G.R. No. 97753 August 10, 1992
82 89965 to 89986 22 88,000
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the
reversal of the decision promulgated by respondent court on
March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with
modifications, the earlier decision of the Regional Trial Court of
Manila, Branch XLII, 2 which dismissed the complaint filed therein
by herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a
quo and adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial
banking institution, through its Sucat Branch
issued 280 certificates of time deposit (CTDs) in
favor of one Angel dela Cruz who deposited with
herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial
Stipulation of Facts and Statement of Issues,
Original Records, p. 207; Defendant's Exhibits 1
to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar.
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates
of time (CTDs) to herein plaintiff in connection
with his purchased of fuel products from the latter
(Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz
informed Mr. Timoteo Tiangco, the Sucat Branch
Manger, that he lost all the certificates of time
deposit in dispute. Mr. Tiangco advised said
depositor to execute and submit a notarized
Affidavit of Loss, as required by defendant bank's
procedure, if he desired replacement of said lost
CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed
and delivered to defendant bank the required
Affidavit of Loss (Defendant's Exhibit 281). On the
basis of said affidavit of loss, 280 replacement
CTDs were issued in favor of said depositor
(Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz
negotiated and obtained a loan from defendant
bank in the amount of Eight Hundred Seventy
Five Thousand Pesos (P875,000.00). On the
same date, said depositor executed a notarized
Deed of Assignment of Time Deposit (Exhibit 562)
which stated, among others, that he (de la Cruz)
surrenders to defendant bank "full control of the
indicated time deposits from and after date" of the
assignment and further authorizes said bank to
pre-terminate, set-off and "apply the said time
deposits to the payment of whatever amount or
amounts may be due" on the loan upon its
maturity (TSN, February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas,
Credit Manager of plaintiff Caltex (Phils.) Inc.,
went to the defendant bank's Sucat branch and
presented for verification the CTDs declared lost
by Angel dela Cruz alleging that the same were
delivered to herein plaintiff "as security for
purchases made with Caltex Philippines, Inc." by
said depositor (TSN, February 9, 1987, pp. 54-
68).
7. On November 26, 1982, defendant received a
letter (Defendant's Exhibit 563) from herein
plaintiff formally informing it of its possession of
the CTDs in question and of its decision to pre-
terminate the same.
8. On December 8, 1982, plaintiff was requested
by herein defendant to furnish the former "a copy
of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz" as well as
"the details of Mr. Angel dela Cruz" obligation
against which plaintiff proposed to apply the time
deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was
furnished herein defendant.
10. Accordingly, defendant bank rejected the
plaintiff's demand and claim for payment of the
value of the CTDs in a letter dated February 7,
1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with
the defendant bank matured and fell due and on
August 5, 1983, the latter set-off and applied the
time deposits in question to the payment of the
matured loan (TSN, February 9, 1987, pp. 130-
131).
12. In view of the foregoing, plaintiff filed the
instant complaint, praying that defendant bank be
ordered to pay it the aggregate value of the
certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein
at 16% per annum, moral and exemplary
damages as well as attorney's fees.
After trial, the court a quo rendered its decision
dismissing the instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower
court's dismissal of the complaint, hence this petition wherein
petitioner faults respondent court in ruling (1) that the subject
certificates of deposit are non-negotiable despite being clearly
negotiable instruments; (2) that petitioner did not become a
holder in due course of the said certificates of deposit; and (3) in
disregarding the pertinent provisions of the Code of Commerce
relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced
below to provide a better understanding of the issues involved in
this recourse.
 SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22,
1982, 19____
This is to Certify that B E A R E
R has deposited in this Bank the
sum of PESOS: FOUR
THOUSAND ONLY, SECURITY
BANK SUCAT OFFICE P4,000 &
00 CTS Pesos, Philippine
Currency, repayable to said
depositor 731 days. after date,
upon presentation and surrender
of this certificate, with interest at
the rate of 16% per cent per
annum.
the name of the depositor, the words "has
deposited" a certain amount follows. The
document further provides that the amount
deposited shall be "repayable to said depositor"
on the period indicated. Therefore, the text of the
instrument(s) themselves manifest with clarity that
they are payable, not to whoever purports to be
the "bearer" but only to the specified person
indicated therein, the depositor. In effect, the
appellee bank acknowledges its depositor Angel
dela Cruz as the person who made the deposit
and further engages itself to pay said depositor
the amount indicated thereon at the stipulated
date. 6
We disagree with these findings and conclusions, and hereby
hold that the CTDs in question are negotiable instruments.
Section 1 Act No. 2031, otherwise known as the Negotiable
Instruments Law, enumerates the requisites for an instrument to
become negotiable, viz:
(a) It must be in writing and signed by the maker
or drawer;

(Sgd. Illegible) (Sgd. Illegible) (b) Must contain an unconditional promise or

order to pay a sum certain in money;
—————————— ———————————
(c) Must be payable on demand, or at a fixed or
AUTHORIZED SIGNATURES 5 determinable future time;

Respondent court ruled that the CTDs in question are non- (d) Must be payable to order or to bearer; and
negotiable instruments, nationalizing as follows:
(e) Where the instrument is addressed to a
. . . While it may be true that the word "bearer" drawee, he must be named or otherwise indicated
appears rather boldly in the CTDs issued, it is therein with reasonable certainty.
important to note that after the word "BEARER"
stamped on the space provided supposedly for
The CTDs in question undoubtedly meet the requirements of the
law for negotiability. The parties' bone of contention is with regard
to requisite (d) set forth above. It is noted that Mr. Timoteo P.
Tiangco, Security Bank's Branch Manager way back in 1982,
testified in open court that the depositor reffered to in the CTDs is
no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you
are saying that per books of the
bank, the depositor referred (sic)
in these certificates states that it
was Angel dela Cruz?
witness:
a Yes, your Honor, and we have
the record to show that Angel dela
Cruz was the one who cause (sic)
the amount.
Atty. Calida:
q And no other person or entity or
company, Mr. Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the
depositor identified in all of these
certificates of time deposit insofar
as the bank is concerned?
witness:
a Angel dela Cruz is the
depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-
negotiability of an instrument is determined from the writing, that
is, from the face of the instrument itself.9 In the construction of a
bill or note, the intention of the parties is to control, if it can be
legally ascertained. 10 While the writing may be read in the light of
surrounding circumstances in order to more perfectly understand
the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it
or substituted in its stead. The duty of the court in such case is to
ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is
the meaning of the words they have used. What the parties
meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited
shall be repayable to the depositor. And who, according to the
document, is the depositor? It is the "bearer." The documents do
not say that the depositor is Angel de la Cruz and that the
amounts deposited are repayable specifically to him. Rather, the
amounts are to be repayable to the bearer of the documents or,
for that matter, whosoever may be the bearer at the time of
presentment.
If it was really the intention of respondent bank to pay the amount
to Angel de la Cruz only, it could have with facility so expressed
that fact in clear and categorical terms in the documents, instead
of having the word "BEARER" stamped on the space provided for
the name of the depositor in each CTD. On the wordings of the
documents, therefore, the amounts deposited are repayable to
whoever may be the bearer thereof. Thus, petitioner's aforesaid
witness merely declared that Angel de la Cruz is the depositor
"insofar as the bank is concerned," but obviously other parties not
privy to the transaction between them would not be in a position
to know that the depositor is not the bearer stated in the CTDs.
Hence, the situation would require any party dealing with the
CTDs to go behind the plain import of what is written thereon to
unravel the agreement of the parties thereto through
facts aliunde. This need for resort to extrinsic evidence is what is
sought to be avoided by the Negotiable Instruments Law and
calls for the application of the elementary rule that the
interpretation of obscure words or stipulations in a contract shall
not favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the
CTDs. This time, the answer is in the negative. The records
reveal that Angel de la Cruz, whom petitioner chose not to
implead in this suit for reasons of its own, delivered the CTDs
amounting to P1,120,000.00 to petitioner without informing
respondent bank thereof at any time. Unfortunately for petitioner,
although the CTDs are bearer instruments, a valid negotiation
thereof for the true purpose and agreement between it and De la
Cruz, as ultimately ascertained, requires both delivery and
indorsement. For, although petitioner seeks to deflect this fact,
the CTDs were in reality delivered to it as a security for De la
Cruz' purchases of its fuel products. Any doubt as to whether the
CTDs were delivered as payment for the fuel products or as a
security has been dissipated and resolved in favor of the latter by
petitioner's own authorized and responsible representative
himself.
In a letter dated November 26, 1982 addressed to respondent
Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". .
. These certificates of deposit were negotiated to us by Mr. Angel
dela Cruz to guarantee his purchases of fuel products" (Emphasis
ours.) 13 This admission is conclusive upon petitioner, its
protestations notwithstanding. Under the doctrine of estoppel, an
admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against
the person relying thereon. 14 A party may not go back on his own
acts and representations to the prejudice of the other party who
relied upon them. 15 In the law of evidence, whenever a party has,
by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing true, and to
act upon such belief, he cannot, in any litigation arising out of
such declaration, act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not
as security, petitioner's credit manager could have easily said so,
instead of using the words "to guarantee" in the letter
aforequoted. Besides, when respondent bank, as defendant in
the court below, moved for a bill of particularity therein 17 praying,
among others, that petitioner, as plaintiff, be required to aver with
sufficient definiteness or particularity (a) the due date or dates
of payment of the alleged indebtedness of Angel de la Cruz to
plaintiff and (b) whether or not it issued a receipt showing that the
CTDs were delivered to it by De la Cruz as payment of the latter's
alleged indebtedness to it, plaintiff corporation opposed the
motion. 18 Had it produced the receipt prayed for, it could have
proved, if such truly was the fact, that the CTDs were delivered as
payment and not as security. Having opposed the motion,
petitioner now labors under the presumption that evidence
willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated
Realty Corporation, et al. vs. Philippine National Bank, et al. 20 is
apropos:
. . . Adverting again to the Court's
pronouncements in Lopez, supra, we quote
therefrom:
The character of the transaction
between the parties is to be
determined by their intention,
regardless of what language was
used or what the form of the
transfer was. If it was intended to
secure the payment of money, it
must be construed as a pledge;
but if there was some other
intention, it is not a pledge.
However, even though a transfer,
if regarded by itself, appears to
have been absolute, its object and
character might still be qualified
and explained by
contemporaneous writing
declaring it to have been a deposit
of the property as collateral
security. It has been said that a
transfer of property by the debtor
to a creditor, even if sufficient on
its face to make an absolute
conveyance, should be treated as
a pledge if the debt continues in
inexistence and is not discharged
by the transfer, and that
accordingly the use of the terms
ordinarily importing conveyance of
absolute ownership will not be
given that effect in such a
transaction if they are also
commonly used in pledges and
mortgages and therefore do not
unqualifiedly indicate a transfer of
absolute ownership, in the
absence of clear and
unambiguous language or other
circumstances excluding an intent
to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs
the question. Under the Negotiable Instruments Law, an
instrument is negotiated when it is transferred from one person to
another in such a manner as to constitute the transferee the
holder thereof, 21 and a holder may be the payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof. 22 In
the present case, however, there was no negotiation in the sense
of a transfer of the legal title to the CTDs in favor of petitioner in
which situation, for obvious reasons, mere delivery of the bearer
CTDs would have sufficed. Here, the delivery thereof only as
security for the purchases of Angel de la Cruz (and we even
disregard the fact that the amount involved was not disclosed)
could at the most constitute petitioner only as a holder for value
by reason of his lien. Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the instrument since,
necessarily, the terms thereof and the subsequent disposition of
such security, in the event of non-payment of the principal
obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien
on the instrument arising from contract, he is deemed a holder for
value to the extent of his lien. 23 As such holder of collateral
security, he would be a pledgee but the requirements therefor
and the effects thereof, not being provided for by the Negotiable
Instruments Law, shall be governed by the Civil Code provisions
on pledge of incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by
negotiable instruments, . . . may also be pledged.
The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must
be indorsed.
 Art. 2096. A pledge shall not take effect against
third persons if a description of the thing pledged
and the date of the pledge do not appear in a
public instrument.
Aside from the fact that the CTDs were only delivered but not
indorsed, the factual findings of respondent court quoted at the
start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee
agreement between it and Angel de la Cruz. 25 Consequently, the
mere delivery of the CTDs did not legally vest in petitioner any
right effective against and binding upon respondent bank. The
requirement under Article 2096 aforementioned is not a mere rule
of adjective law prescribing the mode whereby proof may be
made of the date of a pledge contract, but a rule of substantive
law prescribing a condition without which the execution of a
pledge contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel
de la Cruz in favor of respondent bank was embodied in a public
instrument. 27 With regard to this other mode of transfer, the Civil
Code specifically declares:
Art. 1625. An assignment of credit, right or action
shall produce no effect as against third persons,
unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property
in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement.
Contrarily, petitioner, whether as purchaser, assignee or lien
holder of the CTDs, neither proved the amount of its credit or the
extent of its lien nor the execution of any public instrument which
could affect or bind private respondent. Necessarily, therefore, as
between petitioner and respondent bank, the latter has definitely
the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into
the question of whether or not private respondent observed the
requirements of the law in the case of lost negotiable instruments
and the issuance of replacement certificates therefor, on the
ground that petitioner failed to raised that issue in the lower
court. 28
On this matter, we uphold respondent court's finding that the
aspect of alleged negligence of private respondent was not
included in the stipulation of the parties and in the statement of
issues submitted by them to the trial court. 29 The issues agreed
upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are
negotiable instruments.
2. Whether or not defendant could legally apply
the amount covered by the CTDs against the
depositor's loan by virtue of the assignment
(Annex "C").
3. Whether or not there was legal compensation
or set off involving the amount covered by the
CTDs and the depositor's outstanding account
with defendant, if any.
4. Whether or not plaintiff could compel defendant
to preterminate the CTDs before the maturity date
provided therein.
5. Whether or not plaintiff is entitled to the
proceeds of the CTDs.
6. Whether or not the parties can recover
damages, attorney's fees and litigation expenses
from each other.
As respondent court correctly observed, with appropriate citation
of some doctrinal authorities, the foregoing enumeration does not
include the issue of negligence on the part of respondent bank.
An issue raised for the first time on appeal and not raised timely
in the proceedings in the lower court is barred by
estoppel. 30 Questions raised on appeal must be within the issues
framed by the parties and, consequently, issues not raised in the
trial court cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues
necessary to the disposition of a case are properly raised. Thus,
to obviate the element of surprise, parties are expected to
disclose at a pre-trial conference all issues of law and fact which
they intend to raise at the trial, except such as may involve
privileged or impeaching matters. The determination of issues at
a pre-trial conference bars the consideration of other questions
on appeal. 32
To accept petitioner's suggestion that respondent bank's
supposed negligence may be considered encompassed by the
issues on its right to preterminate and receive the proceeds of the
CTDs would be tantamount to saying that petitioner could raise
on appeal any issue. We agree with private respondent that the
broad ultimate issue of petitioner's entitlement to the proceeds of
the questioned certificates can be premised on a multitude of
other legal reasons and causes of action, of which respondent
bank's supposed negligence is only one. Hence, petitioner's
submission, if accepted, would render a pre-trial delimitation of
issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was
raised in the court below, petitioner still cannot have the odds in
its favor. A close scrutiny of the provisions of the Code of
Commerce laying down the rules to be followed in case of lost
instruments payable to bearer, which it invokes, will reveal that
said provisions, even assuming their applicability to the CTDs in
the case at bar, are merely permissive and not mandatory. The
very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for
what cause it may be, may apply to the judge or
court of competent jurisdiction, asking that the
principal, interest or dividends due or about to
become due, be not paid a third person, as well
as in order to prevent the ownership of the
instrument that a duplicate be issued him.
(Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not
mandatory but discretionary on the part of the "dispossessed
owner" to apply to the judge or court of competent jurisdiction for
the issuance of a duplicate of the lost instrument. Where the
provision reads "may," this word shows that it is not mandatory
but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity,
permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles
548 to 558 of the Code of Commerce, on which petitioner seeks
to anchor respondent bank's supposed negligence, merely
established, on the one hand, a right of recourse in favor of a
dispossessed owner or holder of a bearer instrument so that he
may obtain a duplicate of the same, and, on the other, an option
in favor of the party liable thereon who, for some valid ground,
may elect to refuse to issue a replacement of the instrument.
Significantly, none of the provisions cited by petitioner
categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure
outlined therein, and none establishes a mandatory precedent
requirement therefor.
WHEREFORE, on the modified premises above set forth, the
petition is DENIED and the appealed decision is hereby
AFFIRMED.
SO ORDERED.
G.R. No. L-21069 October 26, 1967
MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-
appellee,
vs.
RODOLFO R. VELAYO, 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.
G.R. No. 82457 March 22, 1993
INOCENTE LEONARDO, LORENZO LEONARDO, VISITACION
LEONARDO, ASUNCION AND MARGARITA LEONARDO
BERNAL, petitioners,
vs.
COURT OF APPEALS and TROYANO V.
LEONARDO, respondents.
Asuncion, Gomez & Associates for petitioners.
Loreto N. Pono for private respondent.
NOCON, J.:
This is a petition for review on certiorari to annul and set aside the
decision dated January 26, 1988 of the Court of
Appeals1 affirming the decision of the trial court2 in ordering the
Register of Deeds of Cebu City to register the Deed of Sale with
Assumption of Real Estate Mortgage Plus a Right of Repurchase
and to issue the corresponding Transfer Certificate of Title in the
name of private respondent Troyano V. Leonardo and his wife.
It appears on record that petitioner Inocente Leonardo, married to
Cristina Velez, was the registered owner of a parcel of land
designated as Lot No.
1414-B of the subdivision plan Psd-40447 situated in Cebu City
with an area of 1,700 square meters, more or less, and covered
by Transfer Certificate of Title No. 12958.
On August 28, 1969, petitioner Inocente Leonardo and his wife
mortgaged subject property including its poultry building with the
Development Bank of the Philippines (DBP for brevity) to secure
a loan in the amount of P60,000.00.
Sometime in January, 1973, petitioner Inocente Leonardo and his
wife received a notice from DBP dated January 19, 1973
informing them of their outstanding loan in the amount of
P57,742.75 as of January 31, 1973 and that they have until
January 31, 1973 to pay said amount or the subject property will
be foreclosed.3
On January 31, 1973, petitioner Inocente Leonardo with the
consent of his wife executed in favor of their youngest son,
private respondent Troyano V. Leonardo, a Deed of Sale with
Assumption of a Real Estate Mortgage Plus a Right to
Repurchase with the following pertinent stipulations, to wit:
That for and in consideration of the assumption by
the Vendee of the foregoing obligation in favor of
the Development Bank of the Philippines, the
Vendor hereby SELLS, TRANSFERS and
CONVEYS unto the said Vendee, his heirs,
successors or assigns, the above described
parcel of land & improvements subject to the
existing mortgage in favor of the Development
Bank of the Philippines.
That the Vendor reserves the right to repurchase
from the Vendee, the western ONE-HALF (1/2)
portion of the above-described parcel of land
within a period of SEVEN (7) YEARS from and
after the execution of this instrument by paying to
the Vendee an amount equivalent to THIRTY-
THREE THOUSAND FOUR HUNDRED
SEVENTY-FIVE a 80/100 PESOS (P33,475.80),
plus interest at the rate of 12% per annum and
one half of whatever expenses, including land
taxes, the Vendee shall incur in connection with
the sale of the foregoing lot and which he may
thereafter incur.4
Said document was registered with the Office of the Register of
Deeds of Cebu City on May 21, 1976.5 Considering that the
subject property was already mortgaged, private respondent
executed with petitioner spouses a Supplemental Deed of Sale
which was also registered with the Register of Deeds.6
On February 5, 1980, private respondent filed a Petition for
Consolidation of Ownership with the then Court of First Instance
of Cebu, Branch 1 in Civil Case No. R-18921 against petitioner
spouses Inocente and Cristina Leonardo for the latter's failure to
exercise their right to repurchase the subject property within the
period agreed upon which expired on January 31, 1980.
Thereafter, private respondent received a letter dated January 29,
1980 from his father, petitioner Inocente Leonardo, but mailed
only by the latter on February 12, 1980 as evidenced by the date
stamped on the envelope of said registered letter with Registry
Receipt No. 2/42 of the Cebu City's Postal Office,7 together with
an enclosed China Banking Corporation check in the amount of
P74,000.00,8 to wit:
Dear Son:
With reference to the notarial Deed of Sale, with
Assumption of Real Estate Mortgage Plus a Right
of Repurchase, relative to one-half (1/2) portion of
Lot No. 1414-B, I beg to inform you that I will
exercise my
right to repurchase from you the said one-half
(1/2) portion of said Lot No. 1414-B, as granted to
me in said notarial document.
Your wife has given me a detailed statement of
the amount that I will repurchase from you said
1/2 portion of Lot No. 1414-B with 12%
interest per annum, a xerox copy of said detailed
statement is herewith enclosed, as Annex "A"
hereof.
According to said detailed statement, Annex "A",
my total repurchase account with you amounts to
P74,004.28, as of January 31, 1980.
I am now tendering my repurchase payment to
you in the sum of P74,000.00 as per enclosed
China Banking Corporation Check No.
RMS-15618-A belonging to Mrs. Lourdes Leyson
payable to me but which I have endorsed the
same for payment to you. The difference of P4.28
will be paid to you at any time.
Please, therefore, the next move is for you to
execute in my favor the Deed of Repurchase from
you of the 1/2 portion of said Lot No. 1414-B
within the earliest time possible.9
On February 16, 1980, the counsel of private respondent sent a
letter rejecting petitioner's offer and returned the latter's check on
the ground that the period to repurchase subject property had
already expired. 10
Thereafter or on March 4, 1980, petitioner spouses alleged in
their Answer that the consolidation in favor of the private
respondent could not be legally effected because they have
already tendered the purchase price and that the Deed of Sale
with Assumption Plus the Right to Repurchase did not express
the true intention of the parties inasmuch as the entire Lot No.
1414-B and not merely one-half (1/2) portion thereof shall be the
subject of the repurchased agreement.
On July 12, 1980, petitioner Cristina Leonardo died and was
substituted by her children, Lorenzo Leonardo, Visitacion
Leonardo Asuncion and Margarita Leonardo Bernal constraining
petitioners to file a Motion for Leave to Amend Petition on
September 15, 1980 which was granted by the trial court.
On December 8, 1980, petitioners in their Amended Answer with
Counterclaims alleged that private respondent cannot validly
consolidate the ownership of the subject property because the
contract executed between them was one of mortgage and not
a pacto de retro sale.
After trial on the merits, the trial court rendered a decision, the
pertinent portion of which reads:
Upon evidence on record this Court is fully
convinced that the contract, Exh. "A", is a Deed of
Sale with Assumption of Real Estate Mortgage,
with a Right to Repurchase based on the
evidence on record. The period within which
vendor-a-retro should have repurchased the land
in question had already expired without said
vendor-a-retro having redeemed the property as
evidenced by Exhs. "E" to "E-4" inclusive.
xxx xxx xxx
IN VIEW OF THE FOREGOING, judgment is
hereby rendered granting the herein amended
petition, and the Register of Deeds for the City of
Cebu is hereby ordered and directed to record
and register the "Deed of Sale With Assumption of
Real Estate Mortgage, Plus a Right of
Repurchase" in said Office and to issue the
corresponding Transfer Certificate of Title in the
name of Petitioner Troyano V. Leonardo and his
wife, Florencia U. Leonardo. 11
From said decision, petitioners filed their Notice of Appeal and
their Record on Appeal to respondent appellate court.
On November 22, 1982, private respondent filed a Motion for
Execution of Judgment with the trial court and the latter on
December 9, 1982, granted said motion upon the filing of a bond
in the amount of P10,000.00.
On February 18, 1983, petitioners' Motion for Reconsideration
and/or to Stay Execution was denied and an appeal from the
Order granting said Motion for Execution was filed with the
respondent appellate court on March 14, 1983.
In the course of the appeal, petitioner Lorenzo Leonardo died on
October 12, 1984. 12
On January 26, 1988, the respondent appellate court rendered a
decision, the dispositive portion of which reads as follows:
WHEREFORE, finding no reversible error, the
judgment appealed from is hereby AFFIRMED.
No costs. 13
On February 18, 1988, petitioners filed their Motion for
Reconsideration which was denied on March 2, 1988.
Hence, this petition.
Petitioners now submit the following issues for the consideration
and resolution of this Court, to wit:
1. WHETHER OR NOT THE AGREEMENT ENTERED INTO
BETWEEN THE FATHER, PETITIONER INOCENTE
LEONARDO, AND THE SON, RESPONDENT TROYANO V.
LEONARDO, WAS ONE OF SALE OR MORTGAGE?
2. WHETHER OR NOT THE ORDER OF EXECUTION ISSUED
BY THE TRIAL COURT AND AFFIRMED BY THE HONORABLE
COURT OF APPEALS WAS VALIDLY ISSUED? 14
During the pendency of this case or on November 15, 1990,
petitioner Inocente Leonardo also died. 15
The petition is without merit.
The issues raised in this case principally involve questions of fact
and the settled rule is that findings of facts of the Court of
Appeals are conclusive upon this Court. As held in Ronquillo vs.
Court of Appeals:
Elementary is the rule that the jurisdiction of the
Supreme Court in cases brought to it from the
Court of Appeals in a petition for certiorari under
Rule 45 of the Rules of Court is limited to the
review of errors of law, and that said appellate
court's finding of fact is conclusive upon this
Court. However, there are certain exceptions,
such as (1) when the conclusion is a finding
grounded entirely on speculation, surmises or
conjectures; (2) when the inference made is
manifestly absurd, mistaken or impossible; (3)
when there is grave abuse of discretion in the
appreciation of facts; (4) when the judgment is
premised on a misapprehension of facts; (5) when
the findings of fact are conflicting; and (6) when
the Court of Appeals in making its finding went
beyond the issues of the case and the same is
contrary to the admissions of both appellant and
appellee. 16
Petitioners failed to show that they fall under any of the
aforementioned exceptions. The appellate court, in affirming the
findings of the trial court that the contract executed between
private respondent and his father is a pacto de retrosale and not
an equitable mortgage, stated as follows:
From a reading of the document there was no
cash outlay given to the vendors (herein
petitioners). The sale was solely for and in
consideration of the assumption by the vendee
(herein private respondent) of the obligation of the
vendor in favor of the bank in the sum of
P57,742.75.
So far as one half of the property is concerned,
the same was absolutely sold by the vendor to the
vendee without the former getting any cash in
return thereof except the assumption of
respondents, (herein petitioners') obligation with
the Development Bank of the Philippines.
However, with respect to the other half,
respondents (herein petitioners) were granted a
right to repurchase the same for a period of seven
years for the amount of P33,475.00 plus interest
at the rate of 12% per annum and one-half of
whatever expenses, including land taxes, the
vendee shall incur in connection with the sale of
the foregoing lot and which he may thereafter
incur.
There was no actual loan extended or delivered to
respondents. Instead, their loan with the DBP was
assumed by petitioner, and in consideration of
their selling one-half of the property to petitioner,
the latter granted the former a right to repurchase
the property in the amount aforestated which
corresponds to one-half of the amount stated in
the notice of foreclosure (Exh. D) together with
the corresponding interest thereon, and it is
apparently for this reason that interests were
likewise added to the principal amount as
repurchase price.
What is, therefore, apparent from the document of
sale with right to repurchase is that in
consideration of petitioner's assumption of
respondent's obligation with the DBP,
respondents ceded one-half of the property to
petitioner while the latter granted respondents a
period of seven (7) years to repurchase the other
half for the same amounts paid by him to the
DBP, including the interests thereon.
Given these considerations which are apparent
from the terms of the agreement and the cardinal
rule of interpretation that where the terms of the
contract are clear and leave no doubt upon the
intention of the contracting parties, the literal
meaning of its stipulation shall control (Article
1370, New Civil Code). We hold that the Deed of
Sale with Assumption of Mortgage Plus a Right to
Repurchase (Exh. A) is what it purports to be a
sale with right to repurchase one-half of the
property and not a mortgage, real or equitable, as
belatedly claimed by respondents.
It is fundamental that contracts are to be
interpreted according to their literal meaning when
the terms and conditions are clear and leave no
doubt as to the intention of the contracting parties
(Gonzales vs. Court of Appeals, 124 SCRA 630
[1983]). Thus, if the terms of the pacto de
retro sale are clear and the contract is not
assailed as false nor its authenticity challenged,
the literal sense of its terms shall be given effect
(Ordoñez vs. Villaroman, 78 Phil. 116).
The claim by respondents in their Amended
Answer to the
Amended Petition that the transaction is an
equitable mortgage is a mere afterthought. 17
It is clear from the terms of the contract that the agreement
entered into between the parties is one of a sale with assumption
of real estate mortgage with right to repurchase. Said contract
provides that the vendor (herein petitioners) has the power to
redeem the subject property within seven (7) years from the
execution of the document on January 31, 1973, or on January
31, 1980. Thus, when private respondent received the letter of his
father, Inocente, on February 12, 1980 signifying his intention to
exercise his right to repurchase one-half (1/2) portion of the
property in question, the period to repurchase, per their contract,
had already expired.
Article 1606 paragraph (3) of the New Civil Code, allowing the
vendor thirty (30) days from the time final judgment is rendered
within which to repurchase property sold under a contract of sale
with a right to repurchase has no application in the instant case.
Such article has applicability in a civil action in which the true
nature of the contract between the parties was the main issue,
that is where the buyer a retro honestly believed that the contract
he had entered into was an equitable mortgage not a pacto de
retro transaction, and because of such belief, he had not
redeemed the property within the proper period, which is not
present in the case at bar.
The record is clear that petitioner Inocente Leonardo understood
the nature of the contract he entered into when he categorically
admitted in his letter to private respondent that he is exercising
his right to repurchase the subject property and tendering for that
purpose the sum of P74,000.00 as his repurchase payment for
said property. Moreover, petitioners denied the true nature of their
agreement only after private respondent filed his petition for
consolidation of ownership with the trial court, by alleging in their
Answer that the contract is one of equitable mortgage.
With respect to petitioners' contention that the trial court erred in
ordering the execution of the decision despite the pendency of
the appeal, this matter was correctly resolved by the respondent
appellate court, in this wise:
 Finally, the power to grant or deny a motion for
execution is discretionary with the court, unless it
is prevented by a preliminary injunction issued by
a higher court. Accordingly, the appellate court
will not interfere to modify, control or inquire into
the exercise of this discretion, unless it be shown
that there has been an abuse thereof, or that,
since the issuance of the order, conditions have
so far changed as to necessitate the intervention
of the appellate court to protect the interests of
the parties against contingencies which were not,
or could not have been contemplated by the trial
judge at the time of the issuance of the order. 18
WHEREFORE, finding no reversible error in the assailed
decision, this petition for certiorari is hereby DISMISSED for lack
of merit. Costs against petitioners.
SO ORDERED.
Star Two (SPV-AMC), Inc., vs Paper City Corporation of
the Philippines, G.R. No. 169211, March 6, 2013
Facts:
From 1990-1991, Paper City applied for and was granted four (4) loans and
credit accommodations by Rizal Commercial Banking Corporation
(RCBC), now substituted by Star Two (SPV-AMC), Inc by virtue of
Republic Act No. 9182. The loans were secured by four (4) Deeds of
Continuing Chattel Mortgages on its machineries and equipments found
inside its paper plants. However, RCBC eventually executed a unilateral
Cancellation of Deed of Contining Chattel Mortgage. In 1992, RCBC, as
the trustee bank, together with Metrobank and Union Bank, entered into a
Mortgage Trust Indenture (MTI), with Paper City. In the said MTI, Paper
City acquired additional loans secured by five (5) Deed of Real Estate
Mortgage, plus real and personal properties in an annex to the MTI, which
covered the machineries and equipment of Paper City. The MTI was later
on amended and supplemented three (3) times, wherein the loan was
increased and included the same mortgages with an additional building and
other improvements inthe plant site. Paper City was able to comply with
the loans but only until 1997 due to an economic crisis. RCBC filed a
petition for extra-judicial foreclosure against the real estate executed by
Paper City including all the improvements because of payment default. The
property was foreclosed and subjected to public acution. The three banks
and the highest bidder were issued a Certificate of Sale. Paper City filed a
complaint alleging that the sale was null and void due to lack of prior
notice. During the pendency of the complaint, Paper City filed a motion to
remove machinery out of the foreclosed land and building, that the same
were not included in the foreclosure of the real estate mortgage. The trial
court denied the motion, ruling that the machineries and equipment were
included. Thereafter, Paper City's Motion for Reconsideration, the trial
court granted the same and justified the reversal by finding that the
machineries and equipment are chattels by agreement thru the four Deeds of
Continuing Chattel Mortgages; and that the deed of cancellation executed
by RCBC of said mortgage was not valid because it was one unilaterally.
RCBC's Motion for Reconsideration was denied. The case was petitioned
at CA that
1. That Paper City gave its consent to consider the disputedmachineries and
equipment as real properties when they signed the MTI's and all its
amendments; 2. That the machineries and equipment are the same as inthe
MTI's, hence treated by agreement of the parties as real properties. The CA
affirmed the orders of the trial court because it relied on the plain language
of the MTI's stating that nowhere from any of the MTIs executed by the
parties can we find the alleged "express" agreement adverted to by
petitioner. There is no provision in any of the parties’ MTI, which expressly
states to the effect that the parties shall treat the equipments and
machineries as real property. On the contrary, the plain and unambiguous
language of the aforecited MTIs, which described the same as personal
properties, contradicts petitioner’s claims.
Issue:
Whether the subsequent contracts of the parties such as Mortgage Trust
Indenture as well as the subsequent supplementary amendments included in
its coverage of mortgaged properties the subject machineries and
equipment; and
Whether or not the subject machineries and equipment were considered real
properties and should therefore be included in the extra-judicial foreclosure
which in turn were sold to the banks.
Ruling:
Petition was granted.
1. Repeatedly, the parties stipulated that the properties mortgaged by
Paper City to RCBC are various parcels of land including the buildings
and existing improvements thereon as well as the machineries and
equipments, which as stated in the granting clause of the original
mortgage, are "more particularly described and listed that is to say, the
real and personal properties listed in Annexes ‘A’ and ‘B’ x x x of
which the Paper City is the lawful and registered owner." Significantly,
Annexes "A" and "B" are itemized listings of the buildings,
machineries and equipments typed single spaced in twenty-seven
pages of the document made part of the records. As held in Gateway
Electronics Corp. v. Land Bank of the Philippines,49 the rule in this
jurisdiction is that the contracting parties may establish any agreement,
term, and condition they may deem advisable, provided they are not
contrary to law, morals or public policy. The right to enter into lawful
contracts constitutes one of the liberties guaranteed by the
Constitution.
2. Law and jurisprudence provide and guide that even if not
expressly so stated, the mortgage extends to the
improvements
Art. 2127. The mortgage extends to the natural accessions,
to the improvements, growing fruits, and the rents or income
not yet received when the obligation becomes due, and to
the amount of the indemnity granted or owing to the
proprietor from the insurers of the property mortgaged, or in
virtue of expropriation for public use, with the declarations,
amplifications and limitations established by law, whether the
estate remains in the possession of the mortgagor, or it
passes into the hands of a third person.
3. Contrary to the finding of the CA, the Extra-Judicial Foreclosure of
Mortgage includes the machineries and equipments of respondent.
Considering that the Indenture which is the instrument of the mortgage
that was foreclosed exactly states through the Deed of Amendment that
the machineries and equipments listed in Annexes "A" and "B" form
part of the improvements listed and located on the parcels of land
subject of the mortgage, such machineries and equipments are surely
part of the foreclosure of the "real estate properties, including all
improvements thereon" as prayed for in the petition. The real estate
mortgages which specifically included the machineries and equipments
were subsequent to the chattel mortgages. Without doubt, the real
estate mortgages superseded the earlier chattel mortgages.
 The real estate mortgage over the machineries and equipments is even
in full accord with the classification of such properties by the Civil
Code of the Philippines as immovable property. Thus:
Article 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
xxxx
(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;
the petition is GRANTED. Accordingly, the Decision and
Resolution of the Court of Appeals dated 8 March 2005 and 8
August 2005 upholding the 15 August 2003 and 1 December
2003 Orders of the Valenzuela Regional Trial Court are hereby
REVERSED and SET ASIDE and the original Order of the trial
court dated 28 February 2003 denying the motion of respondent
to remove or dispose of machinery is hereby REINSTATE
LUISA BRIONES-VASQUEZ, petitioner, vs. COURT
OF APPEALS and HEIRS OF MARIA MENDOZA
VDA. DE OCAMPO, respondents.
DECISION
AZCUNA, J.:
This is a petition for certiorari under Rule 65 of the
Rules of Civil Procedure, assailing the Resolution of the
Court of Appeals in CA-G.R. CV No. 39025, dated June
9, 2000, which denied petitioners motion for clarificatory
judgment and the Resolution of the Court of Appeals,
dated August 3, 2000, which denied the motion for
reconsideration.
Under an agreement denominated as a pacto de
retro sale, Maria Mendoza Vda. De Ocampo acquired a
parcel of land from Luisa Briones. The latter thereunder
reserved the right to repurchase the parcel of land up to
December 31, 1970. [1]
Maria Mendoza Vda. De Ocampo passed away on
May 27, 1979. On June 14, 1990, Hipolita Ocampo
[2]
Paulite and Eusebio Mendoza Ocampo, the heirs of
Maria Mendoza Vda. De Ocampo, filed a petition for
consolidation of ownership, alleging that the seller was
not able to exercise her privilege to redeem the property
on or before December 31, 1970. [3]
The Regional Trial Court (RTC) of Pili, Camarines
Sur, Branch 32 rendered a Decision on January 30,
[4]
1992 as follows:
WHEREFORE, premises considered, judgment is hereby
rendered as follows:
1. declaring that exh. A is a true pacto de retro sale;
 2. declaring that the defendant can still redeem the
property within 30 days from the finality of this
judgment, subject to the provisions of Art. 1616 of
the New Civil Code;
3. No costs.
SO ORDERED. [5]
Plaintiffs therein -- herein private respondents --
appealed the RTC Decision to the Court of Appeals. On
June 29, 1995, the Court of Appeals promulgated a
Decision and disposed of the case in the following
[7]
manner:
THE FOREGOING CONSIDERED, the contested decision is
hereby set aside; and declaring the 1970 sale with right of
repurchase, Exhibit A, as one of an equitable mortgage.
SO ORDERED. [8]
Respondents filed a motion for reconsideration which
the Court of Appeals denied through a Resolution, dated [9]
the Writ of Execution issued in the above-entitled case with the
following information, to wit:
That the plaintiffs [herein private respondents] were informed
that the writ of execution was already issued for
implementation and that they should pay the necessary sheriffs
and kilometrage fees;
That [one of] the plaintiff[s] came to the Office of the Clerk of
[6]
Court VI but did not deposit any amount for the kilometrage
fee and for the expenses in the implementation of the said writ,
but instead plaintiff said that he is not interested to implement
such writ;
That the 60-day period within which the said writ should be
implemented has already expired.
WHEREFORE, the original copy of the Writ of Execution is
hereby returned unserved.
Cadlan, Pili, Camarines Sur July 8, 1997

December 15, 1995. The Court of Appeals Decision For the Clerk of Court VI
became final and executory and entry of judgment was and
made on July 17, 1996. [10]
Ex-Officio
Subsequently, at the RTC, both petitioner and Provincial Sheriff
respondents filed their respective motions for a writ of by:
execution. The RTC issued a writ of execution. However,
the writ was returned unserved per sheriffs return which (signed)
reads as follows: EDDIE M.
ROSERO
Respectfully returned to this Court thru the Clerk of Court VI, Sherif
RTC, Pili, Camarines Sur the herein attached original copy of f IV [11]
 Petitioner thereafter filed a motion for an alias writ of granted and the Clerk of Court V of this Court transmitted the
execution. This was granted by the RTC: [12] entire records of the case to the Court of Appeals, Manila;
ALIAS WRIT OF EXECUTION
WHEREAS, on June 29, 1995, a decision was rendered by the
Court of Appeals, Manila, the dispositive portion of which
T O : THE SHERIFF or any person authorized
reads as follows:
to serve process, RTC, Br. 32, Pili, C.s.
THE FOREGOING CONSIDERED, the contested decision is
THRU : THE CLERK OF COURT VI and EX-OFFICIO
hereby set aside; and declaring the 1970 sale with right of
PROVINCIAL SHERIFF
repurchase, Exh. A as one of an equitable mortgage.
Regional Trial Court
Pili, Camarines Sur
WHEREAS, on March 5, 1997, the Hon. Nilo A. Malanyaon,
Presiding Judge of this Court issued an order granting the
GREETINGS:
issuance of a writ of execution, hereunder quoted as follows:
WHEREAS, on January 20, 1992, a decision
It appearing that the decision of the Court of Appeals had
was rendered by this Court, the dispositive portion of
become final and executory, and an entry of final judgment had
which reads as follows:
already been issued by the Honorable Court of Appeals, let a
writ of execution issue.
WHEREFORE, premises considered, judgment
is hereby rendered as follows:
WHEREAS, on July 10, 1997, Sheriff Eddie M. Rosero
1. declaring that Exh. A is a true pacto de
submitted his return:
retro sale;
WHEREFORE, the original copy of the Writ of execution is
2. declaring that the defendant can still
redeem the property within 30 days from
hereby returned unserved.
the finality of this judgment, subject to the
provisions of Art. 1616 of the New Civil WHEREAS, on July 18, 1997, the Hon. Nilo A. Malanyaon
Code. issued an Order:
3. No costs.
The motion for issuance of alias writ of execution filed by
WHEREAS, in an order of this Court dated June 16, 1992, the counsel for the defendant, Atty. Lucille Fe R. Maggay-
notice of appeal filed by counsel for the defendant has been Principe, is hereby granted.
Consequently, the Clerk of Court of this Court is directed to Luisa Briones so that the mortgage may now be deemed
issue alias writ of execution. released or cancelled.

WHEREFORE, you the Provincial Sheriff of Camarines Sur or That until this time the said plaintiff[s] failed and or did not
his lawful deputy is hereby commanded to effect the bother to withdraw the said amount deposited by defendant
satisfaction of the above-quoted decision of the Honorable Luisa Briones despite letter of advice and the alias writ of
Court of Appeals, Manila. Return this writ to this Court within execution having been personally received by them.
sixty (60) days from your receipt hereof.
Cadlan, Pili, Camarines Sur September 9, 1997.
WITNESS THE HON. NILO A. MALANYAON, Judge of this
Court, this 21st day of July, 1997, at Cadlan, Pili, Camarines For the Clerk
Sur. of Court and
Ex-Officio
(Sgd.) LALAINE P. Sheriff
MONSERATE by:
Officer-In-Charge
(sig
Legal Researcher
ned)
II
EDDIE
The Sheriff was unable to effect the satisfaction of M. ROSERO
the alias writ as stated in the sheriffs report, which is She
worded thus: riff IV [13]

Unable to effect the execution of the Court of

This is to report on the status of the implementation of the
Appeals decision, petitioner filed with the RTC an
Alias Writ of Execution issued in the above-entitled case, to
omnibus motion, dated May 25, 1999, praying:
wit:
WHEREFORE, it is respectfully prayed that an order issue:
That on August 6, 1997 the plaintiff[s] represented by Sps.
Policarpio Paulite and Hipolita Ocampo and Eusebio M.
a) Declaring the equitable mortgage, Exhibit A, discharged;
Ocampo personally received copy of the Alias Writ of
Execution but they refused to sign on the original copy of the
b) Directing the issuance of a Writ of Possession against the
said writ, together with the letter of advise informing them to
plaintiffs for the delivery of possession of the land in question
withdraw at any time the amount deposited to the Office of the
to the defendant.[14]
Clerk of Court VI, RTC, Pili, Camarines Sur by defendant
 The RTC denied the omnibus motion in an Order Petitioner filed a motion for reconsideration of the
dated November 16, 1999, which states: above Resolution. The Court of Appeals denied the same
in a Resolution dated August 3, 2000. [20]

Acting on the omnibus motion of plaintiff dated 25 May 1999

Petitioner now comes to this Court raising the
and the opposition thereto of defendant, and considering that
following issues:
the decision of the Court of Appeals referring the decision of
this Court has become final and executory, hence, this Court
PETITIONER SUBMITS THAT THE PUBLIC
can no longer alter, modify or add anything thereto, the prayers
RESPONDENT ACTED ARBITRARILY, WITH GRAVE
set forth in the omnibus motion is, as it is, hereby denied.
ABUSE OF DISCRETION AMOUNTING TO LACK OF
JURISDICTION IN ISSUING THE FOLLOWING
SO ORDERED. [15]

RESOLUTIONS:
Petitioner filed a motion for reconsideration of the
[16]

A) RESOLUTION DATED JUNE 9, 2000, DENYING

above Order, which was denied by the RTC in an Order
PETITIONERS MOTION FOR CLARIFICATORY
dated February 23, 2000. [17]

JUDGMENT.
Petitioner then filed a motion for clarificatory
judgment, dated April 5, 2000, with the Court of B) RESOLUTION DATED AUGUST 3, 2000, DENYING
Appeals. The motion was denied in a Resolution, dated
[18]
PETITIONERS MOTION FOR RECONSIDERATION. [21]

June 9, 2000, which reads as follows:

The only issues that reached Us, through an appeal, was
whether the 1970 Sale with Right of Repurchase was actually
an equitable mortgage. We ruled, it was, necessarily there is
nothing to clarify.
If it is a matter however whether the prevailing party should be
entitled to a right to repossess the property, then the remedy is
not with Us, but with the Court below.
For lack of merit, the Motion for Clarificatory Judgment is
hereby DENIED.
SO ORDERED. [19]
The sole issue is whether or not the Court of Appeals
acted with grave abuse of discretion amounting to lack of
jurisdiction in refusing to grant petitioners motion for
clarificatory judgment.
It must be noted, as narrated above, that the
Decision of the Court of Appeals had already become
final and executory at the time that the motion for
clarificatory judgment was filed. With regards to final
judgments, this Court has pronounced that:
nothing is more settled in the law than that when a final
judgment becomes executory, it thereby becomes immutable
and unalterable. The judgment may no longer be modified in
any respect, even if the modification is meant to correct what is
perceived to be an erroneous conclusion of fact or law, and
regardless of whether the modification is attempted to be made
by the Court rendering it or by the highest Court of the land.
The only recognized exceptions are the correction of clerical
errors or the making of so-called nunc pro tunc entries which
cause no prejudice to any party, and, of course, where the
judgment is void.[22]
As a general rule, therefore, final and executory
judgments are immutable and unalterable except under
the three exceptions named above: a) clerical errors;
b) nunc pro tunc entries which cause no prejudice to any
party; and c) void judgments.
In the present case, petitioner claims the second
exception, i.e., that her motion for clarificatory judgment
is for the purpose of obtaining a nunc pro
tunc amendment of the final and executory Decision of
the Court of Appeals.
Nunc pro tunc judgments have been defined and
characterized by this Court in the following manner:
The office of a judgment nunc pro tunc is to record some act of
the court done at a former time which was not then carried into
the record, and the power of a court to make such entries is
restricted to placing upon the record evidence of judicial action
which has been actually taken. It may be used to make the
record speak the truth, but not to make it speak what it did
not speak but ought to have spoken. If the court has not
rendered a judgment that it might or should have rendered,
or if it has rendered an imperfect or improper judgment, it
has no power to remedy these errors or omissions by
ordering the entry nunc pro tunc of a proper judgment.
Hence a court in entering a judgment nunc pro tunc has no
power to construe what the judgment means, but only to
enter of record such judgment as had been formerly
rendered, but which had not been entered of record as
rendered. In all cases the exercise of the power to enter
judgments nunc pro tunc presupposes the actual rendition of a
judgment, and a mere right to a judgment will not furnish the
basis for such an entry. (15 R. C. L., pp. 622-623.)
The object of a judgment nunc pro tunc is not the rendering
of a new judgment and the ascertainment and
determination of new rights, but is one placing in proper
form on the record, the judgment that had been previously
rendered, to make it speak the truth, so as to make it show
what the judicial action really was, not to correct judicial
errors, such as to render a judgment which the court ought
to have rendered, in place of the one it did erroneously
render, nor to supply nonaction by the court, however
erroneous the judgment may have been. (Wilmerding vs.
Corbin Banking Co., 28 South., 640, 641; 126 Ala., 268.)
A nunc pro tunc entry in practice is an entry made now of
something which was actually previously done, to have effect
as of the former date. Its office is not to supply omitted
action by the court, but to supply an omission in the record
of action really had, but omitted through inadvertence or
mistake. (Perkins vs. Haywood, 31 N. E., 670, 672.)
It is competent for the court to make an entry nunc pro
tunc after the term at which the transaction occurred, even
though the rights of third persons may be affected. But
entries nunc pro tunc will not be ordered except where this can
be done without injustice to either party, and as a nunc pro
tunc order is to supply on the record something which has
actually occurred, it cannot supply omitted action by the
court . . . (15 C. J., pp. 972-973.)
[23]
mortgage. Since the contract is characterized as a
mortgage, the provisions of the Civil Code governing
mortgages apply. Article 2088 of the Civil Code states:

The creditor cannot appropriate the things given by way of

From the above characterization of a nunc pro
tunc judgment it is clear that the judgment petitioner
sought through the motion for clarificatory judgment is
outside its scope. Petitioners did not allege that the Court
of Appeals actually took judicial action and that such
action was not included in the Court of Appeals Decision
by inadvertence. A nunc pro tunc judgment cannot
correct judicial error nor supply nonaction by the court. [24]
Since the judgment sought through the motion for
clarificatory judgment is not a nunc pro tunc one, the
pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void.
This Court has interpreted this provision in the
following manner:
The essence of pacto commissorio, which is prohibited by
Article 2088 of the Civil Code, is that ownership of the security
will pass to the creditor by the mere default of the debtor
(Guerrero v. Yigo, et al., 96 Phil. 37, 41-42; Puig v. Sellner, et
al., 45 Phil. 286, 287 88) [25]

general rule regarding final and executory decisions

applies. In this case, no motion for reconsideration
The only right of a mortgagee in case of non-payment of a debt
having been filed after the Court of Appeals rendered its
secured by mortgage would be to foreclose the mortgage and
decision on June 29, 1995 and an entry of judgment
have the encumbered property sold to satisfy the outstanding
having been made on July 17, 1996, the same became
indebtedness. The mortgagors default does not operate to vest
final and executory and, hence, is no longer susceptible
in the mortgagee the ownership of the encumbered property,
to amendment. It, therefore, follows that the Court of
for any such effect is against public policy, as enunciated by
Appeals did not act arbitrarily nor with grave abuse of
the Civil Code [26]

discretion amounting to lack of jurisdiction when it issued

the aforementioned Resolution denying petitioners
Applying the principle of pactum
motion for clarificatory judgment and the Resolution
commissorium specifically to equitable mortgages,
denying petitioners motion for reconsideration.
in Montevergin v. CA, the Court enunciated that the
[27]

Nevertheless, for purposes of guiding the parties in
the execution of the aforesaid Decision of the CA, without
altering the same, the following should be noted:
The Court of Appeals pronounced in its Decision that
the contract between the parties is an equitable
consolidation of ownership in the person of the
mortgagee in equity, merely upon failure of the mortgagor
in equity to pay the obligation, would amount to a pactum
commissorium. The Court further articulated that an
action for consolidation of ownership is an inappropriate
remedy on the part of the mortgagee in equity. The only
proper remedy is to cause the foreclosure of the
mortgage in equity. And if the mortgagee in equity
desires to obtain title to the mortgaged property, the
mortgagee in equity may buy it at the foreclosure sale.
The private respondents do not appear to have
caused the foreclosure of the mortgage much less have
they purchased the property at a foreclosure sale.
Petitioner, therefore, retains ownership of the subject
property. The right of ownership necessarily includes the
right to possess, particularly where, as in this case, there
appears to have been no availment of the remedy of
foreclosure of the mortgage on the ground of default or
non-payment of the obligation in question.
WHEREFORE, the petition for certiorari is
DISMISSED. The parties are directed to proceed upon
the basis of the final Decision of the Court of Appeals,
dated June 29, 1995, in CA-G.R. CV No. 39025, that the
contract in question was an equitable mortgage and not a
sale.
No costs.
SO ORDERED.
G.R. No. L-50008 August 31, 1987
PRUDENTIAL BANK, petitioner,
vs.
HONORABLE DOMINGO D. PANIS, Presiding Judge of
Branch III, Court of First Instance of Zambales and Olongapo
City; FERNANDO MAGCALE & TEODULA BALUYUT-
MAGCALE, respondents.
PARAS, J.:
This is a petition for review on certiorari of the November 13,
1978 Decision * of the then Court of First Instance of Zambales and Olongapo City in
Civil Case No. 2443-0 entitled "Spouses Fernando A. Magcale and Teodula Baluyut-
Magcale vs. Hon. Ramon Y. Pardo and Prudential Bank" declaring that the deeds of real
estate mortgage executed by respondent spouses in favor of petitioner bank are null and
void.
The undisputed facts of this case by stipulation of the parties are
as follows:
... on November 19, 1971, plaintiffs-spouses
Fernando A. Magcale and Teodula Baluyut
Magcale secured a loan in the sum of P70,000.00
from the defendant Prudential Bank. To secure
payment of this loan, plaintiffs executed in favor of
defendant on the aforesaid date a deed of Real
Estate Mortgage over the following described
properties:
l. A 2-STOREY, SEMI-CONCRETE, residential
building with warehouse spaces containing a total
floor area of 263 sq. meters, more or less,
generally constructed of mixed hard wood and
concrete materials, under a roofing of cor. g. i.
sheets; declared and assessed in the name of
FERNANDO MAGCALE under Tax Declaration
No. 21109, issued by the Assessor of Olongapo
City with an assessed value of P35,290.00. This
building is the only improvement of the lot.
 2. THE PROPERTY hereby conveyed by way of
MORTGAGE includes the right of occupancy on
the lot where the above property is erected, and
more particularly described and bounded, as
follows:
A first class residential land
Identffied as Lot No. 720, (Ts-308,
Olongapo Townsite Subdivision)
Ardoin Street, East Bajac-Bajac,
Olongapo City, containing an area
of 465 sq. m. more or less,
declared and assessed in the
name of FERNANDO MAGCALE
under Tax Duration No. 19595
issued by the Assessor of
Olongapo City with an assessed
value of P1,860.00; bounded on
the
NORTH: By No. 6, Ardoin Street
SOUTH: By No. 2, Ardoin Street
EAST: By 37 Canda Street, and
WEST: By Ardoin Street.
All corners of the lot marked by conc. cylindrical monuments of
the Bureau of Lands as visible limits. ( Exhibit "A, " also Exhibit
"1" for defendant).
Apart from the stipulations in the printed portion of the aforestated
deed of mortgage, there appears a rider typed at the bottom of
the reverse side of the document under the lists of the properties
mortgaged which reads, as follows:
AND IT IS FURTHER AGREED that in the event the Sales Patent
on the lot applied for by the Mortgagors as herein stated is
released or issued by the Bureau of Lands, the Mortgagors
hereby authorize the Register of Deeds to hold the Registration of
same until this Mortgage is cancelled, or to annotate this
encumbrance on the Title upon authority from the Secretary of
Agriculture and Natural Resources, which title with annotation,
shall be released in favor of the herein Mortgage.
From the aforequoted stipulation, it is obvious that the mortgagee
(defendant Prudential Bank) was at the outset aware of the fact
that the mortgagors (plaintiffs) have already filed a Miscellaneous
Sales Application over the lot, possessory rights over which, were
mortgaged to it.
Exhibit "A" (Real Estate Mortgage) was registered under the
Provisions of Act 3344 with the Registry of Deeds of Zambales on
November 23, 1971.
On May 2, 1973, plaintiffs secured
an additional loan from defendant
Prudential Bank in the sum of
P20,000.00. To secure payment of
this additional loan, plaintiffs
executed in favor of the said
defendant another deed of Real
Estate Mortgage over the same
properties previously mortgaged in
Exhibit "A." (Exhibit "B;" also
Exhibit "2" for defendant). This
second deed of Real Estate
Mortgage was likewise registered
with the Registry of Deeds, this
time in Olongapo City, on May
2,1973.
On April 24, 1973, the Secretary of Agriculture
issued Miscellaneous Sales Patent No. 4776 over
 the parcel of land, possessory rights over which
were mortgaged to defendant Prudential Bank, in
favor of plaintiffs. On the basis of the aforesaid
Patent, and upon its transcription in the
Registration Book of the Province of Zambales,
Original Certificate of Title No. P-2554 was issued
in the name of Plaintiff Fernando Magcale, by the
Ex-Oficio Register of Deeds of Zambales, on May
15, 1972.
For failure of plaintiffs to pay their obligation to
defendant Bank after it became due, and upon
application of said defendant, the deeds of Real
Estate Mortgage (Exhibits "A" and "B") were
extrajudicially foreclosed. Consequent to the
foreclosure was the sale of the properties therein
mortgaged to defendant as the highest bidder in a
public auction sale conducted by the defendant
City Sheriff on April 12, 1978 (Exhibit "E"). The
auction sale aforesaid was held despite written
request from plaintiffs through counsel dated
March 29, 1978, for the defendant City Sheriff to
desist from going with the scheduled public
auction sale (Exhibit "D")." (Decision, Civil Case
No. 2443-0, Rollo, pp. 29-31).
Respondent Court, in a Decision dated November 3, 1978
declared the deeds of Real Estate Mortgage as null and void
(Ibid., p. 35).
On December 14, 1978, petitioner filed a Motion for
Reconsideration (Ibid., pp. 41-53), opposed by private
respondents on January 5, 1979 (Ibid., pp. 54-62), and in an
Order dated January 10, 1979 (Ibid., p. 63), the Motion for
Reconsideration was denied for lack of merit. Hence, the instant
petition (Ibid., pp. 5-28).
The first Division of this Court, in a Resolution dated March 9,
1979, resolved to require the respondents to comment (Ibid., p.
65), which order was complied with the Resolution dated May
18,1979, (Ibid., p. 100), petitioner filed its Reply on June 2,1979
(Ibid., pp. 101-112).
Thereafter, in the Resolution dated June 13, 1979, the petition
was given due course and the parties were required to submit
simultaneously their respective memoranda. (Ibid., p. 114).
On July 18, 1979, petitioner filed its Memorandum (Ibid., pp. 116-
144), while private respondents filed their Memorandum on
August 1, 1979 (Ibid., pp. 146-155).
In a Resolution dated August 10, 1979, this case was considered
submitted for decision (Ibid., P. 158).
In its Memorandum, petitioner raised the following issues:
1. WHETHER OR NOT THE DEEDS OF REAL ESTATE
MORTGAGE ARE VALID; AND
2. WHETHER OR NOT THE SUPERVENING ISSUANCE IN
FAVOR OF PRIVATE RESPONDENTS OF MISCELLANEOUS
SALES PATENT NO. 4776 ON APRIL 24, 1972 UNDER ACT
NO. 730 AND THE COVERING ORIGINAL CERTIFICATE OF
TITLE NO. P-2554 ON MAY 15,1972 HAVE THE EFFECT OF
INVALIDATING THE DEEDS OF REAL ESTATE MORTGAGE.
(Memorandum for Petitioner, Rollo, p. 122).
This petition is impressed with merit.
The pivotal issue in this case is whether or not a valid real estate
mortgage can be constituted on the building erected on the land
belonging to another.
The answer is in the affirmative.
In the enumeration of properties under Article 415 of the Civil
Code of the Philippines, this Court ruled that, "it is obvious that
the inclusion of "building" separate and distinct from the land, in
said provision of law can only mean that a building is by itself an
immovable property." (Lopez vs. Orosa, Jr., et al., L-10817-18,
Feb. 28, 1958; Associated Inc. and Surety Co., Inc. vs. Iya, et al.,
L-10837-38, May 30,1958).
Thus, while it is true that a mortgage of land necessarily includes,
in the absence of stipulation of the improvements thereon,
buildings, still a building by itself may be mortgaged apart from
the land on which it has been built. Such a mortgage would be
still a real estate mortgage for the building would still be
considered immovable property even if dealt with separately and
apart from the land (Leung Yee vs. Strong Machinery Co., 37
Phil. 644). In the same manner, this Court has also established
that possessory rights over said properties before title is vested
on the grantee, may be validly transferred or conveyed as in a
deed of mortgage (Vda. de Bautista vs. Marcos, 3 SCRA 438
[1961]).
Coming back to the case at bar, the records show, as aforestated
that the original mortgage deed on the 2-storey semi-concrete
residential building with warehouse and on the right of occupancy
on the lot where the building was erected, was executed on
November 19, 1971 and registered under the provisions of Act
3344 with the Register of Deeds of Zambales on November 23,
1971. Miscellaneous Sales Patent No. 4776 on the land was
issued on April 24, 1972, on the basis of which OCT No. 2554
was issued in the name of private respondent Fernando Magcale
on May 15, 1972. It is therefore without question that the original
mortgage was executed before the issuance of the final patent
and before the government was divested of its title to the land, an
event which takes effect only on the issuance of the sales patent
and its subsequent registration in the Office of the Register of
Deeds (Visayan Realty Inc. vs. Meer, 96 Phil. 515; Director of
Lands vs. De Leon, 110 Phil. 28; Director of Lands vs. Jurado, L-
14702, May 23, 1961; Pena "Law on Natural Resources", p. 49).
Under the foregoing considerations, it is evident that the
mortgage executed by private respondent on his own building
which was erected on the land belonging to the government is to
all intents and purposes a valid mortgage.
As to restrictions expressly mentioned on the face of
respondents' OCT No. P-2554, it will be noted that Sections 121,
122 and 124 of the Public Land Act, refer to land already acquired
under the Public Land Act, or any improvement thereon and
therefore have no application to the assailed mortgage in the
case at bar which was executed before such eventuality.
Likewise, Section 2 of Republic Act No. 730, also a restriction
appearing on the face of private respondent's title has likewise no
application in the instant case, despite its reference to
encumbrance or alienation before the patent is issued because it
refers specifically to encumbrance or alienation on the land itself
and does not mention anything regarding the improvements
existing thereon.
But it is a different matter, as regards the second mortgage
executed over the same properties on May 2, 1973 for an
additional loan of P20,000.00 which was registered with the
Registry of Deeds of Olongapo City on the same date. Relative
thereto, it is evident that such mortgage executed after the
issuance of the sales patent and of the Original Certificate of
Title, falls squarely under the prohibitions stated in Sections 121,
122 and 124 of the Public Land Act and Section 2 of Republic Act
730, and is therefore null and void.
Petitioner points out that private respondents, after physically
possessing the title for five years, voluntarily surrendered the
same to the bank in 1977 in order that the mortgaged may be
annotated, without requiring the bank to get the prior approval of
the Ministry of Natural Resources beforehand, thereby implicitly
authorizing Prudential Bank to cause the annotation of said
mortgage on their title.
However, the Court, in recently ruling on violations of Section 124
which refers to Sections 118, 120, 122 and 123 of
Commonwealth Act 141, has held:
... Nonetheless, we apply our earlier rulings
because we believe that as in pari delicto may not
be invoked to defeat the policy of the State neither
may the doctrine of estoppel give a validating
effect to a void contract. Indeed, it is generally
considered that as between parties to a contract,
validity cannot be given to it by estoppel if it is
prohibited by law or is against public policy (19
Am. Jur. 802). It is not within the competence of
any citizen to barter away what public policy by
law was to preserve (Gonzalo Puyat & Sons, Inc.
vs. De los Amas and Alino supra). ... (Arsenal vs.
IAC, 143 SCRA 54 [1986]).
This pronouncement covers only the previous transaction already
alluded to and does not pass upon any new contract between the
parties (Ibid), as in the case at bar. It should not preclude new
contracts that may be entered into between petitioner bank and
private respondents that are in accordance with the requirements
of the law. After all, private respondents themselves declare that
they are not denying the legitimacy of their debts and appear to
be open to new negotiations under the law (Comment; Rollo, pp.
95-96). Any new transaction, however, would be subject to
whatever steps the Government may take for the reversion of the
land in its favor.
PREMISES CONSIDERED, the decision of the Court of First
Instance of Zambales & Olongapo City is hereby MODIFIED,
declaring that the Deed of Real Estate Mortgage for P70,000.00
is valid but ruling that the Deed of Real Estate Mortgage for an
additional loan of P20,000.00 is null and void, without prejudice to
any appropriate action the Government may take against private
respondents.
SO ORDERED.
G.R. No. L-26371 September 30, 1969
MOBIL OIL PHILIPPINES, INC., plaintiff-appellant,
vs.
RUTH R. DIOCARES, ET AL., defendants-appellees.
Faylona, Berroya, Norte and Associates for plaintiff-appellant.
Vivencio G. Ibrado Jr. for defendants-appellees.
FERNANDO, J.:
It may very well be, as noted by jurists of repute, that to stress the
element of a promise as the basis of contracts is to acknowledge
the influence of natural law. 1 Nonetheless, it does not admit of
doubt that whether under the civil law or the common law, the
existence of a contract is unthinkable without one's word being
plighted. So the New Civil Code provides: "A contract is a
meeting of minds between two persons whereby one binds
himself, with respect to the other, to give something or to render
some service." 2 So it is likewise under American law. Thus: "A
contract is a promise or a set of promises for the breach of which
the law gives a remedy, or the performance of which the law in
some way recognizes as a duty." 3
The law may go further and require that certain formalities be
executed. Thus, for a mortgage to be validly constituted, "it is
indispensable, ..., that the document in which it appears be
recorded in the Registry of Property." The same codal provision
goes on: "If the instrument is not recorded, the mortgage is
nevertheless binding between the parties." 4
The question before us in this appeal from a lower court decision,
one we have to pass upon for the first time, is the effect, if any, to
be given to a mortgage contract admittedly not registered, only
the parties being involved in the suit. The lower court was of the
opinion that while it "created a personal obligation [it] did not
establish a real estate mortgage." 5 It did not decree foreclosure
therefor. Plaintiff-appellant appealed. We view the matter
differently and reverse the lower court.
The case for the plaintiff, Mobil Oil Philippines, Inc., now
appellant, was summarized in the lower court order of February
25, 1966, subject of this appeal. Thus: "In its complaint plaintiff
alleged that on Feb. 9, 1965 defendants Ruth R. Diocares and
Lope T. Diocares entered into a contract of loan and real estate
mortgage wherein the plaintiff extended to the said defendants a
loan of P45,000.00; that said defendants also agreed to buy from
the plaintiff on cash basis their petroleum requirements in an
amount of not less than 50,000 liters per month; that the said
defendants will pay to the plaintiff 9-1/2% per annum on the
diminishing balance of the amount of their loan; that the
defendants will repay the said loan in monthly installments of
P950.88 for a period of five (5) years from February 9, 1965; that
to secure the performance of the foregoing obligation they
executed a first mortgage on two parcels of land covered by
Transfer Certificates of Title Nos. T-27136 and T-27946, both
issued by the Register of Deeds of Bacolod City. The agreement
further provided that in case of failure of the defendants to pay
any of the installments due and purchase their petroleum
requirements in the minimum amount of 50,000 liters per month
from the plaintiff, the latter has the right to foreclose the mortgage
or recover the payment of the entire obligation or its remaining
unpaid balance; that in case of foreclosure the plaintiff shall be
entitled to 12% of the indebtedness as damages and attorney's
fees. A copy of the loan and real estate mortgage contract
executed between the plaintiff and the defendants is attached to
the complaint and made a part thereof. The complaint further
alleges that the defendant paid only the amount of P1,901.76 to
the plaintiff, thus leaving a balance of P43,098.24, excluding
interest, on their indebtedness. The said defendants also failed to
buy on cash basis the minimum amount of petroleum which they
agreed to purchase from the plaintiff. The plaintiff, therefore,
prayed that the defendants be ordered to pay the amount of
P43,098.24, with interest at 9-1/2% per annum from the date it fell
due, and in default of such payment that the mortgaged
properties be sold and the proceeds applied to the payment of
defendants' obligation." 6
Defendants, Ruth R. Diocares and Lope T. Diocares, now
appellees, admitted their indebtedness as set forth above,
denying merely the alleged refusal to pay, the truth, according to
them, being that they sought for an extension of time to do so,
inasmuch as they were not in a position to comply with their
obligation. They further set forth that they did request plaintiff to
furnish them with the statement of accounts with the view of
paying the same on installment basis, which request was,
however, turned down by the plaintiff.
Then came a motion from the plaintiff for a judgment on the
pleadings, which motion was favorably acted on by the lower
court. As was stated in the order appealed from: "The answer of
the defendants dated October 21, 1965 did not raise any issue.
On the contrary, said answer admitted the material allegations of
the complaint. The plaintiff is entitled to a judgment on the
pleadings." 7
As to why the foreclosure sought by plaintiff was denied, the
lower court order on appeal reads thus: "The Court cannot,
however, order the foreclosure of the mortgage of properties, as
prayed for, because there is no allegation in the complaint nor
does it appear from the copy of the loan and real estate mortgage
contract attached to the complaint that the mortgage had been
registered. The said loan agreement although binding among the
parties merely created a personal obligation but did not establish
a real estate mortgage. The document should have been
registered. (Art. 2125, Civil Code of the Phil.)" 8 The dispositive
portion is thus limited to ordering defendants "to pay the plaintiff
the account of P43,098.24, with interest at the rate of 9-1/2% per
annum from the date of the filing of the complaint until fully paid,
plus the amount of P2,000.00 as attorneys' fees, and the costs of
the suit." 9
Hence this appeal, plaintiff-appellant assigning as errors the
holding of the lower court that no real estate mortgage was
established and its consequent refusal to order the foreclosure of
the mortgaged properties. As set forth at the outset, we find the
appeal meritorious. The lower court should not have held that no
real estate mortgage was established and should have ordered
its foreclosure.
The lower court predicated its inability to order the foreclosure in
view of the categorical nature of the opening sentence of the
governing article 10 that it is indispensable, "in order that a
mortgage may be validly constituted, that the document in which
it appears be recorded in the Registry of Property." Note that it
ignored the succeeding sentence: "If the instrument is not
recorded, the mortgage is nevertheless binding between the
parties." Its conclusion, however, is that what was thus created
was merely "a personal obligation but did not establish a real
estate mortgage."
Such a conclusion does not commend itself for approval. The
codal provision is clear and explicit. Even if the instrument were
not recorded, "the mortgage is nevertheless binding between the
parties." The law cannot be any clearer. Effect must be given to it
as written. The mortgage subsists; the parties are bound. As
between them, the mere fact that there is as yet no compliance
with the requirement that it be recorded cannot be a bar to
foreclosure.1awphîl.nèt
A contrary conclusion would manifest less than full respect to
what the codal provision ordains. The liability of the mortgagor is
therein explicitly recognized. To hold, as the lower court did, that
no foreclosure would lie under the circumstances would be to
render the provision in question nugatory. That we are not
allowed to do. What the law requires in unambiguous language
must be lived up to. No interpretation is needed, only its
application, the undisputed facts calling for it. 11
Moreover to rule as the lower court did would be to show less
than fealty to the purpose that animated the legislators in giving
expression to their will that the failure of the instrument to be
recorded does not result in the mortgage being any the less
"binding between the parties." In the language of the Report of
the Code Commission: "In article [2125] an additional provision is
made that if the instrument of mortgage is not recorded, the
mortgage is nevertheless binding between the parties." 12 We are
not free to adopt then an interpretation, even assuming that the
codal provision lacks the forthrightness and clarity that this
particular norm does and, therefore, requires construction, that
would frustrate or nullify such legislative objective.
Nor is the reason difficult to discern why such an exception
should be made to the rule that is indispensable for a mortgage to
be validly constituted that it be recorded. Equity so demands, and
justice is served. There is thus full acknowledgment of the binding
effect of a promise, which must be lived up to, otherwise the
freedom a contracting party is supposed to possess becomes
meaningless. It could be said of course that to allow foreclosure
in the absence of such a formality is to offend against the
demands of jural symmetry. What is "indispensable" may be
dispense with. Such an objection is far from fatal. This would not
be the first time when logic yields to what is fair and what is just.
To such an overmastering requirement, law is not immune.
WHEREFORE, the lower court order of February 25, 1966 is
affirmed with the modification that in default of the payment of the
above amount of P43,028.94 with interests at the rate of 9-1/2%
per annum from the date of the filing of the complaint, that the Before us is a Petition for Review under Rule 45 of the
[1]

mortgage be foreclosed with the properties subject thereof being Rules of Court, seeking to set aside the August 22, 2001
sold and the proceeds of the sale applied to the payment of the Decision of the Court of Appeals (CA) in CA-GR CV No.
[2]

amounts due the plaintiff in accordance with law. With costs 49749. The dispositive portion of the Decision reads as
against defendants-appellees. follows:

WHEREFORE, premises considered[,] the judgment appealed from

is hereby AFFIRMED, with x x x MODIFICATION as follows:

1. The amount of actual damages and losses is reduced

from P985,722.15 to merely P380,713.55 with legal
interest from the date of the filing of the
PHILIPPINE NATIONAL BANK, petitioner, vs. RBL complaint. The interest payable on the loan is
ENTERPRISES, INC.; RAMON B. LACSON SR.; and ordered reduced by using the agreed interest rate of
18% per annum in the computation[;]
Spouses EDWARDO and HERMINIA
LEDESMA, respondents. 2. The amount of moral damages is reduced
from P100,000.00 to P50,000.00;

DECISION 3. The amount of exemplary damages is reduced

from P50,000.00 to P30,000.00; and
PANGANIBAN, J.:
4. The award of attorneys fees is reduced
from P200,000.00 to P50,000.00.[3]
Having released fifty percent of the loan proceeds on the
basis of the signed loan and mortgage contracts, petitioner
can no longer require the borrowers to secure the lessors
conformity to the Mortgage Contract as a condition precedent The Facts
to the release of the loan balance. The conformity of the lessor
was not necessary to protect the banks interest, because
The facts of the case are narrated in the assailed Decision
respondents were unquestionably the absolute owners of the
of the CA, as follows:
mortgaged property. Furthermore, the registration of the
mortgage created a real right to the properties which, in
1. On April 28, 1993, [respondents] instituted an action against
subsequent transfers by the mortgagor, the transferees are
[Petitioner] PNB and the Provincial Sheriff of Negros Occidental
legally bound to respect.
alleging among others, the following:

(a) Sometime in 1987, [respondents] opened a prawn

The Case hatchery in San Enrique, Negros Occidental, and for this
purpose, leased from Nelly Bedrejo a parcel of land where
the operations were conducted;
 (b) In order to increase productions and improve the
hatchery facilities, [respondents] applied for and was
approved a loan of P2,000,000.00, by [Petitioner] PNB. To
secure its payment, [respondents] executed in favor of PNB,
a real estate mortgage over two (2) parcels of land, located
at Bago City, Negros Occidental, covered by Transfer
Certificate of Title Nos. T-13005 and T-12642 in the names
of [respondents], and another real [estate] and chattel
mortgage over the buildings, culture tanks and other
hatchery facilities located in the leased property of Nelly
Bedrejo;
(c) PNB partially released to [respondents] on several dates,
the total sum of P1,000,000.00 less the advance interests,
which amount [respondents] used for introducing
improvements on the leased property where the hatchery
business was located.
(d) During the mid-part of the construction of the
improvements, PNB refused to release the balance
of P1,000,000.00 allegedly because [respondents] failed to
comply with the banks requirement that Nelly Bedrejo should
execute an undertaking or a lessors conformity provided
in Real Estate and Chattel Mortgage contract dated August
3, 1989, which states, par. 9.07. It is a condition of this
mortgage that while the obligations remained unpaid, the
acquisition by the lessor of the permanent improvements
covered by this Real Estate Mortgage as provided for in the
covering Lease Contract, shall be subject to this
mortgage. For this purpose, the mortgagor hereby
undertakes to secure the lessors conformity hereto.
(e) For said alleged failure of [respondents] to comply with
the additional requirement and the demand of PNB to pay
the released amount of P1,000,000.00, PNB foreclosed the
mortgaged properties, to the detriment of [respondents].
(f) Due to the non-release of the remaining balance of the
loan applied for and approved, the productions-operations of
the business were disrupted causing losses to [respondents],
and thereafter, to the closure of the business.
2. On June 29, 1990, [Petitioner] PNB filed its Answer with
Counterclaim alleging that the lessors conformity was not an
additional requirement but was already part of the terms and
conditions contained in the Real Estate and Chattel Mortgage dated
August 3, 1989, executed between [respondents] and [petitioner];
and that the release of the balance of the loan was conditioned on the
compliance and submission by the [respondents] of the required
lessors conformity.
3. On November 8, 1993, a writ of preliminary injunction was issued
by the court a quo prohibiting PNB and the Provincial Sheriff of
Negros Occidental from implementing the foreclosure proceedings
including the auction sale of the properties of the [respondents]
subject matter of the real [estate] and chattel mortgages.
[4]
The Regional Trial Court (RTC) ruled that Philippine
National Bank (PNB) had breached its obligation under the
Contract of Loan and should therefore be held liable for the
consequential damages suffered by respondents. The trial
court held that PNBs refusal to release the balance of the loan
was unjustified for the following reasons: 1) the banks partial
release of the loan of respondents had estopped it from
requiring them to secure the lessors signature on the Real
Estate and Chattel Mortgage Contract; 2) Nelly Bedrejo, the
lessor, had no interest in the property and was not in any
manner connected with respondents business; thus, the
fulfillment of the condition was legally impossible; and 3) the
interests of PNB were amply protected, as the loan had overly
been secured by collaterals with a total appraised value
of P3,088,000.
The RTC further observed that while the loan would
mature in three years, the lease contract between Bedrejo and
respondents would expire in ten years. According to a
provision in the Contract, upon its expiration, all improvements
found on the leased premises would belong to the
lessor. Thus, in the event of nonpayment of the loan at its
maturity, PNB could still foreclose on those improvements, the
subject of the chattel mortgage.
 Ruling of the Court of Appeals
Affirming the lower court, the CA held that Nelly Bedrejo,
who was not a party to the Mortgage Contract, could not be
compelled to affix her signature thereto. The appellate court
further ruled that the registration of the mortgage not only
revealed PNBs intention to give full force and effect to the
instrument but, more important, gave the mortgagee ample
security against subsequent owners of the chattels.
The CA, however, reduced the amount of actual damages
for lack of competent proof of the lost income and the
unrealized profits of RBL, as well as for the additional
expenses and liabilities incurred by respondents as a result of
petitioners refusal to release the balance of the loan. Moral
and exemplary damages as well as attorneys fees were
likewise lessened.
Hence, this Petition. [5]
Issues
Petitioner raises the following alleged errors for our
consideration:
A.
Whether or not the Court of Appeals committed serious error
when it held that Petitioner PNB has no legal basis to require
respondents to secure the conformity of the lessor and owner of
the property where their hatchery business is being conducted
notwithstanding that respondents obligated themselves in no
uncertain terms to secure such conformity pursuant to par. 9.07
of the Real Estate and Chattel Mortgage and considering further
that respondents authority to mortgage the lessors property and
leasehold rights are annotated [on] the titles of the mortgage[d]
properties.
B.
Whether or not the Court of Appeals erred in holding Petitioner
PNB liable for actual, moral and exemplary damages as well as
attorneys fees for the non-release of the balance of the loan
applied by respondents even though there is no evidence that
such non-release was attended by malice or bad faith.[6]
Simply put, the issues are as follows: 1) whether the non-
release of the balance of the loan by PNB is justified; and 2)
whether it is liable for actual, moral and exemplary damages
as well as attorneys fees.
The Courts Ruling
The Petition is partly meritorious.
First Issue:
Was PNBs Non-Release of the Loan Justified?
Petitioner maintains that the lessors signature in
the conforme portion of the Real Estate and Chattel Mortgage
Contract was a condition precedent to the release of the
balance of the loan to respondents. Petitioner invokes
paragraph 9.07 of the Contract as legal basis for insisting upon
respondents fulfillment of the aforesaid clause.
We are not persuaded. If the parties truly intended to
suspend the release of the P1,000,000 balance of the loan
until the lessors conformity to the Mortgage Contract would
have been obtained, such condition should have been plainly
stipulated either in that Contract or in the Credit
Agreement. The tenor of the language used in paragraph.
9.07, as well as its position relative to the whole Contract,
negated the supposed intention to make the release of the
loan subject to the fulfillment of the clause. From a mere
reading thereof, respondents could not reasonably be
expected to know that it was petitioners unilateral intention to
suspend the release of the P1,000,000 balance until the
lessors conformity to the Mortgage Contract would have been
obtained.
Respondents had complied with all the requirements set
forth in the recommendation and approval sheet forwarded by
petitioners main office to the Bacolod branch for
implementation; and the Credit Agreement had been executed
thereafter. Naturally, respondents were led to believe and to
expect the full release of their approved loan
accommodation. This belief was bolstered by the initial release
of the first P1,000,000 portion of the loan.
We agree with the RTC in its ruling on this point:
x x x. In the instant case, there is a clear and categorical showing that
when the parties have finally executed the contract of loan and the
Real Estate and Chattel Mortgage Contract, the applicant complied
with the terms and conditions imposed by defendant bank on the
recommendation and approval sheet, hence, defendant bank waived
its right to further require the plaintiffs other conditions not specified
in the previous agreement. Should there [appear] any obscurity after
such execution, the same should not favor the party who caused such
obscurity. Therefore, such obscurity must be construed against the
party who drew up the contract. Art. 1377 of the Civil Code applies x
x x [even] with greater force [to] this type of contract where the
contract is already prepared by a big concern and [the] other party
merely adheres to it. (Citations omitted)
[7]
Conditions Precedent
Conditions precedent are not favored. Unless impelled by
plain and unambiguous language or by necessary implication,
courts will not construe a stipulation as laden with such
burden, particularly when that stipulation would result in a
forfeiture or in inequitable consequences. [8]
Nowhere did PNB explicitly state that the release of the
second half of the loan accommodation was subject to the
mortgagors procurement of the lessors conformity to the
Mortgage Contract. Absent such a condition, the efficacy of
the Credit Agreement stood, and petitioner was obligated to
release the balance of the loan. Its refusal to do so constituted
a breach of its reciprocal obligation under the Loan
Agreement.
Flimsy was the insistence of petitioner that the lessor
should be compelled to sign the Mortgage Contract, since she
was allegedly a beneficiary thereof. The chattel mortgage was
a mere accessory to the contract of loan executed between
PNB and RBL. The latter was undisputably the absolute owner
of the properties covered by the chattel mortgage. Clearly, the
lessor was never a party to either the loan or the Mortgage
Contract.
The Real Nature of a Mortgage
The records show that all the real estate and chattel
mortgages were registered with the Register of Deeds of Bago
City, Negros Occidental, and annotated at the back of the
mortgaged titles. Thus, petitioner had ample security to protect
its interest. As correctly held by the appellate court, the lessors
nonconformity to the Mortgage Contract would not cause
petitioner any undue prejudice or disadvantage, because the
registration and the annotation were considered sufficient
notice to third parties that the property was subject to an
encumbrance. [9]
Article 2126 of the Civil Code describes the real nature of
a mortgage: it is a real right following the property, such that in
subsequent transfers by the mortgagor, the transferee must
respect the mortgage. A registered mortgage lien is
considered inseparable from the property inasmuch as it is a
right in rem. The mortgage creates a real right or a lien
[10]
which, after being recorded, follows the chattel wherever it
goes. Under Article 2129 of the same Code, the mortgage on
the property may still be foreclosed despite the transfer.
Indeed, even if the mortgaged property is in the
possession of the debtor, the creditor is still protected. To
protect the latter from the formers possible disposal of the
property, the chattel mortgage is made effective against third
persons by the process of registration.
PNB violated the Loan Agreement when it refused to
release the P1,000,000 balance. As regards the partial release
of that amount, over which respondents executed three
Promissory Notes, the bank is deemed to have complied with
its reciprocal obligation. The Promissory Notes compelled
them to pay that initial amount when it fell due. Their failure to
pay any overdue amortizations under those Promissory Notes
rendered them liable thereunder.
Effect of Failure of Consideration
Since PNB failed to release the P1,000,000 balance of the
loan, the Real Estate and Chattel Mortgage Contract became
unenforceable to that extent. Relevantly, we quote this Courts
ruling in Central Bank of the Philippines v. Court of Appeals: [11]
The consideration of the accessory contract of real estate mortgage is
the same as that of the principal contract. For the debtor, the
consideration of his obligation to pay is the existence of a debt. Thus,
in the accessory contract of real estate mortgage, the consideration of
the debtor in furnishing the mortgage is the existence of a valid,
voidable, or unenforceable debt.
xxxxxxxxx
[W]hen there is partial failure of consideration, the mortgage
becomes unenforceable to the extent of such failure. Where the
indebtedness actually owing to the holder of the mortgage is less
than the sum named in the mortgage, the mortgage cannot be
enforced for more than the actual sum due. [12]
Second Issue:
Propriety of Award for Damages
and Attorneys Fees
In reducing the award for actual damages
from P985,722.15 to P380,713.55, the CA explained:
The alleged projected cash flow and net income for the 5-year period
of operations were not substantiated by any other evidence to
sufficiently establish the attainability of the projection. No evidence
was also introduced to show the accounts payable of and other
expenses incurred by [respondents]. The court a quo therefore, erred
when it ruled that [respondents] incurred actual damages and losses
amounting to P985,722.15 from 1990 to 1992, when no evidence
was presented to establish the same.
Compensatory or actual damages cannot be presumed. They cannot
be allowed if there are no specific facts, which should be a basis for
measuring the amount. The trial court cannot rely on speculation as
to the fact and amount of damages, but must depend on actual proof faith. Concededly, the bank was remiss in its obligation to
[15]

that damage had been suffered. The amount of loss must not only be release the balance of the loan extended to
capable of proof but must actually be proven with reasonable degree respondents. Nothing in the findings of the trial and the
of certainty, premised upon competent proof or best evidence to appellate courts, however, sufficiently indicate a deliberate
support his claim for actual damages. intent on the part of PNB to cause harm to respondents.
Exemplary damages, in turn, are intended to serve as an
At most, the court a quo may declare as lost income and unrealized
example or a correction for the public good. Courts may award
profits, the amount of P380,713.55 for the 3-year period of business
them if the defendant is found to have acted in a wanton,
operations from 1990 when PNB refused to release the loans until
fraudulent, reckless, oppressive, or malevolent
closure of business in 1992, based on the highest quarterly taxable
manner. Given the above premises and the circumstances
[16]

income earned in 1989 in the amount of P28,754.80, with a

here obtaining, the exemplary damages granted by the
conservative and reasonable increase of 10% per year on the net
courts a quo cannot be sustained.
income. The amount of actual damages is therefore, reduced
from P985,722.15 to P380,713.55 x x x. [13]
Finally, the award of attorneys fees as part of the
damages is just and equitable under the
We see no reason to overturn these findings. True, circumstances. Such fees may be awarded when parties are
[17]

indemnification for damages comprises not only the loss that compelled to litigate or to incur expenses to protect their
was actually suffered, but also the profits -- referred to as interest by reason of an unjustified act of the opposing
compensatory damages -- that the obligee failed to obtain. To party. In the present case, petitioners refusal to release the
[18]

justify a grant of actual or compensatory damages, however, it balance of the loan has compelled respondents to institute an
would be necessary to prove the amount of loss with a action for injunction and damages in order to protect their clear
reasonable degree of certainty, based upon competent proof rights and interests.
and the best evidence obtainable by the injured party. The [14]

WHEREFORE, the Petition is PARTLY GRANTED. The

quarterly income tax report of Respondent RBL Enterprises,
assailed Decision is hereby AFFIRMED, with
Inc., which was presented by petitioner and used by the
the MODIFICATION that the award of actual and exemplary
appellate court as basis for computing the average profits
damages is deleted. No costs.
earned by respondents in their business, provided a
reasonable means for ascertaining their claims for lost SO ORDERED.
profits. Thus, we believe that the assessment by the Court of
Appeals was fair and just.
On the other hand, the award for moral and exemplary PABLO P. GARCIA,
damages should be deleted, because respondents failed to
Petitioner, v YOLANDA VALDEZ VILLAR,
prove malice or bad faith on the part of petitioner.
Respondent.
Moral damages are explicitly authorized in breaches of
contract when the defendant has acted fraudulently or in bad
LEONARDO-DE CASTRO, J.: REAL ESTATE MORTGAGE

Entry No. 6537/T-RT-67970(253279) MORTGAGE

[1]
This is a petition for review on certiorari of the February
27, 2003 Decision[2] and July 2, 2003 Resolution[3] of the Court of
Appeals in CA-G.R. SP No. 72714, which reversed the May 27,
2002 Decision[4] of the Regional Trial Court (RTC), Branch 92 of
Quezon City in Civil Case No. Q-99-39139.
In favor of Yolanda Valdez Villar m/to Jaime Villar
to guarantee a principal obligation in the sum
of P2,200,000- mortgagees consent necessary in case
of subsequent encumbrance or alienation of the
property; Other conditions set forth in Doc. No. 97,
Book No. VI, Page No. 20 of the Not. Pub. of Diana
P. Magpantay

Date of Instrument: 7-6-93

Lourdes V. Galas (Galas) was the original owner of a piece
of property (subject property) located at Malindang St., Quezon City,
covered by Transfer Certificate of Title (TCT) No. RT-
67970(253279).[5]
On July 6, 1993, Galas, with her daughter, Ophelia G. Pingol
(Pingol), as co-maker, mortgaged the subject property to Yolanda
Valdez Villar (Villar) as security for a loan in the amount of Two
Million Two Hundred Thousand Pesos (P2,200,000.00).[6]
Date of Inscription: 7-7-93
SECOND REAL ESTATE MORTGAGE
Entry No. 821/T-RT-67970(253279) MORTGAGE
In favor of Pablo Garcia m/to Isabela Garcia to
guarantee a principal obligation in the sum
of P1,800,000.00 mortgagees consent necessary in
case of subsequent encumbrance or alienation of the
property; Other conditions set forth in Doc. No. 08,
Book No. VII, Page No. 03 of the Not. Pub. of
Azucena Espejo Lozada

On October 10, 1994, Galas, again with Pingol as her co- Date of Instrument: 10/10/94
Date of Inscription: 10/11/94
maker, mortgaged the same subject property to Pablo P. Garcia
LRC Consulta No. 169[8]
(Garcia) to secure her loan of One Million Eight Hundred Thousand
Pesos (P1,800,000.00).[7]
On November 21, 1996, Galas sold the subject property to
Both mortgages were annotated at the back of TCT No. RT- Villar for One Million Five Hundred Thousand Pesos
67970 (253279), to wit: (P1,500,000.00), and declared in the Deed of Sale[9] that such
property was free and clear of all liens and encumbrances of any Villar, in her Answer,[17] claimed that the complaint stated no
kind whatsoever.[10] cause of action and that the second mortgage was done in bad faith
as it was without her consent and knowledge. Villar alleged that she
On December 3, 1996, the Deed of Sale was registered and, only discovered the second mortgage when she had the Deed of Sale
consequently, TCT No. RT-67970(253279) was cancelled and TCT registered. Villar blamed Garcia for the controversy as he accepted
No. N-168361[11] was issued in the name of Villar. Both Villars and the second mortgage without prior consent from her.She averred that
Garcias mortgages were carried over and annotated at the back of there could be no subrogation as the assignment of credit was done
Villars new TCT.[12] with neither her knowledge nor prior consent. Villar added that
Garcia should seek recourse against Galas and Pingol, with whom he
On October 27, 1999, Garcia filed a Petition had privity insofar as the second mortgage of property is concerned.
[13]
for Mandamus with Damages against Villar before the RTC,
Branch 92 of Quezon City. Garcia subsequently amended his petition On May 23, 2000, the RTC issued a Pre-Trial
[18]
to a Complaint for Foreclosure of Real Estate Mortgage with Order wherein the parties agreed on the following facts and issue:
Damages.[14] Garcia alleged that when Villar purchased the subject
property, she acted in bad faith and with malice as she knowingly STIPULATIONS OF FACTS/ADMISSIONS
and willfully disregarded the provisions on laws on judicial and The following are admitted:

extrajudicial foreclosure of mortgaged property. Garcia further 1. the defendant admits the second mortgage
claimed that when Villar purchased the subject property, Galas was annotated at the back of TCT No. RT-67970 of
Lourdes V. Galas with the qualification that the
relieved of her contractual obligation and the characters of creditor existence of said mortgage was discovered only
and debtor were merged in the person of Villar. Therefore, Garcia in 1996 after the sale;
argued, he, as the second mortgagee, was subrogated to Villars
2. the defendant admits the existence of the
original status as first mortgagee, which is the creditor with the right annotation of the second mortgage at the back of
to foreclose. Garcia further asserted that he had demanded payment the title despite the transfer of the title in the
name of the defendant;
from Villar,[15] whose refusal compelled him to incur expenses in
filing an action in court.[16] 3. the plaintiff admits that defendant Yolanda
Valdez Villar is the first mortgagee;

4. the plaintiff admits that the first mortgage was
annotated at the back of the title of the
mortgagor Lourdes V. Galas; and
5. the plaintiff admits that by virtue of the deed of
sale the title of the property was transferred from
the previous owner in favor of defendant
Yolanda Valdez Villar.
xxxx
ISSUE
Whether or not the plaintiff, at this point in time,
could judicially foreclose the property in question.
On June 8, 2000, upon Garcias manifestation, in open court,
of his intention to file a Motion for Summary Judgment,[19] the RTC
issued an Order[20] directing the parties to simultaneously file their
respective memoranda within 20 days.
On June 26, 2000, Garcia filed a Motion for Summary
Judgment with Affidavit of Merit[21] on the grounds that there was no
genuine issue as to any of the material facts of the case and that he
was entitled to a judgment as a matter of law.
On June 28, 2000, Garcia filed his Memorandum[22] in
support of his Motion for Summary Judgment and in compliance
with the RTCs June 8, 2000 Order. Garcia alleged that his equity of
redemption had not yet been claimed since Villar did not foreclose
the mortgaged property to satisfy her claim.
On August 13, 2000, Villar filed an Urgent Ex-Parte Motion
for Extension of Time to File Her Memorandum.[23] This, however,
was denied[24] by the RTC in view of Garcias Opposition.[25]
On May 27, 2002, the RTC rendered its Decision, the
dispositive portion of which reads:
WHEREFORE, the foregoing premises considered,
judgment is hereby rendered in favor of the plaintiff
Pablo P. Garcia and against the defendant Yolanda
V. Villar, who is ordered to pay to the former within
a period of not less than ninety (90) days nor more
than one hundred twenty (120) days from entry of
judgment, the sum of P1,800,000.00 plus legal
interest from October 27, 1999 and upon failure of
the defendant to pay the said amount within the
prescribed period, the property subject matter of the
2nd Real Estate Mortgage dated October 10, 1994
shall, upon motion of the plaintiff, be sold at public
auction in the manner and under the provisions of
Rules 39 and 68 of the 1997 Revised Rules of Civil
Procedure and other regulations governing sale of
real estate under execution in order to satisfy the
judgment in this case. The defendant is further
ordered to pay costs.[26]
 The RTC declared that the direct sale of the subject property
to Villar, the first mortgagee, could not operate to deprive Garcia of
his right as a second mortgagee. The RTC said that upon Galass
failure to pay her obligation, Villar should have foreclosed the
subject property pursuant to Act No. 3135 as amended, to provide
junior mortgagees like Garcia, the opportunity to satisfy their claims
from the residue, if any, of the foreclosure sale proceeds. This, the
RTC added, would have resulted in the extinguishment of the
[27]
mortgages.
The RTC held that the second mortgage constituted in
Garcias favor had not been discharged, and that Villar, as the new
registered owner of the subject property with a subsisting mortgage,
was liable for it.[28]
[29]
Villar appealed this Decision to the Court of Appeals
based on the arguments that Garcia had no valid cause of action
against her; that he was in bad faith when he entered into a contract
of mortgage with Galas, in light of the restriction imposed by the
first mortgage; and that Garcia, as the one who gave the occasion for
the commission of fraud, should suffer. Villar further asseverated
that the second mortgage is a void and inexistent contract
considering that its cause or object is contrary to law, moral, good
customs, and public order or public policy, insofar as she was
concerned.[30]
Garcia, in his Memorandum,[31] reiterated his position that
his equity of redemption remained unforeclosed since Villar did not
institute foreclosure proceedings. Garcia added that the mortgage,
until discharged, follows the property to whomever it may be
transferred no matter how many times over it changes hands as long
as the annotation is carried over.[32]
The Court of Appeals reversed the RTC in a Decision dated
February 27, 2003, to wit:
WHEREFORE, the decision appealed from
is REVERSED and another one
entered DISMISSING the complaint for judicial
foreclosure of real estate mortgage with damages.[33]
The Court of Appeals declared that Galas was free to
mortgage the subject property even without Villars consent as the
restriction that the mortgagees consent was necessary in case of a
subsequent encumbrance was absent in the Deed of Real Estate
Mortgage. In the same vein, the Court of Appeals said that the sale of
the subject property to Villar was valid as it found nothing in the
records that would show that Galas violated the Deed of Real Estate
Mortgage prior to the sale.[34]
In dismissing the complaint for judicial foreclosure of real
estate mortgage with damages, the Court of Appeals held that Garcia
had no cause of action against Villar in the absence of evidence
showing that the second mortgage executed in his favor by Lourdes
V. Galas [had] been violated and that he [had] made a demand on the
latter for the payment of the obligation secured by said mortgage
prior to the institution of his complaint against Villar.[35]
On March 20, 2003, Garcia filed a Motion
[36]
Reconsideration on the ground that the Court of Appeals failed to
resolve the main issue of the case, which was whether or not Garcia,
as the second mortgagee, could still foreclose the mortgage after the
subject property had been sold by Galas, the mortgage debtor, to
Villar, the mortgage creditor.
This motion was denied for lack of merit by the Court of
Appeals in its July 2, 2003 Resolution.
Garcia is now before this Court, with the same arguments he
posited before the lower courts. In his Memorandum,[37] he added
that the Deed of Real Estate Mortgage contained a stipulation, which
is violative of the prohibition on pactum commissorium.
Issues
The crux of the controversy before us boils down to the
propriety of Garcias demand upon Villar to either pay Galass debt
of P1,800,000.00, or to judicially foreclose the subject property to
satisfy the aforesaid debt. This Court will, however, address the
following issues in seriatim:
1. Whether or not the second mortgage to Garcia was valid;
2. Whether or not the sale of the subject property to Villar
for was valid;
3. Whether or not the sale of the subject property to Villar
was in violation of the prohibition on pactum
commissorium;
4. Whether or not Garcias action for foreclosure of
mortgage on the subject property can prosper.
Discussion
Validity of second mortgage to Garcia
and sale of subject property to Villar
At the onset, this Court would like to address the validity of
the second mortgage to Garcia and the sale of the subject property to
Villar. We agree with the Court of Appeals that both are valid under
the terms and conditions of the Deed of Real Estate Mortgage
executed by Galas and Villar.
While it is true that the annotation of the first mortgage to
Villar on Galass TCT contained a restriction on further
encumbrances without the mortgagees prior consent, this restriction
was nowhere to be found in the Deed of Real Estate Mortgage. As
this Deed became the basis for the annotation on Galass title, its
terms and conditions take precedence over the standard, stamped
annotation placed on her title. If it were the intention of the parties to
impose such restriction, they would have and should have stipulated
such in the Deed of Real Estate Mortgage itself.
Neither did this Deed proscribe the sale or alienation of the
subject property during the life of the mortgages. Garcias insistence
that Villar should have judicially or extrajudicially foreclosed the
mortgage to satisfy Galass debt is misplaced. The Deed of Real
Estate Mortgage merely provided for the options Villar may
undertake in case Galas or Pingol fail to pay their loan. Nowhere was
it stated in the Deed that Galas could not opt to sell the subject
property to Villar, or to any other person. Such stipulation would
have been void anyway, as it is not allowed under Article 2130 of the
Civil Code, to wit:
Art. 2130. A stipulation forbidding the
owner from alienating the immovable mortgaged
shall be void.
Prohibition on pactum commissorium
Garcia claims that the stipulation appointing Villar, the
mortgagee, as the mortgagors attorney-in-fact, to sell the property in
case of default in the payment of the loan, is in violation of the
prohibition on pactum commissorium, as stated under Article 2088 of
the Civil Code, viz:
Art. 2088. The creditor cannot appropriate
the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is
null and void.
The power of attorney provision in the Deed of Real Estate
Mortgage reads:
5. Power of Attorney of MORTGAGEE. Effective
upon the breach of any condition of this Mortgage,
and in addition to the remedies herein stipulated, the
MORTGAGEE is likewise appointed attorney-in-
fact of the MORTGAGOR with full power and
authority to take actual possession of the mortgaged
properties, to sell, lease any of the mortgaged
properties, to collect rents, to execute deeds of sale,
lease, or agreement that may be deemed convenient,
to make repairs or improvements on the mortgaged
properties and to pay the same, and perform any
other act which the MORTGAGEE may deem
convenient for the proper administration of the
mortgaged properties. The payment of any expenses
advanced by the MORTGAGEE in connection with
the purpose indicated herein is also secured by this
Mortgage. Any amount received from the sale,
disposal or administration abovementioned maybe
applied by assessments and other incidental
expenses and obligations and to the payment of
original indebtedness including interest and penalties
thereon. The power herein granted shall not be
 revoked during the life of this Mortgage and all acts
which may be executed by the MORTGAGEE by
virtue of said power are hereby ratified.[38]
The following are the elements of pactum commissorium:
(1) There should be a property mortgaged by way of security
for the payment of the principal obligation; and
(2) There should be a stipulation for automatic appropriation
by the creditor of the thing mortgaged in case of non-payment of the
principal obligation within the stipulated period.[39]
Villars purchase of the subject property did not violate the
prohibition on pactum commissorium. The power of attorney
provision above did not provide that the ownership over the subject
property would automatically pass to Villar upon Galass failure to
pay the loan on time. What it granted was the mere appointment of
Villar as attorney-in-fact, with authority to sell or otherwise dispose
of the subject property, and to apply the proceeds to the payment of
the loan.[40] This provision is customary in mortgage contracts, and is
in conformity with Article 2087 of the Civil Code, which reads:
Art. 2087. It is also of the essence of these
contracts that when the principal obligation becomes
due, the things in which the pledge or mortgage
consists may be alienated for the payment to the
creditor.
Galass decision to eventually sell the subject property to
Villar for an additional P1,500,000.00 was well within the scope of
her rights as the owner of the subject property. The subject property
was transferred to Villar by virtue of another and separate contract,
which is the Deed of Sale. Garcia never alleged that the transfer of
the subject property to Villar was automatic upon Galass failure to
discharge her debt, or that the sale was simulated to cover up such
automatic transfer.
Propriety of Garcias action
for foreclosure of mortgage
The real nature of a mortgage is described in Article 2126 of
the Civil Code, to wit:
Art. 2126. The mortgage directly and
immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the
fulfillment of the obligation for whose security it
was constituted.
Simply put, a mortgage is a real right, which follows the
property, even after subsequent transfers by the mortgagor. A
registered mortgage lien is considered inseparable from the property
inasmuch as it is a right in rem.[41]

The sale or transfer of the mortgaged property cannot affect
or release the mortgage; thus the purchaser or transferee is
necessarily bound to acknowledge and respect the
encumbrance. [42]
In fact, under Article 2129 of the Civil Code, the
mortgage on the property may still be foreclosed despite the
transfer, viz:
Art. 2129. The creditor may claim from a
third person in possession of the mortgaged
property, the payment of the part of the credit
secured by the property which said third person
possesses, in terms and with the formalities which
the law establishes.
While we agree with Garcia that since the second mortgage,
of which he is the mortgagee, has not yet been discharged, we find
that said mortgage subsists and is still enforceable. However, Villar,
in buying the subject property with notice that it was mortgaged,
only undertook to pay such mortgage or allow the subject property to
be sold upon failure of the mortgage creditor to obtain payment from
the principal debtor once the debt matures. Villar did not obligate
herself to replace the debtor in the principal obligation, and could not
do so in law without the creditors consent.[43]Article 1293 of the
Civil Code provides:
Art. 1293. Novation which consists in
substituting a new debtor in the place of the original
one, may be made even without the knowledge or
against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor
gives him the rights mentioned in articles 1236 and
1237.
Therefore, the obligation to pay the mortgage indebtedness
remains with the original debtors Galas and Pingol.[44] The case
of E.C. McCullough & Co. v. Veloso and Serna[45] is square on this
point:
The effects of a transfer of a mortgaged property to a
third person are well determined by the Civil
Code. According to article 1879[46] of this Code, the
creditor may demand of the third person in
possession of the property mortgaged payment of
such part of the debt, as is secured by the property in
his possession, in the manner and form established
by the law. The Mortgage Law in force at the
promulgation of the Civil Code and referred to in the
latter, provided, among other things, that the debtor
should not pay the debt upon its maturity after
judicial or notarial demand, for payment has been
made by the creditor upon him. (Art. 135 of the
Mortgage Law of the Philippines of
1889.) According to this, the obligation of the new
possessor to pay the debt originated only from the
right of the creditor to demand payment of him, it
being necessary that a demand for payment should
have previously been made upon the debtor and the
latter should have failed to pay. And even if these
requirements were complied with, still the third
 possessor might abandon the property mortgaged, foreclosed, i.e., sold, in case the principal obligor
and in that case it is considered to be in the does not pay the mortgage debt, and apply the
possession of the debtor. (Art. 136 of the same proceeds of the sale to the satisfaction of his credit.
law.) This clearly shows that the spirit of the Civil Mortgage is merely an accessory undertaking for the
Code is to let the obligation of the debtor to pay the convenience and security of the mortgage creditor,
debt stand although the property mortgaged to and exists independently of the obligation to pay the
secure the payment of said debt may have been debt secured by it. The mortgagee, if he is so
transferred to a third person. While the Mortgage minded, can waive the mortgage security and
Law of 1893 eliminated these provisions, it proceed to collect the principal debt by personal
contained nothing indicating any change in the spirit action against the original mortgagor.[49]
of the law in this respect. Article 129 of this law,
which provides the substitution of the debtor by the
third person in possession of the property, for the In view of the foregoing, Garcia has no cause of action
purposes of the giving of notice, does not show this
change and has reference to a case where the action against Villar in the absence of evidence to show that the second
is directed only against the property burdened with mortgage executed in favor of Garcia has been violated by his
the mortgage. (Art. 168 of the Regulation.)[47]
debtors, Galas and Pingol, i.e., specifically that Garcia has made a
demand on said debtors for the payment of the obligation secured by
This pronouncement was reiterated in Rodriguez v. the second mortgage and they have failed to pay.
[48]
Reyes wherein this Court, even before quoting the same above
portion in E.C. McCullough & Co. v. Veloso and Serna, held: WHEREFORE, this Court hereby AFFIRMS the February
27, 2003 Decision and March 8, 2003 Resolution of the Court of
We find the stand of petitioners-appellants
Appeals in CA-G.R. SP No. 72714.
to be unmeritorious and untenable. The
maxim caveat emptor applies only to execution
sales, and this was not one such. The mere fact that SO ORDERED.
the purchaser of an immovable has notice that the
acquired realty is encumbered with a mortgage does
not render him liable for the payment of the debt
guaranteed by the mortgage, in the absence of
stipulation or condition that he is to assume payment
of the mortgage debt. The reason is plain: the
mortgage is merely an encumbrance on the property,
entitling the mortgagee to have the property