G.R. No.

L-5219 February 15, 1910 other cause unenforceable against her, it would be
wholly unjust, by declaring its preference over a debt
JOSE McMICKING, sheriff of Manila, plaintiff- acknowledged by and conclusive against her, to
appellee, require that said funds be paid over to the holder of
vs. said document. That would be to require her to pay
PEDRO MARTINEZ and GO JUNA, defendants. a debt which has not only not been shown to be
GO JUNA, appellant. enforceable against her but which, as a witness for
the defendant Martinez on the trial of this cause, she
M. Legazpi Florendo, for appellant. expressly and vehemently repudiated as a valid
Eugenio de Lara, for defendant Pedro Martinez. claim against her.

MORELAND, J.: The judgement is, therefore, reversed; and it is

ordered that the cause be returned to the court
below; that the plaintiff bring in Maria Aniversario as
The defendant, Pedro Martinez, some time during
a party to this action, and that she be given an
the year 1908 obtained judgment in the Court of
opportunity to make her defense, if she have any, to
First Instance of the city of Manila against one Maria
the document in question under proper procedure.
Aniversario; that thereafter execution was issued
No finding as to costs. So ordered
upon said judgment and the sheriff levied upon
a pailebot, Tomasa, alleged to be the property of
said Maria Aniversario; that thereupon the said
defendant Go Juna intervened and claimed a lien
upon said boat by virtue of a pledge of the same to
him by the said Maria Aniversario made on the 27th
day of February, 1907, which said pledge was
evidenced by a public instrument bearing that date.

This action was brought by the sheriff against Go

Juna and Pedro Martinez to determine the rights of
the parties to the funds in his hands. Maria
Aniversario was not made a party.

The said Pedro Martinez alleged as a defense that

the pledge which said document was intended to
constitute had not been made effective by delivery
of the property pledged, as required by article 1863
of the Civil Code, and that, therefore, there existed
no preference in favor of said Go Juna.

The court below found with the contention of the

said Pedro Martinez, declared a preference in his
favor, and ordered the sheriff to pay over the said
funds in consonance therewith. An appeal was taken
from said judgment.

The conclusion of the court below that the property

was not delivered in accordance with the provisions
of article 1863 of the Civil Code is sustained by the
proofs. His conclusion that the pledge was
ineffective against Martinez is correct. It appears,
however, that the document of pledge is a public
document which contains an admission of
indebtedness. In other words, while it is intended to
be a pledge, it is also a credit which appears in a
public document. Article 1924, paragraph 3, letter a,
is therefore applicable; and, said public document
antedating the judgment of defendant Martinez,
takes preference thereover. The validity of that
document in so far as it shows an indebtedness
against Maria Aniversario and its effectiveness
against her have not, however, been determined.
She is not a party to this action. No judgment can be
rendered affecting her rights or liabilities under said
instrument. If said instrument is invalid or for any
G.R. No. L-17072 October 31, 1961
CRISTINA MARCELO VDA. DE BAUTISTA, plaintiff-
appellee,
vs.
BRIGIDA MARCOS, ET AL., defendants-appellants.
Aladin B. Bermudez for defendants-appellants.
Cube and Fajardo for plaintiff-appellee.
REYES, J.B.L., J.:
The main question in this appeal is whether or not a
mortgagee may foreclose a mortgage on a piece of
land covered by a free patent where the mortgage
was executed before the patent was issued and is
sought to be foreclosed within five years from its
issuance.
The facts of the case appear to be as follows:
On May 17, 1954, defendant Brigida Marcos
obtained a loan in the amount of P2,000 from
plaintiff Cristina Marcel Vda. de Bautista and to
secure payment thereof conveyed to the latter by
way of mortgage a two (2)-hectare portion of an
unregistered parcel of land situated in Sta. Ignacia,
Tarlac. The deed of mortgage, Exhibit "A", provided
that it was to last for three years, that possession of
the land mortgaged was to be turned over to the
mortgagee by way of usufruct, but with no
obligation on her part to apply the harvests to the
principal obligation; that said mortgage would be
released only upon payment of the principal loan of
P2,000 without any interest; and that the mortgagor
promised to defend and warrant the mortgagee's
rights over the land mortgaged.
Subsequently, or in July, 1956, mortgagor Brigida
Marcos filed in behalf of the heirs of her deceased
mother Victoriana Cainglet (who are Brigida herself
and her three sisters), an application for the issuance
of a free patent over the land in question, on the
strength of the cultivation and occupation of said
land by them and their predecessor since July, 1915.
As a result, Free Patent No. V-64358 was issued to
the applicants on January 25, 1957, and on February
22, 1957, it was registered in their names under
Original Certificate of Title No. P-888 of the office of
Register of Deeds for the province of Tarlac.
Defendant Brigida Marcos' indebtedness of P2,000
to plaintiff having remained unpaid up to 1959, the
latter, on March 4, 1959, filed the present action
against Brigida and her husband (Civil Case No. 3382)
in the court below for the payment thereof, or in
default of the debtors to pay, for the foreclosure of
her mortgage on the land give as security.
Defendants moved to dismiss the action, pointing
out that the land in question is covered by a free
patent and could not, therefore, under the Public
Land Law, be taken within five years from the
issuance of the patent for the payment of any debts
of the patentees contracted prior to the expiration
of said five-year period; but the lower court denied
the motion to dismiss on the ground that the law
cited does not apply because the mortgage sought
to be foreclosed was executed before the patent
was issued. Defendants then filed their answer,
reiterating the defense invoked in their motion to
dismiss, and alleging as well that the real contract
between the parties was an antichresis and not a
mortgage. Pre-trial of the case followed, after which
the lower court rendered judgment finding the
mortgage valid to the extent of the mortgagor's pro-
indiviso share of 15,333 square meters in the land in
question, on the theory that the Public Land Law
does not apply in this case because the mortgage in
question was executed before a patent was issued
over the land in question; that the agreement of the
parties could not be antichresis because the deed
Exhibit "A" clearly shows a mortgage with usufruct in
favor of the mortgagee; and ordered the payment of
the mortgage loan of P2,000 to plaintiff or, upon
defendant's failure to do so, the foreclosure of
plaintiff's mortgage on defendant Brigida Marcos'
undivided share in the land in question. From this
judgment, defendants Brigida Marcos and her
husband Osmondo Apolocio appealed to this Court.
There is merit in the appeal.
The right of plaintiff-appellee to foreclose her
mortgage on the land in question depends not so
much on whether she could take said land within the
prohibitive period of five years from the issuance of
defendants' patent for the satisfaction of the
indebtedness in question, but on whether the deed
of mortgage Exhibit "A" is at all valid and
enforceable, since the land mortgaged was
apparently still part of the public domain when the
deed of mortgage was constituted. As it is an
essential requisite for the validity of a mortgage that
the mortgagor be the absolute owner of the thing
mortgaged (Art. 2085), the mortgage here in
question is void and ineffective because at the time
it was constituted, the mortgagor was not yet the
owner of the land mortgaged and could not, for that
reason, encumber the same to the plaintiff-appellee.
Nor could the subsequent acquisition by the
mortgagor of title over said land through the
issuance of a free patent validate and legalize the
deed of mortgage under the doctrine of estoppel (cf.
Art. 1434, New Civil Code,1 since upon the issuance
of said patient, the land in question was thereby
brought under the operation of the Public Land Law
that prohibits the taking of said land for the
satisfaction of debts contracted prior to the
expiration of five years from the date of the issuance
of the patent (sec. 118, C.A. No. 141). This
prohibition should include not only debts contracted
during the five-year period immediately preceding
the issuance of the patent but also those contracted
before such issuance, if the purpose and policy of
the law, which is "to preserve and keep in the family
of the homesteader that portion of public land which
the State has gratuitously given to him" (Pascua v.
Talens, 45 O.G. No. 9 [Supp.] 413; De los Santos v.
Roman Catholic Church of Midsayap, G.R. L-6088,
Feb. 24, 1954), is to be upheld.

The invalidity of the mortgage Exhibit "A" does not,

however, imply the concomitant invalidity of the
collate agreement in the same deed of mortgage
whereby possession of the land mortgaged was
transferred to plaintiff-appellee in usufruct, without
any obligation on her part to account for its harvests
or deduct them from defendants' indebtedness of
P2,000. Defendant Brigida Marcos, who, together
with her sisters, was in possession of said land by
herself and through her deceased mother before her
since 1915, had possessory rights over the same
even before title vested in her as co-owner by the
issuance of the free patent to her and her sisters,
and these possessory right she could validly transfer
and convey to plaintiff-appellee, as she did in the
deed of mortgage Exhibit "A". The latter, upon the
other hand, believing her mortgagor to be the owner
of the land mortgaged and not being aware of any
flaw which invalidated her mode of acquisition, was
a possessor in good faith (Art. 526, N.C.C.), and as
such had the right to all the fruits received during
the entire period of her possession in good faith (Art.
544, N.C.C.). She is, therefore, entitled to the full
payment of her credit of P2,000 from defendants,
without any obligation to account for the fruits or
benefits obtained by her from the land in question.

WHEREFORE, the judgment appealed from is

reversed insofar as it orders the foreclosure of the
mortgage in question, but affirmed in all other
respects. Costs again defendants-appellants
G.R. No. 131679 February 1, 2000
CAVITE DEVELOPMENT BANK and FAR EAST BANK
AND TRUST COMPANY, petitioners,
vs.
SPOUSES CYRUS LIM and LOLITA CHAN LIM and
COURT OF APPEALS, respondents.
MENDOZA, J.:
This is a petition for review on certiorari of the
decision1 of the Court of Appeals in C.A. GR CV No.
42315 and the order dated December 9, 1997
denying petitioners' motion for reconsideration.
The following facts are not in dispute.
Petitioners Cavite Development Bank (CDB) and Far
East Bank and Trust Company (FEBTC) are banking
institutions duly organized and existing under
Philippine laws. On or about June 15, 1983, a certain
Rodolfo Guansing obtained a loan in the amount of
P90,000.00 from CDB, to secure which he mortgaged
a parcel of land situated at No. 63 Calavite Street, La
Loma, Quezon City and covered by TCT No. 300809
registered in his name. As Guansing defaulted in the
payment of his loan, CDB foreclosed the mortgage.
At the foreclosure sale held on March 15, 1984, the
mortgaged property was sold to CDB as the highest
bidder. Guansing failed to redeem, and on March 2,
1987, CDB consolidated title to the property in its
name. TCT No. 300809 in the name of Guansing was
cancelled and, in lieu thereof, TCT No. 355588 was
issued in the name of CDB.1âwphi1.nêt
On June 16, 1988, private respondent Lolita Chan
Lim, assisted by a broker named Remedios
Gatpandan, offered to purchase the property from
CDB. The written Offer to Purchase, signed by Lim
and Gatpandan, states in part:
We hereby offer to purchase your property
at #63 Calavite and Retiro Sts., La Loma,
Quezon City for P300,000.00 under the
following terms and conditions:
(1) 10% Option Money;
(2) Balance payable in cash;
(3) Provided that the property shall
be cleared of illegal occupants or
tenants.
Pursuant to the foregoing terms and conditions of
the offer, Lim paid CDB P30,000.00 as Option
Money, for which she was issued Official Receipt No.
3160, dated June 17, 1988, by CDB. However, after
some time following up the sale, Lim discovered that
the subject property was originally registered in the
name of Perfecto Guansing, father of mortgagor
Rodolfo Guansing, under TCT No. 91148. Rodolfo
succeeded in having the property registered in his
name under TCT No. 300809, the same title he
mortgaged to CDB and from which the latter's title
(TCT No. 355588) was derived. It appears, however,
that the father, Perfecto, instituted Civil Case No. Q-
39732 in the Regional Trial Court, Branch 83, Quezon
City, for the cancellation of his son's title. On March
23, 1984, the trial court rendered a
decision2 restoring Perfecto's previous title (TCT No.
91148) and cancelling TCT No. 300809 on the ground
that the latter was fraudulently secured by Rodolfo.
This decision has since become final and executory.
Aggrieved by what she considered a serious
misrepresentation by CDB and its mother-company,
FEBTC, on their ability to sell the subject property,
Lim, joined by her husband, filed on August 29, 1989
an action for specific performance and damages
against petitioners in the Regional Trial Court,
Branch 96, Quezon City, where it was docketed as
Civil Case No. Q-89-2863. On April 20, 1990, the
complaint was amended by impleading the Register
of Deeds of Quezon City as an additional defendant.
On March 10, 1993, the trial court rendered a
decision in favor of the Lim spouses. It ruled that: (1)
there was a perfected contract of sale between Lim
and CDB, contrary to the latter's contention that the
written offer to purchase and the payment of
P30,000.00 were merely pre-conditions to the sale
and still subject to the approval of FEBTC; (2)
performance by CDB of its obligation under the
perfected contract of sale had become impossible on
account of the 1984 decision in Civil Case No. Q-
39732 cancelling the title in the name of mortgagor
Rodolfo Guansing; (3) CDB and FEBTC were not
exempt from liability despite the impossibility of
performance, because they could not credibly
disclaim knowledge of the cancellation of Rodolfo
Guansing's title without the admitting their failure to
discharge their duties to the public as reputable
banking institutions; and (4) CDB and FEBTC are
liable for damages for the prejudice caused against
the Lims.3 Based on the foregoing findings, the trial
court ordered CDB and FEBTC to pay private
respondents, jointly and severally, the amount of
P30,000.00 plus interest at the legal rate computed
from June 17, 1988 until full payment. It also
ordered petitioners to pay private respondents,
jointly and severally, the amounts of P250,000.00 as
moral damages, P50,000.00 as exemplary damages,
P30,000.00 as attorney's fees, and the costs of the
suit.4
Petitioners brought the matter to the Court of
Appeals, which, on October 14, 1997, affirmed in
toto the decision of the Regional Trial Court.
Petitioners moved for reconsideration, but their
motion was denied by the appellate court on
December 9, 1997. Hence, this petition. Petitioners
contend that —
1. The Honorable Court of Appeals erred
when it held that petitioners CDB and
FEBTC were aware of the decision dated
 March 23, 1984 of the Regional Trial Court
of Quezon City in Civil Case No. Q-39732.
2. The Honorable Court of Appeals erred in
ordering petitioners to pay interest on the
deposit of THIRTY THOUSAND PESOS
(P30,000.00) by applying Article 2209 of the
New Civil Code.
3. The Honorable Court of Appeals erred in
ordering petitioners to pay moral damages,
exemplary damages, attorney's fees and
costs of suit.
I.
At the outset, it is necessary to determine the legal
relation, if any, of the parties.
Petitioners deny that a contract of sale was ever
perfected between them and private respondent
Lolita Chan Lim. They contend that Lim's letter-offer
clearly states that the sum of P30,000,00 was given
as option money, not as earnest money.5 They thus
conclude that the contract between CDB and Lim
was merely an option contract, not a contract of
sale.
The contention has no merit. Contracts are not
defined by the parries thereto but by principles of
law.6 In determining the nature of a contract, the
courts are not bound by the name or title given to it
by the contracting parties.7 In the case at bar, the
sum of P30,000.00, although denominated in the
offer to purchase as "option money," is actually in
the nature of earnest money or down payment
when considered with the other terms of the offer.
In Carceler v. Court of Appeals,8 we explained the
nature of an option contract, viz. —
An option contract is a preparatory contract
in which one party grants to the other, for a
fixed period and under specified conditions,
the power to decide, whether or not to
enter into a principal contract, it binds the
party who has given the option not to enter
into the principal contract with any other
person during the period; designated, and
within that period, to enter into such
contract with the one to whom the option
was granted, if the latter should decide to
use the option. It is a separate agreement
distinct from the contract to which the
parties may enter upon the consummation
of the option.
An option contract is therefore a contract separate
from and preparatory to a contract of sale which, if
perfected, does not result in the perfection or
consummation of the sale. Only when the option is
exercised may a sale be perfected.
In this case, however, after the payment of the 10%
option money, the Offer to Purchase provides for
the payment only of the balance of the purchase
price, implying that the "option money" forms part
of the purchase price. This is precisely the result of
paying earnest money under Art. 1482 of the Civil
Code. It is clear then that the parties in this case
actually entered into a contract of sale, partially
consummated as to the payment of the price.
Moreover, the following findings of the trial court
based on the testimony of the witnesses establish
that CDB accepted Lim's offer to purchase:
It is further to be noted that CDB and FEBTC
already considered plaintiffs' offer as good
and no longer subject to a final approval. In
his testimony for the defendants on
February 13, 1992, FEBTC's Leomar Guzman
stated that he was then in the Acquired
Assets Department of FEBTC wherein
plaintiffs' offer to purchase was endorsed
thereto by Myoresco Abadilla, CDB's senior
vice-president, with a recommendation that
the necessary petition for writ of possession
be filed in the proper court; that the
recommendation was in accord with one of
the conditions of the offer, i.e., the clearing
of the property of illegal occupants or
tenants (tsn, p. 12); that, in compliance with
the request, a petition for writ of
possession was thereafter filed on July 22,
1988 (Exhs. 1 and 1-A); that the offer met
the requirements of the banks; and that no
rejection of the offer was thereafter relayed
to the plaintiffs (p. 17); which was not a
normal procedure, and neither did the
banks return the amount of P30,000.00 to
the plaintiffs.9
Given CDB's acceptance of Lim's offer to purchase, it
appears that a contract of sale was perfected and,
indeed, partially executed because of the partial
payment of the purchase price. There is, however, a
serious legal obstacle to such sale, rendering it
impossible for CDB to perform its obligation as seller
to deliver and transfer ownership of the property.
Nemo dat quod non habet, as an ancient Latin
maxim says. One cannot give what one does not
have. In applying this precept to a contract of sale, a
distinction must be kept in mind between the
"perfection" and "consummation" stages of the
contract.
A contract of sale is perfected at the moment there
is a meeting of minds upon the thing which is the
object of the contract and upon the price.10 It is,
therefore, not required that, at the perfection stage,
the seller be the owner of the thing sold or even that
such subject matter of the sale exists at that point in
time.11 Thus, under Art. 1434 of the Civil Code, when
a person sells or alienates a thing which, at that
time, was not his, but later acquires title thereto,
such title passes by operation of law to the buyer or
grantee. This is the same principle behind the sale of
"future goods" under Art. 1462 of the Civil Code.
However, under Art. 1459, at the time of delivery or
consummation stage of the sale, it is required that
the seller be the owner of the thing sold. Otherwise,
he will not be able to comply with his obligation to
transfer ownership to the buyer. It is at the
consummation stage where the principle of nemo
dat quod non habet applies.
In Dignos v. Court of Appeals,12 the subject contract
of sale was held void as the sellers of the subject
land were no longer the owners of the same because
of a prior sale.13 Again, in Nool v. Court of
Appeals,14 we ruled that a contract of repurchase, in
which the seller does not have any title to the
property sold, is invalid:
We cannot sustain petitioners' view. Article
1370 of the Civil Code is applicable only to
valid and enforceable contracts. The
Regional Trial Court and the Court of
Appeals rules that the principal contract of
sale contained in Exhibit C and the auxiliary
contract of repurchase in Exhibit D are both
void. This conclusion of the two lower
courts appears to find support in Dignos
v. Court of Appeals, where the Court held:
Be that as it may, it is evident that
when petitioners sold said land to
the Cabigas spouses, they were no
longer owners of the same and the
sale is null and void.
In the present case, it is clear that the
sellers no longer had any title to the parcels
of land at the time of sale. Since Exhibit D,
the alleged contract of repurchase, was
dependent on the validity of Exhibit C, it is
itself void. A void contract cannot give rise
to a valid one. Verily, Article 1422 of the
Civil Code provides that (a) contract which
is the direct result of a previous illegal
contract, is also void and inexistent.
We should however add that Dignos did not
cite its basis for ruling that a "sale is null
and void" where the sellers "were no longer
the owners" of the property. Such a
situation (where the sellers were no longer
owners) does not appear to be one of the
void contracts enumerated in Article 1409
of the Civil Code. Moreover, the Civil Code
itself recognizes a sale where the goods are
to be acquired . . . by the seller after the
perfection of the contract of sale, clearly
implying that a sale is possible even if the
seller was not the owner at the time of sale,
provided he acquires title to the property
later on.
In the present case, however, it is likewise
clear that the sellers can no longer deliver
the object of the sale to the buyers, as the
buyers themselves have already acquired
title and delivery thereof from the rightful
owner, the DBP. Thus, such contract may be
deemed to be inoperative and may thus fall,
by analogy, under item No. 5 of Article 1409
of the Civil Code: Those which contemplate
an impossible service. Article 1459 of the
Civil Code provides that "the vendor must
have a right to transfer the ownership
thereof [subject of the sale] at the time it is
delivered." Here, delivery of ownership is
no longer possible. It has become
impossible.15
In this case, the sale by CDB to Lim of the property
mortgaged in 1983 by Rodolfo Guansing must,
therefore, be deemed a nullity for CDB did not have
a valid title to the said property. To be sure, CDB
never acquired a valid title to the property because
the foreclosure sale, by virtue of which, the property
had been awarded to CDB as highest bidder, is
likewise void since the mortgagor was not the owner
of the property foreclosed.
A foreclosure sale, though essentially a "forced sale,"
is still a sale in accordance with Art. 1458 of the Civil
Code, under which the mortgagor in default, the
forced seller, becomes obliged to transfer the
ownership of the thing sold to the highest bidder
who, in turn, is obliged to pay therefor the bid price
in money or its equivalent. Being a sale, the rule that
the seller must be the owner of the thing sold also
applies in a foreclosure sale. This is the reason Art.
208516 of the Civil Code, in providing for the
essential requisites of the contract of mortgage and
pledge, requires, among other things, that the
mortgagor or pledgor be the absolute owner of the
thing pledged or mortgaged, in anticipation of a
possible foreclosure sale should the mortgagor
default in the payment of the loan.
There is, however, a situation where, despite the
fact that the mortgagor is not the owner of the
mortgaged property, his title being fraudulent, the
mortgage contract and any foreclosure sale arising
therefrom are given effect by reason of public policy.
This is the doctrine of "the mortgagee in good faith"
based on the rule that all persons dealing with
property covered by a Torrens Certificate of Title, as
buyers or mortgagees, are not required to go
beyond what appears on the face of the title. 17 The
public interest in upholding the indefeasibility of a
certificate of title, as evidence of the lawful
ownership of the land or of any encumbrance
thereon, protects a buyer or mortgagee who, in
good faith, relied upon what appears on the face of
the certificate of title.
This principle is cited by petitioners in claiming that,
as a mortgagee bank, it is not required to make a
detailed investigation of the history of the title of the
property given as security before accepting a
mortgage.
We are not convinced, however, that under the
circumstances of this case, CDB can be considered a
mortgagee in good faith. While petitioners are not
expected to conduct an exhaustive investigation on
the history of the mortgagor's title, they cannot be
excused from the duty of exercising the due
diligence required of banking institutions. In Tomas
v. Tomas,18 we noted that it is standard practice for
banks, before approving a loan, to send
representatives to the premises of the land offered
as collateral and to investigate who are real owners
thereof, noting that banks are expected to exercise
more care and prudence than private individuals in
their dealings, even those involving registered lands,
for their business is affected with public interest. We
held thus:
We, indeed, find more weight and vigor in a
doctrine which recognizes a better right for
the innocent original registered owner who
obtained his certificate of title through
perfectly legal and regular proceedings,
than one who obtains his certificate from a
totally void one, as to prevail over judicial
pronouncements to the effect that one
dealing with a registered land, such as a
purchaser, is under no obligation to look
beyond the certificate of title of the vendor,
for in the latter case, good faith has yet to
be established by the vendee or transferee,
being the most essential condition, coupled
with valuable consideration, to entitle him
to respect for his newly acquired title even
as against the holder of an earlier and
perfectly valid title. There might be
circumstances apparent on the face of the
certificate of title which could excite
suspicion as to prompt inquiry, such as
when the transfer is not by virtue of a
voluntary act of the original registered
owner, as in the instant case, where it was
by means of a self-executed deed of extra-
judicial settlement, a fact which should be
noted on the face of Eusebia Tomas
certificate of title. Failing to make such
inquiry would hardly be consistent with any
pretense of good faith, which the appellant
bank invokes to claim the right to be
protected as a mortgagee, and for the
reversal of the judgment rendered against it
by the lower court.19
In this case, there is no evidence that CDB observed
its duty of diligence in ascertaining the validity of
Rodolfo Guansing's title. It appears that Rodolfo
Guansing obtained his fraudulent title by executing
an Extra-Judicial Settlement of the Estate With
Waiver where he made it appear that he and
Perfecto Guansing were the only surviving heirs
entitled to the property, and that Perfecto had
waived all his rights thereto. This self-executed deed
should have placed CDB on guard against any
possible defect in or question as to the mortgagor's
title. Moreover, the alleged ocular inspection
report20 by CDB's representative was never formally
offered in evidence. Indeed, petitioners admit that
they are aware that the subject land was being
occupied by persons other than Rodolfo Guansing
and that said persons, who are the heirs of Perfecto
Guansing, contest the title of Rodolfo.21
II.
The sale by CDB to Lim being void, the question now
arises as to who, if any, among the parties was at
fault for the nullity of the contract. Both the trial
court and the appellate court found petitioners
guilty of fraud, because on June 16, 1988, when Lim
was asked by CDB to pay the 10% option money,
CDB already knew that it was no longer the owner of
the said property, its title having been
cancelled.22 Petitioners contend that: (1) such
finding of the appellate court is founded entirely on
speculation and conjecture; (2) neither CDB nor
FEBTC was a party in the case where the mortgagor's
title was cancelled; (3) CDB is not privy to any
problem among the Guansings; and (4) the final
decision cancelling the mortgagor's title was not
annotated in the latter's title.
As a rule, only questions of law may be raised in a
petition for review, except in circumstances where
questions of fact may be properly raised.23 Here,
while petitioners raise these factual issues, they
have not sufficiently shown that the instant case falls
under any of the exceptions to the above rule. We
are thus bound by the findings of fact of the
appellate court. In any case, we are convinced of
petitioners' negligence in approving the mortgage
application of Rodolfo Guansing.
III.
We now come to the civil effects of the void contract
of sale between the parties. Article 1412(2) of the
Civil Code provides:
If the act in which the unlawful or forbidden
cause consists does not constitute a
criminal offense, the following rules shall be
observed:
xxx xxx xxx
(2) When only one of the contracting
parties is at fault, he cannot recover what
he has given by reason of the contract, or
ask for the fulfillment of what has been
promised him. The other, who is not at
fault, may demand the return of what he
has given without any obligation to comply
with his promise.
Private respondents are thus entitled to recover the
P30,000,00 option money paid by them. Moreover,
since the filing of the action for damages against
petitioners amounted to a demand by respondents
for the return of their money, interest thereon at the
legal rate should be computed from August 29,
1989, the date of filing of Civil Case No. Q-89-2863,
not June 17, 1988, when petitioners accepted the
payment. This is in accord with our ruling inCastillo
v. Abalayan24 that in case of avoid sale, the seller has
no right whatsoever to keep the money paid by
virtue thereof and should refund it, with interest at
the legal rate, computed from the date of filing of
the complaint until fully paid. Indeed, Art. 1412(2)
which provides that the non-guilty party "may
demand the return of what he has given" clearly
implies that without such prior demand, the
obligation to return what was given does not
become legally demandable.

Considering CDB's negligence, we sustain the award

of moral damages on the basis of Arts. 21 and 2219
of the Civil Code and our ruling in Tan v. Court of
Appeals25 that moral damages may be recovered
even if a bank's negligence is not attended with
malice and bad faith. We find, however, that the
sum of P250,000.00 awarded by the trial court is
excessive. Moral damages are only intended to
alleviate the moral suffering undergone by private
respondent, not to enrich them at the expenses of
the petitioners.26 Accordingly, the award of moral
damages must be reduced to P50,000.00.

Likewise, the award of P50,000.00 as exemplary

damages, although justified under Art. 2232 of the
Civil Code, is excessive and should be reduced to
P30,000.00. The award of P30,000.00 attorney's fees
based on Art. 2208, pars. 1, 2, 5 and 11 of the Civil
Code should similarly be reduced to P20,000.00.

WHEREFORE, the decision of the Court of Appeals is

AFFIRMED with the MODIFICATION as to the award
of damages as above stated.1âwphi1.nêt

SO ORDERED
G.R. No. 125055 October 30, 1998 For value received I promise to
pay A. FRANCISCO REALTY AND
A. FRANCISCO REALTY AND DEVELOPMENT DEVELOPMENT CORPORATION,
CORPORATION, petitioner, the additional sum of Two Million
vs. Five Hundred Thousand Pesos
COURT OF APPEALS and SPOUSES ROMULO S.A. (P2,500,000.00) on or before April
JAVILLONAR and ERLINDA P. 27, 1992, with interest at the rate
JAVILLONAR, respondents. of four percent (4%) a month until
fully paid and if after the said date
this note and/or the other
promissory note of P7.5 Million
remains unpaid and/or unsettled,
MENDOZA, J.:
without any need for prior
demand or notification, I promise
This is a petition for review on certiorari of the
to vacate voluntarily and willfully
decision rendered on February 29, 1996 by the Court
and/or allow A.FRANCISCO
of Appeals 1reversing, in toto, the decision of the
REALTY AND DEVELOPMENT
Regional Trial Court of Pasig City in Civil Case No.
CORPORATION to appropriate and
62290, as well as the appellate court's resolution of
occupy for their exclusive use the
May 7, 1996 denying reconsideration.
real property located at 56
Dragonfly, Valle Verde VI, Pasig,
Petitioner A. Francisco Realty and Development Metro Manila.5
Corporation granted a loan of P7.5 Million to
private respondents, the spouses Romulo and
Petitioner demanded possession of the mortgaged
Erlinda Javillonar, in consideration of which the
realty and the payment of 4% monthly interest
latter executed the following documents: (a) a
from May 1992, plus surcharges. As respondent
promissory note, dated November 27, 1991, stating
spouses refused to vacate, petitioner filed the
an interest charge of 4% per month for six months;
present action for possession before the Regional
(b) a deed of mortgage over realty covered by TCT
Trial Court in Pasig City.6
No. 58748, together with the improvements
thereon; and (c) an undated deed of sale of the
In their answer, respondents admitted liability on
mortgaged property in favor of the mortgagee,
the loan but alleged that it was not their intent to
petitioner A. Francisco Realty. 2
sell the realty as the undated deed of sale was
executed by them merely as an additional security
The interest on the said loan was to be paid in four
for the payment of their loan. Furthermore, they
installments: half of the total amount agreed upon
claimed that they were not notified of the
(P900,000.00) to be paid in advance through a
registration of the sale in favor of petitioner A.
deduction from the proceeds of the loan, while the
Francisco Realty and that there was no interest
balance to be paid monthly by means of checks
then unpaid as they had in fact been paying interest
post-dated March 27, April 27, and May 27, 1992.
even subsequent to the registration of the sale. As
The promissory note expressly provided that upon
an alternative defense, respondents contended
"failure of the MORTGAGOR (private respondents)
that the complaint was actually for ejectment and,
to pay the interest without prior arrangement with
therefore, the Regional Trial Court had no
the MORTGAGEE (petitioner), full possession of the
jurisdiction to try the case. As counterclaim,
property will be transferred and the deed of sale
respondents sought the cancellation of TCT No. PT-
will be registered. 3 For this purpose, the owner's
85569 as secured by petitioner and the issuance of
duplicate of TCT No. 58748 was delivered to
a new title evidencing their ownership of the
petitioner A. Francisco Realty.
property.7

Petitioner claims that private respondents failed to

On December 19, 1992, the Regional Trial Court
pay the interest and, as a consequence, it
rendered a decision, the dispositive portion of
registered the sale of the land in its favor on
which reads as follows:
February 21, 1992. As a result, TCT No. 58748 was
cancelled and in lieu thereof TCT No. PT-85569 was
WHEREFORE, prescinding from the
issued in the name of petitioner A. Francisco
foregoing considerations,
Realty.4
judgment is hereby rendered
declaring as legal and valid, the
Private respondents subsequently obtained an
right of ownership of A. Francisco
additional loan of P2.5 Million from petitioner on
Realty Find Development
March 13, 1992 for which they signed a promissory
Corporation, over the property
note which reads:
subject of this case and now
registered in its name as owner
PROMISSORY NOTE thereof, under TCT No. 85569 of
the Register of Deeds of Rizal,
 situated at No. 56 Dragonfly jurisdiction of the Metropolitan or
Street, Valle Verde VI, Pasig, Municipal Trial Courts, is defined
Metro Manila. as withholding from by a person
from another for not more than
Consequently, defendants are one year, the possession of the
hereby ordered to cease and land or building to which the
desist from further committing latter is entitled after the
acts of dispossession or from expiration or termination of the
withholding possession from supposed rights to hold
plaintiff of the said property as possession by virtue of a contract,
herein described and specified. express or implied. (Tenorio vs.
Gamboa, 81 Phil. 54; Dikit vs.
Claim for damages in all its forms, Dicaciano, 89 Phil. 44). If no action
however, including attorney's is initiated for forcible entry or
fees, are hereby denied, no unlawful detainer within the
competent proofs having been expiration of the 1 year period,
adduced on record, in support the case may still be filed under
thereof.8 the plenary action to recover
possession by accion publiciana
before the Court of First Instance
Respondent spouses appealed to the Court of
(now the Regional Trial Court)
Appeals which reversed the decision of the trial
(Medina vs. Valdellon, 63 SCRA
court and dismissed the complaint against them.
278). In plain language, the case at
The appellate court ruled that the Regional Trial
bar is a legitimate ejectment case
Court had no jurisdiction over the case because it
filed within the 1 year period from
was actually an action for unlawful detainer which
the jurisdictional demand to
is exclusively cognizable by municipal trial courts.
vacate. Thus, the Regional Trial
Furthermore, it ruled that, even presuming
Court has no jurisdiction over the
jurisdiction of the trial court, the deed of sale was
case. Accordingly, under Section
void for being in fact a pactum commissorium
33 of B.P. Blg. 129 Municipal Trial
which is prohibited by Art. 2088 of the Civil Code.
Courts are vested with the
exclusive original jurisdiction over
Petitioner A. Francisco Realty filed a motion for
forcible entry and unlawful
reconsideration, but the Court of Appeals denied
detainer case. (Sen Po Ek
the motion in its resolution, dated May 7, 1996.
Marketing Corp. vs. CA, 212 SCRA
Hence, this petition for review on certiorari raising
154 [1990])9
the following issues:
We think the appellate court is in error. What really
WHETHER OR NOT THE COURT OF
distinguishes an action for unlawful detainer from a
APPEALS ERRED IN RULING THAT
possessory action (accion publiciana) and from a
THE REGIONAL TRIAL COURT HAD
reivindicatory action (accion reivindicatoria) is that
NO JURISDICTION OVER THE
the first is limited to the question of possession de
COMPLAINT FILED BY THE
facto.
PETITIONER.
An unlawful detainer suit (accion
WHETHER OR NOT THE COURT OF
interdictal) together with forcible
APPEALS ERRED IN RULING THAT
entry are the two forms of an
THE CONTRACTUAL DOCUMENTS
ejectment suit that may be filed to
SUBJECT OF THE INSTANT CASE
recover possession of real
ARE CONSTITUTIVE OF PACTUM
property. Aside from the
COMMISSORIUM AS DEFINED
summary action of
UNDER ARTICLE 2088 OF THE CIVIL
ejectment, accion publiciana or
CODE OF THE PHILIPPINES.
the plenary action to recover the
right of possession and accion
On the first issue, the appellate court stated: reivindicatoria or the action to
recover ownership which includes
Ostensibly, the cause of action in recovery of possession, make up
the complaint indicates a case for the three kinds of actions to
unlawful detainer, as contra- judicially recover possession.
distinguished from accion
publiciana. As contemplated by Illegal detainer consists in
Rule 70 of the Rules of Court, an withholding by a person from
action for unlawful detainer which another of the possession of a
falls under the exclusive land or building to which the
 latter is entitled after the
expiration or termination of the
former's right to hold possession
by virtue of a contract, express or
implied. An ejectment suit is
brought before the proper inferior
court to recover physical
possession only or possession de
facto and not possession de jure,
where dispossession has lasted for
not more than one year. Forcible
entry and unlawful detainer are
quieting processes and the one-
year time bar to the suit is in
pursuance of the summary nature
of the action. The use of summary
procedure in ejectment cases is
intended to provide an
expeditious means of protecting
actual possession or right to
possession of the property. They
are not processes to determine
the actual title to an estate. If at
all, inferior courts are empowered
to rule on the question of
ownership raised by the
defendant in such suits, only to
resolve the issue of possession. Its
determination on the ownership
issue is, however, not
conclusive.10
The allegations in both the original and the
amended complaints of petitioner before the trial
court clearly raise issues involving more than the
question of possession, to wit: (a) the validity of the
Transfer of ownership to petitioner; (b) the alleged
new liability of private respondents for P400,000.00
a month from the time petitioner made its demand
on them to vacate; and (c) the alleged continuing
liability of private respondents under both loans to
pay interest and surcharges on such. As petitioner
A. Francisco Realty alleged in its amended
complaint:
5. To secure the payment of the
sum of 7.5 Million together with
the monthly interest, the
defendant spouses agreed to
execute a Deed of Mortgage over
the property with the express
condition that if and when they
fail to pay monthly interest or any
infringement thereof they agreed
to convert the mortgage into a
Deed of Absolute Sale in favor of
the plaintiff by executing Deed of
Sale thereto, copy of which is
hereto attached and incorporated
herein as Annex "A";
6. That in order to authorize the
Register of Deeds into registering
the Absolute Sale and transfer to
the plaintiff, defendant delivered
unto the plaintiff the said Deed of
Sale together with the original
owner's copy of Transfer
Certificate of Title No. 58748 of
the Registry of Rizal, copy of
which is hereto attached and
made an integral part herein as
Annex "B";
7. That defendant spouses later
secured from the plaintiff an
additional loan of P2.5 Million
with the same condition as
aforementioned with 4% monthly
interest;
8. That defendants spouses failed
to pay the stipulated monthly
interest and as per agreement of
the parties, plaintiff recorded and
registered the Absolute Deed of
Sale in its favor on and was issued
Transfer Certificate of Title No. PT-
85569, copy of which is hereto
attached and incorporated herein
as Annex "C";
9. That upon registration and
transfer of the Transfer Certificate
of Title in the name of the
plaintiff, copy of which is hereto
attached and incorporated herein
as Annex "C", plaintiff demanded
the surrender of the possession of
the above-described parcel of land
together with the improvements
thereon, but defendants failed
and refused to surrender the
same to the plaintiff without
justifiable reasons thereto;
Neither did the defendants pay
the interest of 4% a month from
May, 1992 plus surcharges up to
the present;
10. That it was the understanding
of the parties that if and when the
defendants shall fail to pay the
interest due and that the Deed of
Sale be registered in favor of
plaintiff, the defendants shall pay
a monthly rental of P400,000.00 a
month until they vacate the
premises, and that if they still fail
to pay as they are still failing to
pay the amount of P400,000.00 a
month as rentals and/or interest,
the plaintiff shall take physical
possession of the said property; 11
It is therefore clear from the foregoing that
petitioner A. Francisco Realty raised issues which
involved more than a simple claim for the
immediate possession of the subject property. Such
issues range across the full scope of rights of the
respective parties under their contractual
arrangements. As held in an analogous case:
The disagreement of the parties in
Civil Case No. 96 of the Justice of
the Peace of Hagonoy, Bulacan
extended far beyond the issues
generally involved in unlawful
detainer suits. The litigants
therein did not raise merely the
question of who among them was
entitled to the possession of the
fishpond of Federico Suntay. For
all judicial purposes, they likewise
prayed of the court to rule on
their respective rights under the
various contractual documents —
their respective deeds of lease,
the deed of assignment and the
promissory note — upon which
they predicate their claims to the
possession of the said fishpond. In
other words, they gave the court
no alternative but to rule on the
validity or nullity of the above
documents. Clearly, the case was
converted into the determination
of the nature of the proceedings
from a mere detainer suit to one
that is "incapable of pecuniary
estimation" and thus beyond the
legitimate authority of the Justice
of the Peace Court to rule on. 12
Nor can it be said that the compulsory counterclaim
filed by respondent spouses challenging the title of
petitioner A. Francisco Realty was merely a
collateral attack which would bar a ruling here on
the validity of the said title.
A counterclaim is considered a
complaint, only this time, it is the
original defendant who becomes
the plaintiff (Valisno v. Plan, 143
SCRA 502 (1986). It stands on the
same footing and is to be tested
by the same rules as if it were an
independent action. Hence, the
same rules on jurisdiction in an
independent action apply to a
counterclaim (Vivar v. Vivar, 8
SCRA 847 (1963); Calo v. Ajar
International, Inc. v. 22 SCRA 996
(1968); Javier v. Intermediate
Appellate Court, 171 SCRA 605
(1989); Quiason, Philippine Courts
and Their Jurisdictions, 1993 ed.,
p. 203). 13
On the second issue, the Court of Appeals held that,
even "on the assumption that the trial court has
jurisdiction over the instant case," petitioner's
action could not succeed because the deed of sale
on which it was based was void, being in the nature
of a pactum commissorium prohibited by Art. 2088
of the Civil Code which provides:
Art. 2088. The creditor cannot
appropriate the things given by
way to pledge or mortgage, or
dispose of them. Any stipulation
to the contrary is null and void.
With respect to this question, the ruling of the
appellate court should be affirmed. Petitioner
denies, however, that the promissory notes contain
a pactum commissorium. It contends that —
What is envisioned by Article 2088
of the Civil Code of the Philippines
is a provision in the deed of
mortgage providing for the
automatic conveyance of the
mortgaged property in case of the
failure of the debtor to pay the
loan (Tan v. West Coast Life
Assurance Co., 54 Phil. 361).
A pactum commissorium is a
forfeiture clause in a deed of
mortgage (Hechanova v. Adil, 144
SCRA 450; Montevergen v. Court
of Appeals, 112 SCRA 641; Report
of the Code Commission, 156).
Thus, before Article 2088 can find
application herein, the subject
deed of mortgage must be
scrutinized to determine if it
contains such a provision giving
the creditor the right "to
appropriate the things given by
way of mortgage without
following the procedure
prescribed by law for the
foreclosure of the mortgage"
(Ranjo v. Salmon, 15 Phil. 436). IN
SHORT, THE PROSCRIBED
STIPULATION SHOULD BE FOUND
IN THE MORTGAGE DEED ITSELF.14
The contention is patently without merit. To
sustain the theory of petitioner would be to allow a
subversion of the prohibition in Art. 2088.
In Nakpil v. Intermediate Appellate Court, 15 which
involved the violation of a constructive trust, no
deed of mortgage was expressly executed between
the parties in that case: Nevertheless, this Court
ruled that an agreement whereby property held in
trust was ceded to the trustee upon failure of the
beneficiary to pay his debt to the former as secured
by the said property was void for being a pactum
commissorium. Itwas there held:
 The arrangement entered into
between the parties, whereby
Pulong Maulap was to be
"considered sold to him
(respondent) . . ." in case
petitioner fails to reimburse
Valdes, must then be construed as
tantamount to a pactum
commissorium which is expressly
prohibited by Art. 2088 of the Civil
Code. For, there was to be
automatic appropriation of the
property by Valdez in the event of
failure of petitioner to pay the
value of the advances. Thus,
contrary to respondent's
manifestations, all the elements
of a pactum commissorium were
present: there was a creditor-
debtor relationship between the
parties; the property was used as
security for the loan; and, there
was automatic appropriation by
respondent of Pulong Maulap in
case of default of petitioner.16
Similarly, the Court has struck down such
stipulations as contained in deeds of sale
purporting to bepacto de retro sales but found
actually to be equitable mortgages.
It has been consistently held that
the presence of even one of the
circumstances enumerated in Art.
1602 of the New Civil Code is
sufficient to declare a contract of
sale with right to repurchase an
equitable mortgage. This is so
because pacto de retro sales with
the stringent and onerous effects
that accompany them are not
favored. In case of doubt, a
contract purporting to be a sale
with the right to repurchase shall
be construed as an equitable
mortgage.
Petitioner, to prove her claim,
cannot rely on the stipulation in
the contract providing that
complete and absolute title shall
be vested on the vendee should
the vendors fail to redeem the
property on the specified date.
Such stipulation that the
ownership of the property would
automatically pass to the vendee
in case no redemption was
effected within the stipulated
period is void for being a pactum
commissorium which enables the
mortgagee to acquire ownership
of the mortgaged property
without need of foreclosure. Its
insertion in the contract is an
avowal of the intention to
mortgage rather that to sell the
property. 17
Indeed, in Reyes v. Sierra 18 this Court categorically
ruled that a mortgagee's mere act of registering the
mortgaged property in his own name upon the
mortgagor's failure to redeem the property
amounted to the exercise of the privilege of a
mortgagee in a pactum commissorium.
Obviously, from the nature of the
transaction, applicant's a
predecessor-in-interest is a mere
mortgagee, and ownership of the
thing mortgaged is retained by
Basilia Beltran, the mortgagor.
The mortgagee, however, may
recover the loan, although the
mortgage document evidencing
the loan was nonregistrable being
a purely private instrument.
Failure of mortgagor to redeem
the property does not
automatically vest ownership of
the property to the mortgagee,
which would grant the latter the
right to appropriate the thing
mortgaged or dispose of it. This
violates the provision of Article
2088 of the New Civil Code, which
reads:
The creditor cannot appropriate
the things given by way of pledge
or mortgage, or dispose by them.
Any stipulation to the contrary is
null and void.
The act of applicant in registering
the property in his own name
upon mortgagor's failure to
redeem the property would to
a pactum commissorium which is
against good morals and public
policy.19
Thus, in the case at bar, the stipulations in the
promissory notes providing that, upon failure of
respondent spouses to pay interest, ownership of
the property would be automatically transferred to
petitioner A. Francisco Realty and the deed of sale
in its favor would be registered, are in substance
apactum commissorium. They embody the two
elements of pactum commissorium as laid down in
Uy Tong v. Court of Appeals,20 to wit:
The prohibition on pactum
commissorium stipulations is
provided for by Article 2088 of the
Civil Code:
 Art. 2088. The creditor cannot
appropriate the things given by
way of pledge or mortgagee, or
dispose of the same. Any
stipulation to the contrary is null
and void.

The aforequoted provision

furnishes the two elements for
pactum commissorium to exist:
(1) that there should be a pledge
or mortgage wherein a property is
pledged or mortgaged by way of
security for the payment of the
principal obligation; and (2) that
there should be a stipulation for
an automatic appropriation by the
creditor of the thing pledged or
mortgaged in the event of non-
payment of the principal
obligation within the stipulated
period.21

The subject transaction being void, the registration

of the deed of sale, by virtue of which petitioner A.
Francisco Realty was able to obtain TCT No. PT-
85569 covering the subject lot, must also be
declared void, as prayed for by respondents in their
counterclaim.

WHEREFORE, the decision of the Court of Appeals is

AFFIRMED, insofar as it dismissed petitioner's
complaint against respondent spouses on the
ground that the stipulations in the promissory
notes are void for being a pactum commissorium,
but REVERSED insofar as it ruled that the trial court
had no jurisdiction over this case. The Register of
Deeds of Pasig City is hereby ORDERED to CANCEL
TCT No. PT-85569 issued to petitioner and ISSUE a
new one in the name of respondent spouses.

SO ORDERED

Cruz vs. Serrano 54 Phil. 10

G.R. No. L-21069 October 26, 1967
MANILA SURETY and FIDELITY COMPANY,
INC., plaintiff-appellee,
vs.
RODOLFO R. VELAYO, defendant-appellant.
Villaluz Law Office for plaintiff-appellee.
Rodolfo R. Velayo for and in his own behalf as
defendant-appellant.
REYES, J.B.L., J.:
Direct appeal from a judgment of the Court of First
Instance of Manila (Civil Case No. 49435) sentencing
appellant Rodolfo Velayo to pay appellee Manila
Surety & Fidelity Co., Inc. the sum of P2,565.00 with
interest at 12-½% per annum from July 13, 1954;
P120.93 as premiums with interest at the same rate
from June 13, 1954: attorneys' fees in an amount
equivalent to 15% of the total award, and the costs.
Hub of the controversy are the applicability and
extinctive effect of Article 2115 of the Civil Code of
the Philippines (1950).
The uncontested facts are that in 1953, Manila
Surety & Fidelity Co., upon request of Rodolfo
Velayo, executed a bond for P2,800.00 for the
dissolution of a writ of attachment obtained by one
Jovita Granados in a suit against Rodolfo Velayo in
the Court of First Instance of Manila. Velayo
undertook to pay the surety company an annual
premium of P112.00; to indemnify the Company for
any damage and loss of whatsoever kind and nature
that it shall or may suffer, as well as reimburse the
same for all money it should pay or become liable to
pay under the bond including costs and attorneys'
fees.
As "collateral security and by way of pledge" Velayo
also delivered four pieces of jewelry to the Surety
Company "for the latter's further protection", with
power to sell the same in case the surety paid or
become obligated to pay any amount of money in
connection with said bond, applying the proceeds to
the payment of any amounts it paid or will be liable
to pay, and turning the balance, if any, to the
persons entitled thereto, after deducting legal
expenses and costs (Rec. App. pp. 12-15).
Judgment having been rendered in favor of Jovita
Granados and against Rodolfo Velayo, and execution
having been returned unsatisfied, the surety
company was forced to pay P2,800.00 that it later
sought to recoup from Velayo; and upon the latter's
failure to do so, the surety caused the pledged
jewelry to be sold, realizing therefrom a net product
of P235.00 only. Thereafter and upon Velayo's
failure to pay the balance, the surety company
brought suit in the Municipal Court. Velayo
countered with a claim that the sale of the pledged
jewelry extinguished any further liability on his part
under Article 2115 of the 1950 Civil Code, which
recites:
Art. 2115. The sale of the thing pledged
shall extinguish the principal obligation,
whether or not the proceeds of the sale are
equal to the amount of the principal
obligation, interest and expenses in a
proper case. If the price of the sale is more
than said amount, the debtor shall not be
entitled to the excess, unless it is otherwise
agreed. If the price of the sale is less,
neither shall the creditor be entitled to
recover the deficiency, notwithstanding any
stipulation to the contrary.
The Municipal Court disallowed Velayo's claims and
rendered judgment against him. Appealed to the
Court of First Instance, the defense was once more
overruled, and the case decided in the terms set
down at the start of this opinion.
Thereupon, Velayo resorted to this Court on appeal.
The core of the appealed decision is the following
portion thereof (Rec. Appeal pp. 71-72):
It is thus crystal clear that the main
agreement between the parties is the
Indemnity Agreement and if the pieces of
jewelry mentioned by the defendant were
delivered to the plaintiff, it was merely as
an added protection to the latter. There
was no understanding that, should the
same be sold at public auction and the
value thereof should be short of the
undertaking, the defendant would have no
further liability to the plaintiff. On the
contrary, the last portion of the said
agreement specifies that in case the said
collateral should diminish in value, the
plaintiff may demand additional securities.
This stipulation is incompatible with the
idea of pledge as a principal agreement. In
this case, the status of the pledge is nothing
more nor less than that of a mortgage given
as a collateral for the principal obligation in
which the creditor is entitled to a deficiency
judgment for the balance should the
collateral not command the price equal to
the undertaking.
It appearing that the collateral given by the
defendant in favor of the plaintiff to secure
this obligation has already been sold for
only the amount of P235.00, the liability of
the defendant should be limited to the
difference between the amounts of
P2,800.00 and P235.00 or P2,565.00.
We agree with the appellant that the above quoted
reasoning of the appealed decision is unsound. The
accessory character is of the essence of pledge and
mortgage. As stated in Article 2085 of the 1950 Civil
Code, an essential requisite of these contracts is that
they be constituted to secure the fulfillment of a
principal obligation, which in the present case is
Velayo's undertaking to indemnify the surety
company for any disbursements made on account of
its attachment counterbond. Hence, the fact that the
pledge is not the principal agreement is of no
significance nor is it an obstacle to the application of
Article 2115 of the Civil Code.

The reviewed decision further assumes that the

extinctive effect of the sale of the pledged chattels
must be derived from stipulation. This is incorrect,
because Article 2115, in its last portion, clearly
establishes that the extinction of the principal
obligation supervenes by operation of imperative
law that the parties cannot override:

If the price of the sale is less, neither shall

the creditor be entitled to recover the
deficiency notwithstanding any stipulation
to the contrary.

The provision is clear and unmistakable, and its

effect can not be evaded. By electing to sell the
articles pledged, instead of suing on the principal
obligation, the creditor has waived any other
remedy, and must abide by the results of the sale.
No deficiency is recoverable.

It is well to note that the rule of Article 2115 is by no

means unique. It is but an extension of the legal
prescription contained in Article 1484(3) of the same
Code, concerning the effect of a foreclosure of a
chattel mortgage constituted to secure the price of
the personal property sold in installments, and
which originated in Act 4110 promulgated by the
Philippine Legislature in 1933.

WHEREFORE, the decision under appeal is modified

and the defendant absolved from the complaint,
except as to his liability for the 1954 premium in the
sum of P120.93, and interest at 12-1/2% per
annum from June 13, 1954. In this respect the
decision of the Court below is affirmed. No costs. So
ordered