondents city
officials, then the trial court's refusal to enjoin ejectment and demolition of petitioners'
houses may be upheld. Otherwise, petitioners' right under the Act to continue possession
and occupation of the premises and to the lifting and dismissal of the order of demolition
issued against them must be enforced and the trial court's judgment must be set aside.
Respondents city officials' contention that the Act must be stricken down as
unconstitutional for depriving the city of Manila of the lots in question and providing for
their sale in subdivided small lots to bona fide occupants or tenants without payment of
just compensation is untenable and without basis, since the lots in question are
manifestly owned by the city in its public and governmental capacity and are therefore
public property over which Congress had absolute control as distinguished from
patrimonial property owned by it in its private or proprietarycapacity of which it could
not be deprived without due process and without just compensation. 7
Here, Republic Act 3120 expressly declared that the properties were "reserved as
communal property" and ordered their conversion into "disposable and alienable lands of
the State" for sale in small lots to the bona fide occupants thereof. It is established
doctrine that the act of classifying State property calls for the exercise of wide
discretionary legislative power which will not be interfered with by the courts.
The case of Salas vs. Jarencio 8 wherein the Court upheld the constitutionality of
Republic Act 4118 whereby Congress in identical terms as in Republic Act 3120 likewise
converted another city lot (Lot 1-B-2-B of Block 557 of the cadastral survey of Manila
also in Malate) which was reserved as communal property into disposable land of the
State for resale in small lots by the Land Tenure, Administration to the bona fide
occupants is controlling in the case at bar.
The Court therein reaffirmed the established general rule that "regardless of the source or
classification of land in the possession of a municipality, excepting those acquired with
its own funds in its private or corporate capacity, such property is held in trust for the
State for the benefit of its inhabitants, whether it be for governmental or proprietary
purposes. It holds such lands subject to the paramount power of the legislature to dispose
of the same, for after all it owes its creation to it as an agent for the performance of a part
of its public work, the municipality being but a subdivision or instrumentality thereof for
purposes of local administration. Accordingly, the legal situation is the same as if the
State itself holds the property and puts it to a different use" 9 and stressed that "the
property, as has been previously shown, was not acquired by the City of Manila with its
own funds in its private or proprietary capacity. That it has in its name a registered title is
not questioned, but this title should be deemed to be held in trust for the State as the land
covered thereby was part of the territory of the City of Manila granted by the sovereign
upon its creation." 10
There as here, the Court holds that the Acts in question (Republic Acts 4118 in Salas and
Republic Act 3120 in the case at bar) were intended to implement the social justice
policy of the Constitution and the government program of land for the landless and that
they were not "intended to expropriate the property involved but merely to confirm its
character as communal land of the State and to make it available for disposition by the
National Government: ... The subdivision of the land and conveyane of the resulting
subdivision lots to the occupants by Congressional authorization does not operate as an
exercise of the power of eminent domain without just compensation in violation of
Section 1, subsection (2), Article III of the Constitution, 11 but simply as
a manifestationof its right and power to deal with state property." 12

Since the challenge of respondents city officials against the constitutionality of Republic
Act 3120 must fail as the City was not deprived thereby of anything it owns by
acquisition with its private or corporate funds either under the due process clause or
under the eminent domain provisions of the Constitution, the provisions of said Act must
be enforced and petitioners are entitled to the injunction as prayed for implementing the
Act's prohibition against their ejectment and demolition of their houses.
WHEREFORE, the appealed decision of the lower court (in Case No. L-24916) is hereby
set aside, and the preliminary injunction heretofore issued on August 17, 1965 is hereby
made permanent. The respondent Secretary of Agrarian Reform as successor agency of
the Land Tenure Administration may now proceed with the due implementation of
Republic Act 3120 in accordance with its terms and provisions. No costs.
Makalintal, C.J., Zaldivar, Castro, Barredo, Makasiar, Antonio, Esguerra, Muoz Palma
and Aquino, JJ., concur.
Fernandez, J., took no part.

Separate Opinions

FERNANDO, J., concurring:

It is undoubted that the opinion of the Court penned by Justice Teehankee, with his
customary lucidity and thoroughness, is in accordance with our past decisions on the
matter. Reflection on the innovation introduced by the present Constitution on local
government, did, however, give rise to doubts on my part as to the continuing
authoritativeness of Province of Zamboanga del Norte v. City of Zamboanga 1 and Salas
v. Jarencio, 2 the two principal opinions relied upon, both of which decisions were
promulgated before the effectivity of the new fundamental law. Hence this separate
opinion setting forth the reasons why I join the rest of my brethren.
1. In the declaration of principles and state policies 3 it is specifically provided: "The
State shall guarantee and promote the autonomy of local government units, especially the
barrio, to ensure their fullest development as self-reliant communities." 4 What was
succinctly expressed therein was made more definite in the article on local
government. 5 Its first section reads: "The territorial and political subdivisions of the
Philippines are the provinces, cities, municipalities, and barrios." 6 Then comes this
provision: "The National Assembly shall enact a local government code which may not
thereafter be amended except by a majority vote of all its Members, defining a more
responsive and accountable local government structure with an effective system of recall,
allocating among the different local government units their powers, responsibilities, and
resources, and providing for the qualifications, election and removal, term, salaries,
powers, functions, and duties of local officials, and all other matters relating to the
organization and operation of the local units. However, any change in the existing form
of local government shall not take effect until ratified by a majority of the votes cast in a
plebiscite called for the purpose." 7 After which there is this limitation on the power of
local government: "No province, city, municipality, or barrio may be created, divided,
merged, abolished, or its boundary substantially altered, except in accordance with the
criteria established in the local government code, and subject to the approval by a
majority of the votes cast in a plebiscite in the unit or units affected." 8 The autonomy of
cities and municipalities is guaranteed in these words: "(1) Provinces with respect to
component cities and municipalities, and cities and municipalities with respect to
component barrios, shall ensure that the acts of their component units are with the scope
of their assigned powers and functions. Highly urbanized cities, as determined by

standards established in the local government code, shall be independent of

province." 9Then comes the last section: "Each local government unit shall have the
power to create its own sources of revenue and to levy taxes, subject to such limitations
as may be provided by law." 10
The objective is thus crystal-clear and well-defined. The goal is the fullest autonomy to
local government units consistent with the basic theory of a unitary, not a federal, polity.
It is the hope that thereby they will attain "their fullest development as self-reliant
communities." 11 It is more than just the expression of an aspiration as attest by one of the
articles of the Constitution devoted to such a subject. 12 It was not so under the 1935
charter. On this point, all that appeared therein was: "The President shall ... exercise
general supervision over all local governments as may be provided by
law ... . 13 According to Justice Laurel in Planas v. Gil, 14 "the deliberation of the
Constitutional Convention show that the grant of the supervisory authority to the Chief
Executive in this regard was in the nature of a compromise resulting from the conflict of
views in that body, mainly between the historical view which recognizes the right of
local self-government ... and the legal theory which sanctions the possession by the state
of absolute control over local governments .. . The result was the recognition of the
power of supervision and all its implications and the rejection of what otherwise would
be animperium in imperio to the detriment of a strong national government." 15 For the
above provision starts with the vesting of control in the President "of all the executive
departments, bureaus, or offices," as distinguished from "general supervision over all
local governments as may be provided by law." 16 The difference in wording is highly
significant. So it was stressed by the then Justice, later Chief Justice, Concepcion
in Pelaez v. Auditor General: 17 "The power of control under this provision implies the
right of the President to interfere in the exercise of such discretion as may be vested by
law in the officers of the executive departments, bureaus, or offices of the national
government, as well as to act in lieu of such officers. This power is denied by the
Constitution to the Executive, insofar as local governments are concerned. With respect
to the latter, the fundamental law permits him to wield no more authority than that of
checking whether said local governments or the officers thereof perform their duties as
provided by statutory enactments. Hence, the President cannot interfere with local
governments, so long as the same or its officers act within the scope of their authority. He
may not enact an ordinance which the municipal council has failed or refused to pass,
even if it had thereby violated a duty imposed thereto by law, although he may see to it
that the corresponding provincial officials take appropriate disciplinary action therefor.
Neither may he vote, set aside or annul an ordinance passed by said council within the
scope of its jurisdiction, no matter how patently unwise it may be. He may not even
suspend an elective official of a regular municipality or take any disciplinary action
against him, except on appeal from a decision of the corresponding provincial board." 18
2. So it was that under the 1935 Constitution, the national government when acting
through the executive had only such general supervisory authority as was provided by
statute. There was no restriction, however, on the legislative body to create or to abolish
local government units. What was more, the powers vested in them could be expanded or
diminished depending on the will of Congress. It could hardly be assumed therefore that
under the previous charter, they could justifiably lay claim to real autonomy. For so long
as the legislation itself took care of delineating the matters that were appropriately within
the scope of their competence, there could be no objection to its validity. No
constitutional problem arose. Things have changed radically. We start with the declared
principle of the State guaranteeing and promoting the autonomy of local government
units. 19 We have likewise noted the earnestness of the framers as to the attainment of
such declared objective as set forth in the specific article 20 on the matter. It is made
obligatory on the National Assembly to enact a local government code. What is more,
unlike the general run of statutes, it cannot be amended except by a majority vote of all
its members. It is made to include "a more responsive and accountable local government
structure with an effective system of recall," with an expressed reference to
"qualifications, election and removal, term, salaries, powers, functions, and duties of
local officials, [as well as] all other matters relating to the organization and operation of
local units." 21 Mention is likewise made of the "powers, responsibilities, and
resources," 22 items that are identified with local autonomy. As if that were not enough,
the last sentence of this particular provision reads: "However, any change in the existing

form of local government shall not take effect until ratified by a majority of the votes
cast in a plebiscite called for the purpose." 23 To the extent that the last section requires
that the creation, division, merger, abolition or alteration of a boundary of a province,
city, municipality, or barrio, must be in accordance with the criteria established in the
local government code and subject to the approval by a majority of the votes cast in a
plebiscite in such unit or units, the adherence to the basic principle of local selfgovernment is quite clear. 24 Equally significant is the stress on the competence of a
province, city, municipality or barrio "to create its own sources of revenue and to levy
taxes subject to such limitations as may be provided by law." 25 The care and
circumspection with which the framers saw to the enjoyment of real local selfgovernment not only in terms of administration but also in terms of resources is thus
manifest. Their intent is unmistakable. Unlike the case under the 1935 Constitution, there
is thus a clear manifestation of the presumption now in favor of a local government unit.
It is a well-nigh complete departure from what was. Nor should it be ignored that a
highly urbanized city "shall be independent" not only of the national government but also
of a province. 26 Would it not follow then that under the present dispensation, the moment
property is transferred to it by the national government, its control over the same should
be as extensive and as broad as possible. Considerations of the above nature gave rise to
doubts on my part as to the decisions in the Zamboanga del Norte and Salas cases still
retaining unimpaired their doctrinal force. Would this be a case of Republic Act No. 3120
being rendered inoperative by virtue of its repugnancy to the present Constitution? 27
3. Nonetheless, such doubts were set at rest by two considerations. The opinion of Justice
Teehankee makes reference to the ratio decidendi of Salas v. Jarencio as to the trust
character impressed on communal property of a municipal corporation, even if already
titled. As set forth in the opinion: "The Court [in Salas v. Jarencio] reaffirmed the
established general rule that 'regardless of the source of classification of land in the
possession of a municipality, excepting those acquired with its own funds in its private or
corporate capacity, such property is held in trust for the State for the benefit of its
inhabitants, whether it be governmental or proprietary purposes. It holds such lands
subject to the paramount power of the legislature to dispose of the same, for after all it
owes its creation to it as agent for the performance of a part of its public work,
municipality being but a subdivision or instrumentality thereof for purposes of local
administration. Accordingly, the legal situation is the same as if the State itself holds the
property and puts it to a different use' and stressed that 'the property, as has been
previously shown, was not acquired by the City of Manila with its own funds in its
private or proprietary capacity. That it has in its name registered title is not questioned,
but this title should be deemed to be held in trust for the State as the land covered thereby
was part of the territory of the City of Manila granted by the sovereign upon its
creation." 28
This is a doctrine which to my mind is unaffected by grant of extensive local autonomy
under the present Constitution. Its basis is the regalian doctrine. It is my view that under
the Constitution, as was the case under the 1935 charter, the holding of a municipal
corporation as a unit of state does not impair the plenary power of the national
government exercising dominical rights to dispose of it in a manner it sees fit, subject to
applicable constitutional limitations as to the citizenship of the grantee. An excerpt
from Lee Hong Hok v. David 29 is relevant: "As there are overtones indicative of
skepticism, if not of outright rejection, of the well-known distinction in public law
between the government authority possessed by the state which is appropriately
embraced in the concept of sovereignty, and its capacity to own or acquire property, it is
not inappropriate to pursue the matter further. The former comes under the heading
of imperium and the latter of dominium. The use of this term is appropriate with
reference to lands held by the state in its proprietary character. In such capacity, it may
provide for the exploitation and use of lands and other natural resources, including their
disposition, except as limited by the Constitution. Dean Pound did speak of the confusion
that existed during the medieval era between such two concepts, but did note the
existence of res publicae as a corollary todominium. As far as the Philippines was
concerned, there was a recognition by Justice Holmes in Cario v. Insular Government, a
case of Philippine origin, that 'Spain in its earlier decrees embodied the universal feudal
theory that all lands were held from the Crown ... .' That was a manifestation of the

concept of jura regalia, which was adopted by the present Constitution, ownership
however being vested in the state as such rather than the head thereof." 30
4. Much more compelling is the reliance on the opinion of Justice Teehankee on the even
more fundamental principle of social justice, which was given further stress and a wider
scope in the present Constitution. According to the opinion of the Court: "There as here,
the Court holds that the Acts in question (Republic Act 4118 in Salasand Republic Act
3120 in the case at bar) were intended to implement the social justice policy of the
Constitution and the government program of land for the landless and that they were not
'intended to expropriate the property involved but merely to confirm its character as
communal land of the State and to make it available for disposition by the National
Government: ... The subdivision of the land and conveyance of the resulting subdivision
lots to the occupants by Congressional authorization does not operate as an exercise of
the power of eminent domain without just compensation in violation of Section 1,
subsection (2), Article III of the Constitution, but simply as a manifestation of its right
and power to deal with state property." 31 It is true of course, that a local government unit,
if expressly authorized by statute, could make use of its property in the same manner. It
does appear, however, that there was no such grant of authority. Moreover, the national
government is not only in a better position to make a reality of the social justice principle
but also is subject to less pressure on the part of the affluent, at least where the
distribution of state property is concerned. It is thus a more efficient instrument than a
province, city or municipality to attain this highly desirable goal. In an economy
essentially based on capitalism, where the power of concentrated wealth cannot be
underestimated, the countervailing force exerted by a strong national government
sensitive to the needs of our countrymen, deeply mired in the morass of poverty, the
disinherited of fortune, can make itself much more effectively felt. If only for that cogent
reason then, I am prepared to ignore whatever doubts or misgivings I did entertain at the
outset.
Hence this concurrence.

Separate Opinions
FERNANDO, J., concurring:
It is undoubted that the opinion of the Court penned by Justice Teehankee, with his
customary lucidity and thoroughness, is in accordance with our past decisions on the
matter. Reflection on the innovation introduced by the present Constitution on local
government, did, however, give rise to doubts on my part as to the continuing
authoritativeness of Province of Zamboanga del Norte v. City of Zamboanga 1 and Salas
v. Jarencio, 2 the two principal opinions relied upon, both of which decisions were
promulgated before the effectivity of the new fundamental law. Hence this separate
opinion setting forth the reasons why I join the rest of my brethren.
1. In the declaration of principles and state policies 3 it is specifically provided: "The
State shall guarantee and promote the autonomy of local government units, especially the
barrio, to ensure their fullest development as self-reliant communities." 4 What was
succinctly expressed therein was made more definite in the article on local
government. 5 Its first section reads: "The territorial and political subdivisions of the
Philippines are the provinces, cities, municipalities, and barrios." 6 Then comes this
provision: "The National Assembly shall enact a local government code which may not
thereafter be amended except by a majority vote of all its Members, defining a more
responsive and accountable local government structure with an effective system of recall,
allocating among the different local government units their powers, responsibilities, and
resources, and providing for the qualifications, election and removal, term, salaries,
powers, functions, and duties of local officials, and all other matters relating to the
organization and operation of the local units. However, any change in the existing form
of local government shall not take effect until ratified by a majority of the votes cast in a

plebiscite called for the purpose." 7 After which there is this limitation on the power of
local government: "No province, city, municipality, or barrio may be created, divided,
merged, abolished, or its boundary substantially altered, except in accordance with the
criteria established in the local government code, and subject to the approval by a
majority of the votes cast in a plebiscite in the unit or units affected." 8 The autonomy of
cities and municipalities is guaranteed in these words: "(1) Provinces with respect to
component cities and municipalities, and cities and municipalities with respect to
component barrios, shall ensure that the acts of their component units are with the scope
of their assigned powers and functions. Highly urbanized cities, as determined by
standards established in the local government code, shall be independent of
province." 9Then comes the last section: "Each local government unit shall have the
power to create its own sources of revenue and to levy taxes, subject to such limitations
as may be provided by law." 10
The objective is thus crystal-clear and well-defined. The goal is the fullest autonomy to
local government units consistent with the basic theory of a unitary, not a federal, polity.
It is the hope that thereby they will attain "their fullest development as self-reliant
communities." 11 It is more than just the expression of an aspiration as attest by one of the
articles of the Constitution devoted to such a subject. 12 It was not so under the 1935
charter. On this point, all that appeared therein was: "The President shall ... exercise
general supervision over all local governments as may be provided by
law ... . 13 According to Justice Laurel in Planas v. Gil, 14 "the deliberation of the
Constitutional Convention show that the grant of the supervisory authority to the Chief
Executive in this regard was in the nature of a compromise resulting from the conflict of
views in that body, mainly between the historical view which recognizes the right of
local self-government ... and the legal theory which sanctions the possession by the state
of absolute control over local governments .. . The result was the recognition of the
power of supervision and all its implications and the rejection of what otherwise would
be animperium in imperio to the detriment of a strong national government." 15 For the
above provision starts with the vesting of control in the President "of all the executive
departments, bureaus, or offices," as distinguished from "general supervision over all
local governments as may be provided by law." 16 The difference in wording is highly
significant. So it was stressed by the then Justice, later Chief Justice, Concepcion
in Pelaez v. Auditor General: 17 "The power of control under this provision implies the
right of the President to interfere in the exercise of such discretion as may be vested by
law in the officers of the executive departments, bureaus, or offices of the national
government, as well as to act in lieu of such officers. This power is denied by the
Constitution to the Executive, insofar as local governments are concerned. With respect
to the latter, the fundamental law permits him to wield no more authority than that of
checking whether said local governments or the officers thereof perform their duties as
provided by statutory enactments. Hence, the President cannot interfere with local
governments, so long as the same or its officers act within the scope of their authority. He
may not enact an ordinance which the municipal council has failed or refused to pass,
even if it had thereby violated a duty imposed thereto by law, although he may see to it
that the corresponding provincial officials take appropriate disciplinary action therefor.
Neither may he vote, set aside or annul an ordinance passed by said council within the
scope of its jurisdiction, no matter how patently unwise it may be. He may not even
suspend an elective official of a regular municipality or take any disciplinary action
against him, except on appeal from a decision of the corresponding provincial board." 18
2. So it was that under the 1935 Constitution, the national government when acting
through the executive had only such general supervisory authority as was provided by
statute. There was no restriction, however, on the legislative body to create or to abolish
local government units. What was more, the powers vested in them could be expanded or
diminished depending on the will of Congress. It could hardly be assumed therefore that
under the previous charter, they could justifiably lay claim to real autonomy. For so long
as the legislation itself took care of delineating the matters that were appropriately within
the scope of their competence, there could be no objection to its validity. No
constitutional problem arose. Things have changed radically. We start with the declared
principle of the State guaranteeing and promoting the autonomy of local government
units. 19 We have likewise noted the earnestness of the framers as to the attainment of
such declared objective as set forth in the specific article 20 on the matter. It is made

obligatory on the National Assembly to enact a local government code. What is more,
unlike the general run of statutes, it cannot be amended except by a majority vote of all
its members. It is made to include "a more responsive and accountable local government
structure with an effective system of recall," with an expressed reference to
"qualifications, election and removal, term, salaries, powers, functions, and duties of
local officials, [as well as] all other matters relating to the organization and operation of
local units." 21 Mention is likewise made of the "powers, responsibilities, and
resources," 22 items that are identified with local autonomy. As if that were not enough,
the last sentence of this particular provision reads: "However, any change in the existing
form of local government shall not take effect until ratified by a majority of the votes
cast in a plebiscite called for the purpose." 23 To the extent that the last section requires
that the creation, division, merger, abolition or alteration of a boundary of a province,
city, municipality, or barrio, must be in accordance with the criteria established in the
local government code and subject to the approval by a majority of the votes cast in a
plebiscite in such unit or units, the adherence to the basic principle of local selfgovernment is quite clear. 24 Equally significant is the stress on the competence of a
province, city, municipality or barrio "to create its own sources of revenue and to levy
taxes subject to such limitations as may be provided by law." 25 The care and
circumspection with which the framers saw to the enjoyment of real local selfgovernment not only in terms of administration but also in terms of resources is thus
manifest. Their intent is unmistakable. Unlike the case under the 1935 Constitution, there
is thus a clear manifestation of the presumption now in favor of a local government unit.
It is a well-nigh complete departure from what was. Nor should it be ignored that a
highly urbanized city "shall be independent" not only of the national government but also
of a province. 26 Would it not follow then that under the present dispensation, the moment
property is transferred to it by the national government, its control over the same should
be as extensive and as broad as possible. Considerations of the above nature gave rise to
doubts on my part as to the decisions in the Zamboanga del Norte and Salas cases still
retaining unimpaired their doctrinal force. Would this be a case of Republic Act No. 3120
being rendered inoperative by virtue of its repugnancy to the present Constitution? 27
3. Nonetheless, such doubts were set at rest by two considerations. The opinion of Justice
Teehankee makes reference to the ratio decidendi of Salas v. Jarencio as to the trust
character impressed on communal property of a municipal corporation, even if already
titled. As set forth in the opinion: "The Court [in Salas v. Jarencio] reaffirmed the
established general rule that 'regardless of the source of classification of land in the
possession of a municipality, excepting those acquired with its own funds in its private or
corporate capacity, such property is held in trust for the State for the benefit of its
inhabitants, whether it be governmental or proprietary purposes. It holds such lands
subject to the paramount power of the legislature to dispose of the same, for after all it
owes its creation to it as agent for the performance of a part of its public work,
municipality being but a subdivision or instrumentality thereof for purposes of local
administration. Accordingly, the legal situation is the same as if the State itself holds the
property and puts it to a different use' and stressed that 'the property, as has been
previously shown, was not acquired by the City of Manila with its own funds in its
private or proprietary capacity. That it has in its name registered title is not questioned,
but this title should be deemed to be held in trust for the State as the land covered thereby
was part of the territory of the City of Manila granted by the sovereign upon its
creation." 28
This is a doctrine which to my mind is unaffected by grant of extensive local autonomy
under the present Constitution. Its basis is the regalian doctrine. It is my view that under
the Constitution, as was the case under the 1935 charter, the holding of a municipal
corporation as a unit of state does not impair the plenary power of the national
government exercising dominical rights to dispose of it in a manner it sees fit, subject to
applicable constitutional limitations as to the citizenship of the grantee. An excerpt
from Lee Hong Hok v. David 29 is relevant: "As there are overtones indicative of
skepticism, if not of outright rejection, of the well-known distinction in public law
between the government authority possessed by the state which is appropriately
embraced in the concept of sovereignty, and its capacity to own or acquire property, it is
not inappropriate to pursue the matter further. The former comes under the heading
of imperium and the latter of dominium. The use of this term is appropriate with

reference to lands held by the state in its proprietary character. In such capacity, it may
provide for the exploitation and use of lands and other natural resources, including their
disposition, except as limited by the Constitution. Dean Pound did speak of the confusion
that existed during the medieval era between such two concepts, but did note the
existence of res publicae as a corollary todominium. As far as the Philippines was
concerned, there was a recognition by Justice Holmes in Cario v. Insular Government, a
case of Philippine origin, that 'Spain in its earlier decrees embodied the universal feudal
theory that all lands were held from the Crown ... .' That was a manifestation of the
concept of jura regalia, which was adopted by the present Constitution, ownership
however being vested in the state as such rather than the head thereof." 30
4. Much more compelling is the reliance on the opinion of Justice Teehankee on the even
more fundamental principle of social justice, which was given further stress and a wider
scope in the present Constitution. According to the opinion of the Court: "There as here,
the Court holds that the Acts in question (Republic Act 4118 in Salasand Republic Act
3120 in the case at bar) were intended to implement the social justice policy of the
Constitution and the government program of land for the landless and that they were not
'intended to expropriate the property involved but merely to confirm its character as
communal land of the State and to make it available for disposition by the National
Government: ... The subdivision of the land and conveyance of the resulting subdivision
lots to the occupants by Congressional authorization does not operate as an exercise of
the power of eminent domain without just compensation in violation of Section 1,
subsection (2), Article III of the Constitution, but simply as a manifestation of its right
and power to deal with state property." 31 It is true of course, that a local government unit,
if expressly authorized by statute, could make use of its property in the same manner. It
does appear, however, that there was no such grant of authority. Moreover, the national
government is not only in a better position to make a reality of the social justice principle
but also is subject to less pressure on the part of the affluent, at least where the
distribution of state property is concerned. It is thus a more efficient instrument than a
province, city or municipality to attain this highly desirable goal. In an economy
essentially based on capitalism, where the power of concentrated wealth cannot be
underestimated, the countervailing force exerted by a strong national government
sensitive to the needs of our countrymen, deeply mired in the morass of poverty, the
disinherited of fortune, can make itself much more effectively felt. If only for that cogent
reason then, I am prepared to ignore whatever doubts or misgivings I did entertain at the
outset.
Hence this concurrence.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. 97764 August 10, 1992

LEVY D. MACASIANO, Brigadier General/PNP Superintendent, Metropolitan
Traffic Command, petitioner,
vs.
HONORABLE ROBERTO C. DIOKNO, Presiding Judge, Branch 62, Regional
Trial Court of Makati, Metro Manila, MUNICIPALITY OF PARAAQUE,
METRO MANILA, PALANYAG KILUSANG BAYAN FOR SERVICE,respondents.
Ceferino, Padua Law Office for Palanyag Kilusang Bayan for service.
Manuel de Guia for Municipality of Paraaque.

MEDIALDEA, J.:
This is a petition for certiorari under Rule 65 of the Rules of Court seeking the
annulment of the decision of the Regional Trial Court of Makati, Branch 62, which
granted the writ of preliminary injunction applied for by respondents Municipality of
Paraaque and Palanyag Kilusang Bayan for Service (Palanyag for brevity) against
petitioner herein.
The antecedent facts are as follows:
On June 13, 1990, the respondent municipality passed Ordinance No. 86, Series of 1990
which authorized the closure of J. Gabriel, G.G. Cruz, Bayanihan, Lt. Garcia Extension
and Opena Streets located at Baclaran, Paraaque, Metro Manila and the establishment
of a flea market thereon. The said ordinance was approved by the municipal council
pursuant to MMC Ordinance No. 2, Series of 1979, authorizing and regulating the use of
certain city and/or municipal streets, roads and open spaces within Metropolitan Manila
as sites for flea market and/or vending areas, under certain terms and conditions.
On July 20, 1990, the Metropolitan Manila Authority approved Ordinance No. 86, s.
1990 of the municipal council of respondent municipality subject to the following
conditions:
1. That the aforenamed streets are not used for vehicular traffic, and that the majority of
the residents do not oppose the establishment of the flea market/vending areas thereon;
2. That the 2-meter middle road to be used as flea market/vending area shall be marked
distinctly, and that the 2 meters on both sides of the road shall be used by pedestrians;
3. That the time during which the vending area is to be used shall be clearly designated;
4. That the use of the vending areas shall be temporary and shall be closed once the
reclaimed areas are developed and donated by the Public Estate Authority.
On June 20, 1990, the municipal council of Paraaque issued a resolution authorizing
Paraaque Mayor Walfrido N. Ferrer to enter into contract with any service cooperative
for the establishment, operation, maintenance and management of flea markets and/or
vending areas.
On August 8, 1990, respondent municipality and respondent Palanyag, a service
cooperative, entered into an agreement whereby the latter shall operate, maintain and
manage the flea market in the aforementioned streets with the obligation to remit dues to
the treasury of the municipal government of Paraaque. Consequently, market stalls were
put up by respondent Palanyag on the said streets.
On September 13, 1990, petitioner Brig. Gen. Macasiano, PNP Superintendent of the
Metropolitan Traffic Command, ordered the destruction and confiscation of stalls along
G.G. Cruz and J. Gabriel St. in Baclaran. These stalls were later returned to respondent
Palanyag.
On October 16, 1990, petitioner Brig. General Macasiano wrote a letter to respondent
Palanyag giving the latter ten (10) days to discontinue the flea market; otherwise, the
market stalls shall be dismantled.
Hence, on October 23, 1990, respondents municipality and Palanyag filed with the trial
court a joint petition for prohibition and mandamus with damages and prayer for
preliminary injunction, to which the petitioner filed his memorandum/opposition to the
issuance of the writ of preliminary injunction.

On October 24, 1990, the trial court issued a temporary restraining order to enjoin
petitioner from enforcing his letter-order of October 16, 1990 pending the hearing on the
motion for writ of preliminary injunction.
On December 17, 1990, the trial court issued an order upholding the validity of
Ordinance No. 86 s. 1990 of the Municipality' of Paraaque and enjoining petitioner
Brig. Gen. Macasiano from enforcing his letter-order against respondent Palanyag.
Hence, this petition was filed by the petitioner thru the Office of the Solicitor General
alleging grave abuse of discretion tantamount to lack or excess of jurisdiction on the part
of the trial judge in issuing the assailed order.
The sole issue to be resolved in this case is whether or not an ordinance or resolution
issued by the municipal council of Paraaque authorizing the lease and use of public
streets or thoroughfares as sites for flea markets is valid.
The Solicitor General, in behalf of petitioner, contends that municipal roads are used for
public service and are therefore public properties; that as such, they cannot be subject to
private appropriation or private contract by any person, even by the respondent
Municipality of Paraaque. Petitioner submits that a property already dedicated to public
use cannot be used for another public purpose and that absent a clear showing that the
Municipality of Paraaque has been granted by the legislature specific authority to
convert a property already in public use to another public use, respondent municipality is,
therefore, bereft of any authority to close municipal roads for the establishment of a flea
market. Petitioner also submits that assuming that the respondent municipality is
authorized to close streets, it failed to comply with the conditions set forth by the
Metropolitan Manila Authority for the approval of the ordinance providing for the
establishment of flea markets on public streets. Lastly, petitioner contends that by
allowing the municipal streets to be used by market vendors the municipal council of
respondent municipality violated its duty under the Local Government Code to promote
the general welfare of the residents of the municipality.
In upholding the legality of the disputed ordinance, the trial court ruled:
. . . that Chanter II Section 10 of the Local Government Code is a statutory grant of
power given to local government units, the Municipality of Paraaque as such, is
empowered under that law to close its roads, streets or alley subject to limitations stated
therein (i.e., that it is in accordance with existing laws and the provisions of this code).
xxx xxx xxx
The actuation of the respondent Brig. Gen. Levi Macasiano, though apparently within its
power is in fact an encroachment of power legally vested to the municipality, precisely
because when the municipality enacted the ordinance in question the authority of the
respondent as Police Superintendent ceases to be operative on the ground that the streets
covered by the ordinance ceases to be a public thoroughfare. (pp. 33-34, Rollo)
We find the petition meritorious. In resolving the question of whether the disputed
municipal ordinance authorizing the flea market on the public streets is valid, it is
necessary to examine the laws in force during the time the said ordinance was enacted,
namely, Batas Pambansa Blg. 337, otherwise known as Local Government Code, in
connection with established principles embodied in the Civil Code an property and
settled jurisprudence on the matter.
The property of provinces, cities and municipalities is divided into property for public
use and patrimonial property (Art. 423, Civil Code). As to what consists of property for
public use, Article 424 of Civil Code states:
Art. 424. Property for public use, in the provinces, cities and municipalities, consists of
the provincial roads, city streets, the squares, fountains, public waters, promenades, and
public works for public service paid for by said provinces, cities or municipalities.

All other property possessed by any of them is patrimonial and shall be governed by this
Code, without prejudice to the provisions of special laws.
Based on the foregoing, J. Gabriel G.G. Cruz, Bayanihan, Lt. Garcia Extension and
Opena streets are local roads used for public service and are therefore considered public
properties of respondent municipality. Properties of the local government which are
devoted to public service are deemed public and are under the absolute control of
Congress (Province of Zamboanga del Norte v. City of Zamboanga, L-24440, March 28,
1968, 22 SCRA 1334). Hence, local governments have no authority whatsoever to
control or regulate the use of public properties unless specific authority is vested upon
them by Congress. One such example of this authority given by Congress to the local
governments is the power to close roads as provided in Section 10, Chapter II of the
Local Government Code, which states:
Sec. 10. Closure of roads. A local government unit may likewise, through its head
acting pursuant to a resolution of its sangguniang and in accordance with existing law
and the provisions of this Code, close any barangay, municipal, city or provincial road,
street, alley, park or square. No such way or place or any part of thereof shall be close
without indemnifying any person prejudiced thereby. A property thus withdrawn from
public use may be used or conveyed for any purpose for which other real property
belonging to the local unit concerned might be lawfully used or conveyed. (Emphasis
ours).
However, the aforestated legal provision which gives authority to local government units
to close roads and other similar public places should be read and interpreted in
accordance with basic principles already established by law. These basic principles have
the effect of limiting such authority of the province, city or municipality to close a public
street or thoroughfare. Article 424 of the Civil Code lays down the basic principle that
properties of public dominion devoted to public use and made available to the public in
general are outside the commerce of man and cannot be disposed of or leased by the
local government unit to private persons. Aside from the requirement of due process
which should be complied with before closing a road, street or park, the closure should
be for the sole purpose of withdrawing the road or other public property from public use
when circumstances show that such property is no longer intended or necessary for
public use or public service. When it is already withdrawn from public use, the property
then becomes patrimonial property of the local government unit concerned (Article 422,
Civil Code; Cebu Oxygen, etc. et al. v. Bercilles, et al., G.R. No. L-40474, August 29,
1975, 66 SCRA 481). It is only then that the respondent municipality can "use or convey
them for any purpose for which other real property belonging to the local unit concerned
might be lawfully used or conveyed" in accordance with the last sentence of Section 10,
Chapter II of Blg. 337, known as Local Government Code. In one case, the City Council
of Cebu, through a resolution, declared the terminal road of M. Borces Street, Mabolo,
Cebu City as an abandoned road, the same not being included in the City Development
Plan. Thereafter, the City Council passes another resolution authorizing the sale of the
said abandoned road through public bidding. We held therein that the City of Cebu is
empowered to close a city street and to vacate or withdraw the same from public use.
Such withdrawn portion becomes patrimonial property which can be the object of an
ordinary contract (Cebu Oxygen and Acetylene Co., Inc. v. Bercilles, et al., G.R. No.
L-40474, August 29, 1975, 66 SCRA 481). However, those roads and streets which are
available to the public in general and ordinarily used for vehicular traffic are still
considered public property devoted to public use. In such case, the local government has
no power to use it for another purpose or to dispose of or lease it to private persons. This
limitation on the authority of the local government over public properties has been
discussed and settled by this Court en banc in "Francisco V. Dacanay, petitioner v. Mayor
Macaria Asistio, Jr., et al., respondents, G.R. No. 93654, May 6, 1992." This Court ruled:
There is no doubt that the disputed areas from which the private respondents' market
stalls are sought to be evicted are public streets, as found by the trial court in Civil Case
No. C-12921. A public street is property for public use hence outside the commerce of
man (Arts. 420, 424, Civil Code). Being outside the commerce of man, it may not be the
subject of lease or others contract (Villanueva, et al. v. Castaeda and Macalino, 15
SCRA 142 citing the Municipality of Cavite v. Rojas, 30 SCRA 602; Espiritu v.

Municipal Council of Pozorrubio, 102 Phil. 869; And Muyot v. De la Fuente, 48 O.G.
4860).
As the stallholders pay fees to the City Government for the right to occupy portions of
the public street, the City Government, contrary to law, has been leasing portions of the
streets to them. Such leases or licenses are null and void for being contrary to law. The
right of the public to use the city streets may not be bargained away through contract.
The interests of a few should not prevail over the good of the greater number in the
community whose health, peace, safety, good order and general welfare, the respondent
city officials are under legal obligation to protect.
The Executive Order issued by acting Mayor Robles authorizing the use of Heroes del
'96 Street as a vending area for stallholders who were granted licenses by the city
government contravenes the general law that reserves city streets and roads for public
use. Mayor Robles' Executive Order may not infringe upon the vested right of the public
to use city streets for the purpose they were intended to serve: i.e., as arteries of travel for
vehicles and pedestrians.
Even assuming, in gratia argumenti, that respondent municipality has the authority to
pass the disputed ordinance, the same cannot be validly implemented because it cannot
be considered approved by the Metropolitan Manila Authority due to non-compliance by
respondent municipality of the conditions imposed by the former for the approval of the
ordinance, to wit:
1. That the aforenamed streets are not used for vehicular traffic, and that the majority of
the residents do(es) not oppose the establishment of the flea market/vending areas
thereon;
2. That the 2-meter middle road to be used as flea market/vending area shall be marked
distinctly, and that the 2 meters on both sides of the road shall be used by pedestrians;
3. That the time during which the vending area is to be used shall be clearly designated;
4. That the use of the vending areas shall be temporary and shall be closed once the
reclaimed areas are developed and donated by the Public Estate Authority. (p. 38, Rollo)
Respondent municipality has not shown any iota of proof that it has complied with the
foregoing conditions precedent to the approval of the ordinance. The allegations of
respondent municipality that the closed streets were not used for vehicular traffic and that
the majority of the residents do not oppose the establishment of a flea market on said
streets are unsupported by any evidence that will show that this first condition has been
met. Likewise, the designation by respondents of a time schedule during which the flea
market shall operate is absent.
Further, it is of public notice that the streets along Baclaran area are congested with
people, houses and traffic brought about by the proliferation of vendors occupying the
streets. To license and allow the establishment of a flea market along J. Gabriel, G.G.
Cruz, Bayanihan, Lt. Garcia Extension and Opena streets in Baclaran would not help in
solving the problem of congestion. We take note of the other observations of the Solicitor
General when he said:
. . . There have been many instances of emergencies and fires where ambulances and fire
engines, instead of using the roads for a more direct access to the fire area, have to
maneuver and look for other streets which are not occupied by stalls and vendors thereby
losing valuable time which could, otherwise, have been spent in saving properties and
lives.
Along G.G. Cruz Street is a hospital, the St. Rita Hospital. However, its ambulances and
the people rushing their patients to the hospital cannot pass through G.G. Cruz because
of the stalls and the vendors. One can only imagine the tragedy of losing a life just
because of a few seconds delay brought about by the inaccessibility of the streets leading
to the hospital.

The children, too, suffer. In view of the occupancy of the roads by stalls and vendors,
normal transportation flow is disrupted and school children have to get off at a distance
still far from their schools and walk, rain or shine.
Indeed one can only imagine the garbage and litter left by vendors on the streets at the
end of the day. Needless to say, these cause further pollution, sickness and deterioration
of health of the residents therein. (pp. 21-22, Rollo)
Respondents do not refute the truth of the foregoing findings and observations of
petitioners. Instead, respondents want this Court to focus its attention solely on the
argument that the use of public spaces for the establishment of a flea market is well
within the powers granted by law to a local government which should not be interfered
with by the courts.
Verily, the powers of a local government unit are not absolute. They are subject to
limitations laid down by toe Constitution and the laws such as our Civil Code. Moreover,
the exercise of such powers should be subservient to paramount considerations of health
and well-being of the members of the community. Every local government unit has the
sworn obligation to enact measures that will enhance the public health, safety and
convenience, maintain peace and order, and promote the general prosperity of the
inhabitants of the local units. Based on this objective, the local government should
refrain from acting towards that which might prejudice or adversely affect the general
welfare.
As what we have said in the Dacanay case, the general public have a legal right to
demand the demolition of the illegally constructed stalls in public roads and streets and
the officials of respondent municipality have the corresponding duty arising from public
office to clear the city streets and restore them to their specific public purpose.
The instant case as well as the Dacanay case, involves an ordinance which is void and
illegal for lack of basis and authority in laws applicable during its time. However, at this
point, We find it worthy to note that Batas Pambansa Blg. 337, known as Local
Government Lode, has already been repealed by Republic Act No. 7160 known as Local
Government Code of 1991 which took effect on January 1, 1992. Section 5(d) of the new
Code provides that rights and obligations existing on the date of effectivity of the new
Code and arising out of contracts or any other source of prestation involving a local
government unit shall be governed by the original terms and conditions of the said
contracts or the law in force at the time such rights were vested.
ACCORDINGLY, the petition is GRANTED and the decision of the respondent Regional
Trial Court dated December 17, 1990 which granted the writ of preliminary injunction
enjoining petitioner as PNP Superintendent, Metropolitan Traffic Command from
enforcing the demolition of market stalls along J. Gabriel, G.G. Cruz, Bayanihan, Lt.
Garcia Extension and Opena streets is hereby RESERVED and SET ASIDE.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 120098

October 2, 2001

RUBY L. TSAI, petitioner,

vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC. and MAMERTO R
VILLALUZ, respondents.
x---------------------------------------------------------x
[G.R. No. 120109. October 2, 2001.]
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS and MAMERTO R
VILLALUZ, respondents.
QUISUMBING, J.:
These consolidated cases assail the decision1 of the Court of Appeals in CA-G.R. CV No.
32986, affirming the decision2 of the Regional Trial Court of Manila, Branch 7, in Civil
Case No. 89-48265. Also assailed is respondent court's resolution denying petitioners'
motion for reconsideration.
On November 26, 1975, respondent Ever Textile Mills, Inc. (EVERTEX) obtained a
three million peso (P3,000,000.00) loan from petitioner Philippine Bank of
Communications (PBCom). As security for the loan, EVERTEX executed in favor of
PBCom, a deed of Real and Chattel Mortgage over the lot under TCT No. 372097, where
its factory stands, and the chattels located therein as enumerated in a schedule attached to
the mortgage contract. The pertinent portions of the Real and Chattel Mortgage are
quoted below:
MORTGAGE
(REAL AND CHATTEL)
xxx

xxx

xxx

The MORTGAGOR(S) hereby transfer(s) and convey(s), by way of First Mortgage, to

the MORTGAGEE, . . . certain parcel(s) of land, together with all the buildings and
improvements now existing or which may hereafter exist thereon, situated in . . .
"Annex A"
(Real and Chattel Mortgage executed by Ever Textile Mills in favor of
PBCommunications continued)
LIST OF MACHINERIES & EQUIPMENT
A. Forty Eight (48) units of Vayrow Knitting Machines-Tompkins made in Hongkong:
Serial Numbers Size of Machines
xxx

xxx

xxx

B. Sixteen (16) sets of Vayrow Knitting Machines made in Taiwan.

xxx

xxx

xxx

C. Two (2) Circular Knitting Machines made in West Germany.

xxx

xxx

xxx

D. Four (4) Winding Machines.

xxx

xxx

xxx
SCHEDULE "A"

I. TCT # 372097 - RIZAL

xxx

xxx

xxx

II. Any and all buildings and improvements now existing or hereafter to exist on the
above-mentioned lot.
III. MACHINERIES & EQUIPMENT situated, located and/or installed on the abovementioned lot located at . . .
(a) Forty eight sets (48) Vayrow Knitting Machines . . .
(b) Sixteen sets (16) Vayrow Knitting Machines . . .
(c) Two (2) Circular Knitting Machines . . .
(d) Two (2) Winding Machines . . .
(e) Two (2) Winding Machines . . .
IV. Any and all replacements, substitutions, additions, increases and accretions to above
properties.
xxx

xxx

xxx3

On April 23, 1979, PBCom granted a second loan of P3,356,000.00 to EVERTEX. The
loan was secured by a Chattel Mortgage over personal properties enumerated in a list
attached thereto. These listed properties were similar to those listed in Annex A of the
first mortgage deed.
After April 23, 1979, the date of the execution of the second mortgage mentioned above,
EVERTEX purchased various machines and equipments.
On November 19, 1982, due to business reverses, EVERTEX filed insolvency
proceedings docketed as SP Proc. No. LP-3091-P before the defunct Court of First
Instance of Pasay City, Branch XXVIII. The CFI issued an order on November 24, 1982
declaring the corporation insolvent. All its assets were taken into the custody of the
Insolvency Court, including the collateral, real and personal, securing the two mortgages
as abovementioned.
In the meantime, upon EVERTEX's failure to meet its obligation to PBCom, the latter
commenced extrajudicial foreclosure proceedings against EVERTEX under Act 3135,
otherwise known as "An Act to Regulate the Sale of Property under Special Powers
Inserted in or Annexed to Real Estate Mortgages" and Act 1506 or "The Chattel
Mortgage Law". A Notice of Sheriff's Sale was issued on December 1, 1982.
On December 15, 1982, the first public auction was held where petitioner PBCom
emerged as the highest bidder and a Certificate of Sale was issued in its favor on the
same date. On December 23, 1982, another public auction was held and again, PBCom
was the highest bidder. The sheriff issued a Certificate of Sale on the same day.

On March 7, 1984, PBCom consolidated its ownership over the lot and all the properties
in it. In November 1986, it leased the entire factory premises to petitioner Ruby L. Tsai
for P50,000.00 a month. On May 3, 1988, PBCom sold the factory, lock, stock and barrel
to Tsai for P9,000,000.00, including the contested machineries.
On March 16, 1989, EVERTEX filed a complaint for annulment of sale, reconveyance,
and damages with the Regional Trial Court against PBCom, alleging inter alia that the
extrajudicial foreclosure of subject mortgage was in violation of the Insolvency Law.
EVERTEX claimed that no rights having been transmitted to PBCom over the assets of
insolvent EVERTEX, therefore Tsai acquired no rights over such assets sold to her, and
should reconvey the assets.
Further, EVERTEX averred that PBCom, without any legal or factual basis, appropriated
the contested properties, which were not included in the Real and Chattel Mortgage of
November 26, 1975 nor in the Chattel Mortgage of April 23, 1979, and neither were
those properties included in the Notice of Sheriff's Sale dated December 1, 1982 and
Certificate of Sale . . . dated December 15, 1982.
The disputed properties, which were valued at P4,000,000.00, are: 14 Interlock Circular
Knitting Machines, 1 Jet Drying Equipment, 1 Dryer Equipment, 1 Raisin Equipment
and 1 Heatset Equipment.
The RTC found that the lease and sale of said personal properties were irregular and
illegal because they were not duly foreclosed nor sold at the December 15, 1982 auction
sale since these were not included in the schedules attached to the mortgage contracts.
The trial court decreed:
WHEREFORE, judgment is hereby rendered in favor of plaintiff corporation and against
the defendants:
1. Ordering the annulment of the sale executed by defendant Philippine Bank of
Communications in favor of defendant Ruby L. Tsai on May 3, 1988 insofar as it affects
the personal properties listed in par. 9 of the complaint, and their return to the plaintiff
corporation through its assignee, plaintiff Mamerto R. Villaluz, for disposition by the
Insolvency Court, to be done within ten (10) days from finality of this decision;
2. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum
of P5,200,000.00 as compensation for the use and possession of the properties in
question from November 1986 to February 1991 and P100,000.00 every month
thereafter, with interest thereon at the legal rate per annum until full payment;
3. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum
of P50,000.00 as and for attorney's fees and expenses of litigation;
4. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum
of P200,000.00 by way of exemplary damages;
5. Ordering the dismissal of the counterclaim of the defendants; and
6. Ordering the defendants to proportionately pay the costs of suit.
SO ORDERED.4
Dissatisfied, both PBCom and Tsai appealed to the Court of Appeals, which issued its
decision dated August 31, 1994, the dispositive portion of which reads:
WHEREFORE, except for the deletion therefrom of the award; for exemplary damages,
and reduction of the actual damages, from P100,000.00 to P20,000.00 per month, from
November 1986 until subject personal properties are restored to appellees, the judgment
appealed from is hereby AFFIRMED, in all other respects. No pronouncement as to
costs.5

Motion for reconsideration of the above decision having been denied in the resolution of
April 28, 1995, PBCom and Tsai filed their separate petitions for review with this Court.
In G.R No. 120098, petitioner Tsai ascribed the following errors to the respondent court:
I
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
EFFECT MAKING A CONTRACT FOR THE PARTIES BY TREATING THE 1981
ACQUIRED MACHINERIES AS CHATTELS INSTEAD OF REAL PROPERTIES
WITHIN THEIR EARLIER 1975 DEED OF REAL AND CHATTEL MORTGAGE OR
1979 DEED OF CHATTEL MORTGAGE.
II
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
HOLDING THAT THE DISPUTED 1981 MACHINERIES ARE NOT REAL
PROPERTIES DEEMED PART OF THE MORTGAGE DESPITE THE CLEAR
IMPORT OF THE EVIDENCE AND APPLICABLE RULINGS OF THE SUPREME
COURT.
III
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
DEEMING PETITIONER A PURCHASER IN BAD FAITH.
IV
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
ASSESSING PETITIONER ACTUAL DAMAGES, ATTORNEY'S FEES AND
EXPENSES OF LITIGATION FOR WANT OF VALID FACTUAL AND LEGAL
BASIS.
V
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
HOLDING AGAINST PETITIONER'S ARGUMENTS ON PRESCRIPTION AND
LACHES.6
In G.R. No. 120098, PBCom raised the following issues:
I.
DID THE COURT OF APPEALS VALIDLY DECREE THE MACHINERIES LISTED
UNDER PARAGRAPH 9 OF THE COMPLAINT BELOW AS PERSONAL
PROPERTY OUTSIDE OF THE 1975 DEED OF REAL ESTATE MORTGAGE AND
EXCLUDED THEM FROM THE REAL PROPERTY EXTRAJUDICIALLY
FORECLOSED BY PBCOM DESPITE THE PROVISION IN THE 1975 DEED THAT
ALL AFTER-ACQUIRED PROPERTIES DURING THE LIFETIME OF THE
MORTGAGE SHALL FORM PART THEREOF, AND DESPITE THE UNDISPUTED
FACT THAT SAID MACHINERIES ARE BIG AND HEAVY, BOLTED OR
CEMENTED ON THE REAL PROPERTY MORTGAGED BY EVER TEXTILE
MILLS TO PBCOM, AND WERE ASSESSED FOR REAL ESTATE TAX PURPOSES?
II
CAN PBCOM, WHO TOOK POSSESSION OF THE MACHINERIES IN QUESTION
IN GOOD FAITH, EXTENDED CREDIT FACILITIES TO EVER TEXTILE MILLS
WHICH AS OF 1982 TOTALLED P9,547,095.28, WHO HAD SPENT FOR
MAINTENANCE AND SECURITY ON THE DISPUTED MACHINERIES AND HAD
TO PAY ALL THE BACK TAXES OF EVER TEXTILE MILLS BE LEGALLY
COMPELLED TO RETURN TO EVER THE SAID MACHINERIES OR IN LIEU

THEREOF BE ASSESSED DAMAGES. IS THAT SITUATION TANTAMOUNT TO A

CASE OF UNJUST ENRICHMENT?7
The principal issue, in our view, is whether or not the inclusion of the questioned
properties in the foreclosed properties is proper. The secondary issue is whether or not
the sale of these properties to petitioner Ruby Tsai is valid.
For her part, Tsai avers that the Court of Appeals in effect made a contract for the parties
by treating the 1981 acquired units of machinery as chattels instead of real properties
within their earlier 1975 deed of Real and Chattel Mortgage or 1979 deed of Chattel
Mortgage.8 Additionally, Tsai argues that respondent court erred in holding that the
disputed 1981 machineries are not real properties.9 Finally, she contends that the Court of
Appeals erred in holding against petitioner's arguments on prescription and laches 10 and
in assessing petitioner actual damages, attorney's fees and expenses of litigation, for want
of valid factual and legal basis.11
Essentially, PBCom contends that respondent court erred in affirming the lower court's
judgment decreeing that the pieces of machinery in dispute were not duly foreclosed and
could not be legally leased nor sold to Ruby Tsai. It further argued that the Court of
Appeals' pronouncement that the pieces of machinery in question were personal
properties have no factual and legal basis. Finally, it asserts that the Court of Appeals
erred in assessing damages and attorney's fees against PBCom.
In opposition, private respondents argue that the controverted units of machinery are not
"real properties" but chattels, and, therefore, they were not part of the foreclosed real
properties, rendering the lease and the subsequent sale thereof to Tsai a nullity.12
Considering the assigned errors and the arguments of the parties, we find the petitions
devoid of merit and ought to be denied.
Well settled is the rule that the jurisdiction of the Supreme Court in a petition for review
on certiorari under Rule 45 of the Revised Rules of Court is limited to reviewing only
errors of law, not of fact, unless the factual findings complained of are devoid of support
by the evidence on record or the assailed judgment is based on misapprehension of
facts.13 This rule is applied more stringently when the findings of fact of the RTC is
affirmed by the Court of Appeals.14
The following are the facts as found by the RTC and affirmed by the Court of Appeals
that are decisive of the issues: (1) the "controverted machineries" are not covered by, or
included in, either of the two mortgages, the Real Estate and Chattel Mortgage, and the
pure Chattel Mortgage; (2) the said machineries were not included in the list of
properties appended to the Notice of Sale, and neither were they included in the Sheriff's
Notice of Sale of the foreclosed properties.15
Petitioners contend that the nature of the disputed machineries, i.e., that they were heavy,
bolted or cemented on the real property mortgaged by EVERTEX to PBCom, make
them ipso facto immovable under Article 415 (3) and (5) of the New Civil Code. This
assertion, however, does not settle the issue. Mere nuts and bolts do not foreclose the
controversy. We have to look at the parties' intent.
While it is true that the controverted properties appear to be immobile, a perusal of the
contract of Real and Chattel Mortgage executed by the parties herein gives us a contrary
indication. In the case at bar, both the trial and the appellate courts reached the same
finding that the true intention of PBCOM and the owner, EVERTEX, is to treat
machinery and equipment as chattels. The pertinent portion of respondent appellate
court's ruling is quoted below:
As stressed upon by appellees, appellant bank treated the machineries as chattels; never
as real properties. Indeed, the 1975 mortgage contract, which was actually real and
chattel mortgage, militates against appellants' posture. It should be noted that the printed
form used by appellant bank was mainly for real estate mortgages. But reflective of the
true intention of appellant PBCOM and appellee EVERTEX was the typing in capital

letters, immediately following the printed caption of mortgage, of the phrase "real and
chattel." So also, the "machineries and equipment" in the printed form of the bank had to
be inserted in the blank space of the printed contract and connected with the word
"building" by typewritten slash marks. Now, then, if the machineries in question were
contemplated to be included in the real estate mortgage, there would have been no
necessity to ink a chattel mortgage specifically mentioning as part III of Schedule A a
listing of the machineries covered thereby. It would have sufficed to list them as
immovables in the Deed of Real Estate Mortgage of the land and building involved.
As regards the 1979 contract, the intention of the parties is clear and beyond question. It
refers solely tochattels. The inventory list of the mortgaged properties is an itemization
of sixty-three (63) individually described machineries while the schedule listed only
machines and 2,996,880.50 worth of finished cotton fabrics and natural cotton fabrics.16
In the absence of any showing that this conclusion is baseless, erroneous or
uncorroborated by the evidence on record, we find no compelling reason to depart
therefrom.
Too, assuming arguendo that the properties in question are immovable by nature, nothing
detracts the parties from treating it as chattels to secure an obligation under the principle
of estoppel. As far back as Navarro v. Pineda, 9 SCRA 631 (1963), an immovable may
be considered a personal property if there is a stipulation as when it is used as security in
the payment of an obligation where a chattel mortgage is executed over it, as in the case
at bar.
In the instant case, the parties herein: (1) executed a contract styled as "Real Estate
Mortgage and Chattel Mortgage," instead of just "Real Estate Mortgage" if indeed their
intention is to treat all properties included therein as immovable, and (2) attached to the
said contract a separate "LIST OF MACHINERIES & EQUIPMENT". These facts, taken
together, evince the conclusion that the parties' intention is to treat these units of
machinery as chattels. A fortiori, the contested after-acquired properties, which are of the
same description as the units enumerated under the title "LIST OF MACHINERIES &
EQUIPMENT," must also be treated as chattels.
Accordingly, we find no reversible error in the respondent appellate court's ruling that
inasmuch as the subject mortgages were intended by the parties to involve chattels,
insofar as equipment and machinery were concerned, the Chattel Mortgage Law applies,
which provides in Section 7 thereof that: "a chattel mortgage shall be deemed to
cover only the property described therein and not like or substituted property thereafter
acquired by the mortgagor and placed in the same depository as the property originally
mortgaged, anything in the mortgage to the contrary notwithstanding."
And, since the disputed machineries were acquired in 1981 and could not have been
involved in the 1975 or 1979 chattel mortgages, it was consequently an error on the part
of the Sheriff to include subject machineries with the properties enumerated in said
chattel mortgages.
As the auction sale of the subject properties to PBCom is void, no valid title passed in its
favor. Consequently, the sale thereof to Tsai is also a nullity under the elementary
principle of nemo dat quod non habet, one cannot give what one does not have.17
Petitioner Tsai also argued that assuming that PBCom's title over the contested properties
is a nullity, she is nevertheless a purchaser in good faith and for value who now has a
better right than EVERTEX.
To the contrary, however, are the factual findings and conclusions of the trial court that
she is not a purchaser in good faith. Well-settled is the rule that the person who asserts
the status of a purchaser in good faith and for value has the burden of proving such
assertion.18 Petitioner Tsai failed to discharge this burden persuasively.
Moreover, a purchaser in good faith and for value is one who buys the property of
another without notice that some other person has a right to or interest in such

property and pays a full and fair price for the same, at the time of purchase, or before he
has notice of the claims or interest of some other person in the property.19Records reveal,
however, that when Tsai purchased the controverted properties, she knew of respondent's
claim thereon. As borne out by the records, she received the letter of respondent's
counsel, apprising her of respondent's claim, dated February 27, 1987.20 She replied
thereto on March 9, 1987.21 Despite her knowledge of respondent's claim, she proceeded
to buy the contested units of machinery on May 3, 1988. Thus, the RTC did not err in
finding that she was not a purchaser in good faith.
Petitioner Tsai's defense of indefeasibility of Torrens Title of the lot where the disputed
properties are located is equally unavailing. This defense refers to sale of lands and not to
sale of properties situated therein. Likewise, the mere fact that the lot where the factory
and the disputed properties stand is in PBCom's name does not automatically make
PBCom the owner of everything found therein, especially in view of EVERTEX's letter
to Tsai enunciating its claim.
Finally, petitioners' defense of prescription and laches is less than convincing. We find no
cogent reason to disturb the consistent findings of both courts below that the case for the
reconveyance of the disputed properties was filed within the reglementary period. Here,
in our view, the doctrine of laches does not apply. Note that upon petitioners' adamant
refusal to heed EVERTEX's claim, respondent company immediately filed an action to
recover possession and ownership of the disputed properties. There is no evidence
showing any failure or neglect on its part, for an unreasonable and unexplained length of
time, to do that which, by exercising due diligence, could or should have been done
earlier. The doctrine of stale demands would apply only where by reason of the lapse of
time, it would be inequitable to allow a party to enforce his legal rights. Moreover,
except for very strong reasons, this Court is not disposed to apply the doctrine of laches
to prejudice or defeat the rights of an owner.22
As to the award of damages, the contested damages are the actual compensation,
representing rentals for the contested units of machinery, the exemplary damages, and
attorney's fees.
As regards said actual compensation, the RTC awarded P100,000.00 corresponding to
the unpaid rentals of the contested properties based on the testimony of John Chua, who
testified that the P100,000.00 was based on the accepted practice in banking and finance,
business and investments that the rental price must take into account the cost of money
used to buy them. The Court of Appeals did not give full credence to Chua's projection
and reduced the award to P20,000.00.
Basic is the rule that to recover actual damages, the amount of loss must not only be
capable of proof but must actually be proven with reasonable degree of certainty,
premised upon competent proof or best evidence obtainable of the actual amount
thereof.23 However, the allegations of respondent company as to the amount of unrealized
rentals due them as actual damages remain mere assertions unsupported by documents
and other competent evidence. In determining actual damages, the court cannot rely on
mere assertions, speculations, conjectures or guesswork but must depend on competent
proof and on the best evidence obtainable regarding the actual amount of
loss.24 However, we are not prepared to disregard the following dispositions of the
respondent appellate court:
. . . In the award of actual damages under scrutiny, there is nothing on record warranting
the said award of P5,200,000.00, representing monthly rental income of P100,000.00
from November 1986 to February 1991, and the additional award of P100,000.00 per
month thereafter.
As pointed out by appellants, the testimonial evidence, consisting of the testimonies of
Jonh (sic) Chua and Mamerto Villaluz, is shy of what is necessary to substantiate the
actual damages allegedly sustained by appellees, by way of unrealized rental income of
subject machineries and equipments.

The testimony of John Cua (sic) is nothing but an opinion or projection based on what is
claimed to be a practice in business and industry. But such a testimony cannot serve as
the sole basis for assessing the actual damages complained of. What is more, there is no
showing that had appellant Tsai not taken possession of the machineries and equipments
in question, somebody was willing and ready to rent the same for P100,000.00 a month.
xxx

xxx

xxx

Then, too, even assuming arguendo that the said machineries and equipments could have
generated a rental income of P30,000.00 a month, as projected by witness Mamerto
Villaluz, the same would have been a gross income. Therefrom should be deducted or
removed, expenses for maintenance and repairs . . . Therefore, in the determination of the
actual damages or unrealized rental income sued upon, there is a good basis to calculate
that at least four months in a year, the machineries in dispute would have been idle due to
absence of a lessee or while being repaired. In the light of the foregoing rationalization
and computation, We believe that a net unrealized rental income of P20,000.00 a month,
since November 1986, is more realistic and fair.25
As to exemplary damages, the RTC awarded P200,000.00 to EVERTEX which the Court
of Appeals deleted. But according to the CA, there was no clear showing that petitioners
acted malevolently, wantonly and oppressively. The evidence, however, shows
otherwise.It is a requisite to award exemplary damages that the wrongful act must be
accompanied by bad faith,26 and the guilty acted in a wanton, fraudulent, oppressive,
reckless or malevolent manner.27 As previously stressed, petitioner Tsai's act of
purchasing the controverted properties despite her knowledge of EVERTEX's claim was
oppressive and subjected the already insolvent respondent to gross disadvantage.
Petitioner PBCom also received the same letters of Atty. Villaluz, responding thereto on
March 24, 1987.28 Thus, PBCom's act of taking all the properties found in the factory of
the financially handicapped respondent, including those properties not covered by or
included in the mortgages, is equally oppressive and tainted with bad faith. Thus, we are
in agreement with the RTC that an award of exemplary damages is proper.
The amount of P200,000.00 for exemplary damages is, however, excessive. Article 2216
of the Civil Code provides that no proof of pecuniary loss is necessary for the
adjudication of exemplary damages, their assessment being left to the discretion of the
court in accordance with the circumstances of each case. 29 While the imposition of
exemplary damages is justified in this case, equity calls for its reduction. In Inhelder
Corporation v. Court of Appeals, G.R. No. L-52358, 122 SCRA 576, 585, (May 30,
1983), we laid down the rule that judicial discretion granted to the courts in the
assessment of damages must always be exercised with balanced restraint and measured
objectivity. Thus, here the award of exemplary damages by way of example for the
public good should be reduced to P100,000.00.
By the same token, attorney's fees and other expenses of litigation may be recovered
when exemplary damages are awarded.30 In our view, RTC's award of P50,000.00 as
attorney's fees and expenses of litigation is reasonable, given the circumstances in these
cases.
WHEREFORE, the petitions are DENIED. The assailed decision and resolution of the
Court of Appeals in CA-G.R. CV No. 32986 are AFFIRMED WITH MODIFICATIONS.
Petitioners Philippine Bank of Communications and Ruby L. Tsai are hereby ordered to
pay jointly and severally Ever Textile Mills, Inc. the following: (1) P20,000.00 per
month, as compensation for the use and possession of the properties in question from
November 198631 until subject personal properties are restored to respondent corporation;
(2) P100,000.00 by way of exemplary damages, and (3) P50,000.00 as attorney's fees and
litigation expenses. Costs against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 120098

October 2, 2001

RUBY L. TSAI, petitioner,

vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC. and MAMERTO R
VILLALUZ, respondents.
x---------------------------------------------------------x
[G.R. No. 120109. October 2, 2001.]
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS and MAMERTO R
VILLALUZ, respondents.
QUISUMBING, J.:
These consolidated cases assail the decision1 of the Court of Appeals in CA-G.R. CV No.
32986, affirming the decision2 of the Regional Trial Court of Manila, Branch 7, in Civil
Case No. 89-48265. Also assailed is respondent court's resolution denying petitioners'
motion for reconsideration.
On November 26, 1975, respondent Ever Textile Mills, Inc. (EVERTEX) obtained a
three million peso (P3,000,000.00) loan from petitioner Philippine Bank of
Communications (PBCom). As security for the loan, EVERTEX executed in favor of
PBCom, a deed of Real and Chattel Mortgage over the lot under TCT No. 372097, where
its factory stands, and the chattels located therein as enumerated in a schedule attached to
the mortgage contract. The pertinent portions of the Real and Chattel Mortgage are
quoted below:
MORTGAGE
(REAL AND CHATTEL)
xxx

xxx

xxx

The MORTGAGOR(S) hereby transfer(s) and convey(s), by way of First Mortgage, to

the MORTGAGEE, . . . certain parcel(s) of land, together with all the buildings and
improvements now existing or which may hereafter exist thereon, situated in . . .
"Annex A"
(Real and Chattel Mortgage executed by Ever Textile Mills in favor of
PBCommunications continued)
LIST OF MACHINERIES & EQUIPMENT
A. Forty Eight (48) units of Vayrow Knitting Machines-Tompkins made in Hongkong:
Serial Numbers Size of Machines
xxx

xxx

xxx

B. Sixteen (16) sets of Vayrow Knitting Machines made in Taiwan.

xxx

xxx

xxx

C. Two (2) Circular Knitting Machines made in West Germany.

xxx

xxx

xxx

D. Four (4) Winding Machines.

xxx

xxx

xxx
SCHEDULE "A"

I. TCT # 372097 - RIZAL

xxx

xxx

xxx

II. Any and all buildings and improvements now existing or hereafter to exist on the
above-mentioned lot.
III. MACHINERIES & EQUIPMENT situated, located and/or installed on the abovementioned lot located at . . .
(a) Forty eight sets (48) Vayrow Knitting Machines . . .
(b) Sixteen sets (16) Vayrow Knitting Machines . . .
(c) Two (2) Circular Knitting Machines . . .
(d) Two (2) Winding Machines . . .
(e) Two (2) Winding Machines . . .
IV. Any and all replacements, substitutions, additions, increases and accretions to above
properties.
xxx

xxx

xxx3

On April 23, 1979, PBCom granted a second loan of P3,356,000.00 to EVERTEX. The
loan was secured by a Chattel Mortgage over personal properties enumerated in a list
attached thereto. These listed properties were similar to those listed in Annex A of the
first mortgage deed.
After April 23, 1979, the date of the execution of the second mortgage mentioned above,
EVERTEX purchased various machines and equipments.
On November 19, 1982, due to business reverses, EVERTEX filed insolvency
proceedings docketed as SP Proc. No. LP-3091-P before the defunct Court of First
Instance of Pasay City, Branch XXVIII. The CFI issued an order on November 24, 1982
declaring the corporation insolvent. All its assets were taken into the custody of the
Insolvency Court, including the collateral, real and personal, securing the two mortgages
as abovementioned.
In the meantime, upon EVERTEX's failure to meet its obligation to PBCom, the latter
commenced extrajudicial foreclosure proceedings against EVERTEX under Act 3135,
otherwise known as "An Act to Regulate the Sale of Property under Special Powers
Inserted in or Annexed to Real Estate Mortgages" and Act 1506 or "The Chattel
Mortgage Law". A Notice of Sheriff's Sale was issued on December 1, 1982.
On December 15, 1982, the first public auction was held where petitioner PBCom
emerged as the highest bidder and a Certificate of Sale was issued in its favor on the
same date. On December 23, 1982, another public auction was held and again, PBCom
was the highest bidder. The sheriff issued a Certificate of Sale on the same day.

On March 7, 1984, PBCom consolidated its ownership over the lot and all the properties
in it. In November 1986, it leased the entire factory premises to petitioner Ruby L. Tsai
for P50,000.00 a month. On May 3, 1988, PBCom sold the factory, lock, stock and barrel
to Tsai for P9,000,000.00, including the contested machineries.
On March 16, 1989, EVERTEX filed a complaint for annulment of sale, reconveyance,
and damages with the Regional Trial Court against PBCom, alleging inter alia that the
extrajudicial foreclosure of subject mortgage was in violation of the Insolvency Law.
EVERTEX claimed that no rights having been transmitted to PBCom over the assets of
insolvent EVERTEX, therefore Tsai acquired no rights over such assets sold to her, and
should reconvey the assets.
Further, EVERTEX averred that PBCom, without any legal or factual basis, appropriated
the contested properties, which were not included in the Real and Chattel Mortgage of
November 26, 1975 nor in the Chattel Mortgage of April 23, 1979, and neither were
those properties included in the Notice of Sheriff's Sale dated December 1, 1982 and
Certificate of Sale . . . dated December 15, 1982.
The disputed properties, which were valued at P4,000,000.00, are: 14 Interlock Circular
Knitting Machines, 1 Jet Drying Equipment, 1 Dryer Equipment, 1 Raisin Equipment
and 1 Heatset Equipment.
The RTC found that the lease and sale of said personal properties were irregular and
illegal because they were not duly foreclosed nor sold at the December 15, 1982 auction
sale since these were not included in the schedules attached to the mortgage contracts.
The trial court decreed:
WHEREFORE, judgment is hereby rendered in favor of plaintiff corporation and against
the defendants:
1. Ordering the annulment of the sale executed by defendant Philippine Bank of
Communications in favor of defendant Ruby L. Tsai on May 3, 1988 insofar as it affects
the personal properties listed in par. 9 of the complaint, and their return to the plaintiff
corporation through its assignee, plaintiff Mamerto R. Villaluz, for disposition by the
Insolvency Court, to be done within ten (10) days from finality of this decision;
2. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum
of P5,200,000.00 as compensation for the use and possession of the properties in
question from November 1986 to February 1991 and P100,000.00 every month
thereafter, with interest thereon at the legal rate per annum until full payment;
3. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum
of P50,000.00 as and for attorney's fees and expenses of litigation;
4. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum
of P200,000.00 by way of exemplary damages;
5. Ordering the dismissal of the counterclaim of the defendants; and
6. Ordering the defendants to proportionately pay the costs of suit.
SO ORDERED.4
Dissatisfied, both PBCom and Tsai appealed to the Court of Appeals, which issued its
decision dated August 31, 1994, the dispositive portion of which reads:
WHEREFORE, except for the deletion therefrom of the award; for exemplary damages,
and reduction of the actual damages, from P100,000.00 to P20,000.00 per month, from
November 1986 until subject personal properties are restored to appellees, the judgment
appealed from is hereby AFFIRMED, in all other respects. No pronouncement as to
costs.5

Motion for reconsideration of the above decision having been denied in the resolution of
April 28, 1995, PBCom and Tsai filed their separate petitions for review with this Court.
In G.R No. 120098, petitioner Tsai ascribed the following errors to the respondent court:
I
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
EFFECT MAKING A CONTRACT FOR THE PARTIES BY TREATING THE 1981
ACQUIRED MACHINERIES AS CHATTELS INSTEAD OF REAL PROPERTIES
WITHIN THEIR EARLIER 1975 DEED OF REAL AND CHATTEL MORTGAGE OR
1979 DEED OF CHATTEL MORTGAGE.
II
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
HOLDING THAT THE DISPUTED 1981 MACHINERIES ARE NOT REAL
PROPERTIES DEEMED PART OF THE MORTGAGE DESPITE THE CLEAR
IMPORT OF THE EVIDENCE AND APPLICABLE RULINGS OF THE SUPREME
COURT.
III
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
DEEMING PETITIONER A PURCHASER IN BAD FAITH.
IV
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
ASSESSING PETITIONER ACTUAL DAMAGES, ATTORNEY'S FEES AND
EXPENSES OF LITIGATION FOR WANT OF VALID FACTUAL AND LEGAL
BASIS.
V
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
HOLDING AGAINST PETITIONER'S ARGUMENTS ON PRESCRIPTION AND
LACHES.6
In G.R. No. 120098, PBCom raised the following issues:
I.
DID THE COURT OF APPEALS VALIDLY DECREE THE MACHINERIES LISTED
UNDER PARAGRAPH 9 OF THE COMPLAINT BELOW AS PERSONAL
PROPERTY OUTSIDE OF THE 1975 DEED OF REAL ESTATE MORTGAGE AND
EXCLUDED THEM FROM THE REAL PROPERTY EXTRAJUDICIALLY
FORECLOSED BY PBCOM DESPITE THE PROVISION IN THE 1975 DEED THAT
ALL AFTER-ACQUIRED PROPERTIES DURING THE LIFETIME OF THE
MORTGAGE SHALL FORM PART THEREOF, AND DESPITE THE UNDISPUTED
FACT THAT SAID MACHINERIES ARE BIG AND HEAVY, BOLTED OR
CEMENTED ON THE REAL PROPERTY MORTGAGED BY EVER TEXTILE
MILLS TO PBCOM, AND WERE ASSESSED FOR REAL ESTATE TAX PURPOSES?
II
CAN PBCOM, WHO TOOK POSSESSION OF THE MACHINERIES IN QUESTION
IN GOOD FAITH, EXTENDED CREDIT FACILITIES TO EVER TEXTILE MILLS
WHICH AS OF 1982 TOTALLED P9,547,095.28, WHO HAD SPENT FOR
MAINTENANCE AND SECURITY ON THE DISPUTED MACHINERIES AND HAD
TO PAY ALL THE BACK TAXES OF EVER TEXTILE MILLS BE LEGALLY
COMPELLED TO RETURN TO EVER THE SAID MACHINERIES OR IN LIEU

THEREOF BE ASSESSED DAMAGES. IS THAT SITUATION TANTAMOUNT TO A

CASE OF UNJUST ENRICHMENT?7
The principal issue, in our view, is whether or not the inclusion of the questioned
properties in the foreclosed properties is proper. The secondary issue is whether or not
the sale of these properties to petitioner Ruby Tsai is valid.
For her part, Tsai avers that the Court of Appeals in effect made a contract for the parties
by treating the 1981 acquired units of machinery as chattels instead of real properties
within their earlier 1975 deed of Real and Chattel Mortgage or 1979 deed of Chattel
Mortgage.8 Additionally, Tsai argues that respondent court erred in holding that the
disputed 1981 machineries are not real properties.9 Finally, she contends that the Court of
Appeals erred in holding against petitioner's arguments on prescription and laches 10 and
in assessing petitioner actual damages, attorney's fees and expenses of litigation, for want
of valid factual and legal basis.11
Essentially, PBCom contends that respondent court erred in affirming the lower court's
judgment decreeing that the pieces of machinery in dispute were not duly foreclosed and
could not be legally leased nor sold to Ruby Tsai. It further argued that the Court of
Appeals' pronouncement that the pieces of machinery in question were personal
properties have no factual and legal basis. Finally, it asserts that the Court of Appeals
erred in assessing damages and attorney's fees against PBCom.
In opposition, private respondents argue that the controverted units of machinery are not
"real properties" but chattels, and, therefore, they were not part of the foreclosed real
properties, rendering the lease and the subsequent sale thereof to Tsai a nullity.12
Considering the assigned errors and the arguments of the parties, we find the petitions
devoid of merit and ought to be denied.
Well settled is the rule that the jurisdiction of the Supreme Court in a petition for review
on certiorari under Rule 45 of the Revised Rules of Court is limited to reviewing only
errors of law, not of fact, unless the factual findings complained of are devoid of support
by the evidence on record or the assailed judgment is based on misapprehension of
facts.13 This rule is applied more stringently when the findings of fact of the RTC is
affirmed by the Court of Appeals.14
The following are the facts as found by the RTC and affirmed by the Court of Appeals
that are decisive of the issues: (1) the "controverted machineries" are not covered by, or
included in, either of the two mortgages, the Real Estate and Chattel Mortgage, and the
pure Chattel Mortgage; (2) the said machineries were not included in the list of
properties appended to the Notice of Sale, and neither were they included in the Sheriff's
Notice of Sale of the foreclosed properties.15
Petitioners contend that the nature of the disputed machineries, i.e., that they were heavy,
bolted or cemented on the real property mortgaged by EVERTEX to PBCom, make
them ipso facto immovable under Article 415 (3) and (5) of the New Civil Code. This
assertion, however, does not settle the issue. Mere nuts and bolts do not foreclose the
controversy. We have to look at the parties' intent.
While it is true that the controverted properties appear to be immobile, a perusal of the
contract of Real and Chattel Mortgage executed by the parties herein gives us a contrary
indication. In the case at bar, both the trial and the appellate courts reached the same
finding that the true intention of PBCOM and the owner, EVERTEX, is to treat
machinery and equipment as chattels. The pertinent portion of respondent appellate
court's ruling is quoted below:
As stressed upon by appellees, appellant bank treated the machineries as chattels; never
as real properties. Indeed, the 1975 mortgage contract, which was actually real and
chattel mortgage, militates against appellants' posture. It should be noted that the printed
form used by appellant bank was mainly for real estate mortgages. But reflective of the
true intention of appellant PBCOM and appellee EVERTEX was the typing in capital

letters, immediately following the printed caption of mortgage, of the phrase "real and
chattel." So also, the "machineries and equipment" in the printed form of the bank had to
be inserted in the blank space of the printed contract and connected with the word
"building" by typewritten slash marks. Now, then, if the machineries in question were
contemplated to be included in the real estate mortgage, there would have been no
necessity to ink a chattel mortgage specifically mentioning as part III of Schedule A a
listing of the machineries covered thereby. It would have sufficed to list them as
immovables in the Deed of Real Estate Mortgage of the land and building involved.
As regards the 1979 contract, the intention of the parties is clear and beyond question. It
refers solely tochattels. The inventory list of the mortgaged properties is an itemization
of sixty-three (63) individually described machineries while the schedule listed only
machines and 2,996,880.50 worth of finished cotton fabrics and natural cotton fabrics.16
In the absence of any showing that this conclusion is baseless, erroneous or
uncorroborated by the evidence on record, we find no compelling reason to depart
therefrom.
Too, assuming arguendo that the properties in question are immovable by nature, nothing
detracts the parties from treating it as chattels to secure an obligation under the principle
of estoppel. As far back as Navarro v. Pineda, 9 SCRA 631 (1963), an immovable may
be considered a personal property if there is a stipulation as when it is used as security in
the payment of an obligation where a chattel mortgage is executed over it, as in the case
at bar.
In the instant case, the parties herein: (1) executed a contract styled as "Real Estate
Mortgage and Chattel Mortgage," instead of just "Real Estate Mortgage" if indeed their
intention is to treat all properties included therein as immovable, and (2) attached to the
said contract a separate "LIST OF MACHINERIES & EQUIPMENT". These facts, taken
together, evince the conclusion that the parties' intention is to treat these units of
machinery as chattels. A fortiori, the contested after-acquired properties, which are of the
same description as the units enumerated under the title "LIST OF MACHINERIES &
EQUIPMENT," must also be treated as chattels.
Accordingly, we find no reversible error in the respondent appellate court's ruling that
inasmuch as the subject mortgages were intended by the parties to involve chattels,
insofar as equipment and machinery were concerned, the Chattel Mortgage Law applies,
which provides in Section 7 thereof that: "a chattel mortgage shall be deemed to
cover only the property described therein and not like or substituted property thereafter
acquired by the mortgagor and placed in the same depository as the property originally
mortgaged, anything in the mortgage to the contrary notwithstanding."
And, since the disputed machineries were acquired in 1981 and could not have been
involved in the 1975 or 1979 chattel mortgages, it was consequently an error on the part
of the Sheriff to include subject machineries with the properties enumerated in said
chattel mortgages.
As the auction sale of the subject properties to PBCom is void, no valid title passed in its
favor. Consequently, the sale thereof to Tsai is also a nullity under the elementary
principle of nemo dat quod non habet, one cannot give what one does not have.17
Petitioner Tsai also argued that assuming that PBCom's title over the contested properties
is a nullity, she is nevertheless a purchaser in good faith and for value who now has a
better right than EVERTEX.
To the contrary, however, are the factual findings and conclusions of the trial court that
she is not a purchaser in good faith. Well-settled is the rule that the person who asserts
the status of a purchaser in good faith and for value has the burden of proving such
assertion.18 Petitioner Tsai failed to discharge this burden persuasively.
Moreover, a purchaser in good faith and for value is one who buys the property of
another without notice that some other person has a right to or interest in such

property and pays a full and fair price for the same, at the time of purchase, or before he
has notice of the claims or interest of some other person in the property.19Records reveal,
however, that when Tsai purchased the controverted properties, she knew of respondent's
claim thereon. As borne out by the records, she received the letter of respondent's
counsel, apprising her of respondent's claim, dated February 27, 1987.20 She replied
thereto on March 9, 1987.21 Despite her knowledge of respondent's claim, she proceeded
to buy the contested units of machinery on May 3, 1988. Thus, the RTC did not err in
finding that she was not a purchaser in good faith.
Petitioner Tsai's defense of indefeasibility of Torrens Title of the lot where the disputed
properties are located is equally unavailing. This defense refers to sale of lands and not to
sale of properties situated therein. Likewise, the mere fact that the lot where the factory
and the disputed properties stand is in PBCom's name does not automatically make
PBCom the owner of everything found therein, especially in view of EVERTEX's letter
to Tsai enunciating its claim.
Finally, petitioners' defense of prescription and laches is less than convincing. We find no
cogent reason to disturb the consistent findings of both courts below that the case for the
reconveyance of the disputed properties was filed within the reglementary period. Here,
in our view, the doctrine of laches does not apply. Note that upon petitioners' adamant
refusal to heed EVERTEX's claim, respondent company immediately filed an action to
recover possession and ownership of the disputed properties. There is no evidence
showing any failure or neglect on its part, for an unreasonable and unexplained length of
time, to do that which, by exercising due diligence, could or should have been done
earlier. The doctrine of stale demands would apply only where by reason of the lapse of
time, it would be inequitable to allow a party to enforce his legal rights. Moreover,
except for very strong reasons, this Court is not disposed to apply the doctrine of laches
to prejudice or defeat the rights of an owner.22
As to the award of damages, the contested damages are the actual compensation,
representing rentals for the contested units of machinery, the exemplary damages, and
attorney's fees.
As regards said actual compensation, the RTC awarded P100,000.00 corresponding to
the unpaid rentals of the contested properties based on the testimony of John Chua, who
testified that the P100,000.00 was based on the accepted practice in banking and finance,
business and investments that the rental price must take into account the cost of money
used to buy them. The Court of Appeals did not give full credence to Chua's projection
and reduced the award to P20,000.00.
Basic is the rule that to recover actual damages, the amount of loss must not only be
capable of proof but must actually be proven with reasonable degree of certainty,
premised upon competent proof or best evidence obtainable of the actual amount
thereof.23 However, the allegations of respondent company as to the amount of unrealized
rentals due them as actual damages remain mere assertions unsupported by documents
and other competent evidence. In determining actual damages, the court cannot rely on
mere assertions, speculations, conjectures or guesswork but must depend on competent
proof and on the best evidence obtainable regarding the actual amount of
loss.24 However, we are not prepared to disregard the following dispositions of the
respondent appellate court:
. . . In the award of actual damages under scrutiny, there is nothing on record warranting
the said award of P5,200,000.00, representing monthly rental income of P100,000.00
from November 1986 to February 1991, and the additional award of P100,000.00 per
month thereafter.
As pointed out by appellants, the testimonial evidence, consisting of the testimonies of
Jonh (sic) Chua and Mamerto Villaluz, is shy of what is necessary to substantiate the
actual damages allegedly sustained by appellees, by way of unrealized rental income of
subject machineries and equipments.

The testimony of John Cua (sic) is nothing but an opinion or projection based on what is
claimed to be a practice in business and industry. But such a testimony cannot serve as
the sole basis for assessing the actual damages complained of. What is more, there is no
showing that had appellant Tsai not taken possession of the machineries and equipments
in question, somebody was willing and ready to rent the same for P100,000.00 a month.
xxx

xxx

xxx

Then, too, even assuming arguendo that the said machineries and equipments could have
generated a rental income of P30,000.00 a month, as projected by witness Mamerto
Villaluz, the same would have been a gross income. Therefrom should be deducted or
removed, expenses for maintenance and repairs . . . Therefore, in the determination of the
actual damages or unrealized rental income sued upon, there is a good basis to calculate
that at least four months in a year, the machineries in dispute would have been idle due to
absence of a lessee or while being repaired. In the light of the foregoing rationalization
and computation, We believe that a net unrealized rental income of P20,000.00 a month,
since November 1986, is more realistic and fair.25
As to exemplary damages, the RTC awarded P200,000.00 to EVERTEX which the Court
of Appeals deleted. But according to the CA, there was no clear showing that petitioners
acted malevolently, wantonly and oppressively. The evidence, however, shows
otherwise.It is a requisite to award exemplary damages that the wrongful act must be
accompanied by bad faith,26 and the guilty acted in a wanton, fraudulent, oppressive,
reckless or malevolent manner.27 As previously stressed, petitioner Tsai's act of
purchasing the controverted properties despite her knowledge of EVERTEX's claim was
oppressive and subjected the already insolvent respondent to gross disadvantage.
Petitioner PBCom also received the same letters of Atty. Villaluz, responding thereto on
March 24, 1987.28 Thus, PBCom's act of taking all the properties found in the factory of
the financially handicapped respondent, including those properties not covered by or
included in the mortgages, is equally oppressive and tainted with bad faith. Thus, we are
in agreement with the RTC that an award of exemplary damages is proper.
The amount of P200,000.00 for exemplary damages is, however, excessive. Article 2216
of the Civil Code provides that no proof of pecuniary loss is necessary for the
adjudication of exemplary damages, their assessment being left to the discretion of the
court in accordance with the circumstances of each case. 29 While the imposition of
exemplary damages is justified in this case, equity calls for its reduction. In Inhelder
Corporation v. Court of Appeals, G.R. No. L-52358, 122 SCRA 576, 585, (May 30,
1983), we laid down the rule that judicial discretion granted to the courts in the
assessment of damages must always be exercised with balanced restraint and measured
objectivity. Thus, here the award of exemplary damages by way of example for the
public good should be reduced to P100,000.00.
By the same token, attorney's fees and other expenses of litigation may be recovered
when exemplary damages are awarded.30 In our view, RTC's award of P50,000.00 as
attorney's fees and expenses of litigation is reasonable, given the circumstances in these
cases.
WHEREFORE, the petitions are DENIED. The assailed decision and resolution of the
Court of Appeals in CA-G.R. CV No. 32986 are AFFIRMED WITH MODIFICATIONS.
Petitioners Philippine Bank of Communications and Ruby L. Tsai are hereby ordered to
pay jointly and severally Ever Textile Mills, Inc. the following: (1) P20,000.00 per
month, as compensation for the use and possession of the properties in question from
November 198631 until subject personal properties are restored to respondent corporation;
(2) P100,000.00 by way of exemplary damages, and (3) P50,000.00 as attorney's fees and
litigation expenses. Costs against petitioners.
SO ORDERED.