G.R. No.

L-108638 March 11, 1994

Spouses RAMON R. NACU and LOURDES I. NACU, petitioners,
vs.
THE COURT OF APPEALS and PILIPINAS BANK, respondents.
Geofredo E. Mabunga and Froilan D. Cabaltera for petitioners.
Gella, Danguilan, Fuentes, Ferrer, Samson & Associates for private respondent.

NOCON, J.:
The pith of the issues in this petition is the question of whether or not the real estate mortgage undertaken by Spouses Ramon R. Nacu and Lourdes
Nacu, in favor of Home Construction — Joint Venture was extended, amplified or modified to cover the loan transaction of Ramon R. Nacu, in his
capacity as one of the executive officers of the Joint Venture of JBS Construction, Inc. and P.I. Construction and Services Co., Inc., by virtue alone of
the comprehensive provision in the mortgage contract that:
. . . it shall also stand as security for the payment of the said promissory note or notes, and/or accommodations without the necessity of executing a
new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing as
of the date thereof. . . . 1
Briefly, the facts established below show that petitionerse spouses are the registered owners of the subject property covered by Transfer Certificate of
Title No. 276891 of the Registry of Deeds for Quezon City, located at 12 Yakan Street, La Vista Subdivision, Quezon City.
On July 12, 1982, respondent Pilipinas Bank extended to Home Construction-Joint venture, represented by Horacio Mendoza, Julio Matias and
Ramon Nacu, Irrevocable Stand-by LC No. 82/408-HO in the amount of P4,400,000.00 to guarantee the ten per cent (10%) mobilization fund to be
released by the Ministry of Public Works and Highways in connection with a Lucana Fishing Port and Construction Project.
To secure this Home Construction-Joint Venture credit accommodation, petitioners spouses, together with Spouses Horacio S. Mendoza and Leonisa
D. Mendoza and Spouses Julio D. Matias and Lydia Sison constituted real estate mortgages on five (5) distinct properties in favor of respondent
Bank.
The subject deed of real estate mortgage dated June 7, 1982 executed by petitioner spouses, together with the aforementioned co-mortgagors,
provides, among other things, that the mortgage shall secure the payment of the said loan and those others that the mortgagee may extend to the
mortgagor including interest thereon and expenses incurred incidental thereto and other obligations owing by the mortgagor to the mortgagee,
whether direct or indirect, principal or secondary as appearing in the accounts, books and records of the mortgagee.
In due time, the principal obligation mentioned in the said real estate mortgage extended to the Home Construction — Joint Venture was fully paid
and extinguished.
Upon request, respondent Bank effected the cancellation/release of the titles subject of the said real estate mortgage, particularly the properties of the
co-mortgagors, Horacio Mendoza and Julio Matias.
Petitioners spouses did not immediately request for the issuance of the corresponding certificate of cancellation/release of mortgage of TCT No.
276891 from respondent Bank.
On February 24, 1983, two (2) corporations under the Joint Venture — JBS Construction, Inc., represented by its president, Jose B. Sahagun and P.I.
Construction and Services Co., Inc., represented by its president, petitioner Nacu secured from respondent Bank, under letters of credit (L/C) Nos.
83/13786-HO and 83/13801-HO, a loan accommodation for the importation of several pieces of construction machinery and equipment to be used by
said joint venture in a construction project, located at Mindanao.
In consideration of this JBS and PI Construction Joint Venture credit accommodation, Jose Sahagun and petitioner Nacu executed in their capacities
as executive officers thereof, a Continuing Security Agreement in favor of respondent Bank. Said debtor corporations, represented by their respective
presidents, were also made to sign trust receipts in favor of respondent Bank.
Later, petitioner spouses requested from respondent Bank the issuance of the Certificate of Cancellation/Release of the Real Estate Mortgage on TCT
No. 276891. The respondent Bank refused despite its admission that the Home Construction loan had been fully paid and despite the release of the
properties of the co-mortgagors, Horacio Mendoza and Julio Matias.
The demands in writing for the release of the questioned encumbrance were not heeded. Petitioners spouses thereby decided to file an action against
respondent bank before the Regional Trial Court of Quezon City docketed as Civil Case No. 49233 for cancellation of the encumbrance on TCT No.
276891
After trial on the merits, the trial court, through Presiding Judge Ignacio L. Salvador, rendered its decision in Civil Case No. 49233, the pertinent
portions of which, are quoted herein:
. . . as correctly pointed out by the plaintiffs, this loan accommodation which was subsequently contracted by J.B.S. Construction Corporation on
April 19, 1983 and in which TCT 272689 is allegedly made to answer is not duly annotated on said title. And it is fundamental that real property
constituted to secure an obligation by way of mortgage, must be registered and shall take effect upon the title only from the time of registration. (Sec.
60, Act 496)
Furthermore co-plaintiff, Lourdes Nacu (co-owner of the property covered by TCT No. 276891) was not privy to the subsequent transactions
aforesaid.
Since the principal obligation covered by LC No. 82/408-HO in the amount of P4,400,000.00 had subsequently been fully paid and the obligation
extinguised, as expressly admitted by defendant bank the real estate mortgage is discharged, (Art. 2135) and consequently the defendant bank may
now be compelled to release . . . plaintiffs Transfer Certificate of Title No. 276891.
PREMISES CONSIDERED", judgment is hereby rendered in favor of the plaintiffs and against the defendant, ordering said defendant bank to
immediately release/discharge the second encumbrance annotated on TCT No. 276891-Registry of Deeds of Quezon City and ordering said
defendant bank to pay plaintiffs attorney's fees in the amount of P5,000.00. 2
The respondent Bank appealed from the aforesaid decision of the trial court before respondent Court of Appeals on June 15, 1990.
On October 28, 1992, respondent Court rendered its decision reversing the judgment of the trial court, the pertinent portions stating, thus:
Everything considered, plaintiffs' property stands as continuing security for the subject credit accommodations guaranteed by plaintiff Ramon Nacu,
and the mortgage lien thereon cannot be discharged until these obligations are fully settled.
WHEREFORE, judgment is hereby rendered reversing the appealed decision and dismissing the complaint. Costs against appellees. 3
On November 18, 1992, petitioner spouses seasonably filed a motion for reconsideration of the said assailed decision.
On January 25, 1993, respondent Court promulgated its resolution denying petitioner spouses' motion for reconsideration. Hence, this instant petition
of petitioners spouses assigning the following as errors:
A
THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT PETITIONERS SPOUSES' LA VISTA PROPERTY
WAS ENCUMBERED AS SECURITY NOT ONLY FOR THE (1982) HOME CONSTRUCTION LOAN, BUT ALSO FOR THE (1983) JBS AND
PIC JOINT VENTURE LOAN;
B
THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT JBS CONSTRUCTION, INC. IS THE ONLY DEBTOR
CORPORATION, AND AS SUCH, IT COULD NOT HAVE SIMULTANEOUSLY ASSUMED THE ROLE OF A SURETY/GUARANTOR OF
THE LOAN OBLIGATION WHICH ITSELF CONTRACTED;
C
THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT EXHIBIT "C"; "5"; "9"; AND, "10" CLEARLY
REVEAL THAT PETITIONER RAMON NACU SIGNED SAID DOCUMENTS IN HIS PERSONAL CAPACITY AND NOT AS A
REPRESENTATIVE OR EXECUTIVE OFFICER OF THE DEBTOR CORPORATIONS;
D
THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN GIVING WEIGHT AND CREDENCE TO EXHIBIT "4"; MINUTES OF
THE MEETING OF RESPONDENT BANK'S BOARD OF DIRECTORS AND THE REPORT SUBMITTED BY THE BANK'S PRESIDENT
PERTAINING TO THE APPLICATION FOR LETTERS OF CREDIT BY THE DEBTOR CORPORATIONS SHOWING THAT A SECOND REAL
ESTATE MORTGAGE ON PETITIONERS' LA VISTA PROPERTY WAS INTENDED TO SECURE SAID (1983) JBS AND PIC JOINT
VENTURE OBLIGATION;
E
RESPONDENT HONORABLE COURT OF APPEALS ERRED IN NOT SUSTAINING THE TRIAL COURTS DECISION THAT PETITIONERS
SPOUSES ARE NOT PRIVY TO THE SUBSEQUENT TRANSACTIONS, PARTICULARLY THE CONTRACTS ENTERED INTO BY (1983)
JBS-PIC CONSTRUCTION — JOINT VENTURE, THE DEBTOR CORPORATIONS (JBS AND PIC) BEING SEPARATE AND DISTINCT
JURIDICAL PERSONALITIES FROM PETITIONERS SPOUSES;
F
RESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT PETITIONER RAMON NACU SIGNED THE
CONTINUING SURETY AGREEMENT AND TRUST RECEIPTS IN HIS PERSONAL CAPACITY;
G
RESPONDENT HONORABLE COURT ERRED IN FINDING THAT THE (1983) JBS-PIC JOINT VENTURE BOUND THE JUNE 7, 1982
REAL ESTATE MORTGAGE DESPITE THE FACT THAT PETITIONER LOURDES NACU DID NOT GIVE HER CONSENT THERETO;
H
RESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT THERE WAS NO NEED TO ANNOTATE THE JULY 1983
LOAN ACCOMMODATION ALLEGEDLY GUARANTEED BY PETITIONER RAMON NACU ON TCT NO. 276891 SINCE THE SAME
HAVE BEEN EXPRESSLY COVERED BY THE MORTGAGE CONTRACT; AND,
I
RESPONDENT HONORABLE COURT OF APPEALS ERRED AND ACTED IN GRAVE ABUSE OF DISCRETION WHEN IT "CREATED" AN
OBLIGATION ON THE PART OF PETITIONERS WHERE NONE EXISTED. 4
Arising from the foregoing assignments of errors are the following issues:
1) Whether or not the (1983) JBS and PIC JOINT VENTURE loan transaction is another direct or indirect, principal or secondary obligation owing
by the MORTGAGOR (HOME CONSTRUCTION — JOINT VENTURE to the MORTGAGEE (RESPONDENT BANK);
2) Whether or not the 1983 LOAN DOCUMENTS, Surety Agreement and Trust Receipts were executed by Petitioner Ramon Nacu in his personal
capacity or in behalf of a corporate entity;
3) Whether or not the TRUST RECEIPT is an extension of the Real Estate Mortgage dated June 7, 1982;
4) Whether or not the JBS CONSTRUCTION, INC. is the only DEBTOR CORPORATION in the 1983 loan transaction, and as such, it could not
have simultaneously assumed the role of a surety/guarantor of the loan obligation which itself contracted;
5) Whether or not weight and credence to Exhibit "4", the minutes of the meeting of Respondent Bank's Board of Directors and the Report submitted
by the bank's president pertaining to the application for letters of credit by the debtor corporation, showing that a second real estate mortgage on
Petitioners' La Vista property was intended to secure said obligation, could be given evidentiary weight and credence;
6) Whether or not the July 1983 loan accommodation allegedly guaranteed by Petitioner Ramon Nacu should have been annotated on Petitioners'
TCT to bind their subject property;
7) Whether or not the want of Petitioner Lourdes Nacu's consent in the 1983 loan agreements signed by Petitioner Ramon Nacu renders the same
voidable;
8) Whether or not Petitioner Spouses are privy to the 1983 loan transactions entered into by JBS-PI CONSTRUCTION JOINT VENTURE, the
debtor corporations being separate and distinct juridical personalities from that of Spouses Petitioner; and,
9) Whether or not the ambiguity in the interpretation of the intention of the parties in the case at bar should be resolved in favor of the Petitioners
Spouses. 5
The assailed decision of respondent Court held that in view of the provisions of the real estate mortgage more particularly that which provides that
the real estate mortgage secures ". . . other obligations owing by the Mortgagor to the Mortgagee, whether direct or indirect, principal or secondary,
as appearing in the accounts, books and records of the Mortgagee," the bank may legally refuse to release the second mortgage on TCT No. 276891
considering that the same was used as security for another loan accommodation extended to P.I. Construction and Services Co., Inc., headed by
plaintiff Ramon R. Nacu, and J.B.S. Construction, Inc., headed by Jose B. Sahagun, a joint venture.
True, the real estate mortgage categorically provides that it shall also stand as security for the payment of the said promissory note or notes; and/or
accommodations without the necessity of executing a new contract and that the mortgage shall have the same force and effect as if the said
promissory note or notes and/or accommodations were existing on the date thereof.
However, the July 12, 1982 Home Construction loan transaction and the February 24, 1983 JBS and P.I. Construction — Joint Venture loan
transaction are totally alien to each other. Noteworthy is the fact that the 1982 loan transaction was extended to Home Construction — Joint Venture,
represented by Spouses Horacio S. Mendoza and Leonisia D. Mendoza; Spouses Julio D. Matias and Lydia Sison and Spouses Ramon R. Nacu and
Lourdes I. Nacu. On the other hand, the 1983 loan transaction was applied for and extended to the Joint Venture-JBS Construction, Inc., represented
by its president, Ramon Nacu.
Clearly, the two (2) loan transaction involved different sets of parties. While it is true that petitioner Nacu is a party in both transactions, he acted in
totally different capacities.
Thus, we find the findings of facts of the trial court accurate as they are positively supported by documentary evidence, to wit:
. . . A carefully reading of the Continuing Surety Agreement (Exhibit "5") will reveal the fact that plaintiff Ramon R. Nacu, and Jose B. Sahagun
signed said Continuing Surety Agreement in their capacities as Executive Officer of the J.B.S. Construction Corporation. It is therefore the J.B.S.
Construction Corporation that is the Surety. The plaintiff Ramon N. Nacu, and/or Jose B. Sahagun cannot be made answerable for the liability or
obligation or the corporation. If at all said Ramon R. Nacu and Jose B. Sahagun can be liable only to the extent of their stocks in the corporation. In
other words, this contract (Exhibit "5") entered into by J.B.S. Construction Corporation with defendant bank is a distinct contract and cannot in any
way be related to the provisions of the Real Estate Mortgage (Exhibit "C" and Exhibit "6") because the parties thereto are different. 6
To allow the 1982 mortgage contract to be amplified to include the 1983 Continuing Surety Agreement would be stretching too far the former
contract's extent. Interpreting the same as respondent Bank would want us to do would make the provision too comprehensive and all-encompassing
as to amount to absurdity.
Besides, there is nothing in the loan accommodation subsequently contracted that TCT 276891 is mortgaged. Said loan was not even duly annotated
on said title. Under Section 60 of Act No. 496, a mortgage deed and all instruments assigning discharging and otherwise dealing with the mortgage
are required to be registered. Without registration, they cannot have any effect on the title.
The respondent Court in reversing the decision of the trial court, linked the trust receipts, signed by petitioner Nacu, together with Jose Sahagun, with
the real estate mortgage dated June 7, 1982 by finding that under the express terms of the trust receipts in favor of respondent Bank, petitioner Nacu
again bound himself "jointly and severally" with the Trustees (JBS Corporation and PI Construction) for the value of the goods covered by the
instruments.
Rather than support the position of respondent Bank, the trust receipt agreement shows that the 1982 real estate mortgage is no longer operative
because otherwise, there would have been no need for the execution of said trust agreement to secure the second loan.
Under pertinent laws, the trust receipt is a separate and independent security transaction intended to aid in financing importers whereby the imported
goods are held as security by the lending institution for the loan obligation.
In the case and Vintola v. Insular bank of Asia and America 7 this Court explained the nature and usage of trust receipts as follows:
. . . A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a
loan covered by the letter of credit, with the trust receipt as a security for the loan. In other words, the transaction involved a loan feature represented
by the letter of credit, and security feature which is in the covering trust receipt. . . .
A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a security interest in the goods. It secures an indebtedness and
there can be no such thing as security interest that secures no obligation.
. . . A trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase or merchandise, and who may not be able to acquire credit except through utilization, as collateral,
of the merchandise imported or purchased. . . .
Moreover, by virtue of the trust receipt agreement, respondent Bank should proceed against the same because the trust receipt theoretically
transferred the ownership of the imported personal property to respondent Bank.
Worth mentioning is also the fact that the trust receipts and the Continuing Surety Agreement were signed only by petitioner Nacu. Assuming that
both documents duly constituted a real estate mortgage on the property of petitioners spouses, they are voidable for want of petitioner Lourdes Nacu's
acquiescence and/or consent thereto. Article 166 of the Civil Code, the law then applicable, provides that unless the wife has been declared a non
compos mentis, a spendthrift, is under civil interdiction or is confined in a leprosarium, the husband cannot alienate or encumber any real property of
the conjugal partnership without the wife's consent.
In resolving in favor of respondent Bank, respondent Court likewise appreciated the weight of Exhibit "4," the purported minutes of the meeting of
respondent Bank's Board of Directors and Report pertaining to the application for letters of credit by the JBS and P.I. Construction Joint Venture. In
giving evidentiary weight thereto, the decision of respondent Court said:
Still another important consideration negates the trial court's finding that plaintiffs' property could not be held as continuing security for the
obligations of the debtor corporation. The minutes of the meeting of defendant bank's Board of Directors (Exhibit 4) and the report submitted by the
bank's president pertaining to the application for letters of credit by the debtor corporation show that a second real estate mortgage on plaintiffs' La
Vista property was intended to secure such obligation. From the evidence adduced, there is ample basis to hold plaintiff Ramon Nacu liable as surety
for the accommodation extended to the debtor corporation, and consequently gives defendant bank reason to hold on to the subject mortgaged
property until the obligations are fully settled. 8
However, petitioner spouses were not privy to Exhibit "4" as these documents are internal to respondent Bank. Whether or not they gave their
consent thereto cannot be ascertained.
Finally, if the parties intended the 1982 real estate mortgage to apply to the 1983 loan transaction, respondent Bank should have required petitioners
spouses to execute the proper loan documents clearly and categorically constituting upon the same property a real estate mortgage. The respondent
Bank failed in this regard and must therefore suffer the consequences. In Orient Air Services and Hotel Representatives v. Court of Appeals, 9 this
Court upheld the doctrine that any ambiguity in a contract whose terms are susceptible of different interpretation, must be read against the party who
drafted it.
Indisputably, respondent Bank was the party responsible for the preparation of the, 1982 and 1983 loan agreement which are contracts of adhesion.
Consequently, any ambiguity in the loan agreement should be construed against it on the assumption that it could have avoided it by the exercise of a
little more care.
More emphatic and appropriate is our pronouncement in La Insular v. Machuca Go Tanco, et al. 10 where we held:
It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled that the obligation of the surety
cannot be extended by implication beyond specified limits.
It is crystal clear from the foregoing that respondent Bank's actuation in refusing to cancel the encumbrance annotated on petitioners spouses'
Transfer Certificate of Title on the ground that the latter's property is still liable for an unpaid loan obligation of J.B.S. Construction, Inc. and P.I.
Construction and Services Co., Inc. was a clever attempt to extend by implication, beyond the terms of the real estate mortgage contract, the latter's
force and effect. Respondent Bank should not be allowed to take this "short-cut" to collect an indebtedness due it. Principles of fair play demand that
it should not resort to the expedience of enforcing a real estate mortgage when there is none duly constituted.
WHEREFORE, the petition is GRANTED. The assailed decision of the respondent Court of Appeals in CA-G.R. No. CV 276693 is hereby
REVERSED and the decision of the trial court in Civil Case No. Q-49223 ordering, among other things, respondent Pilipinas Bank to release and/or
discharge the encumbrance on Transfer Certificate of Title No. 276891 of the Registry of Deeds of Quezon City is hereby REINSTATED in toto.
SO ORDERED.
THIRD DIVISION

Spouses RODRIGO PADERES and SONIA G. R. No. 147074

PADERES ,
Petitioners,
Present:

- versus -
PANGANIBAN, J., Chairman,
SANDOVAL-GUTIERREZ,
The Hon. COURT OF APPEALS,[1]Hon.
CARLOTA P. VALENZUELA, in her CORONA,
capacity as the Liquidator of Banco Filipino CARPIO MORALES,
Savings and Mortgage Bank,[2]
GARCIA, JJ.
Respondents.

x---------------------------------------------x

Spouses ISABELO BERGARDO and G. R. No. 147075

JUANA HERMINIA BERGARDO,
Petitioners,

- versus -

The Hon. COURT OF APPEALS,1Hon.

CARLOTA P. VALENZUELA, in her
capacity as the Liquidator of Banco Filipino Promulgated:
Savings and Mortgage Bank,2
Respondents.
July 15, 2005

DECISION
CARPIO MORALES, J.:

By their Petition for review on certiorari under Rule 45 of the Rules of Court, petitioners spouses Rodrigo and Sonia Paderes and spouses
Isabelo and Juana Bergado seek the reversal of the September 20, 2000 Decision [3] and February 16, 2001 Resolution of the Court of Appeals, which
dismissed their original Petition and denied their Motion for Reconsideration, respectively.
 On September 14, 1982, Manila International Construction Corporation (MICC) executed a real estate mortgage [4] over 21 registered parcels
of land including the improvements thereon in favor of Banco Filipino Savings and Mortgage Bank (Banco Filipino) in order to secure a loan
of P1,885,000.00. The mortgage was registered with the Registry of Deeds of Pasay City and annotated on the corresponding transfer certificates of
title (TCTs) covering the properties on December 17, 1982.[5]

The 21 mortgaged properties included two lots, one with an area of 264 square meters, and the other with an area of 263, both located in the
then Municipality of Paraaque (now Paraaque City) covered by TCT Nos. 61062[6] and 61078,[7] respectively.

Subsequently or in August 1983, MICC sold the lot[8] covered by TCT No. 61078, together with the house[9] thereon, to the petitioners in the
first case, the Paderes spouses. And on January 9, 1984, MICC sold the house [10] built on the lot covered by TCT No. 61062 to the petitioners in the
second case, the Bergado spouses. Neither sale was registered, however.[11]

On January 25, 1985, for failure of MICC to settle its obligations, Banco Filipino filed a verified Petition [12] for the extrajudicial foreclosure of
MICCs mortgage. At the auction sale of the foreclosed properties on March 25, 1985, Banco Filipino submitted a bid of P3,092,547.82 and was
declared the highest bidder. A Certificate of Sale[13] was issued in its favor which was registered with the Registry of Deeds and annotated on the
corresponding TCTs covering the mortgaged properties on July 29, 1985.

No redemption of the foreclosed mortgage having been made within the reglementary period, Carlota P. Valenzuela, the then Liquidator of
Banco Filipino, filed on October 16, 1987 an ex parte Petition[14] for the issuance of a Writ of Possession of the foreclosed properties with the
Regional Trial Court (RTC) of Makati. After hearing, the Petition was granted by Order dated September 8, 1988[15] of Branch 59 of the RTC.

On November 7, 1996, copies of the Writ of Possession dated November 5, 1996, together with a notice addressed to MICC and/or All
persons claiming rights under them to voluntarily vacate the premises within 7 days from receipt thereof, were served on petitioners.[16]

Instead of vacating the two lots, however, petitioners filed separate petitions before the Court of Appeals, docketed as C.A. G.R. Numbers
42470 and 42471 which were later consolidated,[17] assailing the validity of the Writ of Possession.

On September 20, 2000, the Court of Appeals promulgated its questioned Decision [18] dismissing the consolidated petitions for lack of merit
and upholding the validity of the Writ of Possession.
 Petitioners Motion for Reconsideration of the appellate courts decision having been denied by Resolution of February 16, 2001, they
jointly come before this Court arguing that: (1) having purchased their respective properties in good faith from MICC, they are third parties whose
right thereto are superior to that of Banco Filipino; (2) they are still entitled to redeem the properties and in fact a binding agreement between them
and the bank had been reached; (3) their respective houses should not have been included in the auction sale of the mortgaged properties; (4) on the
contrary, as builders in good faith, they are entitled to the benefits of Article 448 of the Civil Code;
and (5) the writ of possession issued by the RTC in 1996 had already lost its validity and efficacy.

The petition must be denied.

In extra-judicial foreclosures of real estate mortgages, the issuance of a writ of possession, which is an order commanding the sheriff to place
a person in possession of the foreclosed property, [19] is governed by Section 7 of Act No. 3135 (AN ACT TO REGULATE THE SALE OF
PROPERTY UNDER SPECIAL POWERS INSERTED IN OR ANNEXED TO REAL ESTATE MORTGAGES), as amended:

Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of the province or
place where the property or any part thereof is situated, to give him possession thereof during the redemption period, furnishing bond
in an amount equivalent to the use of the property for a period of twelve months, to indemnify the debtor in case it be shown that the
sale was made without violating the mortgage or without complying with the requirements of this Act. Such petition shall be made
under oath and filed in form of an ex parte motion in the registration or cadastral proceedings if the property is registered, or in special
proceedings in the case of property registered under the Mortgage Law or under section one hundred and ninety-four of the
Administrative Code, or of any other real property encumbered with a mortgage duly registered in the office of any register of deeds
in accordance with any existing law, and in each case the clerk of the court shall, upon the filing of such petition, collect the fees
specified in paragraph eleven of section one hundred and fourteen of Act Numbered Four hundred and ninety-six, as amended by Act
Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval of the bond, order that a writ of possession issue,
addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately.

That petitioners purchased their properties from MICC in good faith is of no moment. The purchases took place after MICCs mortgage to
Banco Filipino had been registered in accordance with Article 2125[20] of the Civil Code and the provisions of P.D. 1529 (PROPERTY REGISTRY
DECREE).[21] As such, under Articles 1312[22] and 2126[23] of the Civil Code, a real right or lien in favor of Banco Filipino had already been
established, subsisting over the properties until the discharge of the principal obligation, whoever the possessor(s) of the land might be.

In rejecting a similar argument, this Court, in Philippine National Bank v. Mallorca,[24] ratiocinated:
1. Appellants stand is that her undivided interest consisting of 20,000 square meters of the mortgaged lot, remained
unaffected by the foreclosure and subsequent sale to PNB, and she neither secured nor contracted a loan with said bank. What PNB
foreclosed, she maintains, was that portion belonging to Ruperta Lavilles only, not the part belonging to her.

Appellants position clashes with precepts well-entrenched in law. By Article 2126 of the Civil Code, a mortgage directly and
immediately subjects the property on which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for
whose security it was constituted. Sale or transfer cannot affect or release the mortgage. A purchaser is necessarily bound to
acknowledge and respect the encumbrance to which is subjected the purchased thing and which is at the disposal of the
creditor in order that he, under the terms of the contract, may recover the amount of his credit therefrom. For, a recorded real
estate mortgage is a right in rem, a lien on the property whoever its owner may be. Because the personality of the owner is
disregarded; the mortgage subsists notwithstanding changes of ownership; the last transferee is just as much of a debtor as
the first one; and this, independent of whether the transferee knows or not the person of the mortgagee. So it is, that a
mortgage lien is inseperable from the property mortgaged. All subsequent purchasers thereof must respect the mortgage,
whether the transfer to them be with or without the consent of the mortgagee. For, the mortgage, until discharge, follows the
property.[25] (Emphasis and underscoring supplied; italics in the original; citations omitted)

And in Roxas v. Buan[26] this Court held:

Contending that petitioner Roxas is a party actually holding the property adversely to the debtor, Arcadio Valentin, petitioners
argue that under the provisions of Act No. 3135 they cannot be ordered to vacate the property. Hence, the question of whether, under
the circumstances, petitioner Roxas indeed is a party actually holding the property adversely to Valentin.
It will be recalled that Roxas' possession of the property was premised on its alleged sale to him by Valentin for the
amount of P100,000.00. Assuming this to be true, it is readily apparent that Roxas holds title to and possesses the property as
Valentin's transferee. Any right he has to the property is necessarily derived from that of Valentin. As transferee, he steps into
the latter's shoes. Thus, in the instant case, considering that the property had already been sold at public auction pursuant to an
extrajudicial foreclosure, the only interest
that may be transferred by Valentin to Roxas is the right to redeem it within the period prescribed by law. Roxas is therefore the
successor-in-interest of Valentin, to whom the latter had conveyed his interest in the property for the purpose of
redemption [Rule 39, Sec. 29 (a) of the Revised Rules of Court; Magno v. Viola, 61 Phil. 80 (1934); Rosete v. Prov. Sheriff of
Zambales, 95 Phil. 560 (1954).] Consequently, Roxas' occupancy of the property cannot be considered adverse to Valentin.
Thus, in Belleza v. Zandaga [98 Phil. 702 (1956)], the Court held that where the purchaser in an execution sale has already
received the definitive deed of sale, he becomes the owner of the property bought and, as absolute owner, he is entitled to its
possession and cannot be excluded therefrom by one who merely claims to be a successor-in-interest of the judgment debtor, unless it
 is adjudged that the alleged successor has a better right to the property than the purchaser at the execution sale. Stated differently, the
purchaser's right of possession is recognized only as against the judgment debtor and his successor-in-interest but not against
persons whose right of possession is adverse to the latter. The rule was reiterated in Guevara v. Ramos [G.R. No. L-24358, March
31, 1971, 38 SCRA 194].
The rule in Belleza, although relating to the possession of property sold in execution sales under what is now Sec. 35, Rule 39
of the Revised Rules of Court, is also applicable to the possession of property sold at extrajudicial foreclosure sales pursuant to Sec. 6
of Act No. 3135 [see IFC Service Leasing and Acceptance Corp. v. Nera, supra]. Thus, as petitioner Roxas is not a party holding
the property adversely to Valentin, being the latter's successor-in-interest, there was no bar to the respondent trial court's
issuance of a writ of possession upon private respondent Buan's application.
It does not matter that petitioner Roxas was not specifically named in the writ of possession, as he merely stepped into the
shoes of Valentin, being the latter's successor-in-interest. On the other hand, petitioner de Guia was occupying the house as Roxas'
alleged tenant [Rollo, p. 24]. Moreover, respondent court's decision granting private respondent Buan's petition for the issuance of a
writ of possession ordered the Provincial Sheriff of Zambales or any of his deputies to remove Valentin or any person claiming
interest under him from the property [Rollo, p. 16]. Undeniably, petitioners fell under this category.[27] (Emphasis supplied)

As transferees of mortgagor MICC, petitioners merely stepped into its shoes and are necessarily bound to acknowledge and respect the
mortgage it had earlier executed in favor of Banco Filipino.

As for petitioners argument that they are still entitled to redeem the foreclosed properties, it must be rejected too.

The debtor in extra-judicial foreclosures under Act No. 3135, or his successor-in-interest, has, one year from the date of registration of the
Certificate of Sale with the Registry of Deeds, a right to redeem the foreclosed mortgage, [28] hence, petitioners, as MICCs successors-in-interest, had
one year from the registration of the Certificate of Sale on July 29, 1985 or until July 29, 1986 for the purpose.

Petitioners, however, failed to do so. Ownership of the subject properties was thus consolidated in favor of Banco Filipino, [29] and TCT Nos.
112352 (in lieu of TCT No. 61078) and 112353 (in lieu of TCT No. 61062) were issued in its name.

As this Court held in F. David Enterprises v. Insular Bank of Asia and America:[30]

It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not redeemed
during the period of one year after the registration of the sale. As such, he is entitled to the possession of the said property and
 can demand it at any time following the consolidation of ownership in his name and the issuance to him of a new transfer
certificate of title. The buyer can in fact demand possession of the land even during the redemption period except that he has to post
a bond in accordance with Section 7 of Act No. 3135 as amended. No such bond is required after the redemption period if the
property is not redeemed. Possession of the land then becomes an absolute right of the purchaser as confirmed owner. Upon
proper application and proof of title, the issuance of the writ of possession becomes a ministerial duty of the court.
[31]
(Emphasis supplied)

Petitioners assert, however, that a binding agreement for the repurchase of the subject properties was reached with Banco Filipino as, so they
claim, reflected in the following exchange of communications:
October 17, 1996

Mrs. Luz B. Dacasin

Asst. Vice-President
Real Estate Dept.
Banco Filipino Savings and Mortgage Bank
101 Paseo De Roxas cro. [sic] Dela Rosa Sts.
Makati City

Dear Madam:

I am writing to you, on behalf of spouses Sonia and Rodrigo Paderes re: TCT No. 61078 formerly owned by Manila International
Construction Corporation (MICC for short) now TCT No. 112352, registered in the name of Banco Filipino Savings and Mortgage
Bank in July 30, 1996 at the Register of Deeds of Paraaque, Metro Manila. Incidentally, the property is denominated as Block 48, Lot
5 located at Leon Florentino St., BF Executive , Paraaque, Metro Manila.

The background facts of TCT No. 61078 are as follows:

In August 1983, the MICC executed a Deed of Absolute Sale of that lot covered by TCT No. 61078 in favor of spouses Sonia and
Rodrigo Paderes which was acknowledged before a Notary Public on October 1, 1983. The value of the lot was P115,720.00. In the
same year, the parties executed an addendum to the said deed of absolute sale which covered a house valued at P242,874.45. The net
package price of the house and lot was fixed at P329,405.75. From this amount, the spouses Sonia and Rodrigo Paderes paid MICC
inclusive of equity the amount ofP125,437.35 leaving a balance of P212,985.60. The spouses moved in the house in November 1983.

Unknown to the spouses, MICC mortgaged TCT No. 61078 in favor of Banco Filipino Savings and Mortgage Bank for P1,885.00
duly inscribed in TCT No. 112352 on December 12, 1982. It was foreclosed by the bank for P3,092,547.82 pursuant to the certificate
of sale executed by the sheriff as inscribed on TCT No. 112352 [should be TCT No. 61078] on July 29, 1985 . . .

Then came the news that Banco Filipino Savings and Mortgage Bank was under conservatorship by the Board of Liquidators. On the
other hand, MICC became bankrupt and closed shop. The spouses were [sic] nowhere to go to then at the time to get the title of the
property they purchased from MICC.

Until, the spouses received a letter dated April 6, 1987 from the Board of Liquidators via Alberto Reyes, Deputy Liquidator,
informing the spouses that the property they purchased from MICC was already foreclosed by the bank. The spouses answered the
letter and disclaimed any knowledge of the foreclosure. In their answer to the said letter, they emphasized that their unpaid balance
with MICC was P188,985.60.

We are addressing your goodself [sic] to inform the bank that the spouses Sonia and Rodrigo Paderes are exercising their right of
redemption as subrogees of the defunct MICC under special laws.

From reliable information, the bank had already made appraisal of the property and from that end, may we be
informed [at] the soonest possible time the value of the property to enable the spouses to prepare for such eventuality. And,
upon receipt of the said appraisal value we shall immediately inform you [of] our position on the matter.

Thank you very much.

Very truly yours,

 [SGD.]
LUCIANO D. VALENCIA
Counsel for Spouses Paderes
JPA Subdivision, City of Muntinlupa[32]

x x x (Emphasis supplied).

October 25, 1996

Mr. Luciano D. Valencia

Counsel for Sps. Paderes
JPA Subdivision, Muntinlupa

Dear Sir:

This is with regard to your letter dated October 17, 1996 concerning the property formerly owned by Manila International
Construction Corporation (MICC) foreclosed by the Bank.

Please inform Sps. Rodrigo and Sonia Paderes to come to the bank to discuss said foreclosed property directly with the bank.

Thank you.

Very truly yours,

 [SGD.]
LUZ B. DACASIN
Assistant Vice-President
Real Estate Department[33]

x x x (Emphasis supplied; italics in the original).

November 4, 1996

Mrs. Luz B. Dacasin

Asst. Vice-President
Real Estate Dept., Banco Filipino
Makati City

Dear Madam:

Thank you very much for your letter dated October 25, 1996, which was received on October 31, 1996, the contents of which had
been duly noted. Pursuant thereto I advised my clients spouses Rodrigo and Sonia Paderes to see [you].

With your indulgence, I also advised my other clients spouses Isabelo and Juana Herminia Bergado to go along with the spouses
Paderes, who are similarly situated with spouses Paderes property.
Incidentally, on October 28, 1996, I also wrote your goodself another letter at the behest of spouses Isabelo and Juana Herminia
Bergado whose property is equally footed with spouses Paderes.

It is hoped that, out of that conference per your invitation my clients above-named be informed formally the total amounts due the
bank as a consequence of the right of redemption extended to them. Of course, whatever appraised value arrived at by the bank
on the properties subject of redemption the same shall not be construed as my clients committed liability.

Thank you very much.

Very truly yours,

[SGD.]
LUCIANO D. VALENCIA
Counsel for Spouses Paderes
JPA Subdivision, City of Muntinlupa[34]

x x x (Emphasis supplied).

November 8, 1996

Mrs. LUZ B. DACASIN

Asst. Vice-President
Real Estate Department
Banco Filipino Savings & Mortgage Bank
Makati City

Re: Lot 18, Block 48 Gamboa St.

BF Homes, Paraaque, MM (264 SQ.M.)
Occupied by Sps. Isabelo Bergado &
Juana Herminia Bergado

Lot 5, Block 48, L. Florentino St.

BF Homes, Paraaque, MM (263 SQ.M.)
Occupied by Sps. Rodrigo Paderes &
Sonia Paderes

Dear Madam Asst. Vice-President:

Pursuant to our conference this morning November 8, 1996, regarding our desire to redeem the properties above-captioned, which
your good office accommodated, and per your advi[c]e, we submit the following facts taken out and our proposals:

1. Regarding the lot, you mentioned that, the cost per square meter was P7,500.00. To this price we are no-committal for the
said price is high. Although, we are still to have the amount re-negotiated.

2. We appreciate very much your having excluded the house built in the said lot for purposes of fixing the redemption price.

3. Your advi[c]e to subject the properties (house and lot) to a real-estate mortgage with the bank so that the amount to be
loaned will be used as payment of the properties to be redeemed is accepted, and we are committed to it.

Thank you very much

 Very truly yours,

[SGD.]
SPS. SONIA &
RODRIGO PADERES

[SGD.]
SPS. ISABELO &
JUANA HERMINIA BERGADO[35]
(Emphasis supplied).

Petitioners assertion does not pass muster.

Under Article 1318 of the Civil Code, there are three essential requisites which must concur in order to give rise to a binding contract:
(1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation which is
established. Consent is further defined in Article 1319 of the Code as follows:

Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to
constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-
offer.

Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such
a case, is presumed to have been entered into in the place where the offer was made. (Emphasis supplied)
 By offer is meant a unilateral proposition which one party makes to the other for the celebration of the contract. There is an offer in the
context of Article 1319 only if the contract can come into existence by the mere acceptance of the offeree, without any further act on the part of the
offeror. Hence, the offer must be definite, complete and intentional.[36]

With regard to the acceptance, a learned authority notes that:

To produce a contract, the acceptance must not qualify the terms of the offer. There is no acceptance sufficient to produce
consent, when a condition in the offer is removed, or a pure offer is accepted with a condition, or when a term is established, or
changed, in the acceptance, or when a simple obligation is converted by the acceptance into an alternative one; in other words, when
something is desired which is not exactly what is proposed in the offer. It is necessary that the acceptance be unequivocal and
unconditional, and the acceptance and the proposition shall be without any variation whatsoever; and any modification or
variation from the terms of the offer annuls the latter and frees the offeror.[37] (Emphasis supplied)

A reading of the above-quoted correspondence reveals the absence of both a definite offer and an absolute acceptance of any definite offer by
any of the parties.

The letters dated October 17, 1996 and November 4, 1996, signed by petitioners counsel, while ostensibly proposing to redeem the foreclosed
properties and requesting Banco Filipino to suggest a price for their repurchase, made it clear that any proposal by the bank would be subject to
further action on the part of petitioners.

The letter dated October 25, 1996 signed by Luz Dacasin, Assistant Vice-President of Banco Filipino, merely invited petitioners to engage in
further negotiations and does not contain a recognition of petitioners claimed right of redemption or a definite offer to sell the subject properties back
to them.

Petitioners emphasize that in item no. 3 of their letter dated November 8, 1996 they committed to subject the properties (house and lot) to a
real-estate mortgage with the bank so that the amount to be loaned will be used as payment of the properties to be redeemed. It is clear from item no.
1 of the same letter, however, that petitioners did not accept Banco Filipinos valuation of the properties at P7,500.00 per square meter and intended to
have the amount [renegotiated].

Moreover, while purporting to be a memorandum of the matters taken up in the conference between petitioners and Banco Filipino Vice-
President Dacasin, petitioners letter of November 8, 1996 does not contain the concurrence of Ms. Dacasin or any other authorized agent of Banco
Filipino. Where the alleged contract document was signed by only one party and the record shows that the other party did not execute or sign the
same, there is no perfected contract.[38]

The Court of Appeals, therefore, committed no error in concluding that nothing concrete came out of the meeting between petitioners and
Banco Filipino.

Respecting petitioners claim that their houses should have been excluded from the auction sale of the mortgaged properties, it does not lie.
The provision of Article 448[39]of the Civil Code, cited by petitioners, which pertain to those who, in good faith, mistakenly build, plant or sow on the
land of another, has no application to the case at bar.

Here, the record clearly shows that petitioners purchased their respective houses from MICC, as evidenced by the Addendum to Deed of Sale
dated October 1, 1983 and the Deed of Absolute Sale dated January 9, 1984.

Being improvements on the subject properties constructed by mortgagor MICC, there is no question that they were also covered by MICCs
real estate mortgage following the terms of its contract with Banco Filipino and Article 2127 of the Civil Code:

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. (Underscoring
supplied).

The early case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.[40] is illustrative. In that case, this Court held:

. . . (1) That a mortgage constituted on a sugar central includes not only the land on which it is built but also the buildings,
machinery, and accessories installed at the time the mortgage was constituted as well as all the buildings, machinery and
accessories belonging to the mortgagor, installed after the constitution thereof (Bischoff vs. Pomar and Compaia General de
Tabacos, 12 Phil. 690); (2) that the notice announcing the sale at public auction of all the properties of a sugar central extends to the
machinery and accessories acquired and installed in its mill after the constitution of the mortgage; (3) that the court, that has ordered
 the placing of the mortgaged properties in the hands of a receiver in a foreclosure suit, has jurisdiction to order the sale at public
auction of the said mortgaged properties even before the termination of the receivership; and (4) that the fact that the price at which
the mortgaged properties were sold at public auction is inadequate, is not in itself sufficient to justify the annulment of the sale.
[41]
(Emphasis supplied)

Petitioners finally proffer that the issuance, on Banco Filipinos mere motion, of the Writ of Possession on November 5, 1996, more than 8
years since the promulgation of the RTC Order granting its petition on September 8, 1988, violated Section 6, Rule 39 of the Rules of Court, viz:

Sec. 6. Execution by motion or by independent action. A final and executory judgment or order may be executed on motion within
five (5) years from the date of its entry. After the lapse of such time, and before it is barred by the statute of limitations, a judgment
may be enforced by action. The revived judgment may also be enforced by motion within five (5) years from the date of its entry and
thereafter by action before it is barred by the statute of limitations.

Hence, petitioners argue, the writ of possession had lost its validity and efficacy and should therefore be declared null and void.

Petitioners ultimate argument fails too. In Rodil vs. Benedicto,[42] this Court categorically held that the right of the applicant or a subsequent purchaser
to request for the issuance of a writ of possession of the land never prescribes:

The respondents claim that the petition for the issuance of a writ of possession was filed out of time, the said petition having been
filed more than five years after the issuance of the final decree of registration. In support of their contention, the respondents cite the
case of Sorogon vs. Makalintal [80 Phil. 259 (1948)], wherein the following was stated:
"It is the law and well settled doctrine in this jurisdiction that a writ of possession must be issued within the same period of
time in which a judgment in ordinary civil actions may be summarily executed (section 17, Act 496, as amended), upon the
petition of the registered owner or his successors in interest and against all parties who claim a right to or interest in the land
registered prior to the registration proceeding."

The better rule, however, is that enunciated in the case of Manlapas and Tolentino vs. Lorente [48 Phil. 298 (1925)], which has not
yet been abandoned, that the right of the applicant or a subsequent purchaser to ask for the issuance of a writ of possession of
the land never prescribes. . .
 xxx
In a later case [Sta. Ana v. Menla, 111 Phil. 947 (1961)], the Court also ruled that the provision in the Rules of Court to the effect
that judgment may be enforced within five years by motion, and after five years but within ten years by an action (Section 6,
Rule 39) refers to civil actions and is not applicable to special proceedings, such as land registration cases. The Court said:
"The second assignment of error is as follows:
'That the lower court erred in ordering that the decision rendered in this land registration case on November 28, 1931 or
twenty six years ago, has not yet become final and unenforceable.
We fail to understand the arguments of the appellant in support of the above assignment, except in so far as it supports his
theory that after a decision in a land registration case has become final, it may not be enforced after the lapse of a period of 10
years, except by another proceeding to enforce the judgment or decision. Authority for this theory is the provision in the Rules
of Court to the effect that judgment may be enforced within 5 years by motion, and after five years but within 10 years, by an
action (Sec. 6, Rule 39). This provision of the Rules refers to civil actions and is not applicable to special proceedings,
such as a land registration case. This is so because a party in a civil action must immediately enforce a judgment that is
secured as against the adverse party, and his failure to act to enforce the same within a reasonable time as provided in
the Rules makes the decision unenforceable against the losing party. In special proceedings the purpose is to establish a
status, condition or fact; in land registration proceedings, the ownership by a person or a parcel of land is sought to be
established. After the ownership has been proved and confirmed by judicial declaration, no further proceeding to
enforce said ownership is
necessary, except when the adverse or losing party had been in possession of the land and the winning party desires to
oust him therefrom.[43] (Emphasis and underscoring supplied)

Petitioners have not supplied any cogent reason for this Court to deviate from the foregoing ruling.

The established doctrine that the issuance of a writ of possession is a ministerial function whereby the issuing court exercises neither discretion nor
judgment bears reiterating. The writ issues as a matter of course upon the filing of the proper motion and, if filed before the lapse of the redemption
period, the approval of the corresponding bond.[44]
Petitioners, however, are not without remedy. As reflected in the challenged Court of Appeals decision, under Section 8 [45] of Act No. 3135, as
amended, petitioners, as successors-in-interest of mortgagor MICC, have 30 days from the time Banco Filipino is given possession of the subject
properties to question the validity of the auction sale under any of the two grounds therein stated by filing a petition to set aside the same and cancel
the writ of possession.

WHEREFORE, the petition is hereby DENIED.

 Costs against petitioners.

SO ORDERED.

CONCHITA CARPIO MORALES

Associate Justice

WE CONCUR:

ARTEMIO V. PANGANIBAN
Associate Justice
Chairman

ANGELINA SANDOVAL-GUTIERREZ RENATO C. CORONA

 Associate Justice Associate Justice

CANCIO C. GARCIA
Associate Justice

A T T E S T A T I O N

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.

ARTEMIO V. PANGANIBAN
Associate Justice
Chairman, Third Division
 C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the Court.

HILARIO G. DAVIDE, JR.

Chief Justice
G.R. No. 172020 December 6, 2010
TRADERS ROYAL BANK, Petitioner,
vs.
NORBERTO CASTAÑARES and MILAGROS CASTAÑARES, Respondents.
DECISION
VILLARAMA, JR., J.:
Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, is the Decision1 dated January 11, 2006 of the
Court of Appeals (CA) in CA-G.R. CV No. 67257 which reversed the Joint Decision 2 dated August 26, 1998 of the Regional Trial Court (RTC) of
Cebu City, Branch 13 in Civil Case Nos. R-22608 and CEB-112.
The Facts
Respondent-spouses Norberto and Milagros Castañares are engaged in the business of exporting shell crafts and other handicrafts. Between 1977 and
1978, respondents obtained from petitioner Traders Royal Bank various loans and credit accommodations. Respondents executed two real estate
mortgages (REMs) dated April 18, 1977 and January 25, 1978 covering their properties (TCT Nos. T-38346, T-37536, T-37535, T-37192 and T-
37191). As evidenced by Promissory Note No. BD-77-113 dated May 10, 1977, petitioner released only the amount ofP35,000.00 although the
mortgage deeds indicated the principal amounts as P86,000.00 and P60,000.00.3
Respondents were further granted additional funds on various dates under promissory notes4 they executed in favor of the petitioner:

Type of Loan Date Granted Amount

Packing Credit May 10, 1977 P19,000.00

Packing Credit May 18, 1977 P25,000.00

Packing Credit June 23, 1977 P12,500.00

Packing Credit August 19, 1977 P 2,900.00

Packing Credit April 4, 1978 P18,000.00

Packing Credit April 19, 1978 P23,000.00

On June 22, 1977, petitioner transferred the amount of P1,150.00 from respondents’ current account to their savings account, which was erroneously
posted as P1,500.00 but later corrected to reflect the figure P1,150.00 in the savings account passbook. By the second quarter of 1978, the loans
began to mature and the letters of credit against which the packing advances were granted started to expire. Meanwhile, on December 7, 1979,
petitioner, without notifying the respondents, applied to the payment of respondents’ outstanding obligations the sum of $4,220.00 or P30,930.49
which was remitted to the respondents thru telegraphic transfer from AMROBANK, Amsterdam by one Richard Wagner. The aforesaid entries in the
passbook of respondents and the $4,220.00 telegraphic transfer were the subject of respondents’ letter-complaint 5 dated September 20, 1982
addressed to the Manager of the Regional Office of the Central Bank of the Philippines.
For failure of the respondents to pay their outstanding loans with petitioner, the latter proceeded with the extrajudicial foreclosure of the real estate
mortgages.6 Thereafter, a Certificate of Sale7 covering all the mortgaged properties was issued by Deputy Sheriff Wilfredo P. Borces in favor of
petitioner as the lone bidder forP117,000.00 during the auction sale conducted on November 24, 1981. Said certificate of sale was registered with the
Office of the Register of Deeds on February 4, 1982.
On November 24, 1982, petitioner instituted Civil Case No. R-22608 for deficiency judgment, claiming that after applying the proceeds of
foreclosure sale to the total unpaid obligations of respondents (P200,397.78), respondents were still indebted to petitioner for the sum
of P83,397.68.8 Respondents filed their Answer With Counterclaim on December 27, 1982.9
On February 10, 1983, respondents filed Civil Case No. CEB-112 for the recovery of the sums of P2,584.27 debited from their savings account
passbook and the equivalent amount of $4,220.00 telegraphic transfer, and in addition, $55,258.85 representing the damage suffered by the
respondents from letters of credit left un-negotiated because of petitioner’s refusal to pay the $4,220.00 demanded by the respondents.10
The cases were consolidated before Branch 13, RTC of Cebu City.
Ruling of the RTC
In a Joint Decision11 dated August 26, 1998, the RTC ruled in favor of the petitioner, as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in Civil Case No. R-22608 in favor of the plaintiff and against the defendants
directing the defendants jointly and solidarily to pay plaintiff the sum ofP83,397.68 with legal rate of interest to be computed from November 24,
1981 (the date of the auction sale) until full payment thereof. They are likewise directed to pay plaintiff attorney’s fees in the sum of P10,000.00 plus
litigation expenses in the amount of P2,500.00.
With cost against defendants.
In CEB-112, judgment is hereby rendered dismissing the complaint.
With cost against the plaintiff.
SO ORDERED.12
The trial court found that despite respondents’ insistence that the REM covered only a separate loan forP86,000.00 which they believed petitioner
committed to lend them, the evidence clearly shows that said REM was constituted as security for all the promissory notes. No separate demand was
made for the amount of P86,000.00 stated in the REM, as the demand was limited to the amounts of the promissory notes. The trial court further
noted that respondents never questioned the judgment for extrajudicial foreclosure, the certificate of sale and the deficiency in that case.13
With respect to the passbook entries, the trial court stated that no objection thereto was made by the respondents until five years later when in a letter
dated August 10, 1982, respondents’ counsel asked petitioner to be enlightened on the matter. Neither did respondents protest the application of the
balance (P1,150.00) in the passbook to his account with petitioner. More important, respondent Norberto Castañares in his testimony admitted that
the matter was already clarified to him by petitioner and that the latter had the right to apply his deposit to his loan accounts. Admittedly, his
complaint has to do more with the lack of consent on his part and the non-issuance of official receipt. However, he did not follow up his request for
official receipt as he did not want to be going back and forth to the bank.14
CA Ruling
With the trial court’s denial of their motion for reconsideration, respondents appealed to the CA. Finding merit in respondents’ arguments, the
appellate court set aside the trial court’s judgment under its Decision15 dated January 11, 2006, thus:
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us GRANTING the appeal filed in this case and REVERSING
AND SETTING ASIDE the Joint Decision dated August 26, 1998, Regional Trial Court, 7th Judicial Region, Branch 13, in Civil Case No. R-22608
and Civil Case No. CEB-112. With regard to Civil Case No. R-22608, the real estate mortgage dated April 18, 1977 is hereby DECLARED as valid
in part as to the amount of P35,000.00 actually released in favor of appellants, while the real estate mortgage dated January 26, 1978 is hereby
declared as null and void. Furthermore, in Civil Case No. CEB-112, TRB is hereby ordered to release the amount of US$4,220.90 to the appellants at
its current rate of exchange. No pronouncement as to costs.
SO ORDERED.16
The CA held that the RTC overlooked the fact that there were no adequate evidence presented to prove that petitioner released in full to the
respondents the proceeds of the REM loan. Citing Filipinas Marble Corporation v. Intermediate Appellate Court 17 and Naguiat v. Court of
Appeals,18 the appellate court declared that where there was failure of the mortgagee bank to deliver the consideration for which the mortgage was
executed, the contract of loan was invalid and consequently the accessory contract of mortgage is likewise null and void. In this case,
only P35,000.00 out of the P86,000.00 stated in the REM dated April 18, 1977 was released to respondents, and hence the REM was valid only to
that extent. For the same reason, the second REM was null and void since no actual loan proceeds were released to the respondents-mortgagors. The
REMs are not connected to the subsequent promissory notes because these were signed by respondents for the sole purpose of securing packing
credits and export advances. Further citing Acme Shoe, Rubber and Plastic Corp. v. Court of Appeals, 19 the CA stated that the rule is that a pledge,
real estate mortgage or antichresis may exceptionally secure after-incurred obligations only as long as these debts are accurately described therein. In
this case, neither of the two REMs accurately described or even mentioned the securing of future debts or obligations.20
The CA thus held that petitioner’s remedy would be to file a collection case on the unpaid promissory notes which were not secured by the REMs.
As to the $4,220.00 telegraphic transfer, the CA ruled that petitioner had no basis for withholding and applying the said amount to respondents’ loan
account. Said transaction was separate and distinct from the contract of loan between petitioner and respondents. Petitioner had no authority to
convert the said telegraphic transfer into cash since the participation of respondents was necessary to sign and indorse the disbursement voucher and
check. Moreover, petitioner was not transparent in its actions as it did not inform the respondents of its intention to apply the proceeds of the
telegraphic transfer to their loan account and worse, it did not even present an official receipt to prove payment. Section 5 of Republic Act No. 6426,
otherwise known as the Foreign Currency Deposit Act, provides that there shall be no restriction on the withdrawability by the depositor of his
deposit or the transferability of the same abroad except those arising from contract between the depositor and the bank.21
The Petition
Petitioner raised the following grounds in the review of the CA decision:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE REAL ESTATE MORTGAGE DATED 18 APRIL 1977 IS VALID ONLY IN
PART TO THE EXTENT OF PHP35,000.00 WHICH IS ALLEGEDLY THE AMOUNT PROVED TO HAVE BEEN ACTUALLY RELEASED TO
RESPONDENTS OUT OF THE SUM OF PHP86,000.00.
II. THE COURT OF APPEALS ERRED IN DECLARING AS NULL AND VOID THE REAL ESTATE MORTGAGE DATED 26 JANUARY 1978
IN THAT NO ACTUAL LOAN PROCEEDS WERE RELEASED IN FAVOR OF THE RESPONDENTS.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD NO BASIS IN WITHHOLDING AND SUBSEQUENTLY
APPLYING IN PAYMENT OF RESPONDENTS’ OVERDUE ACCOUNT IN THE TELEGRAPHIC TRANSFER IN THE AMOUNT OF U.S.
$4,220.00.22
Petitioner contends that the CA overlooked the specific stipulation in the REMs that the mortgage extends not only to the amounts specified therein
but also to loans or credits subsequently granted, which include the packing credits and export advances obtained by the respondents. Moreover, the
amounts indicated on the REMs need not exactly be the same amounts that should be released and covered by checks or credit memos, the same
being only the maximum sum or "ceiling" which the REM secures, as explained by petitioner’s witness, Ms. Blesy Nemeño. Her testimony does not
prove that the proceeds of the loans were not released in full, as no credit memos in the specific amounts received by the respondents can be
presented.
Petitioner argues that the rulings cited by the CA do not at all support its conclusion that the promissory notes were totally unrelated to the REMs. In
the Acme case, the pronouncement was that the after-incurred obligations must, at the time they are contracted, only be accurately described in a
proper instrument as in the case of a promissory note. The confusion was brought by the use in the CA decision of the word "therein" which is not
found in the text of the Acme ruling. Besides, it is way too impossible that future loans can be accurately described, as the CA opined, at the time that
a deed of real estate mortgage is executed. The CA’s reliance on the case of Filipinas Marble Corporation, is likewise misplaced as it finds no
application under the facts obtaining in the present case. The misappropriation by some individuals of the loan proceeds secured by petitioner was the
consideration which compelled this Court to rule that there was failure on the part of DBP to deliver the consideration for which the mortgage was
executed. Similarly, the case of Naguiat is inapplicable in that there was evidence that an agent of the creditor withheld from the debtor the checks
representing the proceeds of the loan pending delivery of additional collateral.
Finally, petitioner reiterates that it had the right by way of set-off the telegraphic transfer in the sum of $4,220.00 against the unpaid loan account of
respondents. Citing Bank of the Philippine Islands v. Court of Appeals, 23petitioner asserts that they are bound principally as both creditors and
debtors of each other, the debts consisting of a sum of money, both due, liquidated and demandable, and are not claimed by a third person. Hence, the
RTC did not err in holding that petitioner validly applied the amount of P30,930.20 (peso equivalent of $4,220.00) to the loan account of the
respondents.
Our Ruling
We rule for the petitioner.
The subject REMs contain the following provision:
That, for and in consideration of certain loans, overdrafts and other credit accommodations obtained, from the Mortgagee by the Mortgagor
and/or SPS. NORBERTO V. CASTAÑARES & MILAGROS M. CASTAÑARES and to secure the payment of the same, the principal of all of which
is hereby fixed at EIGHTY-SIX THOUSAND PESOS ONLY – (P86,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may
hereafter extend to the Mortgagor x x x, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect,
principal or secondary, as appears in the accounts, books and records of the Mortgagee x x x.24(Emphasis supplied.)
The above stipulation is also known as "dragnet clause" or "blanket mortgage clause" in American jurisprudence that would subsume all debts of past
and future origins. It has been held as a valid and legal undertaking, the amounts specified as consideration in the contracts do not limit the amount
for which the pledge or mortgage stands as security, if from the four corners of the instrument, the intent to secure future and other indebtedness can
be gathered. A pledge or mortgage given to secure future advancements is a continuing security and is not discharged by the repayment of the amount
named in the mortgage until the full amount of all advancements shall have been paid.25
A "dragnet clause" operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to
execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. 26 While a
real estate mortgage may exceptionally secure future loans or advancements, these future debts must be sufficiently described in the mortgage
contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract.27
In holding that the REMs were null and void, the CA opined that the full amount of the principal loan stated in the deed should have been released in
full, sustaining the position of the respondents that the promissory notes were not secured by the mortgage and unrelated to it. However, a reading of
the afore-quoted provision of the REMs shows that its terms are broad enough to cover packing credits and export advances granted by the petitioner
to respondents. That the respondents subsequently availed of letters of credit and export advances in various amounts as reflected in the promissory
notes, buttressed the claim of petitioner that the amounts of P86,000.00 and P60,000.00 stated in the REMs merely represent the maximum total
loans which will be secured by the mortgage. This must be so as respondents confirmed that the mortgage was constituted for the purpose of
obtaining additional capital as dictated by the needs of their export business. Significantly, no complaint was made by the respondents as to the non-
release of P86,000.00 and P60,000.00, in full, simultaneous or immediately following the execution of the REMs -- under a single promissory note
each equivalent to the said sums -- and no demand for the said specific amounts was ever made by the petitioner. Even the letter-complaint sent by
respondents to the Central Bank almost a year after the extrajudicial foreclosure sale mentioned only the questioned entries in their passbook and the
$4,220.00 telegraphic transfer. Considering that respondents deemed it a serious "banking malpractice" for petitioner not to release in full the loan
amount stated in the REMs, it can only be inferred that respondents themselves understood that the P86,000.00 and P60,000.00 indicated in the
REMs was intended merely to fix a ceiling for the loan accommodations which will be secured thereby and not the actual principal loan to be
released at one time. Thus, the RTC did not err in upholding the validity of the REMs and ordering the respondents to pay the deficiency in the
foreclosure sale to satisfy the remaining mortgage indebtedness.
The cases relied upon by the CA are all inapplicable to the present controversy.lawph!1 In Filipinas Marble Corporation, we held that pending the
outcome of litigation between DBP which together with Bancom officers were alleged by the petitioner-mortgagor to have misspent and
misappropriated the $5 million loan granted by DBP, the provisions of P.D. No. 385 prohibiting injunctions against foreclosures by government
financial institutions, cannot be automatically applied. Foreclosure of the mortgaged properties for the whole amount of the loan was deemed
prejudicial to the petitioner, its employees and their families since the true amount of the loan which was applied for the benefit of the petitioner can
be determined only after a trial on the merits.28 No such act of misappropriation by corporate officers appointed by the mortgagee is involved in this
case. Besides, the respondents never denied receiving the amounts under the promissory notes which were all covered by the REMs and the very
obligations subject of the extrajudicial foreclosure.
As to the ruling in Naguiat, we found therein no compelling reason to disturb the lower courts’ finding that the lender did not remit and the borrower
did not receive the proceeds of the loan. Hence, we held the mortgage contract, being just an accessory contract, as null and void for absence of
consideration.29 In this case, however, respondents admitted they received all the amounts under the promissory notes presented by the petitioner. The
consideration in the execution of the REMs consist of those credit accommodations to fund their export transactions. Respondents as an afterthought
raised issue on the nature of the amounts of principal loan indicated in the REMs long after these obligations have matured and the mortgage
foreclosed due to their failure to fully settle their outstanding accounts with petitioner. Having expressly agreed to the terms of the REMs which are
phrased to secure all such loans and advancements to be obtained from petitioner, although the principal amount stated therein were not released at
one time and under several, not just one, subsequently issued promissory notes, respondents may not be allowed to complain later that the amounts
they received were unrelated to the REMs.
On the issue of the $4,220.00 telegraphic transfer which was applied by the petitioner to the loan account of respondents, we hold that the CA erred
in holding that petitioner had no authority to do so by way of compensation or set off. In this case, the parties stipulated on the manner of such set off
in case of non-payment of the amount due under each promissory note.
The subject promissory notes thus provide:
In case of non-payment of this note or any installments thereof at maturity, I/We jointly and severally, agree to pay an additional amount equivalent
to two per cent (2%) per annum of the amount due and demandable as penalty and collection charges, in the form of liquidated damages, until fully
paid; and the further sum of ten per cent (10%) thereof in full, without any deduction, as and for attorney’s fees whether actually incurred or not,
exclusive of costs and judicial/extrajudicial expenses; moreover, I/We, jointly and severally, further empower and authorize the TRADERS ROYAL
BANK, at its option, and without notice, to set-off or to apply to the payment of this note any and all funds, which may be in its hands on deposit or
otherwise belonging to anyone or all of us, and to hold as security therefor any real or personal property, which may be in its possession or control by
virtue of any other contract.30 (Emphasis supplied.)
Agreements for compensation of debts or any obligations when the parties are mutually creditors and debtors are allowed under Art. 1282 of the
Civil Code even though not all the legal requisites for legal compensation are present. Voluntary or conventional compensation is not limited to
obligations which are not yet due.31 The only requirements for conventional compensation are (1) that each of the parties can fully dispose of the
credit he seeks to compensate, and (2) that they agree to the extinguishment of their mutual credits. 32 Consequently, no error was committed by the
trial court in holding that petitioner validly applied, by way of compensation, the $4,220.00 telegraphic transfer remitted by respondents’ foreign
client through the petitioner.
WHEREFORE, the petition is GRANTED. The Decision dated January 11, 2006 of the Court of Appeals in CA-G.R. CV No. 67257 is REVERSED
and SET ASIDE. The Joint Decision dated August 26, 1998 of the Regional Trial Court of Cebu City, Branch 13 in Civil Case Nos. R-22608 and
CEB-112 is REINSTATED and UPHELD.
No pronouncement as to costs.
SO ORDERED.
G.R. Nos. L-54224-25 August 16, 1989
ANTONIO TAMBUNTING and AURORA TAMBUNTING, petitioners,
vs.
REHABILITATION FINANCE CORPORATION (now Development Bank of the Philippines), HEIRS OF JOSE ESCUETA AND
ELEUTERIA ESCUETA, DEMETRIO HERNANDEZ, CANDELARIA PAGUIO and THE COURT OF APPEALS, respondents.
Jose W. Diokno for petitioners.
Teves, Campos & Lim for respondent Heirs of Jose and Eleuteria Escueta. Alberto, Salazar & Associates for respondents Candelaria Paguio and
Heirs of Demetrio Hernandez

NARVASA, J.:
A contract is the law between the parties and, absent any showing that its provisions are wholly or in part contrary to law, morals, good customs,
public order, or public policy, will be enforced to the letter by the Courts. Application of this fundamental principle is all that is required to resolve
the controversy at bar. 1
The root of the dispute is traceable to loans obtained by the Spouses Jose and Eleuteria Escueta from the Rehabilitation Finance Corporation (RFC)
in the aggregate sum of P59,000.00. The loans were secured by a mortgage constituted by said spouses over land (and improvements thereon) owned
by them, covered by Transfer Certificates of Title Numbered 493 (39774) and 494 (39775) of the Registry of Deeds of Pasay City. 2
Later, and with the consent of the RFC, the Escuetas created a second mortgage over the same property as security for a loan in the amount of P
l6,000.00 obtained by them from the Spouses Antonio and Aurora Tambunting. 3 Both first and second mortgages were recorded in the Registry of
Deeds of Pasay City. 4
The Escuetas defaulted in the payment of both loans. The Tambuntings onsequently instituted an action of foreclosure of their second mortgage in the
Court of First Instance of Pasay City. 5 Some three months later, the RFC commenced proceedings for the extra-judicial foreclosure of its first
mortgage, which resulted in the sale at public auction of the mortgaged property to the highest bidder, the RFC itself, subject to the right of
redemption of the mortgagors, the Escuetas. 6 The RFC then applied for and obtained a writ of possession from the proper Court and in virtue
thereof, took possession of the foreclosed property. 7
About eight (8) months after the foreclosure sale, the Tambuntings, as second mortgagees, offered to redeem the property. 8 The RFC agreed, subject
to the Escuetas' right of redemption as former owners thereof. 9 Their agreement was reduced to writing, entitled "Deed of Conditional Sale." Under
it, the RFC sold the property in question to the Tambuntings for P74,643.98, 20% of which (Pl4,928.89) was given as down payment, and the balance
was amortized over a period of ten (10)years. 10 The deed also contained following stipulation, 11 among others:
This contract may be evoked within one (1) year from September 16, 1955 at the option of the vendor should the former owner exercise his right to
redeem the property herein sold. In case the property is redeemed or repurchased within said period by the former owner or his successor-in-interest,
the vendor shall refund to the vendees any and all amounts that the vendees may have paid to the vendor under the conditional sale with interest as
provided for by law, rendering, thereby this instrument automatically null and void and without effect.
The Tambuntings took possession, and commenced to collect the rentals from the tenants thereof after notifying them of the deed of conditional sale
in their favor. 12 In this connection, the deed also provided that in the event of redemption by the former owner, "all rentals collected will be deducted
from the redemption price. 13
About a month later, the Escuetas learned of the sale in favor of the Tambuntings. Three (3) days before the expiry of the stipulated redemption
period, the Escuetas, having been unable to raise the amount to effect redemption, assigned their right to repurchase to the spouses Demetrio
Hernandez and Candelaria Paguio in consideration of the sum of P15,000.00. 14 On the day following, Hernandez went to the RFC and exercised the
right of redemption assigned to him by making a deposit of P19,088.89, and formally undertaking to pay the balance of the repurchase price in fixed
monthly installments over a period of ten (10) years at 6% interest per annum, these being the terms specified by the RFC for redemption, set out in
its Chairman's letter sent to the Escuetas three months after the foreclosure. 15
The RFC then notified the Tambuntings that their contract of conditional sale was deemed revoked in view of the redemption by Hernandez, the
Escuetas'successor-in-interest. 16
On the same day the Tambuntings wrote to the RFC, "vehemently" protesting the acceptance by the RFC of the redemption by the Hernandezes "as
not in accordance with law. 17 And some three weeks afterwards, they instituted in the Court of First Instance of Pasay City, an action against the
RFC, the Escueta Spouses, and the Hernandez Spouses, for (1) the nullification of (a) the deed of assignment by the Escuetas in favor of the
Hernandez Spouses, (b) the latter's redemption of the property in question, and (c) the RFC's revocation of its deed of conditional sale with the
Tambuntings; (2) the declaration of the validity of said deed of conditional sale in their favor; (3) the payment of damages by the defendants; and (4)
the payment by the Escuetas, particularly, of rentals in arrears for their use and occupation of one of the apartments standing on the mortgaged
property. This action, docketed as Case No. 1686-P, was the Tambuntings' second involving the same property, their first, Case No. 1565-P, being one
for the foreclosure of their second mortgage. 18
The Tambuntings also amended their complaint in the first action. 19 They alleged that —
1) the deed of assignment of the Escuetas' right of redemption in favor of the Hernandezes was null and void because "fictitious or simulated," and
violative of the Deed of Second Mortgage of which the assignors and the assignees had notice;
2) the redemption sought to be exercised by the Hernandezes was invalid because (a) the amount deposited (down payment of P19,088.89) was not
the full redemption price (P55,000.00) exclusive of costs, insurance premiums, interest, taxes, attorney's fees and liquidated damages, and (b) was not
accompanied by an offer to pay the Tambuntings' mortgage credit; and
3) if the verdict in Civil Case No. 1686-P uphold the redemption by the Hernandezes and the RFC's right to revoke its contract of conditional sale
with the Tambuntings, then the latter's second mortgage should be enforced on the property in question.
The two cases were consolidated, 20 and decided jointly. 21 The Trial Court's judgment went against the Tambuntings, and disposed of the cases as
follows:
1) the preliminary injunction earlier issued, restraining the defendants from taking possession of the property in question was lifted and set aside;
2) the Deed of Conditional Sale between the RFC (which had in the meantime become the Development Bank of the Philippines [DBPI]) and the
Spouses Tambuntings was declared null and void;
3) the Deed of Assignment of the Escuetas' right of redemption in favor of the Hernandezes was pronounced to be valid and subsisting; and
4) the Tambuntings were ordered to refund to the Escuetas and Hernandezes "whatever excess rentals there may be from plaintiffs' (Tambuntings')
collection on the mortgaged properties after deducting therefrom the down payment of P14,928.80 and the monthly amortizations paid by said
plaintiffs to defendant RFC under said Deed of Conditional Sale, and . . to pay the costs.
The Tambuntings appealed to the Court of Appeals, but there they fared better. That Court affirmed the Trial Court's decision in toto 22 and
subsequently denied the Tambuntings motion for reconsideration . 23 Hence, their present recourse to this Court.
The Tambuntings' submissions in this Court are substantially the same as those they laid before both the Trial Court and the Court of Appeals, to wit:
1) the Escuetas' deed of assignmnent in favor of the Hernandez Spouses violated the terms of the Tambuntings'mortgage' and was fictitious, to boot;
2) even if the assignment were valid, there had been no valid exercise of the right of redemption thereby assigned; and
3) the assignment was designed to deprive petitioners (Tambuntings) of the credit they extended; so that petitioners are also entitled to the damages
prayed for under the(ir) complaint.
The Tambuntings appeal must be rejected and dismissed for lack of merit.
In the first place, the matter of whether or not the assignment was fictitious is an issue of fact and its resolution by the Court of Appeals is, by firmly
established and long observed principle, final and conclusive on this Court. Moreover, the Escuetas' right to redeem the property within one (1) year
from September 16, 1955 was never in any doubt. As much is explicit in the Deed of Conditional Sale already referred to which documented the
Tambuntings'redemption of the property as second mortgagees and provided for its own automatic invalidation upon the exercise by the Escuetas (or
their successor-in-interest) of their own nght of redemption within said period.
Now, the theory of a fictitious transfer of the Escuetas' right of redemption is sustainable only on the premise that such transfer somehow enlarged
the scope of the right or extended the period within which it might be exercised. It did neither, however. Its only effect was to put the transferee in the
shoes of the Escuetas, with exactly the same obligations to fulfill as redemptioner and precisely the same period of time within which to do so. As far
as the Escuetas were concerned, there was no advantage to be gained, no benefit to be derived, no premium in simulating a transfer which altered
none of the conditions for a valid redemption, whether exercised by themselves or by a transferee.
In short, the Escuetas had nothing to gain by going behind the scenes, as it were, and making redemption through a dummy. And even if it be
assumed that they in fact did so, that the redemption had been made for them and on their behalf by the Hernandezes to whom; they had "fictitiously"
assigned their right of redemption, this would be utterly inconsequential, not only because as already pointed out, there is no question about their (the
Escuetas') being entitled to redeem, but also because the redemption was made strictly according to the terms — as to down payment and other
conditions — laid down by the RFC itself. Since, by the way, these terms were precisely the same as those under which the Tambuntings were
initially allowed to redeem, it is illogical and improper, to say the least, for the latter now to impugn them.
Also untenable is the contention that the deed of assignment executed by the Escuetas in favor of the Hernandez Spouses was violative of the
Tambuntings' second mortgage and therefore, inefficacious. A mortgagor, by encumbering his property, does not ordinarily lose the right to sell the
same or create another mortgage over it, although of course obliged, when exercising said right, to preserve and maintain the superiority of the prior
mortgagee's rights. Indeed, recognition of the propriety of subsequent encumbrances is implicit in the grant of the right of redemption by Section 6 of
Act 3135, as amended, in cases of extra-judicial foreclosure of mortgage, to"any person having a lien on the property subsequent to the mortgage or
deed of trust under which the property is sold," in addition to the "debtor, his successors in interest or any judicial creditor or judgment creditor of
said debtor. 24
To be sure, the deed of second mortgage executed by the Escuetas in favor of Aurora Tambunting, married to Antonio L. Tambunting, 25 does contain
a provision that 'the property mortgaged shall not be . . the subject of any new or subsequent contracts or agreements, saving and excepting those
having connection with the first mortgage with the RFC, without first securing the written permission and consent of the MORTGAGEE." But the
provision can only be construed as directed against subsequent mortgages or encumbrances, not to an alienation of the immovable itself. For while
covenants prohibiting the owner from constituting a later mortgage over property registered under the Torrens Act have been held to be legally
permissible, 26 stipulations "forbidding the owner from alienating the immovable mortgaged," are expressly declared void by law. 27 It is clear then
that the stipulation against "subsequent agreements" above mentioned had not been breached by the assignment by the Escuetas (to the Hernandezes)
of their right of redemption in connection with the mortgage constituted in favor of the RFC. The assignment was not a subsequent mortgage or
encumbrance, licitly comprehended by the prohibitory stipulation, but was actually a sale or conveyance of all their rights in the encumbered real
property-in truth, an alienation of the immovable-which could not lawfully be forbidden. Moreover, since the subject of the assignment to the
Hernandezes had "connection with the first mortgage with the RFC," it did not fall within, but was explicitly excepted from, the prohibitory
stipulation in question. Finally, it should not be forgotten that since the Tambuntings, in their own deed of conditional sale with the RFC, had
accepted without demur the provision that said contract could be revoked within one (1) year from September 16, 1 955 at the option of the RFC, as
vendor, should the former owner (Escueta) exercise his right to redeem the property; and that the redemption of the property within said period by
"the former owner or his successor-in-interest" would render their instrument of conditional sale "automatically null and void and without
effect, 28 they cannot now assume a position inconsistent with said provision.
The execution by the Escuetas of a second mortgage over their property had the effect of subjecting the same property to the payment of two
obligations. Both mortgage debts had to be paid by the mortgagors. If they failed to pay either or both, the unpaid mortgagee had the right to look to
the property for satisfaction. Each mortgagee had the right to foreclose the mortgage; but obviously, the second mortgagee's right was inferior and
subordinate to the first. Prior foreclosure by the second mortgagee could not affect the first mortgagee's rights at all; and if the first mortgagee
foreclosed first, the second mortgagee had the right to redeem; i.e., pay the first mortgagee's credit, together with all due interests and charges and
thus acquire the property mortgaged, subject to the right of redemption of the mortgagor.
On the other hand, the assignment by the Escuetas of their right of redemption (as regards both mortgage obligations) to the Hernandez Spouses
operated as a transfer of the property itself, together with its recorded encumbrances. The acquisition by the Hernandezes of the Escuetas' rights over
the property carried with it the assumption of the obligations burdening the property, as recorded in the Registry of Property, i.e., the mortgage debts
in favor of the RFC (DBP) and the Tambuntings. The Hernandezes, by stepping into the Escuetas' shoes as assignees, had the obligation to pay the
mortgage debts, otherwise, these debts would and could be enforced against the property subject of the assignment. Stated otherwise, the
Hernandezes, by the assignment, obtained the right to remove the burdens on the property subject thereof by paying the obligations thereby secured;
that is to say, they had the right of redemption as regards the first mortgage, to be exercised within the time and in the manner prescribed by law and
the mortgage deed; and as regards, the second mortgage, sought to be judicially foreclosed but yet unforeclosed, they had the so-called equity of
redemption. 29
The Tambuntings were perfectly within their rights when they offered to redeem the property in question after it had been foreclosed and acquired at
public auction by the RFC. And it was correct for the RFC, in accepting the Tambuntings' offer and acquiescing to their redemption of the
property, to make such redemption subject to the Escuetas' own right of redemption, which was exigible against the RFC itself. Hence it was that the
Deed of Conditional Sale executed consequent upon that redemption between the RFC and the Tambuntings, expressly provided in language that
could not be made any plainer that — 30
This contract may be revoked within one (1) year from September 16, 1955 at the option of the vendor should the former owner exercise his light to
redeem the property herein sold. In case the property is redeemed or repurchased within said period by the former owner or his successor-in-interest,
the vendor shall refund to the vendees any and all amounts that the vendees may have paid to the vendor under the conditional sale with interest as
provided for by law, rendering thereby this instrument automatically null and void and without effect.
The Court has been cited to no fact or argument invalidating this stipulation. The Tambuntings make no claim that their consent to the deed of
conditional sale was in any manner flawed, or that the stipulation is contrary to law, morals, good customs, public order, or public policy. 31 The
stipulation is a perfectly legitimate one. The Tambuntings are bound by it.
There is no dispute either about the fact that the redemption by the Hernandezes, as assignees of the mortgagor spouses, the Escuetas, was made
within the time and in the manner laid down by law and the RFC itself. Their redemption was deemed by the RFC to have been properly exercised.
The RFC therefore revoked its contract with the Tambuntings, as it was bound to pursuant to the explicit provision thereof above quoted-indeed, that
contract was, by its terms, rendered "automatically null and void and without effect" by the redemption-and executed in the Hernandezes' favor a
deed of conditional sale, substantially identical to that earlier signed in favor of the Tambuntings.
Nor can there be any question about the effects of that redemption by the Hernandezes as far as the Tambuntings are concerned. By reason thereof —
1) the Tambuntings acquired the right to a refund of "any and all amounts that . . (they) may have paid to the . . (RFC DBP) under the conditional
sale with interest as provided for by law;" and
2) their credit against the Escuetas, and their right to foreclose the second mortgage given as security therefor-and now still subject of Civil Case
No.1656-P of the CFI (now RTC) of Pasay City-remained unaffected and intact, subject, of course, to the equity of redemption which the
Hernandezes may exercise as assignees of the Escuetas.
WHEREFORE, the petition for review on certiorari is DENIED, and the judgment of the Court of Appeals thereby challenged is AFFIRMED, with
the modification hereinafter decreed. The case is accordingly remanded to the Trial Court for a determination not only of (1) the "excess rentals there
may be from plaintiffs' (the Tambuntings') collection on the mortgaged properties" to be refunded by said Tambuntings to the "defendants spouses
Escueta and Hernandez " — counted from the date that the Tambuntings were notified in writing by the RFC of the revocation of the deed of
conditional sale executed in their favor — "after deducting therefrom the down payment of P14,928.80 and the monthly amortizations paid by said
plaintiffs to defendant RFC under said Deed of Conditional Sale," as ordained by the judgment of the Trial Court, but also (2) the balance of the
Tambuntings' mortgage credit against the Escuetas, together with all stipulated interests and charges, which the Hernandezes, as assignees of the
Escuetas, are bound to pay to the Tambuntings within ninety (90) days from finality of that determination, in default of which the property shall be
sold at public auction in accordance with the provisions of Rule 68 of the Rules of Court. Costs against petitioners.
Cruz, Gancayco, Griñ;o-Aquino and Medialdea, JJ., concur.
EN BANC
[G.R. No. 130722. December 9, 1999]
SPS. REYNALDO K. LITONJUA and ERLINDA P. LITONJUA and PHIL. WHITE HOUSE AUTO SUPPLY, INC., petitioners, vs. L & R
CORPORATION, VICENTE COLOYAN in his capacity as Acting Registrar of the Register of Deeds of Quezon City thru Deputy
Sheriff ROBERTO R. GARCIA, respondents.
DECISION
YNARES-SANTIAGO, J.:
May a mortgage contract provide: (a) that the mortgagor cannot sell the mortgaged property without first obtaining the consent of the mortgagee
and that, otherwise, the sale made without the mortgagees consent shall be invalid; and (b) for a right of first refusal in favor of the mortgagee?
The controversy stems from loans obtained by the spouses Litonjua from L & R Corporation in the aggregate sum of P400,000.00; P200,000.00
of which was obtained on August 6, 1974 and the remaining P200,000.00 obtained on March 27, 1978. The loans were secured by a
mortgage[1] constituted by the spouses upon their two parcels of land and the improvements thereon located in Cubao, Quezon City covered by
Transfer Certificates of Title No. 197232 and 197233, with an area of 599 and 1,436 square meters, respectively. The mortgage was duly registered
with the Register of Deeds of Quezon City.
On July 14, 1979, the spouses Litonjua sold to Philippine White House Auto Supply, Inc. (PWHAS) the parcels of land they had previously
mortgaged to L & R Corporation for the sum of P430,000.00. [2] The sale was annotated at the back of the respective certificates of title of the
properties.[3]
Meanwhile, with the spouses Litonjua having defaulted in the payment of their loans, L & R Corporation initiated extrajudicial foreclosure
proceedings with the Ex-Oficio Sheriff of Quezon City. On July 23, 1980, the mortgaged properties were sold at public auction to L & R Corporation
as the only bidder for the amount of P221,624.58. [4] When L & R Corporation presented its corresponding Certificate of Sale issued by Deputy
Sheriff Roberto B. Garcia, to the Quezon City Register of Deeds for registration on August 15, 1980, it learned for the first time of the prior sale of
the properties made by the spouses Litonjua to PWHAS upon seeing the inscription at the back of the certificates of title. Thus, on August 20, 1980,
it wrote a letter[5] to the Register of Deeds of Quezon City requesting for the cancellation of the annotation regarding the sale to PWHAS. L & R
Corporation invoked a provision in its mortgage contract with the spouses Litonjua stating that the mortgagees prior written consent was necessary in
case of subsequent encumbrance or alienation of the subject properties. Thus, it argued that since the sale to PWHAS was made without its prior
written consent, the same should not have been registered and/or annotated.
On March 10, 1981, or seven months after the foreclosure sale, PWHAS, for the account of the spouses Litonjua, tendered payment of the full
redemption price to L & R Corporation in the form of China Bank Managers Check No. HOF-M O12623 in the amount of P238,468.04. [6] See
Exhibits G & 2, Letter of PWHAS to L & R Corporation, id.6 L & R Corporation, however, refused to accept the payment, hence, PWHAS was
compelled to redeem the mortgaged properties through the Ex-Oficio Sheriff of Quezon City. On March 31, 1981, it tendered payment of the
redemption price to the Deputy Sheriff through China Bank Managers Check No. HOF-O14750 in the amount of P240,798.94. [7] The check was
deposited with the Branch Clerk of Court who issued Receipt No. 7522484 [8] for the full redemption price of the mortgaged properties. Accordingly,
the Deputy Sheriff issued a Certificate of Redemption in favor of the spouses Litonjua dated March 31, 1981.[9]
In a letter of the same date, the Deputy Sheriff informed L & R Corporation of the payment by PWHAS of the full redemption price and advised
it that it can claim the payment upon surrender of its owners duplicate certificates of title.[10]
On April 2, 1981, the spouses Litonjua presented for registration the Certificate of Redemption issued in their favor to the Register of Deeds of
Quezon City. The Certificate also informed L & R Corporation of the fact of redemption and directed the latter to surrender the owners duplicate
certificates of title within five days.[11]
On April 22, 1981, L & R Corporation wrote a letter to the Sheriff, copy furnished to the Register of Deeds, stating: (1) that the sale of the
mortgaged properties to PWHAS was without its consent, in contravention of paragraphs 8 and 9 of their Deed of Real Estate Mortgage; and (2) that
it was not the spouses Litonjua, but PWHAS, who was seeking to redeem the foreclosed properties, when under Articles 1236 and 1237 of the New
Civil Code, the latter had no legal personality or capacity to redeem the same.[12]
On the other hand, on May 8 and June 8, 1981, the spouses Litonjua asked the Register of Deeds to annotate their Certificate of Redemption as
an adverse claim on the titles of the subject properties on account of the refusal of L & R Corporation to surrender the owners duplicate copies of the
titles to the subject properties. With the refusal of the Register of Deeds to annotate their Certificate of Redemption, the Litonjua spouses filed a
Petition[13] on July 17, 1981 against L & R Corporation for the surrender of the owners duplicate of Transfer Certificates of Title No. 197232 and
197233 before the then Court of First Instance of Quezon City, Branch IV, docketed as Civil Case No. 32905.
On August 15, 1981, while the said case was pending, L & R Corporation executed an Affidavit of Consolidation of Ownership. [14] Thereafter, on
August 20, 1981, the Register of Deeds cancelled Transfer Certificates of Title No. 197232 and 197233 and in lieu thereof, issued Transfer
Certificates of Title No. 280054[15] and 28055[16] in favor of L & R Corporation, free of any lien or encumbrance.
With titles issued in its name, L & R Corporation advised the tenants of the apartments situated in the subject parcels of land that being the new
owner, the rental payments should be made to them, and that new lease contracts will be executed with interested tenants before the end of August,
1981.[17] Upon learning of this incident from their tenants, the spouses Litonjua filed an adverse claim [18] and a notice of lis pendens[19] with the
Register of Deeds. In the process, they learned that the prior sale of the properties in favor of PWHAS was not annotated on the titles issued to L &
R.
A complaint for Quieting of Title, Annulment of Title and Damages with preliminary injunction was filed by the spouses Litonjua and PWHAS
against herein respondents before the then Court of First Instance of Quezon City, Branch 9, docketed as Civil Case No. Q-33362. [20] On February 10,
1987, the lower court rendered its Decision[21] dismissing the Complaint upon its finding that the sale between the spouses Litonjua and PWHAS was
null and void and unenforceable against L & R Corporation and that the redemption made was also null and void.
On appeal, the decision of the trial court was set aside by the Court of Appeals in its Decision dated June 22, 1994, [22] on the ground that the sale
made to PWHAS as well as the redemption effected by the spouses Litonjua were valid. However, the same was subsequently reconsidered and set
aside in an Amended Decision dated September 11, 1997.[23]
Hence, the instant Petition on the following issues:
(1) whether or not paragraphs 8 and 9 of the Real Estate Mortgage are valid and enforceable;
(2) whether or not the sale of the mortgaged properties by the spouses Litonjua to PWHAS, without the knowledge and consent of L & R
Corporation, is valid and enforceable;
(3) whether or not PWHAS had the right to redeem the foreclosed properties on the account of the spouses Litonjua; and
(4) whether or not there was a valid redemption.
Paragraphs 8 and 9 of the subject Deed of Real Estate Mortgage read as follows
"8. That the MORTGAGORS shall not sell, dispose of, mortgage, nor in any other manner encumber the real property/properties subject of this
mortgage without the prior written consent of the MORTGAGEE;
9. That should the MORTGAGORS decide to sell the real property/properties subject of this mortgage, the MORTGAGEE shall be duly notified
thereof by the MORTGAGORS, and should the MORTGAGEE be interested to purchase the same, the latter shall be given priority over all the other
prospective buyers;[24]
There is no question that the spouses Litonjua violated both the aforesaid provisions, selling the mortgaged properties to PWHAS without the
prior written consent of L & R Corporation and without giving the latter notice of such sale nor priority over PWHAS.
Re: Validity of prohibition against subsequent sale of mortgaged property without prior written consent of mortgagee and validity of subsequent sale to PWHAS

Petitioners defend the validity of the sale between them by arguing that paragraph 8 violates Article 2130 of the New Civil Code which provides
that (A) stipulation forbidding the owner from alienating the immovable mortgaged shall be void.
In the case of Philippine Industrial Co. v. El Hogar Filipino and Vallejo,[25] a stipulation prohibiting the mortgagor from entering into second or
subsequent mortgages was held valid. This is clearly not the same as that contained in paragraph 8 of the subject Deed of Real Estate Mortgage
which also forbids any subsequent sale without the written consent of the mortgagee. Yet, in Arancillo v. Rehabilitation Finance Corporation, [26] the
case of Philippine Industrial Co., supra, was erroneously cited to have held that the prohibition in a mortgage contract against the encumbrance, sale
or disposal of the property mortgaged without the consent of the mortgagee is valid. No similar prohibition forbidding the owner of mortgaged
property from (subsequently) mortgaging the immovable mortgaged is found in our laws, making the ruling in Philippine Industrial Co., supra,
perfectly valid. On the other hand, to extend such a ruling to include subsequent sales or alienation runs counter not only to Philippine Industrial Co.,
itself, but also to Article 2130 of the New Civil Code.
Meanwhile in De la Paz v. Macondray & Co., Inc., [27] it was held that while an agreement of such nature does not nullify the subsequent sale
made by the mortgagor, the mortgagee is authorized to bring the foreclosure suit against the mortgagor without the necessity of either notifying the
purchaser or including him as a defendant. At the same time, the purchaser of the mortgaged property was deemed not to have lost his equitable right
of redemption.
In Bonnevie v. Court of Appeals,[28] where a similar provision appeared in the subject contract of mortgage, the petitioners therein, to whom the
mortgaged property were sold without the written consent of the mortgagee, were held as without the right to redeem the said property. No consent
having been secured from the mortgagee to the sale with assumption of mortgage by petitioners therein, the latter were not validly substituted as
debtors. It was further held that since their rights were never recorded, the mortgagee was charged with the obligation to recognize the right of
redemption only of the original mortgagors-vendors. Without discussing the validity of the stipulation in question, the same was, in effect, upheld.
Again, in Cruz v. Court of Appeals,[29] while a similar provision was recognized and applied, no discussion as to its validity was made since the
same was not raised as an issue.
On the other hand, in Tambunting v. Rehabilitation Finance Corporation,[30] the validity of a similar provision was specifically raised and
discussed and found as invalid. It was there ratiocinated that --
To be sure, the deed of second mortgage executed by the Escuetas in favor of Aurora Tambunting, married to Antonio L. Tambunting, does contain a
provision that the property mortgaged shall not be x x x the subject of any new or subsequent contracts of agreements, saving and excepting those
having connection with the first mortgage with the RFC, without first securing the written permission and consent of the MORTGAGEE. But the
provision can only be construed as directed against subsequent mortgages or encumbrances, not to an alienation of the immovable itself. For while
covenants prohibiting the owner from constituting a later mortgage over property registered under the Torrens Act have been held to be legally
permissible (Phil. Industrial Co. v. El Hogar Filipino, et al., 45 Phil. 336, 341-342; Bank of the Philippines v. Ty Camco Sobrino, 57 Phil. 801),
stipulations forbidding the owner from alienating the immovable mortgaged are expressly declared void by law (Art. 2130, Civil Code). It is clear
that the stipulation against subsequent agreements above mentioned had not been breached by the assignment by the Escuetas (to the Hernandezes)
of their right of redemption in connection with the mortgage constituted in favor of the R.F.C. The assignment was not a subsequent mortgage or
encumbrance, licitly comprehended by the prohibitory stipulation, but was actually a sale or conveyance of all their rights in the encumbered real
property in truth, an alienation of the immovable which could not lawfully be forbidden. Moreover, since the subject of the assignment to the
Hernandezes had connection with the first assignment with the R.F.C., it did not fall within, but was explicitly excepted from, the prohibitory
stipulation in question. Finally, it should not be forgotten that since the Tambuntings, in their own deed of conditional sale with the R.F.C., had
accepted without demur the provision that said contract could be revoked within one (1) year from September 16, 1955 at the option of the RFC, as
vendor, should the former owner (Escueta) exercise his right to redeem the property; and that the redemption of the property within said period by
the former owner or his successor-in-interest would render their instrument of conditional sale automatically null and void and without effect, they
cannot now assume a position inconsistent with said provision. (underscoring, Ours)
 Earlier, in PNB v. Mallorca,[31] it was reiterated that a real mortgage is merely an encumbrance; it does not extinguish the title of the debtor,
whose right to dispose a principal attribute of ownership is not thereby lost. Thus, a mortgagor had every right to sell his mortgaged property, which
right the mortgagee cannot oppose.
In upholding the validity of the stipulation in question, the amended Decision relied on the cases of Cruz v. Court of Appeals, supra, and Medida
v. Court of Appeals.[32] According to the Court of Appeals, said cases, are not only more recent that that of Tambunting, supra, but are also more
applicable to the issue at bar.
We are not convinced.
As we have mentioned, although a similar provision was recognized and applied in Cruz v. Court of Appeals, supra, no discussion as to its
validity was made since the same was not raised as an issue.Thus, it cannot be said that the specific pronouncement in the Tambunting case that such
a stipulation can only be construed as against subsequent mortgages or encumbrances but not to an alienation of the immovable itself, which is
prohibited under Article 2130, was abandoned thereby. On the other hand, the facts in the case of Medida v. Court of Appeals, are different from
those in the present case for what was in issue in the said case was a second mortgage over a foreclosed property during the period of
redemption. Thus, the ruling in Medida quoted in the Amended Decision that what is delimited is not the mortgagors jus dispodendi, as an attribute
of ownership, but merely the rights conferred by such act of disposal which may correspondingly be restricted, actually refers to the fact that the only
rights which a mortgagor can legally transfer, cede and convey after the foreclosure of his properties are the right to redeem the land, and the
possession use and enjoyment of the same during the period of redemption. It has no connection or reference to the right of a mortgagor to sell his
mortgaged property without the required consent of the mortgagee. To be sure, there is absolutely nothing in Medida that upholds the validity of the
stipulation in controversy.
Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling his mortgaged property without the consent of the
mortgagee is concerned, therefore, the ruling in theTambunting case is still the controlling law. Indeed, we are fully in accord with the
pronouncement therein that such a stipulation violates Article 2130 of the New Civil Code. Both the lower court and the Court of Appeals in its
Amended Decision rationalize that since paragraph 8 of the subject Deed of Real Estate Mortgage contains no absolute prohibition against the sale of
the property mortgaged but only requires the mortgagor to obtain the prior written consent of the mortgagee before any such sale, Article 2130 is not
violated thereby. This observation takes a narrow and technical view of the stipulation in question without taking into consideration the end result of
requiring such prior written consent. True, the provision does not absolutely prohibit the mortgagor from selling his mortgaged property; but what it
does not outrightly prohibit, it nevertheless achieves. For all intents and purposes, the stipulation practically gives the mortgagee the sole prerogative
to prevent any sale of the mortgaged property to a third party. The mortgagee can simply withhold its consent and thereby, prevent the mortgagor
from selling the property. This creates an unconscionable advantage for the mortgagee and amounts to a virtual prohibition on the owner to sell his
mortgaged property. In other words, stipulations like those covered by paragraph 8 of the subject Deed of Real Estate Mortgage circumvent the law,
specifically, Article 2130 of the New Civil Code.
Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not binding upon the parties. Accordingly, the sale made by
the spouses Litonjua to PWHAS, notwithstanding the lack of prior written consent of L & R Corporation, is valid.
Re: Validity of redemption effected by PWHAS on the account of the spouses Litonjua

Coming now to the issue of whether the redemption offered by PWHAS on account of the spouses Litonjua is valid, we rule in the
affirmative. The sale by the spouses Litonjua of the mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped into the shoes of the
spouses Litonjua on account of such sale and was in effect, their successor-in-interest. As such, it had the right to redeem the property foreclosed by
L & R Corporation. Again, Tambunting, supra, clarifies that
x x x. The acquisition by the Hernandezes of the Escuetas rights over the property carried with it the assumption of the obligations burdening the
property, as recorded in the Registry of Property, i.e., the mortgage debts in favor of the RFC (DBP) and the Tambuntings. The Hernandezes, by
stepping into the Escuetas shoes as assignees, had the obligation to pay the mortgage debts, otherwise, these debts would and could be enforced
against the property subject of the assignment. Stated otherwise, the Hernandezes, by the assignment, obtained the right to remove the burdens on the
property subject thereof by paying the obligations thereby secured; that is to say, they had the right of redemption as regards the first mortgage, to be
exercised within the time and in the manner prescribed by law and the mortgage deed; and as regards the second mortgage, sought to be judicially
foreclosed but yet unforeclosed, they had the so-called equity of redemption.
The redemption of PWHAS to redeem the subject properties finds support in Section 6 of Act 3135 itself which gives not only the mortgagor-
debtor the right to redeem, but also his successors-in-interest.As vendee of the subject properties, PWHAS qualifies as such a successor-in-interest of
the spouses Litonjua.
Re: Validity of redemption made

It is clear from the records that PWHAS offered to redeem the subject properties seven (7) months after the date of registration of the foreclosure
sale, well within the one year period of redemption.
Re: Validity and enforceability of stipulation granting the mortgagee the right of first refusal

While petitioners question the validity of paragraph 8 of their mortgage contract, they appear to be silent insofar as paragraph 9 thereof is
concerned. Said paragraph 9 grants upon L & R Corporation the right of first refusal over the mortgaged property in the event the mortgagor decides
to sell the same. We see nothing wrong in this provision. The right of first refusal has long been recognized as valid in our jurisdiction. The
consideration for the loan-mortgage includes the consideration for the right of first refusal. L & R Corporation is in effect stating that it consents to
lend out money to the spouses Litonjua provided that in case they decide to sell the property mortgaged to it, then L & R Corporation shall be given
the right to match the offered purchase price and to buy the property at that price. Thus, while the spouses Litonjua had every right to sell their
mortgaged property to PWHAS without securing the prior written consent of L & R Corporation, it had the obligation under paragraph 9, which is a
perfectly valid provision, to notify the latter of their intention to sell the property and give it priority over other buyers. It is only upon failure of L &
R Corporation to exercise its right of first refusal could the spouses Litonjua validly sell the subject properties to others, under the same terms and
conditions offered to L & R Corporation.
What then is the status of the sale made to PWHAS in violation of L & R Corporations contractual right of first refusal? On this score, we agree
with the Amended Decision of the Court of Appeals that the sale made to PWHAS is rescissible. The case of Guzman, Bocaling & Co v.
Bonnevie[33] is instructive on this point
The respondent court correctly held that the Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a
contract otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors. The status of creditors could
be validly accorded the Bonnevies for they had substantial interests that were prejudiced by the sale of the subject property to the petitioner without
recognizing their right of first priority under the Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third persons, to secure reparation for damages
caused to them by a contract, even if this should be valid, by means of the restoration of things to their condition at the moment prior to the
celebration of said contract. It is a relief allowed for one of the contracting parties and even third persons from all injury and damage the contract
may cause, or to protect some incompatible and preferential right created by the contract. Rescission implies a contract which, even if initially valid,
produces a lesion or pecuniary damage to someone that justifies its invalidation for reasons of equity. (underscoring, Ours)
It was then held that the Contract of Sale there, which violated the right of first refusal, was rescissible.
In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to L & R Corporation over the subject properties since the
Deed of Real Estate Mortgage containing such a provision was duly registered with the Register of Deeds. As such, PWHAS is presumed to have
been notified thereof by registration, which equates to notice to the whole world.
We note that L & R Corporation had always expressed its willingness to buy the mortgaged properties on equal terms as PWHAS. Indeed, in its
Answer to the Complaint filed, L & R Corporation expressed that it was ready, willing and able to purchase the subject properties at the same
purchase price of P430,000.00, and was agreeable to pay the difference between such purchase price and the redemption price of P249,918.77,
computed as of August 13, 1981, the expiration of the one-year period to redeem. That it did not duly exercised its right of first refusal at the
opportune time cannot be taken against it, precisely because it was not notified by the spouses Litonjua of their intention to sell the subject property
and thereby, to give it priority over other buyers.
All things considered, what then are the relative rights and obligations of the parties? To recapitulate:, the sale between the spouses Litonjua and
PWHAS is valid, notwithstanding the absence of L & R Corporations prior written consent thereto. Inasmuch as the sale to PWHAS was valid, its
offer to redeem and its tender of the redemption price, as successor-in-interest of the spouses Litonjua, within the one-year period should have been
accepted as valid by L & R Corporation. However, while the sale is, indeed, valid, the same is rescissible because it ignored L & R Corporations right
of first refusal.
Foreseeing a possible rescission of the sale, the spouses Litonjua contend that with the restoration of the original status quo, with no sale having
been made, they should now be allowed to redeem the subject properties, the period of redemption having been suspended during the period of
litigation. In effect, the spouses Litonjua want to retain ownership of the same. We cannot, however, sanction this belated reversal of the spouses
Litonjuas decision to sell. To do so would afford them undue advantage on account of the appreciation of the value of the subject properties in the
intervening years when they precisely were the ones who violated and ignored the right of first refusal of L & R Corporation over the
same. Moreover, it must be stressed that in rescinding the sale made to PWHAS, the purpose is to uphold and enforce the right of first refusal of L &
R Corporation.
WHEREFORE, the Decision appealed from is hereby AFFIRMED with the following MODIFICATIONS:
(a) Ordering the rescission of the sale of the mortgaged properties between petitioners spouses Reynaldo and Erlinda Litonjua and
Philippine White House Auto Supply, Inc. and ordering said spouses to return to Philippine White House Auto Supply, Inc. the purchase
price of P430,000.00;
(c) Disallowing, due to the rescission of the sale made in its favor, the redemption made by Philippine White House Auto Supply, Inc. and
ordering Quezon City Sheriff Roberto Garcia to return to it the redemption check of P240,798.94;
 (d) Allowing respondent L & R Corporation to retain its consolidated titles to the foreclosed properties but ordering it to pay to the Litonjua
spouses the additional sum of P189,201.96 representing the difference from the purchase price of P430,000.00 in the rescinded sale;
(e) Deleting the awards for moral and exemplary damages and attorneys fees to the respondents.
No pronouncement as to costs.
SO ORDERED.
[G.R. No. 130722. March 27, 2000]
SPS. REYNALDO K. LITONJUA and ERLINDA P. LITONJUA and PHIL. WHITE HOUSE AUTO SUPPLY, INC., petitioners, vs. L & R
CORPORATION, VICENTE M. COLOYAN in his capacity as Acting Registrar of the Register of Deeds of Quezon City thru Deputy Sheriff
ROBERTO R. GARCIA, respondents.HATOL
RE S O LUTI ON
YNARES-SANTIAGO, J.:
For resolution is petitioners Motion for Partial Reconsideration of our December 9, 1999 Decision on the following grounds:
"I........THE PROVISION OF PARAGRAPH NO. 9 OF THE SUBJECT MORTGAGE CONTRACT IS NULL AND VOID AB
INITIO.
II........THE RESCISSION OF THE DEED OF SALE DATED 6 AUGUST 1974 BETWEEN THE SPS. LITONJUA AND
PHIILIPPINE WHITEHOUSE AUTO SUPPLY, INC. HAS NEVER BEEN INVOKED AS A DEFENSE BY RESPONDENT L & R
CORPORATION; THUS, DEEMED WAIVED.
III........THE DECISION RESCINDING THE DEED OF SALE EXECUTED BY AND BETWEEN THE PETITIONERS IN
EFFECT DEPRIVED THEM OF THEIR BASIC RIGHT TO DUE PROCESS."
Movants first theorize that paragraphs 8 (limiting the right of the mortgagor to sell the property, which we held as void) and 9 (on the right of first
refusal of respondent Corporation) should be "regarded as a tandem designed to subvert the sound public policy prohibiting pactum commissarium";
that both paragraphs "constitute a package". In particular, petitioners argue that "(P)aragraph 9 being intended to support paragraph 8, it is therefore
coupled thereto and is thus similarly mired in its invalidity".
This is the first time, though, that petitioners have raised the issue of invalidity of paragraph 9. While respondent Corporation has consistently
invoked the provisions thereof, petitioners have remained silent insofar as this provision is concerned, concentrating their pleadings on the invalidity
of paragraph 8 alone. Not having been timely objected to below, petitioners cannot belatedly present their objections thereto at this stage.
At any rate, even if we were to entertain petitioners objections, the same will still be held as without merit. To be sure, paragraphs 8 and 9 are
separate provisions of the subject contract and the invalidity of one does not automatically render the other invalid. Indeed, Article 1420 of the New
Civil Code holds that "(I)n case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced." Contrary
to the suppositions of petitioners, the invalid stipulation is independent from the rest of the terms of the agreement and can easily be separated
therefrom without doing violence to the manifest intention of the parties. This being so, the legal terms of the contract, including paragraph 9, can be
enforced.[1]
Petitioners next argue that even if paragraph 9 is considered independently of paragraph 8, it is still unenforceable for being null and void ab initio.
In support of their argument, petitioners point out that the provision in paragraph 9 is not a perfected contract for lack of consideration as mandated
by Article 1479. Petitioners argue that our finding that the consideration for the pre-emptive right is incorporated in the amount of the loan is a
presumption that enjoys no basis.
Again, petitioners arguments must be brushed aside.
Petitioners contention that absent a consideration therefor, the right of first refusal embodied in paragraph 9 is void ab initio is misplaced. Such
contention loses sight of the difference between a right of first refusal and an option contract where a separate consideration is, indeed, required. This
distinction was set out in the analogous case of Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.[2] where it was held that
"Both contracts of lease in question provide the identically worded paragraph 8, which reads:
That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive option to purchase the
same.
In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is bound and obligated, as it
hereby binds and obligates itself, to stipulate in the Deed of Sale thereof that the purchaser shall recognize this lease and be bound by
all the terms and conditions thereof.
We agree with the respondent Court of Appeals that the aforecited contractual stipulation provides for a right of first refusal in favor of
Mayfair. It is not an option clause or an option contract. It is a contract of a right of first refusal.
As early as 1916, in the case of Beaumont vs. Prieto, unequivocal was our characterization of an option contract as one necessarily
involving the choice granted to another for a distinct and separate consideration as to whether or not to purchase a determinate thing at
a predetermined fixed price.
It is unquestionable that, by means of the document Exhibit E, to wit, the letter of December 4, 1911, quoted at the beginning of this
decision, the defendant Valdes granted to the plaintiff Borck the right to purchase the Nagtahan Hacienda belonging to Benito
Legarda, during the period of three months and for its assessed valuation, a grant which necessarily implied the offer or obligation on
the part of the defendant Valdes to sell to Borck the said hacienda during the period and for the price mentioned. x x x. There was,
therefore, a meeting of minds on the part of the one and the other, with regard to the stipulations made in the said document. But it is
not shown that there was any cause or consideration for that agreement, and this omission is a bar which precludes our holding that
the stipulations contained in Exhibit E is a contract of option, for, x x x, there can be no contract without the requisite, among others,
of the cause for the obligation to be established.
In his Law Dictionary, edition of 1897, Bouvier defines an option as a contract, in the following language:
A contract by virtue of which A, in consideration of the payment of a certain sum to B, acquires the privilege of buying from, or selling to B,
certain securities or properties within a limited time at a specified price. (Story vs. Salamon, 71 N.Y., 420).
From vol. 6, page 5001, of the work Words and Phrases, citing the case of Ide vs. Leiser (24 Pac., 695; 10 Mont., 5; 24 Am. St. Rep., 17) the
following quotation has been taken:
An agreement in writing to give a person the option to purchase lands within a given time at a named price is neither a sale nor an
agreement to sell. It is simply a contract by which the owner of property agrees with another person that he shall have the right to buy
his property at a fixed price within a certain time. He does not sell his land; he does not then agree to sell it; but he does sell
something; that is, the right or privilege to buy at the election or option of the other party. The second party gets in praesenti, not
lands, not an agreement that he shall have lands, but he does get something of value; that is, the right to call for and receive lands if he
elects. The owner parts with his right to sell his lands, except to the second party, for a limited period. The second party receives the
right, or, rather, from his point of view, he receives the right to elect to buy.
But the two definitions abovecited refer to the contract of option, or, what amounts to the same thing, to the case where there was cause or
consideration for the obligation, the subject of the agreement made by the parties; while in the case at bar there was no such cause or consideration.
The rule so early established in this jurisdiction is that the deed of option or the option clause in a contract, in order to be valid and enforceable, must,
among other things, indicate the definite price at which the person granting the option, is willing to sell.
Notably, in one case we held that the lessee loses his right to buy the leased property for a named price per square meter upon failure to make the
purchase within the time specified; in one other case we freed the landowner from her promise to sell her land if the prospective buyer could raise
P4,500.00 in three weeks because such option was not supported by a distinct consideration; in the same vein in yet one other case, we also
invalidated an instrument entitled, Option to Purchase a parcel of land for the sum of P1,510.00 because of lack of consideration; and as an exception
to the doctrine enumerated in the two preceding cases, in another case, we ruled that the option to buy the leased premises for P12,000.00 as
stipulated in the lease contract, is not without consideration for in reciprocal contracts, like lease, the obligation or promise of each party is the
consideration for that of the other. In all these cases, the selling price of the object thereof is always predetermined and specified in the option clause
in the contract or in the separate deed of option. We elucidated, thus, in the very recent case of Ang Yu Asuncion vs. Court of Appeals, that:
x x x. In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is perfected when a person,
called the seller, obligates himself, for a price certain, to deliver and to transfer ownership of a thing or right to another, called the
buyer, over which the latter agrees. Article 1458 of the Civil Code provides:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate
thing, and the other to pay therefor a price certain in money or its equivalent.
A contract of sale may be absolute or conditional.
When the sale is not absolute but conditional, such as in a Contract to Sell where invariably the ownership of the thing sold is retained
until the fulfillment of a positive suspensive condition (normally, the full payment of the purchase price), the breach of the condition
will prevent the obligation to convey title from acquiring an obligatory force. x x x.
An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is fixed, can be obligatory on
the parties, and compliance therewith may accordingly be exacted.
 An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a valuable
consideration distinct and separate from the price, is what may properly be termed a perfected contract of option. This contract is
legally binding, and in sales, it conforms with the second paragraph of Article 1479 of the Civil Code, viz.
ART. 1479. x x x.
An accepted unilateral promise to buy or sell a determinate thing for a price certain is binding upon the promisor if the promise is supported
by a consideration distinct from the price.
Observe, however, that the option is not the contract of sale itself. The optionee has the right, but not the obligation, to buy. Once the
option is exercised timely, i.e., the offer is accepted before a breach of the option, a bilateral promise to sell and to buy ensues and
both parties are then reciprocally bound to comply with their respective undertakings.
Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely an offer. Public
advertisements or solicitations and the like are ordinarily construed as mere invitations to make offers or only as proposals. These
relations, until a contract is perfected, are not considered binding commitments. Thus, at any time prior to the perfection of the
contract, either negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective
immediately after its manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal. (Laudico vs.
Arias, 43 Phil. 270). Where a period is given to the offeree within which to accept the offer, the following rules generally govern:
(1).......If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to withdraw the
offer before its acceptance, or, if an acceptance has been made, before the offerors coming to know of such fact, by communicating
that withdrawal to the offeree. The right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could
give rise to a damage claim under Article 19 of the Civil Code which ordains that every person must, in the exercise of his rights and
in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.
(2).......If the period has a separate consideration, a contract of option is deemed perfected, and it would be a breach of that contract to
withdraw the offer during the agreed period. The option, however, is an independent contract by itself, and it is to be distinguished
from the projected main agreement (subject matter of the option) which is obviously yet to be concluded. If, in fact, the optioner-
offeror withdraws the offer before its acceptance (exercise of the option) by the optionee-offeree, the latter may not sue for specific
performance on the proposed contract (object of the option) since it has failed to reach its own stage of perfection. The optioner-
offeror, however, renders himself liable for damages for breach of the option. x x x.
In the light of the foregoing disquisition and in view of the wording of the questioned provision in the two lease contracts involved in
the instant case, we so hold that no option to purchase in contemplation of the second paragraph of Article 1479 of the Civil Code, has
been granted to Mayfair under the said lease contracts.
Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the right of first refusal to Mayfair and is not
an option contract. It also correctly reasoned that as such, the requirement of a separate consideration for the option, has no
applicability in the instant case.
There is nothing in the identical Paragraphs 8 of the June 1, 1967 and March 31, 1969 contracts which would bring them into the
ambit of the usual offer or option requiring an independent consideration.
 An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price. It is a separate and
distinct contract from that which the parties may enter into upon the consummation of the option. It must be supported by
consideration. In the instant case, the right of first refusal is an integral part of the contracts of lease. The consideration is
built into the reciprocal obligations of the parties.
To rule that a contractual stipulation such as that found in paragraph 8 of the contracts is governed by Article 1324 on withdrawal of
the offer or Article 1479 on promise to buy and sell would render ineffectual or inutile the provisions on right of first refusal so
commonly inserted in leases of real estate nowadays. The Court of Appeals is correct in stating that Paragraph 8 was incorporated into
the contracts of lease for the benefit of Mayfair which wanted to be assured that it shall be given the first crack or the first option to
buy the property at the price which Carmelo is willing to accept. It is not also correct to say that there is no consideration in an
agreement of right of first refusal. The stipulation is part and parcel of the entire contract of lease. The consideration for the
lease includes the consideration for the right of first refusal. Thus, Mayfair is in effect stating that it consents to lease the premises
and to pay the price agreed upon provided the lessor also consents that, should it sell the leased property, then, Mayfair shall be given
the right to match the offered purchase price and to buy the property at that price. As stated in Vda. De Quirino vs. Palarca, in
reciprocal contract, the obligation or promise of each party is the consideration for that of the other.
In the instant case, as we have already stated in our Decision sought to be reconsidered, the consideration for the loan-mortgage includes the
consideration for the right of first refusal. Again, contrary to petitioners charge that this conclusion enjoys no basis, we have merely taken our cue
from the Equatorial case, aforequoted.
Petitioners also pray that since the subject contract is a contract of adhesion, its validity and legality should be strictly interpreted against respondent
Corporation. As explained in Ayala Corporation vs. Ray Burton Development Corporation,[3] however, where this court refrained from applying the
rule on strict interpretation of a contract of adhesion
"(T)he stringent treatment towards contracts of adhesion which the courts are enjoined to observe is in pursuance of the mandate in
Article 24 of the New Civil Code that (i)n all contractual, property or other relations, when one of the parties is at a disadvantage on
account of his moral dependence, ignorance, indigence, mental weakness, tender age or other handicap, the courts must be vigilant for
his protection.
Thus, the validity and/or enforceability of a contract of adhesion will have to be determined by the peculiar circumstances obtaining in
each case and the situation of the parties concerned."
Here, petitioners, being not only educated but businesspersons as well, cannot claim being the weaker or disadvantaged parties in the subject contract
so as to call for a strict interpretation against respondent Corporation.
The court also went on to rule in the Ayala case (supra), that since the stipulations in the subject Deed of Restrictions are plain and unambiguous,
which leave no room for interpretation, there was no cause for applying the rule on stringent treatment towards contracts of adhesion. Indeed, while
ambiguities in a contract of adhesion are to be construed against the party that prepared the same, this rule applies only if the stipulations in such
contract are obscure or ambiguous. If the terms thereof are clear and leave no doubt upon the intention of the contracting parties, the literal meaning
of its stipulations control. In the latter case, there would be no need for construction.[4] Coming now to the case at bar, considering that the contract
provision in question (paragraph 9) is likewise plain and unambiguous, we also find no occasion to apply the aforesaid treatment called for by
petitioners.
With respect to the rescission of the Deed of Sale, petitioners complain that this was never invoked as a defense by respondent corporation and is
thus deemed waived. Thus, petitioners also complain that our Decision deprived them of due process since they were not given the opportunity to
confront the issue of rescission, not having been raised as a defense by respondent corporation.
It cannot be denied, however, that respondent Corporation had always invoked its right of first refusal, which became the basis for our order of
rescission. Stated differently, rescission was the necessary relief arising out of the violation of the right of first refusal. For the same reason, neither
may petitioners complain of having been denied due process as they were given the chance to meet the issue of violation of respondent Corporations
right of first refusal upon which we anchored our order for the rescission of the Deed of Sale.
WHEREFORE, premises considered, petitioners Motion for Partial Reconsideration is hereby DENIED for lack of merit.
SO ORDERED. 6/21/00 1:40 PM