1. PRUDENTIAL BANK VS.

ALVIAR AN ALVIAR (6 pages)

TINGA, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner Prudential Bank
seeks the reversal of the Decision[1]of the Court of Appeals dated 27 September 2001 in CA-G.R. CV No. 59543
affirming the Decision of the Regional Trial Court (RTC) of Pasig City, Branch 160, in favor of respondents.
Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a parcel of land in San
Juan, Metro Manila, covered by Transfer Certificate of Title (TCT) No. 438157 of the Register of Deeds of Rizal.
On 10 July 1975, they executed a deed of real estate mortgage in favor of petitioner Prudential Bank to secure the
payment of a loan worth P250,000.00.[2] This mortgage was annotated at the back of TCT No. 438157. On 4
August 1975, respondents executed the corresponding promissory note, PN BD#75/C-252, covering the said loan,
which provides that the loan matured on 4 August 1976 at an interest rate of 12% per annum with a 2% service
charge, and that the note is secured by a real estate mortgage as aforementioned. [3] Significantly, the real estate
mortgage contained the following clause:
That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the
Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal or all of
which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those
that the Mortgagee may extend to the Mortgagor and/or DEBTOR, 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, the Mortgagor does hereby transfer and convey by way of mortgage unto
the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on the back
of this document, and/or appended hereto, together with all the buildings and improvements now existing or which
may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner
free from all liens and incumbrances. . . .[4]
On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345 for P2,640,000.00, secured
by D/A SFDX #129, signifying that the loan was secured by a hold-out on the mortgagors foreign currency
savings account with the bank under Account No. 129, and that the mortgagors passbook is to be surrendered to
the bank until the amount secured by the hold-out is settled.[5]
On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the husband and wife
were President and Chairman of the Board and Vice President,[6] respectively, PN BD#76/C-430
covering P545,000.000. As provided in the note, the loan is secured by Clean-Phase out TOD CA 3923, which
means that the temporary overdraft incurred by Donalco Trading, Inc. with petitioner is to be converted into an
ordinary loan in compliance with a Central Bank circular directing the discontinuance of overdrafts.[7]
On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a straight loan
of P545,000.00, the proceeds of which shall be used to liquidate the outstanding loan of P545,000.00 TOD. The
letter likewise mentioned that the securities for the loan were the deed of assignment on two promissory notes
executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and the
chattel mortgage on various heavy and transportation equipment.[8]
On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the obligations of G.B. Alviar
Realty and Development, Inc. and for the release of the real estate mortgage for the P450,000.00 loan covering
the two (2) lots located at Vam Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. The
payment was acknowledged by petitioner who accordingly released the mortgage over the two properties.[9]
On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the property covered
by TCT No. 438157. Per petitioners computation, respondents had the total obligation of P1,608,256.68, covering
the three (3) promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN BD#76/C-345 for P382,680.83,
and PN BD#76/C-340 for P545,000.00, plus assessed past due interests and penalty charges. The public auction
sale of the mortgaged property was set on 15 January 1980.[10]
Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary injunction with
the RTC of Pasig,[11] claiming that they have paid their principal loan secured by the mortgaged property, and
thus the mortgage should not be foreclosed. For its part, petitioner averred that the payment of P2,000,000.00
made on 6 March 1979 was not a payment made by respondents, but by G.B. Alviar Realty and Development
Inc., which has a separate loan with the bank secured by a separate mortgage.[12]
On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to proceed with the extra-
judicial foreclosure.[13]Respondents sought reconsideration of the decision.[14] On 24 August 1994, the trial court
issued an Order setting aside its earlier decision and awarded attorneys fees to respondents.[15] It found that only
the P250,000.00 loan is secured by the mortgage on the land covered by TCT No. 438157. On the other hand,
the P382,680.83 loan is secured by the foreign currency deposit account of Don A. Alviar, while the P545,000.00
obligation was an unsecured loan, being a mere conversion of the temporary overdraft of Donalco Trading, Inc.
in compliance with a Central Bank circular. According to the trial court, the blanket mortgage clause relied upon
by petitioner applies only to future loans obtained by the mortgagors, and not by parties other than the said
mortgagors, such as Donalco Trading, Inc., for which respondents merely signed as officers thereof.
On appeal to the Court of Appeals, petitioner made the following assignment of errors:
I. The trial court erred in holding that the real estate mortgage covers only the promissory note
BD#75/C-252 for the sum of P250,000.00.
II. The trial court erred in holding that the promissory note BD#76/C-345 for P2,640,000.00
(P382,680.83 outstanding principal balance) is not covered by the real estate mortgage by expressed agreement.
III. The trial court erred in holding that Promissory Note BD#76/C-430 for P545,000.00 is not covered
by the real estate mortgage.
IV. The trial court erred in holding that the real estate mortgage is a contract of adhesion.
V. The trial court erred in holding defendant-appellant liable to pay plaintiffs-appellees attorneys fees
for P20,000.00.[16]
The Court of Appeals affirmed the Order of the trial court but deleted the award of attorneys fees.[17] It ruled that
while a continuing loan or credit accommodation based on only one security or mortgage is a common practice
in financial and commercial institutions, such agreement must be clear and unequivocal. In the instant case, the
parties executed different promissory notes agreeing to a particular security for each loan. Thus, the appellate
court ruled that the extrajudicial foreclosure sale of the property for the three loans is improper.[18]
The Court of Appeals, however, found that respondents have not yet paid the P250,000.00 covered by PN
BD#75/C-252 since the payment of P2,000,000.00 adverted to by respondents was issued for the obligations of
G.B. Alviar Realty and Development, Inc.[19]
Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors raised in the Court of Appeals
as grounds herein.
Petitioner maintains that the blanket mortgage clause or the dragnet clause in the real estate mortgage expressly
covers not only the P250,000.00 under PN BD#75/C-252, but also the two other promissory notes included in the
application for extrajudicial foreclosure of real estate mortgage.[20] Thus, it claims that it acted within the terms
of the mortgage contract when it filed its petition for extrajudicial foreclosure of real estate mortgage. Petitioner
relies on the cases of Lim Julian v. Lutero,[21] Tad-Y v. Philippine National Bank,[22] Quimson v. Philippine
National Bank,[23] C & C Commercial v. Philippine National Bank,[24] Mojica v. Court of Appeals,[25] and China
Banking Corporation v. Court of Appeals,[26]all of which upheld the validity of mortgage contracts securing future
advancements.
Anent the Court of Appeals conclusion that the parties did not intend to include PN BD#76/C-345 in the real
estate mortgage because the same was specifically secured by a foreign currency deposit account, petitioner states
that there is no law or rule which prohibits an obligation from being covered by more than one
security.[27] Besides, respondents even continued to withdraw from the same foreign currency account even while
the promissory note was still outstanding, strengthening the belief that it was the real estate mortgage that
principally secured all of respondents promissory notes.[28] As for PN BD#76/C-345, which the Court of Appeals
found to be exclusively secured by the Clean-Phase out TOD 3923, petitioner posits that such security is not
exclusive, as the dragnet clause of the real estate mortgage covers all the obligations of the respondents.[29]
Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency of stating that the
promissory notes were executed by them not in their personal capacity but as corporate officers. It claims that PN
BD#76/C-430 was in fact for home construction and personal consumption of respondents. Thus, it states that
there is a need to pierce the veil of corporate fiction.[30]
Finally, petitioner alleges that the mortgage contract was executed by respondents with knowledge and
understanding of the dragnet clause, being highly educated individuals, seasoned businesspersons, and political
personalities.[31] There was no oppressive use of superior bargaining power in the execution of the promissory
notes and the real estate mortgage.[32]
For their part, respondents claim that the dragnet clause cannot be applied to the subsequent loans extended to
Don Alviar and Donalco Trading, Inc. since these loans are covered by separate promissory notes that expressly
provide for a different form of security.[33] They reiterate the holding of the trial court that the blanket mortgage
clause would apply only to loans obtained jointly by respondents, and not to loans obtained by other
parties.[34] Respondents also place a premium on the finding of the lower courts that the real estate mortgage
clause is a contract of adhesion and must be strictly construed against petitioner bank.[35]
The instant case thus poses the following issues pertaining to: (i) the validity of the blanket mortgage clause or
the dragnet clause; (ii) the coverage of the blanket mortgage clause; and consequently, (iii) the propriety of
seeking foreclosure of the mortgaged property for the non-payment of the three loans.
At this point, it is important to note that one of the loans sought to be included in the blanket mortgage clause was
obtained by respondents for Donalco Trading, Inc. Indeed, PN BD#76/C-430 was executed by respondents on
behalf of Donalco Trading, Inc. and not in their personal capacity. Petitioner asks the Court to pierce the veil of
corporate fiction and hold respondents liable even for obligations they incurred for the corporation. The mortgage
contract states that the mortgage covers as well as those that the Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or
indirect, principal or secondary. Well-settled is the rule that a corporation has a personality separate and distinct
from that of its officers and stockholders. Officers of a corporation are not personally liable for their acts as such
officers unless it is shown that they have exceeded their authority.[36] However, the legal fiction that a corporation
has a personality separate and distinct from stockholders and members may be disregarded if it is used as a means
to perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues.[37] PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and
not of the respondents, is not within the contemplation of the blanket mortgage clause. Moreover, petitioner is
unable to show that respondents are hiding behind the corporate structure to evade payment of their obligations.
Save for the notation in the promissory note that the loan was for house construction and personal consumption,
there is no proof showing that the loan was indeed for respondents personal consumption. Besides, petitioner
agreed to the terms of the promissory note. If respondents were indeed the real parties to the loan, petitioner, a
big, well-established institution of long standing that it is, should have insisted that the note be made in the name
of respondents themselves, and not to Donalco Trading Inc., and that they sign the note in their personal capacity
and not as officers of the corporation.
Now on the main issues.
A blanket mortgage clause, also known as a dragnet clause in American jurisprudence, is one which is specifically
phrased to subsume all debts of past or future origins. Such clauses are carefully scrutinized and strictly
construed.[38] Mortgages of this character enable the parties to provide continuous dealings, the nature or extent
of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing
a new security on each new transaction.[39] 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.[40] Indeed,
it has been settled in a long line of decisions that mortgages given to secure future advancements are valid and
legal contracts,[41] and the amounts named as consideration in said contracts do not limit the amount for which
the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other
indebtedness can be gathered.[42]
The blanket mortgage clause in the instant case states:
That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the
Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal or
all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well
as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, 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, the Mortgagor does hereby transfer and convey by
way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list
inserted on the back of this document, and/or appended hereto, together with all the buildings and improvements
now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it
is the absolute owner free from all liens and incumbrances. . . .[43] (Emphasis supplied.)
Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real estate mortgage
to secure not only the P250,000.00 loan from the petitioner, but also future credit facilities and advancements that
may be obtained by the respondents. The terms of the above provision being clear and unambiguous, there is
neither need nor excuse to construe it otherwise.
The cases cited by petitioner, while affirming the validity of dragnet clauses or blanket mortgage clauses, are of
a different factual milieu from the instant case. There, the subsequent loans were not covered by any security
other than that for the mortgage deeds which uniformly contained the dragnet clause.
In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN
BD#76/C-345, executed by Don Alviar was secured by a hold-out on his foreign currency savings account, while
PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was secured by Clean-Phase out TOD CA
3923 and eventually by a deed of assignment on two promissory notes executed by Bancom Realty Corporation
with Deed of Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various heavy and
transportation equipment. The matter of PN BD#76/C-430 has already been discussed. Thus, the critical issue is
whether the blanket mortgage clause applies even to subsequent advancements for which other securities were
intended, or particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged on this question. One school advocates that
a dragnet clause so worded as to be broad enough to cover all other debts in addition to the one specifically
secured will be construed to cover a different debt, although such other debt is secured by another
mortgage.[44] The contrary thinking maintains that a mortgage with such a clause will not secure a note that
expresses on its face that it is otherwise secured as to its entirety, at least to anything other than a deficiency after
exhausting the security specified therein,[45] such deficiency being an indebtedness within the meaning of the
mortgage, in the absence of a special contract excluding it from the arrangement.[46]
The latter school represents the better position. The parties having conformed to the blanket mortgage clause or
dragnet clause, it is reasonable to conclude that they also agreed to an implied understanding that subsequent
loans need not be secured by other securities, as the subsequent loans will be secured by the first mortgage. In
other words, the sufficiency of the first security is a corollary component of the dragnet clause. But of course,
there is no prohibition, as in the mortgage contract in issue, against contractually requiring other securities for the
subsequent loans. Thus, when the mortgagor takes another loan for which another security was given it could not
be inferred that such loan was made in reliance solely on the original security with the dragnet clause, but rather,
on the new security given. This is the reliance on the security test.
Hence, based on the reliance on the security test, the California court in the cited case made an inquiry whether
the second loan was made in reliance on the original security containing a dragnet clause. Accordingly, finding a
different security was taken for the second loan no intent that the parties relied on the security of the first loan
could be inferred, so it was held. The rationale involved, the court said, was that the dragnet clause in the first
security instrument constituted a continuing offer by the borrower to secure further loans under the security of
the first security instrument, and that when the lender accepted a different security he did not accept the offer.[47]
In another case, it was held that a mortgage with a dragnet clause is an offer by the mortgagor to the bank to
provide the security of the mortgage for advances of and when they were made. Thus, it was concluded that the
offer was not accepted by the bank when a subsequent advance was made because (1) the second note was secured
by a chattel mortgage on certain vehicles, and the clause therein stated that the note was secured by such chattel
mortgage; (2) there was no reference in the second note or chattel mortgage indicating a connection between the
real estate mortgage and the advance; (3) the mortgagor signed the real estate mortgage by her name alone,
whereas the second note and chattel mortgage were signed by the mortgagor doing business under an assumed
name; and (4) there was no allegation by the bank, and apparently no proof, that it relied on the security of the
real estate mortgage in making the advance.[48]
Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a contrary intention,
a mortgage containing a dragnet clause will not be extended to cover future advances unless the document
evidencing the subsequent advance refers to the mortgage as providing security therefor.[49]
It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of non-
payment of all the three promissory notes. While the existence and validity of the dragnet clause cannot be denied,
there is a need to respect the existence of the other security given for PN BD#76/C-345. The foreclosure of the
mortgaged property should only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount
not covered by the security for the second promissory note. As held in one case, where deeds absolute in form
were executed to secure any and all kinds of indebtedness that might subsequently become due, a balance due on
a note, after exhausting the special security given for the payment of such note, was in the absence of a special
agreement to the contrary, within the protection of the mortgage, notwithstanding the giving of the special
security.[50] This is recognition that while the dragnet clause subsists, the security specifically executed for
subsequent loans must first be exhausted before the mortgaged property can be resorted to.
One other crucial point. The mortgage contract, as well as the promissory notes subject of this case, is a contract
of adhesion, to which respondents only participation was the affixing of their signatures or adhesion thereto.[51] A
contract of adhesion is one in which a party imposes a ready-made form of contract which the other party may
accept or reject, but which the latter cannot modify.[52]
The real estate mortgage in issue appears in a standard form, drafted and prepared solely by petitioner, and which,
according to jurisprudence must be strictly construed against the party responsible for its preparation. [53] If the
parties intended that the blanket mortgage clause shall cover subsequent advancement secured by separate
securities, then the same should have been indicated in the mortgage contract. Consequently, any ambiguity is to
be taken contra proferentum, that is, construed against the party who caused the ambiguity which could have
avoided it by the exercise of a little more care.[54] To be more emphatic, any ambiguity in a contract whose terms
are susceptible of different interpretations must be read against the party who drafted it,[55] which is the petitioner
in this case.
Even the promissory notes in issue were made on standard forms prepared by petitioner, and as such are likewise
contracts of adhesion. Being of such nature, the same should be interpreted strictly against petitioner and with
even more reason since having been accomplished by respondents in the presence of petitioners personnel and
approved by its manager, they could not have been unaware of the import and extent of such contracts.
Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that respondents
have not yet paid the P250,000.00, and gave no credence to their claim that they paid the said amount when they
paid petitioner P2,000,000.00. Thus, the mortgaged property could still be properly subjected to foreclosure
proceedings for the unpaid P250,000.00 loan, and as mentioned earlier, for any deficiency after D/A SFDX#129,
security for PN BD#76/C-345, has been exhausted, subject of course to defenses which are available to
respondents.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 59543 is
AFFIRMED.
Costs against petitioner.
SO ORDERED.
2. PEOPLE’S BANK AND TRUST COMPANY VS. DAHICAN LUMBER COMPANY (7 pages)
DIZON, J.:
On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia corporation licensed to do
business in the Philippines — hereinafter referred to as ATLANTIC — sold and assigned all its rights in the
Dahican Lumber concession to Dahican Lumber Company — hereinafter referred to as DALCO — for the total
sum of $500,000.00, of which only the amount of $50,000.00 was paid. Thereafter, to develop the concession,
DALCO obtained various loans from the People's Bank & Trust Company — hereinafter referred to as the BANK
— amounting, as of July 13, 1950, to P200,000.00. In addition, DALCO obtained, through the BANK, a loan of
$250,000.00 from the Export-Import Bank of Washington D.C., evidenced by five promissory notes of
$50,000.00 each, maturing on different dates, executed by both DALCO and the Dahican America Lumber
Corporation, a foreign corporation and a stockholder of DALCO, — hereinafter referred to as DAMCO, all
payable to the BANK or its order.
As security for the payment of the abovementioned loans, on July 13, 1950 DALCO executed in favor of the
BANK — the latter acting for itself and as trustee for the Export-Import Bank of Washington D.C. — a deed of
mortgage covering five parcels of land situated in the province of Camarines Norte together with all the buildings
and other improvements existing thereon and all the personal properties of the mortgagor located in its place of
business in the municipalities of Mambulao and Capalonga, Camarines Norte (Exhibit D). On the same date,
DALCO executed a second mortgage on the same properties in favor of ATLANTIC to secure payment of the
unpaid balance of the sale price of the lumber concession amounting to the sum of $450,000.00 (Exhibit G). Both
deeds contained the following provision extending the mortgage lien to properties to be subsequently acquired —
referred to hereafter as "after acquired properties" — by the mortgagor:
All property of every nature and description taken in exchange or replacement, and all buildings, machinery,
fixtures, tools equipment and other property which the Mortgagor may hereafter acquire, construct, install, attach,
or use in, to, upon, or in connection with the premises, shall immediately be and become subject to the lien of this
mortgage in the same manner and to the same extent as if now included therein, and the Mortgagor shall from
time to time during the existence of this mortgage furnish the Mortgagee with an accurate inventory of such
substituted and subsequently acquired property.
Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In addition thereto
DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO and 9,286 shares of DAMCO to
secure the same obligations.
Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK paid the
same to the Export-Import Bank of Washington D.C., and the latter assigned to the former its credit and the first
mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up to April 1, 1953 to pay the overdue
promissory note.
After July 13, 1950 — the date of execution of the mortgages mentioned above — DALCO purchased various
machineries, equipment, spare parts and supplies in addition to, or in replacement of some of those already owned
and used by it on the date aforesaid. Pursuant to the provision of the mortgage deeds quoted theretofore regarding
"after acquired properties," the BANK requested DALCO to submit complete lists of said properties but the latter
failed to do so. In connection with these purchases, there appeared in the books of DALCO as due to Connell
Bros. Company (Philippines) — a domestic corporation who was acting as the general purchasing agent of
DALCO — thereinafter called CONNELL — the sum of P452,860.55 and to DAMCO, the sum of P2,151,678.34.
On December 16, 1952, the Board of Directors of DALCO, in a special meeting called for the purpose, passed a
resolution agreeing to rescind the alleged sales of equipment, spare parts and supplies by CONNELL and
DAMCO to it. Thereafter, the corresponding agreements of rescission of sale were executed between DALCO
and DAMCO, on the one hand and between DALCO and CONNELL, on the other.
On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that said agreements be
cancelled but CONNELL and DAMCO refused to do so. As a result, on February 12, 1953; ATLANTIC and the
BANK, commenced foreclosure proceedings in the Court of First Instance of Camarines Norte against DALCO
and DAMCO. On the same date they filed an ex-parte application for the appointment of a Receiver and/or for
the issuance of a writ of preliminary injunction to restrain DALCO from removing its properties. The court
granted both remedies and appointed George H. Evans as Receiver. Upon defendants' motion, however, the court,
in its order of February 21, 1953, discharged the Receiver.
On March 2, 1953, defendants filed their answer denying the material allegations of the complaint and alleging
several affirmative defenses and a counterclaim.
On March 4 of the same year, CONNELL, filed a motion for intervention alleging that it was the owner and
possessor of some of the equipments, spare parts and supplies which DALCO had acquired subsequent to the
execution of the mortgages sought to be foreclosed and which plaintiffs claimed were covered by the lien. In its
order of March 18,1953 the Court granted the motion, as well as plaintiffs' motion to set aside the order
discharging the Receiver. Consequently, Evans was reinstated.
On April 1, 1953, CONNELL filed its answer denying the material averment of the complaint, and asserting
affirmative defenses and a counterclaim.
Upon motion of the parties the Court, on September 30, 1953, issued an order transferring the venue of the action
to the Court of First Instance of Manila where it was docketed as Civil Case No. 20987.
On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the machineries, equipment
and supplies of DALCO, and the same were subsequently sold for a total consideration of P175,000.00 which
was deposited in court pending final determination of the action. By a similar agreement one-half (P87,500.00)
of this amount was considered as representing the proceeds obtained from the sale of the "undebated properties"
(those not claimed by DAMCO and CONNELL), and the other half as representing those obtained from the sale
of the "after acquired properties".
After due trial, the Court, on July 15, 1960, rendered judgment as follows:
IN VIEW WHEREFORE, the Court:
1. Condemns Dahican Lumber Co. to pay unto People's Bank the sum of P200,000,00 with 7% interest per annum
from July 13, 1950, Plus another sum of P100,000.00 with 5% interest per annum from July 13, 1950; plus 10%
on both principal sums as attorney's fees;
2. Condemns Dahican Lumber Co. to pay unto Atlantic Gulf the sum of P900,000.00 with 4% interest per annum
from July 3, 1950, plus 10% on both principal as attorney's fees;
3. Condemns Dahican Lumber Co. to pay unto Connell Bros, the sum of P425,860.55, and to pay unto Dahican
American Lumber Co. the sum of P2,151,678.24 both with legal interest from the date of the filing of the
respective answers of those parties, 10% of the principals as attorney's fees;
4. Orders that of the sum realized from the sale of the properties of P175,000.00, after deducting the recognized
expenses, one-half thereof be adjudicated unto plaintiffs, the court no longer specifying the share of each because
of that announced intention under the stipulation of facts to "pool their resources"; as to the other one-half, the
same should be adjudicated unto both plaintiffs, and defendant Dahican American and Connell Bros. in the
proportion already set forth on page 9, lines 21, 22 and 23 of the body of this decision; but with the understanding
that whatever plaintiffs and Dahican American and Connell Bros. should receive from the P175,000.00 deposited
in the Court shall be applied to the judgments particularly rendered in favor of each;
5. No other pronouncement as to costs; but the costs of the receivership as to the debated properties shall be borne
by People's Bank, Atlantic Gulf, Connell Bros., and Dahican American Lumber Co., pro-rata.
On the following day, the Court issued the following supplementary decision:
IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in order to add the following
paragraph 6:
6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90) days, the Court orders the sale at
public auction of the lands object of the mortgages to satisfy the said mortgages and costs of foreclosure.
From the above-quoted decision, all the parties appealed.
Main contentions of plaintiffs as appellants are the following: that the "after acquired properties" were subject to
the deeds of mortgage mentioned heretofore; that said properties were acquired from suppliers other than
DAMCO and CONNELL; that even granting that DAMCO and CONNELL were the real suppliers, the rescission
of the sales to DALCO could not prejudice the mortgage lien in favor of plaintiffs; that considering the foregoing,
the proceeds obtained from the sale of the "after acquired properties" as well as those obtained from the sale of
the "undebated properties" in the total sum of P175,000.00 should have been awarded exclusively to plaintiffs by
reason of the mortgage lien they had thereon; that damages should have been awarded to plaintiffs against
defendants, all of them being guilty of an attempt to defraud the former when they sought to rescind the sales
already mentioned for the purpose of defeating their mortgage lien, and finally, that defendants should have been
made to bear all the expenses of the receivership, costs and attorney's fees.
On the other hand, defendants-appellants contend that the trial court erred: firstly, in not holding that plaintiffs
had no cause of action against them because the promissory note sued upon was not yet due when the action to
foreclose the mortgages was commenced; secondly, in not holding that the mortgages aforesaid were null and
void as regards the "after acquired properties" of DALCO because they were not registered in accordance with
the Chattel Mortgage Law, the court erring, as a consequence, in holding that said properties were subject to the
mortgage lien in favor of plaintiffs; thirdly, in not holding that the provision of the fourth paragraph of each of
said mortgages did not automatically make subject to such mortgages the "after acquired properties", the only
meaning thereof being that the mortgagor was willing to constitute a lien over such properties; fourthly, in not
ruling that said stipulation was void as against DAMCO and CONNELL and in not awarding the proceeds
obtained from the sale of the "after acquired properties" to the latter exclusively; fifthly, in appointing a Receiver
and in holding that the damages suffered by DAMCO and CONNELL by reason of the depreciation or loss in
value of the "after acquired properties" placed under receivership was damnum absque injuria and, consequently,
in not awarding, to said parties the corresponding damages claimed in their counterclaim; lastly, in sentencing
DALCO and DAMCO to pay attorney's fees and in requiring DAMCO and CONNELL to pay the costs of the
Receivership, instead of sentencing plaintiffs to pay attorney's fees.
Plaintiffs' brief as appellants submit six assignments of error, while that of defendants also as appellants submit a
total of seventeen. However, the multifarious issues thus before Us may be resolved, directly or indirectly, by
deciding the following issues:
Firstly, are the so-called "after acquired properties" covered by and subject to the deeds of mortgage subject of
foreclosure?; secondly, assuming that they are subject thereto, are the mortgages valid and binding on the
properties aforesaid inspite of the fact that they were not registered in accordance with the provisions of the
Chattel Mortgage Law?; thirdly, assuming again that the mortgages are valid and binding upon the "after acquired
properties", what is the effect thereon, if any, of the rescission of sales entered into, on the one hand, between
DAMCO and DALCO, and between DALCO and CONNELL, on the other?; and lastly, was the action to
foreclose the mortgages premature?
A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and
description taken in exchange or replacement, as well as all buildings, machineries, fixtures, tools, equipments,
and other property that the mortgagor may acquire, construct, install, attach; or use in, to upon, or in connection
with the premises — that is, its lumber concession — "shall immediately be and become subject to the lien" of
both mortgages in the same manner and to the same extent as if already included therein at the time of their
execution. As the language thus used leaves no room for doubt as to the intention of the parties, We see no useful
purpose in discussing the matter extensively. Suffice it to say that the stipulation referred to is common, and We
might say logical, in all cases where the properties given as collateral are perishable or subject to inevitable wear
and tear or were intended to be sold, or to be used — thus becoming subject to the inevitable wear and tear — but
with the understanding — express or implied — that they shall be replaced with others to be thereafter acquired
by the mortgagor. Such stipulation is neither unlawful nor immoral, its obvious purpose being to maintain, to the
extent allowed by circumstances, the original value of the properties given as security. Indeed, if such properties
were of the nature already referred to, it would be poor judgment on the part of the creditor who does not see to
it that a similar provision is included in the contract.
B. But defendants contend that, granting without admitting, that the deeds of mortgage in question cover the "after
acquired properties" of DALCO, the same are void and ineffectual because they were not registered in accordance
with the Chattel Mortgage Law. In support of this and of the proposition that, even if said mortgages were valid,
they should not prejudice them, the defendants argue (1) that the deeds do not describe the mortgaged chattels
specifically, nor were they registered in accordance with the Chattel Mortgage Law; (2) that the stipulation
contained in the fourth paragraph thereof constitutes "mere executory agreements to give a lien" over the "after
acquired properties" upon their acquisition; and (3) that any mortgage stipulation concerning "after acquired
properties" should not prejudice creditors and other third persons such as DAMCO and CONNELL.
The stipulation under consideration strongly belies defendants contention. As adverted to hereinbefore, it states
that all property of every nature, building, machinery etc. taken in exchange or replacement by the mortgagor
"shall immediately be and become subject to the lien of this mortgage in the same manner and to the same extent
as if now included therein". No clearer language could have been chosen.
Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third persons, a chattel mortgage
must be registered and must describe the mortgaged chattels or personal properties sufficiently to enable the
parties and any other person to identify them, We say that such law does not apply to this case.
As the mortgages in question were executed on July 13, 1950 with the old Civil Code still in force, there can be
no doubt that the provisions of said code must govern their interpretation and the question of their validity. It
happens however, that Articles 334 and 1877 of the old Civil Code are substantially reproduced in Articles 415
and 2127, respectively, of the new Civil Code. It is, therefore, immaterial in this case whether we take the former
or the latter as guide in deciding the point under consideration.
Article 415 does not define real property but enumerates what are considered as such, among them being
machinery, receptacles, instruments or replacements intended by owner of the tenement for an industry or works
which may be carried on in a building or on a piece of land, and shall tend directly to meet the needs of the said
industry or works.
On the strength of the above-quoted legal provisions, the lower court held that inasmuch as "the chattels were
placed in the real properties mortgaged to plaintiffs, they came within the operation of Art. 415, paragraph 5 and
Art. 2127 of the New Civil Code".
We find the above ruling in agreement with our decisions on the subject:
(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph 5 of the Civil Code (old)
gives the character of real property to machinery, liquid containers, instruments or replacements intended by the
owner of any building or land for use in connection with any industry or trade being carried on therein and which
are expressly adapted to meet the requirements of such trade or industry.
(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held that a mortgage constituted on a sugar
central includes not only the land on which it is built but also the buildings, machinery and accessories installed
at the time the mortgage was constituted as well as the buildings, machinery and accessories belonging to the
mortgagor, installed after the constitution thereof .
It is not disputed in the case at bar that the "after acquired properties" were purchased by DALCO in connection
with, and for use in the development of its lumber concession and that they were purchased in addition to, or in
replacement of those already existing in the premises on July 13, 1950. In Law, therefore, they must be deemed
to have been immobilized, with the result that the real estate mortgages involved herein — which were registered
as such — did not have to be registered a second time as chattel mortgages in order to bind the "after acquired
properties" and affect third parties.
But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61 Phil. 709, claim that the "after
acquired properties" did not become immobilized because DALCO did not own the whole area of its lumber
concession all over which said properties were scattered.
The facts in the Davao Sawmill case, however, are not on all fours with the ones obtaining in the present. In the
former, the Davao Sawmill Company, Inc., had repeatedly treated the machinery therein involved as personal
property by executing chattel mortgages thereon in favor of third parties, while in the present case the parties had
treated the "after acquired properties" as real properties by expressly and unequivocally agreeing that they shall
automatically become subject to the lien of the real estate mortgages executed by them. In the Davao Sawmill
decision it was, in fact, stated that "the characterization of the property as chattels by the appellant is indicative
of intention and impresses upon the property the character determined by the parties" (61 Phil. 112, emphasis
supplied). In the present case, the characterization of the "after acquired properties" as real property was made
not only by one but by both interested parties. There is, therefore, more reason to hold that such consensus
impresses upon the properties the character determined by the parties who must now be held in estoppel to
question it.
Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central Altagracia, Inc. (225 U.S. 58) where
it was held that while under the general law of Puerto Rico, machinery placed on property by a tenant does not
become immobilized, yet, when the tenant places it there pursuant to contract that it shall belong to the owner, it
then becomes immobilized as to that tenant and even as against his assignees and creditors who had sufficient
notice of such stipulation. In the case at bar it is not disputed that DALCO purchased the "after acquired
properties" to be placed on, and be used in the development of its lumber concession, and agreed further that the
same shall become immediately subject to the lien constituted by the questioned mortgages. There is also
abundant evidence in the record that DAMCO and CONNELL had full notice of such stipulation and had never
thought of disputed validity until the present case was filed. Consequently all of them must be deemed barred
from denying that the properties in question had become immobilized.
What We have said heretofore sufficiently disposes all the arguments adduced by defendants in support their
contention that the mortgages under foreclosure are void, and, that, even if valid, are ineffectual as against
DAMCO and CONNELL.
Now to the question of whether or not DAMCO CONNELL have rights over the "after acquired properties"
superior to the mortgage lien constituted thereon in favor of plaintiffs. It is defendants' contention that in relation
to said properties they are "unpaid sellers"; that as such they had not only a superior lien on the "after acquired
properties" but also the right to rescind the sales thereof to DALCO.
This contention — it is obvious — would have validity only if it were true that DAMCO and CONNELL were
the suppliers or vendors of the "after acquired properties". According to the record, plaintiffs did not know their
exact identity and description prior to the filing of the case bar because DALCO, in violation of its obligation
under the mortgages, had failed and refused theretofore to submit a complete list thereof. In the course of the
proceedings, however, when defendants moved to dissolve the order of receivership and the writ of preliminary
injunction issued by the lower court, they attached to their motion the lists marked as Exhibits 1, 2 and 3 describing
the properties aforesaid. Later on, the parties agreed to consider said lists as identifying and describing the "after
acquire properties," and engaged the services of auditors to examine the books of DALCO so as to bring out the
details thereof. The report of the auditors and its annexes (Exhibits V, V-1 — V4) show that neither DAMCO nor
CONNELL had supplied any of the goods of which they respective claimed to be the unpaid seller; that all items
were supplied by different parties, neither of whom appeared to be DAMCO or CONNELL that, in fact,
CONNELL collected a 5% service charge on the net value of all items it claims to have sold to DALCO and
which, in truth, it had purchased for DALCO as the latter's general agent; that CONNELL had to issue its own
invoices in addition to those o f the real suppliers in order to collect and justify such service charge.
Taking into account the above circumstances together with the fact that DAMCO was a stockholder and
CONNELL was not only a stockholder but the general agent of DALCO, their claim to be the suppliers of the
"after acquired required properties" would seem to be preposterous. The most that can be claimed on the basis of
the evidence is that DAMCO and CONNELL probably financed some of the purchases. But if DALCO still owes
them any amount in this connection, it is clear that, as financiers, they can not claim any right over the "after
acquired properties" superior to the lien constituted thereon by virtue of the deeds of mortgage under foreclosure.
Indeed, the execution of the rescission of sales mentioned heretofore appears to be but a desperate attempt to
better or improve DAMCO and CONNELL's position by enabling them to assume the role of "unpaid suppliers"
and thus claim a vendor's lien over the "after acquired properties". The attempt, of course, is utterly ineffectual,
not only because they are not the "unpaid sellers" they claim to be but also because there is abundant evidence in
the record showing that both DAMCO and CONNELL had known and admitted from the beginning that the "after
acquired properties" of DALCO were meant to be included in the first and second mortgages under foreclosure.
The claim that Belden, of ATLANTIC, had given his consent to the rescission, expressly or otherwise, is of no
consequence and does not make the rescission valid and legally effective. It must be stated clearly, however, in
justice to Belden, that, as a member of the Board of Directors of DALCO, he opposed the resolution of December
15, 1952 passed by said Board and the subsequent rescission of the sales.
Finally, defendants claim that the action to foreclose the mortgages filed on February 12, 1953 was premature
because the promissory note sued upon did not fall due until April 1 of the same year, concluding from this that,
when the action was commenced, the plaintiffs had no cause of action. Upon this question the lower court says
the following in the appealed judgment;
The other is the defense of prematurity of the causes of action in that plaintiffs, as a matter of grace, conceded an
extension of time to pay up to 1 April, 1953 while the action was filed on 12 February, 1953, but, as to this, the
Court taking it that there is absolutely no debate that Dahican Lumber Co., was insolvent as of the date of the
filing of the complaint, it should follow that the debtor thereby lost the benefit to the period.
x x x unless he gives a guaranty or security for the debt . . . (Art. 1198, New Civil Code);
and as the guaranty was plainly inadequate since the claim of plaintiffs reached in the aggregate, P1,200,000
excluding interest while the aggregate price of the "after-acquired" chattels claimed by Connell under the
rescission contracts was P1,614,675.94, Exh. 1, Exh. V, report of auditors, and as a matter of fact, almost all the
properties were sold afterwards for only P175,000.00, page 47, Vol. IV, and the Court understanding that when
the law permits the debtor to enjoy the benefits of the period notwithstanding that he is insolvent by his giving a
guaranty for the debt, that must mean a new and efficient guaranty, must concede that the causes of action for
collection of the notes were not premature.
Very little need be added to the above. Defendants, however, contend that the lower court had no basis for finding
that, when the action was commenced, DALCO was insolvent for purposes related to Article 1198, paragraph 1
of the Civil Code. We find, however, that the finding of the trial court is sufficiently supported by the evidence
particularly the resolution marked as Exhibit K, which shows that on December 16, 1952 — in the words of the
Chairman of the Board — DALCO was "without funds, neither does it expect to have any funds in the foreseeable
future." (p. 64, record on appeal).
The remaining issues, namely, whether or not the proceeds obtained from the sale of the "after acquired
properties" should have been awarded exclusively to the plaintiffs or to DAMCO and CONNELL, and if in law
they should be distributed among said parties, whether or not the distribution should be pro-rata or otherwise;
whether or not plaintiffs are entitled to damages; and, lastly, whether or not the expenses incidental to the
Receivership should be borne by all the parties on a pro-rata basis or exclusively by one or some of them are of a
secondary nature as they are already impliedly resolved by what has been said heretofore.
As regard the proceeds obtained from the sale of the of after acquired properties" and the "undebated properties",
it is clear, in view of our opinion sustaining the validity of the mortgages in relation thereto, that said proceeds
should be awarded exclusively to the plaintiffs in payment of the money obligations secured by the mortgages
under foreclosure.
On the question of plaintiffs' right to recover damages from the defendants, the law (Articles 1313 and 1314 of
the New Civil Code) provides that creditors are protected in cases of contracts intended to defraud them; and that
any third person who induces another to violate his contract shall be liable for damages to the other contracting
party. Similar liability is demandable under Arts. 20 and 21 — which may be given retroactive effect (Arts.
225253) — or under Arts. 1902 and 2176 of the Old Civil Code.
The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO, after failing to pay the fifth
promissory note upon its maturity, conspired jointly with CONNELL to violate the provisions of the fourth
paragraph of the mortgages under foreclosure by attempting to defeat plaintiffs' mortgage lien on the "after
acquired properties". As a result, the plaintiffs had to go to court to protect their rights thus jeopardized.
Defendants' liability for damages is therefore clear.
However, the measure of the damages suffered by the plaintiffs is not what the latter claim, namely, the difference
between the alleged total obligation secured by the mortgages amounting to around P1,200,000.00, plus the
stipulated interest and attorney's fees, on the one hand, and the proceeds obtained from the sale of "after acquired
properties", and of those that were not claimed neither by DAMCO nor CONNELL, on the other. Considering
that the sale of the real properties subject to the mortgages under foreclosure has not been effected, and
considering further the lack of evidence showing that the true value of all the properties already sold was not
realized because their sale was under stress, We feel that We do not have before Us the true elements or factors
that should determine the amount of damages that plaintiffs are entitled recover from defendants. It is, however,
our considered opinion that, upon the facts established, all the expenses of the Receivership, which was deemed
necessary to safeguard the rights of the plaintiffs, should be borne by the defendants, jointly and severally, in the
same manner that all of them should pay to the plaintiffs, jointly a severally, attorney's fees awarded in the
appealed judgment.
In consonance with the portion of this decision concerning the damages that the plaintiffs are entitled to recover from the defendants,
the record of this case shall be remanded below for the corresponding proceedings.Modified as above indicated, the appealed judgment
is affirmed in all other respects. With costs.
3. STAR TWO (SPV-AMC), INC. VS. PAPER CITY CORP OF THE PHILIPPINES (9 pages)
PEREZ, J.:
For review before this Court is a Petition for Review on Certiorari filed by Rizal Commercial Banking
Corporation now substituted by Star Two (SPV-AMC), Inc. by virtue of Republic Act No. 91822 otherwise known
as the "Special Purpose Vehicle Act of 2002," assailing the 8 March 2005 Decision and 8 August 2005 Resolution
of the Special Fourth Division of the Court of Appeals (CA) in CA-G.R. SP No. 82022 upholding the 15 August
2003 and 1 December 2003 Orders of the Valenzuela Regional Trial Court (RTC) ruling that the subject
machineries and equipments of Paper City Corporation (Paper City) are movable properties by agreement of the
parties and cannot be considered as included in the extrajudicial foreclosure sale of the mortgaged land and
building of Paper City.3
The facts as we gathered from the records are:
Rizal Commercial Banking Corporation (RCBC), Metropolitan Bank and Trust Co. (Metrobank) and Union Bank
of the Philippines (Union Bank) are banking corporations duly organized and existing under the laws of the
Philippines.
On the other hand, respondent Paper City is a domestic corporation engaged in the manufacture of paper products
particularly cartons, newsprint and clay-coated paper.4
From 1990-1991, Paper City applied for and was granted the following loans and credit accommodations in peso
and dollar denominations by RCBC: ₱10,000,000.00 on 8 January 1990,5 ₱14,000,000.00 on 19 July
1990,6₱10,000,000.00 on 28 June 1991,7 and ₱16,615,000.00 on 28 November 1991.8 The loans were secured by
four (4) Deeds of Continuing Chattel Mortgages on its machineries and equipments found inside its paper plants.
On 25 August 1992, a unilateral Cancellation of Deed of Continuing Chattel Mortgage on Inventory of
Merchandise/Stocks-in-Trade was executed by RCBC through its Branch Operation Head Joey P. Singh and Asst.
Vice President Anita O. Abad over the merchandise and stocks-in-trade covered by the continuing chattel
mortgages.9
On 26 August 1992, RCBC, Metrobank and Union Bank (creditor banks with RCBC instituted as the trustee
bank) entered into a Mortgage Trust Indenture (MTI) with Paper City. In the said MTI, Paper City acquired an
additional loan of One Hundred Seventy Million Pesos (₱170,000,000.00) from the creditor banks in addition to
the previous loan from RCBC amounting to ₱110,000,000.00 thereby increasing the entire loan to a total of
₱280,000,000.00. The old loan of ₱110,000,000.00 was partly secured by various parcels of land covered by TCT
Nos. T-157743, V-13515, V-1184, V-1485, V-13518 and V-13516 situated in Valenzuela City pursuant to five
(5) Deeds of Real Estate Mortgage dated 8 January 1990, 27 February 1990, 19 July 1990, 20 February 1992 and
12 March 1992.10 The new loan obligation of ₱170,000,000.00 would be secured by the same five (5) Deeds of
Real Estate Mortgage and additional real and personal properties described in an annex to MTI, Annex
"B."11 Annex "B" of the said MTI covered the machineries and equipments of Paper City.12
The MTI was later amended on 20 November 1992 to increase the contributions of the RCBC and Union Bank
to ₱80,000,000.00 and ₱70,000,000.00, respectively. As a consequence, they executed a Deed of Amendment to
MTI13 but still included as part of the mortgaged properties by way of a first mortgage the various machineries
and equipments located in and bolted to and/or forming part of buildings generally described as:
Annex "A"
A. Office Building
Building 1, 2, 3, 4, and 5
Boiler House
 Workers’ Quarter/Restroom
Canteen
Guardhouse, Parking Shed, Elevated Guard
Post and other amenities
B. Pollution Tank Nos. 1 and 2.
Reserve Water Tank and Swimming Pool
Waste Water Treatment Tank
Elevated Concrete Water Tank
And other Improvements listed in Annex "A"
C. Power Plants Nos. 1 and 2
Fabrication Building
Various Fuel, Water Tanks and Pumps
Transformers
Annex "B"
D. D. Material Handling Equipment
Paper Plant No. 3
A Second Supplemental Indenture to the 26 August 1992 MTI was executed on 7 June 1994 to increase the
amount of the loan from ₱280,000,000.00 to ₱408,900,000.00 secured against the existing properties composed
of land, building, machineries and equipments and inventories described in Annexes "A" and "B."14
Finally, a Third Supplemental Indenture to the 26 August 1992 MTI was executed on 24 January 1995 to increase
the existing loan obligation of ₱408,900,000.00 to ₱555,000,000.00 with an additional security composed of a
newly constructed two-storey building and other improvements, machineries and equipments located in the
existing plant site.15
Paper City was able to comply with its loan obligations until July 1997. But economic crisis ensued which made
it difficult for Paper City to meet the terms of its obligations leading to payment defaults.16 Consequently, RCBC
filed a Petition for Extrajudicial Foreclosure Under Act No. 3135 Against the Real Estate Mortgage executed by
Paper City on 21 October 1998.17 This petition was for the extra-judicial foreclosure of eight (8) parcels of land
including all improvements thereon enumerated as TCT Nos. V-9763, V-13515, V-13516, V-13518, V-1484, V-
1485, V-6662 and V-6663 included in the MTI dated 26 August 1992, Supplemental
MTI dated 20 November 1992, Second Supplemental Indenture on the MTI dated 7 June 1994 and Third
Supplemental Indenture on the MTI dated 24 January 1995.18 Paper City then had an outstanding obligation with
the creditor banks adding up to Nine Hundred One Million Eight Hundred One Thousand Four Hundred Eighty-
Four and 10/100 Pesos (₱901,801,484.10), inclusive of interest and penalty charges.19
A Certificate of Sale was executed on 8 February 1999 certifying that the eight (8) parcels of land with
improvements thereon were sold on 27 November 1998 in the amount of Seven Hundred Two Million Three
Hundred Fifty-One Thousand Seven Hundred Ninety-Six Pesos and 28/100 (₱702,351,796.28) in favor of the
creditor banks RCBC, Union Bank and Metrobank as the highest bidders.20
This foreclosure sale prompted Paper City to file a Complaint21 docketed as Civil Case No. 164-V-99 on 15 June
1999 against the creditor banks alleging that the extra-judicial sale of the properties and plants was null and void
due to lack of prior notice and attendance of gross and evident bad faith on the part of the creditor banks. In the
alternative, it prayed that in case the sale is declared valid, to render the whole obligation of Paper City as fully
paid and extinguished. Also prayed for was the return of ₱5,000,000.00 as excessive penalty and the payment of
damages and attorney’s fees.
In the meantime, Paper City and Union Bank entered into a Compromise Agreement which was later approved
by the trial court on 19 November 2001. It was agreed that the share of Union Bank in the proceeds of the
foreclosure shall be up to 34.23% of the price and the remaining possible liabilities of Paper City shall be
condoned by the bank. Paper City likewise waived all its claim and counter charges against Union Bank and
agreed to turn-over its proportionate share over the property within 120 days from the date of agreement.22
On the other hand, the negotiations between the other creditor banks and Paper City remained pending. During
the interim, Paper City filed with the trial court a Manifestation with Motion to Remove and/or Dispose Machinery
on 18 December 2002 reasoning that the machineries located inside the foreclosed land and building were
deteriorating. It posited that since the machineries were not included in the foreclosure of the real estate mortgage,
it is appropriate that it be removed from the building and sold to a third party.23
Acting on the said motion, the trial court, on 28 February 2003 issued an Order denying the prayer and ruled that
the machineries and equipments were included in the annexes and form part of the MTI dated 26 August 1992 as
well as its subsequent amendments. Further, the machineries and equipments are covered by the Certificate of
Sale issued as a consequence of foreclosure, the certificate stating that the properties described therein with
improvements thereon were sold to creditor banks to the defendants at public auction.24
Paper City filed its Motion for Reconsideration25 on 4 April 2003 which was favorably granted by the trial court
in its Order dated 15 August 2003. The court justified the reversal of its order on the finding that the disputed
machineries and equipments are chattels by agreement of the parties through their inclusion in the four (4) Deeds
of Chattel Mortgage dated 28 January 1990, 19 July 1990, 28 June 1991 and 28 November 1991. It further ruled
that the deed of cancellation executed by RCBC on 25 August 1992 was not valid because it was done unilaterally
and without the consent of Paper City and the cancellation only refers to the merchandise/stocks-in-trade and not
to machineries and equipments.26
RCBC in turn filed its Motion for Reconsideration to persuade the court to reverse its 15 August 2003 Order.
However, the same was denied by the trial court through its 1 December 2003 Order reiterating the finding and
conclusion of the previous Order.27
Aggrieved, RCBC filed with the CA a Petition for Certiorari under Rule 65 to annul the Orders dated 15 August
2003 and 1 December 2003 of the trial court,28 for the reasons that:
I. Paper City gave its conformity to consider the subject machineries and equipment as real properties when the
president and Executive Vice President of Paper City signed the Mortgage Trust Indenture as well as its
subsequent amendments and all pages of the annexes thereto which itemized all properties that were mortgaged.29
II. Under Section 8 of Act No. 1508, otherwise known as "The Chattel Mortgage Law" the consent of the
mortgagor (Paper City) is not required in order to cancel a chattel mortgage. Thus the "Cancellation of Deed of
Continuing Chattel Mortgage on Inventory of Merchandise/Stocks-in-Trade" dated August 25, 1992 is valid and
binding on the Paper City even assuming that it was executed unilaterally by petitioner RCBC.30
III. The four (4) Deeds of Chattel Mortgage that were attached as Annexes "A" to "D" to the December 18, 2003
"Manifestation with Motion to Remove and/or Dispose of Machinery" were executed from January 8, 1990 until
November 28, 1991. On the other hand, the "Cancellation of Deed of Continuing Chattel Mortgage" was executed
on August 25, 1992 while the MTI and the subsequent supplemental amendments thereto were executed from
August 26, 1992 until January 24, 1995. It is of the contention of RCBC that Paper City’s unreasonable delay of
ten
(10) years in assailing that the disputed machineries and equipments were personal amounted to estoppel and
ratification of the characterization that the same were real properties.31
IV. The removal of the subject machineries or equipment is not among the reliefs prayed for by the Paper City in
its June 11, 1999 Complaint. The Paper City sought the removal of the subject machineries and equipment only
when it filed its December 18, 2002 Manifestation with Motion to Remove and/or Dispose of Machinery.32
V. Paper City did not specify in its various motions filed with the respondent judge the subject machineries and
equipment that are allegedly excluded from the extrajudicial foreclosure sale.33
VI. The machineries and equipments mentioned in the four (4) Deeds of Chattel Mortgage that were attached on
the Manifestation with Motion to Remove and/or Dispose of Machinery are the same machineries and equipments
included in the MTI and supplemental amendments, hence, are treated by agreement of the parties as real
properties.34
In its Comment,35 Paper City refuted the claim of RCBC that it gave its consent to consider the machineries and
equipments as real properties. It alleged that the disputed properties remained within the purview of the existing
chattel mortgages which in fact were acknowledged by RCBC in the MTI particularly in Section 11.07 which
reads:
Section 11.07. This INDENTURE in respect of the MORTGAGE OBLIGATIONS in the additional amount not
exceeding TWO HUNDRED TWENTY MILLION SIX HUNDRED FIFTEEN THOUSAND PESOS
(₱220,615,000.00) shall be registered with the Register of Deeds of Valenzuela, Metro Manila, apportioned based
on the corresponding loanable value of the MORTGAGED PROPERTIES, viz:
a. Real Estate Mortgage – ₱206,815,000.00
b. Chattel Mortgage – ₱13,800,000.0036
Paper City argued further that the subject machineries and equipments were not included in the foreclosure of the
mortgage on real properties particularly the eight (8) parcels of land. Further, the Certificate of Sale of the
Foreclosed Property referred only to "lands and improvements" without any specification and made no mention
of the inclusion of the subject properties.37
In its Reply,38 RCBC admitted that there was indeed a provision in the MTI mentioning a chattel mortgage in the
amount of ₱13,800,000.00. However, it justified that its inclusion in the MTI was merely for the purpose of
ascertaining the amount of the loan to be extended to Paper City.39 It reiterated its position that the machineries
and equipments were no longer treated as chattels but already as real properties following the MTI.40
On 8 March 2005, the CA affirmed41 the challenged orders of the trial court. The dispositive portion reads:
WHEREFORE, finding no grave abuse of discretion committed by public respondent, the instant petition is
hereby DISMISSED for lack of merit. The assailed Orders dated 15 August and 2 December 2003, issued by
Hon. Judge Floro P. Alejo are hereby AFFIRMED. No costs at this instance.42
The CA relied on the "plain language of the MTIs:
Undoubtedly, nowhere from any of the MTIs executed by the parties can we find the alleged "express" agreement
adverted to by petitioner. There is no provision in any of the parties’ MTI, which expressly states to the effect
that the parties shall treat the equipments and machineries as real property. On the contrary, the plain and
unambiguous language of the aforecited MTIs, which described the same as personal properties, contradicts
petitioner’s claims.43
It was also ruled that the subject machineries and equipments were not included in the extrajudicial foreclosure
sale. The claim of inclusion was contradicted by the very caption of the petition itself, "Petition for Extra-Judicial
Foreclosure of Real Estate Mortgage Under Act No. 3135 As Amended." It opined further that this inclusion was
further stressed in the Certificate of Sale which enumerated only the mortgaged real properties bought by RCBC
without the subject properties.44
RCBC sought reconsideration but its motion was denied in the CA’s Resolution dated 8 August 2005.
RCBC before this Court reiterated all the issues presented before the appellate court:
1. Whether the unreasonable delay of ten (10) years in assailing that the disputed machineries and equipments
were personal properties amounted to estoppel on the part of Paper City;
2. Whether the Cancellation of Deed of Continuing Mortgage dated 25 August 1992 is valid despite the fact that
it was executed without the consent of the mortgagor Paper City;
3. Whether the subsequent contracts of the parties such as Mortgage Trust Indenture dated 26 August 1992 as
well as the subsequent supplementary amendments dated 20 November 1992, 7 June 1992, and 24 January 1995
included in its coverage of mortgaged properties the subject machineries and equipment; and
4. Whether the subject machineries and equipments were included in the extrajudicial foreclosure dated 21
October 1998 which in turn were sold to the creditor banks as evidenced by the Certificate of Sale dated 8
February 1999.
We grant the petition.
By contracts, all uncontested in this case, machineries and equipments are included in the mortgage in favor of
RCBC, in the foreclosure of the mortgage and in the consequent sale on foreclosure also in favor of petitioner.
The mortgage contracts are the original MTI of 26 August 1992 and its amendments and supplements on 20
November 1992, 7 June 1994, and 24 January 1995. The clear agreements between RCBC and Paper City follow:
The original MTI dated 26 August 1992 states that:
MORTGAGE TRUST INDENTURE
This MORTGAGE TRUST INDENTURE, executed on this day of August 26, 1992, by and between:
PAPER CITY CORPORATION OF THE PHILIPPINES, x x x hereinafter referred to as the "MORTGAGOR");
-and-
RIZAL COMMERCIAL BANKING CORPORATION, x x x (hereinafter referred to as the "TRUSTEE").
xxxx
WHEREAS, against the same mortgaged properties and additional real and personal properties more particularly
described in ANNEX "B" hereof, the MORTGAGOR desires to increase their borrowings to TWO HUNDRED
EIGHTY MILLION PESOS (₱280,000,000.00) or an increase of ONE HUNDRED SEVENTY MILLION
PESOS (₱170,000,000.00) xxx from various banks/financial institutions;
xxxx
GRANTING CLAUSE
NOW, THEREFORE, this INDENTURE witnesseth:
THAT the MORTGAGOR in consideration of the premises and of the acceptance by the TRUSTEE of the trust
hereby created, and in order to secure the payment of the MORTGAGE OBLIGATIONS which shall be incurred
by the MORTGAGOR pursuant to the terms hereof xxx hereby states that with the execution of this INDENTURE
it will assign, transfer and convey as it has hereby ASSIGNED, TRANSFERRED and CONVEYED by way of a
registered first mortgage unto RCBC x x x the various parcels of land covered by several Transfer Certificates of
Title issued by the Registry of Deeds, including the buildings and existing improvements thereon, as well as of
the machinery and equipment more particularly described and listed that is to say, the real and personal properties
listed in Annexes "A" and "B" hereof of which the MORTGAGOR is the lawful and registered
owner.45 (Emphasis and underlining ours)
The Deed of Amendment to MTI dated 20 November 1992 expressly provides:
NOW, THEREFORE, premises considered, the parties considered have amended and by these presents do further
amend the Mortgage Trust Indenture dated August 26, 1992 including the Real Estate Mortgage as follows:
xxxx
2. The Mortgage Trust Indenture and the Real Estate Mortgage are hereby amended to include as part of the
Mortgage Properties, by way of a first mortgage and for pari-passu and pro-rata benefit of the existing and new
creditors, various machineries and equipment owned by the Paper City, located in and bolted to and forming part
of the following, generally describes as x x x more particularly described and listed in Annexes "A" and "B"
which are attached and made integral parts of this Amendment. The machineries and equipment listed in Annexes
"A" and "B" form part of the improvements listed above and located on the parcels of land subject of the Mortgage
Trust Indenture and the Real Estate Mortgage.46 (Emphasis and underlining ours)
A Second Supplemental Indenture to the 26 August 1992 MTI executed on 7 June 1994 to increase the amount
of loan from ₱280,000,000.00 to ₱408,900,000.00 also contains a similar provision in this regard:
WHEREAS, the Paper City desires to increase its borrowings to be secured by the INDENTURE from PESOS:
TWO HUNDRED EIGHTY MILLION (₱280,000,000.00) to PESOS: FOUR HUNDRED EIGHT MILLION
NINE HUNDRED THOUSAND (₱408,900,000.00) or an increase of PESOS: ONE HUNDRED TWENTY
EIGHT MILLION NINE HUNDRED THOUSAND (₱128,900,000.00) x x x which represents additional loan/s
granted to the Paper City to be secured against the existing properties composed of land, building, machineries
and equipment and inventories more particularly described in Annexes "A" and "B" of the INDENTURE x x x.47
(Emphasis and underlining ours)
Finally, a Third Supplemental Indenture to the 26 August 1992 MTI executed on 24 January 1995 contains a
similar provision:
WHEREAS, in order to secure NEW/ADDITIONAL LOAN OBLIGATION under the Indenture, there shall be
added to the collateral pool subject of the Indenture properties of the Paper City composed of newly constructed
two (2)-storey building, other land improvements and machinery and equipment all of which are located at the
existing Plant Site in Valenzuela, Metro Manila and more particularly described in Annex "A" hereof x x
x.48 (Emphasis and underlining ours)
Repeatedly, the parties stipulated that the properties mortgaged by Paper City to RCBC are various parcels of
land including the buildings and existing improvements thereon as well as the machineries and equipments, which
as stated in the granting clause of the original mortgage, are "more particularly described and listed that is to say,
the real and personal properties listed in Annexes ‘A’ and ‘B’ x x x of which the Paper City is the lawful and
registered owner." Significantly, Annexes "A" and "B" are itemized listings of the buildings, machineries and
equipments typed single spaced in twenty-seven pages of the document made part of the records.
As held in Gateway Electronics Corp. v. Land Bank of the Philippines,49 the rule in this jurisdiction is that the
contracting parties may establish any agreement, term, and condition they may deem advisable, provided they are
not contrary to law, morals or public policy. The right to enter into lawful contracts constitutes one of the liberties
guaranteed by the Constitution.
It has been explained by the Supreme Court in Norton Resources and Development Corporation v. All Asia Bank
Corporation50 in reiteration of the ruling in Benguet Corporation v. Cabildo51 that:
x x x A court's purpose in examining a contract is to interpret the intent of the contracting parties, as objectively
manifested by them. The process of interpreting a contract requires the court to make a preliminary inquiry as to
whether the contract before it is ambiguous. A contract provision is ambiguous if it is susceptible of two
reasonable alternative interpretations. Where the written terms of the contract are not ambiguous and can only be
read one way, the court will interpret the contract as a matter of law. x x x
Then till now the pronouncement has been that if the language used is as clear as day and readily understandable
by any ordinary reader, there is no need for construction.52
The case at bar is covered by the rule.
The plain language and literal interpretation of the MTIs must be applied. The petitioner, other creditor banks and
Paper City intended from the very first execution of the indentures that the machineries and equipments
enumerated in Annexes "A" and "B" are included. Obviously, with the continued increase in the amount of the
loan, totaling hundreds of millions of pesos, Paper City had to offer all valuable properties acceptable to the
creditor banks.
The plain and obvious inclusion in the mortgage of the machineries and equipments of Paper City escaped the
attention of the CA which, instead, turned to another "plain language of the MTI" that "described the same as
personal properties." It was error for the CA to deduce from the "description" exclusion from the mortgage.
1. The MTIs did not describe the equipments and machineries as personal property. Had the CA looked into
Annexes "A" and "B" which were referred to by the phrase "real and personal properties," it could have easily
noted that the captions describing the listed properties were "Buildings," "Machineries and Equipments," "Yard
and Outside," and "Additional Machinery and Equipment." No mention in any manner was made in the annexes
about "personal property." Notably, while "personal" appeared in the granting clause of the original MTI, the
subsequent Deed of Amendment specifically stated that:
x x x The machineries and equipment listed in Annexes "A" and "B" form part of the improvements listed above
and located on the parcels of land subject of the Mortgage Trust Indenture and the Real Estate Mortgage.
The word "personal" was deleted in the corresponding granting clauses in the Deed of Amendment and in the
First, Second and Third Supplemental Indentures.
2. Law and jurisprudence provide and guide that even if not expressly so stated, the mortgage extends to the
improvements.
Article 2127 of the Civil Code provides:
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. (Underlining ours)
In the early case of Bischoff v. Pomar and Cia. General de Tabacos,53 the Court ruled that even if the machinery
in question was not included in the mortgage expressly, Article 111 of the old Mortgage Law provides that chattels
permanently located in a building, either useful or ornamental, or for the service of some industry even though
they were placed there after the creation of the mortgage shall be considered as mortgaged with the estate,
provided they belong to the owner of said estate. The provision of the old Civil Code was cited. Thus:
Article 1877 provides that a mortgage includes the natural accessions, improvements, growing fruits, and rents
not collected when the obligation is due, and the amount of the indemnities granted or due the owner by the
underwriters of the property mortgaged or by virtue of the exercise of eminent domain by reason of public utility,
with the declarations, amplifications, and limitations established by law, in case the estate continues in the
possession of the person who mortgaged it, as well as when it passes into the hands of a third person.54
The case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.55 relied on this provision. The issue was whether the
machineries and accessories were included in the mortgage and the subsequent sale during public auction. This
was answered in the affirmative by the Court when it ruled that the machineries were integral parts of said sugar
central hence included following the principle of law that the accessory follows the principal.
Further, in the case of Manahan v. Hon. Cruz,56 this Court denied the prayer of Manahan to nullify the order of
the trial court including the building in question in the writ of possession following the public auction of the
parcels of land mortgaged to the bank. It upheld the inclusion by relying on the principles laid upon in Bischoff
v. Pomar and Cia. General de Tabacos57 and Cu Unjieng e Hijos v. Mabalacat Sugar Co.58
In Spouses Paderes v. Court of Appeals,59 we reiterated once more the Cu Unjieng e Hijos ruling and approved
the inclusion of machineries and accessories installed at the time the mortgage, as well as all the buildings,
machinery and accessories belonging to the mortgagor, installed after the constitution thereof.
3. Contrary to the finding of the CA, the Extra-Judicial Foreclosure of Mortgage includes the machineries and
equipments of respondent. While captioned as a "Petition for Extra-Judicial Foreclosure of Real Estate Mortgage
Under Act No. 3135 As Amended," the averments state that the petition is based on "x x x the Mortgage Trust
Indenture, the Deed of Amendment to the Mortgage Trust Indenture, the Second Supplemental Indenture to the
Mortgage Trust Indenture, and the Third Supplemental Indenture to the Mortgage Trust Indenture (hereinafter
collectively referred to as the Indenture) duly notarized and entered as x x x."60 Noting that herein respondent has
an outstanding obligation in the total amount of Nine Hundred One Million Eight Hundred One Thousand Four
Hundred Eighty Four and 10/100 Pesos (₱901,801,484.10), the petition for foreclosure prayed that a foreclosure
proceedings "x x x on the aforesaid real properties, including all improvements thereon covered by the real estate
mortgage be undertaken and the appropriate auction sale be conducted x x x."61
Considering that the Indenture which is the instrument of the mortgage that was foreclosed exactly states through
the Deed of Amendment that the machineries and equipments listed in Annexes "A" and "B" form part of the
improvements listed and located on the parcels of land subject of the mortgage, such machineries and equipments
are surely part of the foreclosure of the "real estate properties, including all improvements thereon" as prayed for
in the petition.
Indeed, the lower courts ought to have noticed the fact that the chattel mortgages adverted to were dated 8 January
1990, 19 July 1990, 28 June 1991 and 28 November 1991. The real estate mortgages which specifically included
the machineries and equipments were subsequent to the chattel mortgages dated 26 August 1992, 20 November
1992, 7 June 1994 and 24 January 1995. Without doubt, the real estate mortgages superseded the earlier chattel
mortgages.1âwphi1
The real estate mortgage over the machineries and equipments is even in full accord with the classification of
such properties by the Civil Code of the Philippines as immovable property. Thus:
Article 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
xxxx
(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or
works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of
the said industry or works;
WHEREFORE, the petition is GRANTED. Accordingly, the Decision and Resolution of the Court of Appeals
dated 8 March 2005 and 8 August 2005 upholding the 15 August 2003 and 1 December 2003 Orders of the
Valenzuela Regional Trial Court are hereby REVERSED and SET ASIDE and the original Order of the trial court
dated 28 February 2003 denying the motion of respondent to remove or dispose of machinery is hereby
REINSTATED.
SO ORDERED.
4. GARCIA VS. VILLAR (7 pages)
LEONARDO-DE CASTRO, J.:
This is a petition for review on certiorari[1] of the February 27, 2003 Decision[2] and July 2, 2003 Resolution[3] of
the Court of Appeals in CA-G.R. SP No. 72714, which reversed the May 27, 2002 Decision[4] of the Regional
Trial Court (RTC), Branch 92 of Quezon City in Civil Case No. Q-99-39139.
Lourdes V. Galas (Galas) was the original owner of a piece of property (subject property) located at Malindang
St., Quezon City, covered by Transfer Certificate of Title (TCT) No. RT-67970(253279).[5]
On July 6, 1993, Galas, with her daughter, Ophelia G. Pingol (Pingol), as co-maker, mortgaged the subject
property to Yolanda Valdez Villar (Villar) as security for a loan in the amount of Two Million Two Hundred
Thousand Pesos (P2,200,000.00).[6]
On October 10, 1994, Galas, again with Pingol as her co-maker, mortgaged the same subject property to Pablo P.
Garcia (Garcia) to secure her loan of One Million Eight Hundred Thousand Pesos (P1,800,000.00).[7]
Both mortgages were annotated at the back of TCT No. RT-67970 (253279), to wit:
REAL ESTATE MORTGAGE
Entry No. 6537/T-RT-67970(253279) MORTGAGE In favor of Yolanda Valdez Villar m/to Jaime Villar to
guarantee a principal obligation in the sum of P2,200,000- mortgagees consent necessary in case of subsequent
encumbrance or alienation of the property; Other conditions set forth in Doc. No. 97, Book No. VI, Page No. 20
of the Not. Pub. of Diana P. Magpantay
Date of Instrument: 7-6-93
Date of Inscription: 7-7-93
SECOND REAL ESTATE MORTGAGE
Entry No. 821/T-RT-67970(253279) MORTGAGE In favor of Pablo Garcia m/to Isabela Garcia to guarantee a
principal obligation in the sum of P1,800,000.00 mortgagees consent necessary in case of subsequent
encumbrance or alienation of the property; Other conditions set forth in Doc. No. 08, Book No. VII, Page No. 03
of the Not. Pub. of Azucena Espejo Lozada
Date of Instrument: 10/10/94
Date of Inscription: 10/11/94
LRC Consulta No. 169[8]
On November 21, 1996, Galas sold the subject property to Villar for One Million Five Hundred Thousand Pesos
(P1,500,000.00), and declared in the Deed of Sale[9] that such property was free and clear of all liens and
encumbrances of any kind whatsoever.[10]
On December 3, 1996, the Deed of Sale was registered and, consequently, TCT No. RT-67970(253279) was
cancelled and TCT No. N-168361[11] was issued in the name of Villar. Both Villars and Garcias mortgages were
carried over and annotated at the back of Villars new TCT.[12]
On October 27, 1999, Garcia filed a Petition for Mandamus with Damages[13] against Villar before the RTC,
Branch 92 of Quezon City. Garcia subsequently amended his petition to a Complaint for Foreclosure of Real
Estate Mortgage with Damages.[14] Garcia alleged that when Villar purchased the subject property, she acted in
bad faith and with malice as she knowingly and willfully disregarded the provisions on laws on judicial and
extrajudicial foreclosure of mortgaged property. Garcia further claimed that when Villar purchased the subject
property, Galas was relieved of her contractual obligation and the characters of creditor and debtor were merged
in the person of Villar. Therefore, Garcia argued, he, as the second mortgagee, was subrogated to Villars original
status as first mortgagee, which is the creditor with the right to foreclose. Garcia further asserted that he had
demanded payment from Villar,[15] whose refusal compelled him to incur expenses in filing an action in court.[16]
Villar, in her Answer,[17] claimed that the complaint stated no cause of action and that the second mortgage was
done in bad faith as it was without her consent and knowledge. Villar alleged that she only discovered the second
mortgage when she had the Deed of Sale registered. Villar blamed Garcia for the controversy as he accepted the
second mortgage without prior consent from her. She averred that there could be no subrogation as the assignment
of credit was done with neither her knowledge nor prior consent. Villar added that Garcia should seek recourse
against Galas and Pingol, with whom he had privity insofar as the second mortgage of property is concerned.
On May 23, 2000, the RTC issued a Pre-Trial Order[18] wherein the parties agreed on the following facts and
issue:
STIPULATIONS OF FACTS/ADMISSIONS
The following are admitted:
1. the defendant admits the second mortgage annotated at the back of TCT No. RT-67970 of Lourdes V. Galas
with the qualification that the existence of said mortgage was discovered only in 1996 after the sale;
2. the defendant admits the existence of the annotation of the second mortgage at the back of the title despite
the transfer of the title in the name of the defendant;
3. the plaintiff admits that defendant Yolanda Valdez Villar is the first mortgagee;
4. the plaintiff admits that the first mortgage was annotated at the back of the title of the mortgagor Lourdes
V. Galas; and
5. the plaintiff admits that by virtue of the deed of sale the title of the property was transferred from the previous
owner in favor of defendant Yolanda Valdez Villar.
xxxx
ISSUE
Whether or not the plaintiff, at this point in time, could judicially foreclose the property in question.
On June 8, 2000, upon Garcias manifestation, in open court, of his intention to file a Motion for Summary
Judgment,[19] the RTC issued an Order[20] directing the parties to simultaneously file their respective memoranda
within 20 days.
On June 26, 2000, Garcia filed a Motion for Summary Judgment with Affidavit of Merit [21] on the grounds that
there was no genuine issue as to any of the material facts of the case and that he was entitled to a judgment as a
matter of law.
On June 28, 2000, Garcia filed his Memorandum[22] in support of his Motion for Summary Judgment and in
compliance with the RTCs June 8, 2000 Order. Garcia alleged that his equity of redemption had not yet been
claimed since Villar did not foreclose the mortgaged property to satisfy her claim.
On August 13, 2000, Villar filed an Urgent Ex-Parte Motion for Extension of Time to File Her
Memorandum.[23] This, however, was denied[24] by the RTC in view of Garcias Opposition.[25]
On May 27, 2002, the RTC rendered its Decision, the dispositive portion of which reads:
WHEREFORE, the foregoing premises considered, judgment is hereby rendered in favor of the plaintiff Pablo
P. Garcia and against the defendant Yolanda V. Villar, who is ordered to pay to the former within a period of not
less than ninety (90) days nor more than one hundred twenty (120) days from entry of judgment, the sum
of P1,800,000.00 plus legal interest from October 27, 1999 and upon failure of the defendant to pay the said
amount within the prescribed period, the property subject matter of the 2nd Real Estate Mortgage dated October
10, 1994 shall, upon motion of the plaintiff, be sold at public auction in the manner and under the provisions of
Rules 39 and 68 of the 1997 Revised Rules of Civil Procedure and other regulations governing sale of real estate
under execution in order to satisfy the judgment in this case. The defendant is further ordered to pay costs.[26]
The RTC declared that the direct sale of the subject property to Villar, the first mortgagee, could not operate to
deprive Garcia of his right as a second mortgagee. The RTC said that upon Galass failure to pay her obligation,
Villar should have foreclosed the subject property pursuant to Act No. 3135 as amended, to provide junior
mortgagees like Garcia, the opportunity to satisfy their claims from the residue, if any, of the foreclosure sale
proceeds. This, the RTC added, would have resulted in the extinguishment of the mortgages.[27]
The RTC held that the second mortgage constituted in Garcias favor had not been discharged, and that Villar, as
the new registered owner of the subject property with a subsisting mortgage, was liable for it.[28]
Villar appealed[29] this Decision to the Court of Appeals based on the arguments that Garcia had no valid cause
of action against her; that he was in bad faith when he entered into a contract of mortgage with Galas, in light of
the restriction imposed by the first mortgage; and that Garcia, as the one who gave the occasion for the
commission of fraud, should suffer. Villar further asseverated that the second mortgage is a void and inexistent
contract considering that its cause or object is contrary to law, moral, good customs, and public order or public
policy, insofar as she was concerned.[30]
Garcia, in his Memorandum,[31] reiterated his position that his equity of redemption remained unforeclosed since
Villar did not institute foreclosure proceedings. Garcia added that the mortgage, until discharged, follows the
property to whomever it may be transferred no matter how many times over it changes hands as long as the
annotation is carried over.[32]
The Court of Appeals reversed the RTC in a Decision dated February 27, 2003, to wit:
WHEREFORE, the decision appealed from is REVERSED and another one entered DISMISSING the
complaint for judicial foreclosure of real estate mortgage with damages.[33]
The Court of Appeals declared that Galas was free to mortgage the subject property even without Villars consent
as the restriction that the mortgagees consent was necessary in case of a subsequent encumbrance was absent in
the Deed of Real Estate Mortgage. In the same vein, the Court of Appeals said that the sale of the subject property
to Villar was valid as it found nothing in the records that would show that Galas violated the Deed of Real Estate
Mortgage prior to the sale.[34]
In dismissing the complaint for judicial foreclosure of real estate mortgage with damages, the Court of Appeals
held that Garcia had no cause of action against Villar in the absence of evidence showing that the second mortgage
executed in his favor by Lourdes V. Galas [had] been violated and that he [had] made a demand on the latter for
the payment of the obligation secured by said mortgage prior to the institution of his complaint against Villar.[35]
On March 20, 2003, Garcia filed a Motion for Reconsideration[36] on the ground that the Court of Appeals failed
to resolve the main issue of the case, which was whether or not Garcia, as the second mortgagee, could still
foreclose the mortgage after the subject property had been sold by Galas, the mortgage debtor, to Villar, the
mortgage creditor.
This motion was denied for lack of merit by the Court of Appeals in its July 2, 2003 Resolution.
Garcia is now before this Court, with the same arguments he posited before the lower courts. In his
Memorandum,[37] he added that the Deed of Real Estate Mortgage contained a stipulation, which is violative of
the prohibition on pactum commissorium.
Issues
The crux of the controversy before us boils down to the propriety of Garcias demand upon Villar to either pay
Galass debt of P1,800,000.00, or to judicially foreclose the subject property to satisfy the aforesaid debt. This
Court will, however, address the following issues in seriatim:
1. Whether or not the second mortgage to Garcia was valid;
2. Whether or not the sale of the subject property to Villar was valid;
3. Whether or not the sale of the subject property to Villar was in violation of the prohibition on pactum
commissorium;
4. Whether or not Garcias action for foreclosure of mortgage on the subject property can prosper.
Discussion
Validity of second mortgage to Garcia
and sale of subject property to Villar
At the onset, this Court would like to address the validity of the second mortgage to Garcia and the sale of the
subject property to Villar. We agree with the Court of Appeals that both are valid under the terms and conditions
of the Deed of Real Estate Mortgage executed by Galas and Villar.
While it is true that the annotation of the first mortgage to Villar on Galass TCT contained a restriction on further
encumbrances without the mortgagees prior consent, this restriction was nowhere to be found in the Deed of Real
Estate Mortgage. As this Deed became the basis for the annotation on Galass title, its terms and conditions take
precedence over the standard, stamped annotation placed on her title. If it were the intention of the parties to
impose such restriction, they would have and should have stipulated such in the Deed of Real Estate Mortgage
itself.
Neither did this Deed proscribe the sale or alienation of the subject property during the life of the
mortgages. Garcias insistence that Villar should have judicially or extrajudicially foreclosed the mortgage to
satisfy Galass debt is misplaced. The Deed of Real Estate Mortgage merely provided for the options Villar may
undertake in case Galas or Pingol fail to pay their loan. Nowhere was it stated in the Deed that Galas could not
opt to sell the subject property to Villar, or to any other person. Such stipulation would have been void anyway,
as it is not allowed under Article 2130 of the Civil Code, to wit:
Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.
Prohibition on pactum commissorium
Garcia claims that the stipulation appointing Villar, the mortgagee, as the mortgagors attorney-in-fact, to sell the
property in case of default in the payment of the loan, is in violation of the prohibition on pactum commissorium,
as stated under Article 2088 of the Civil Code, viz:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void.
The power of attorney provision in the Deed of Real Estate Mortgage reads:
5. Power of Attorney of MORTGAGEE. Effective upon the breach of any condition of this Mortgage, and in
addition to the remedies herein stipulated, the MORTGAGEE is likewise appointed attorney-in-fact of the
MORTGAGOR with full power and authority to take actual possession of the mortgaged properties, to sell, lease
any of the mortgaged properties, to collect rents, to execute deeds of sale, lease, or agreement that may be deemed
convenient, to make repairs or improvements on the mortgaged properties and to pay the same, and perform any
other act which the MORTGAGEE may deem convenient for the proper administration of the mortgaged
properties. The payment of any expenses advanced by the MORTGAGEE in connection with the purpose
indicated herein is also secured by this Mortgage. Any amount received from the sale, disposal or administration
abovementioned maybe applied by assessments and other incidental expenses and obligations and to the payment
of original indebtedness including interest and penalties thereon. The power herein granted shall not be revoked
during the life of this Mortgage and all acts which may be executed by the MORTGAGEE by virtue of said power
are hereby ratified.[38]
The following are the elements of pactum commissorium:
(1) There should be a property mortgaged by way of security for the payment of the principal obligation; and
(2) There should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of
non-payment of the principal obligation within the stipulated period.[39]
Villars purchase of the subject property did not violate the prohibition on pactum commissorium. The power of
attorney provision above did not provide that the ownership over the subject property would automatically pass
to Villar upon Galass failure to pay the loan on time. What it granted was the mere appointment of Villar as
attorney-in-fact, with authority to sell or otherwise dispose of the subject property, and to apply the proceeds to
the payment of the loan.[40] This provision is customary in mortgage contracts, and is in conformity with Article
2087 of the Civil Code, which reads:
Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things
in which the pledge or mortgage consists may be alienated for the payment to the creditor.
Galass decision to eventually sell the subject property to Villar for an additional P1,500,000.00 was well within
the scope of her rights as the owner of the subject property.The subject property was transferred to Villar by virtue
of another and separate contract, which is the Deed of Sale. Garcia never alleged that the transfer of the subject
property to Villar was automatic upon Galass failure to discharge her debt, or that the sale was simulated to cover
up such automatic transfer.
Propriety of Garcias action
for foreclosure of mortgage
The real nature of a mortgage is described in Article 2126 of the Civil Code, to wit:
Art. 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the
possessor may be, to the fulfillment of the obligation for whose security it was constituted.
Simply put, a mortgage is a real right, which follows the property, even after subsequent transfers by the
mortgagor. A registered mortgage lien is considered inseparable from the property inasmuch as it is a right
in rem.[41]
The sale or transfer of the mortgaged property cannot affect or release the mortgage; thus the purchaser or
transferee is necessarily bound to acknowledge and respect the encumbrance.[42] In fact, under Article 2129 of the
Civil Code, the mortgage on the property may still be foreclosed despite the transfer, viz:
Art. 2129. The creditor may claim from a third person in possession of the mortgaged property, the payment of
the part of the credit secured by the property which said third person possesses, in terms and with the formalities
which the law establishes.
While we agree with Garcia that since the second mortgage, of which he is the mortgagee, has not yet been
discharged, we find that said mortgage subsists and is still enforceable. However, Villar, in buying the subject
property with notice that it was mortgaged, only undertook to pay such mortgage or allow the subject property to
be sold upon failure of the mortgage creditor to obtain payment from the principal debtor once the debt
matures. Villar did not obligate herself to replace the debtor in the principal obligation, and could not do so in
law without the creditors consent.[43] Article 1293 of the Civil Code provides:
Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made
even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment
by the new debtor gives him the rights mentioned in articles 1236 and 1237.
Therefore, the obligation to pay the mortgage indebtedness remains with the original debtors Galas and
Pingol.[44] The case of E.C. McCullough & Co. v. Veloso and Serna[45] is square on this point:
The effects of a transfer of a mortgaged property to a third person are well determined by the Civil
Code. According to article 1879[46] of this Code, the creditor may demand of the third person in possession of the
property mortgaged payment of such part of the debt, as is secured by the property in his possession, in the manner
and form established by the law. The Mortgage Law in force at the promulgation of the Civil Code and referred
to in the latter, provided, among other things, that the debtor should not pay the debt upon its maturity after
judicial or notarial demand, for payment has been made by the creditor upon him. (Art. 135 of the Mortgage Law
of the Philippines of 1889.) According to this, the obligation of the new possessor to pay the debt originated only
from the right of the creditor to demand payment of him, it being necessary that a demand for payment should
have previously been made upon the debtor and the latter should have failed to pay. And even if these
requirements were complied with, still the third possessor might abandon the property mortgaged, and in that case
it is considered to be in the possession of the debtor. (Art. 136 of the same law.) This clearly shows that the spirit
of the Civil Code is to let the obligation of the debtor to pay the debt stand although the property mortgaged to
secure the payment of said debt may have been transferred to a third person. While the Mortgage Law of 1893
eliminated these provisions, it contained nothing indicating any change in the spirit of the law in this respect.
Article 129 of this law, which provides the substitution of the debtor by the third person in possession of the
property, for the purposes of the giving of notice, does not show this change and has reference to a case where
the action is directed only against the property burdened with the mortgage. (Art. 168 of the Regulation.)[47]
This pronouncement was reiterated in Rodriguez v. Reyes[48] wherein this Court, even before quoting the same
above portion in E.C. McCullough & Co. v. Veloso and Serna, held:
We find the stand of petitioners-appellants to be unmeritorious and untenable. The maxim caveat emptor applies
only to execution sales, and this was not one such. The mere fact that the purchaser of an immovable has notice
that the acquired realty is encumbered with a mortgage does not render him liable for the payment of the debt
guaranteed by the mortgage, in the absence of stipulation or condition that he is to assume payment of the
mortgage debt. The reason is plain: the mortgage is merely an encumbrance on the property, entitling the
mortgagee to have the property foreclosed, i.e., sold, in case the principal obligor does not pay the mortgage debt,
and apply the proceeds of the sale to the satisfaction of his credit. Mortgage is merely an accessory undertaking
for the convenience and security of the mortgage creditor, and exists independently of the obligation to pay the
debt secured by it. The mortgagee, if he is so minded, can waive the mortgage security and proceed to collect the
principal debt by personal action against the original mortgagor.[49]
In view of the foregoing, Garcia has no cause of action against Villar in the absence of evidence to show that the
second mortgage executed in favor of Garcia has been violated by his debtors, Galas and Pingol, i.e., specifically
that Garcia has made a demand on said debtors for the payment of the obligation secured by the second mortgage
and they have failed to pay.
WHEREFORE, this Court hereby AFFIRMS the February 27, 2003 Decision and March 8, 2003 Resolution of
the Court of Appeals in CA-G.R. SP No. 72714.
SO ORDERED.
5. KOREA EXCHANGE BANK VS. FILKOR BUSINESS INTEGRATED, INC (4 pages)
QUISUMBING, J.:
This petition assails the order[1] dated April 16, 1999 of the Regional Trial Court of Cavite City, Branch 88, in
Civil Case No. N-6689. Said order denied petitioners partial motion for reconsideration of the trial courts
order[2] dated March 12, 1999 whereby respondents were ordered to pay petitioner various sums of U.S. dollars
as payment of the formers various loans with interest but omitted to state that the property mortgaged as security
for said loans be foreclosed and sold at public auction in case respondents fail to pay their obligations to petitioner
ninety days from entry of judgment.
The facts are summarized from the findings of the trial court.
On January 9, 1997, respondent Filkor Business Integrated, Inc. (Filkor), borrowed US$140,000 from petitioner
Korea Exchange Bank, payable on July 9, 1997. Of this amount, only US$40,000 was paid by Filkor.[3]
In addition, Filkor executed nine trust receipts in favor of petitioner, from June 26, 1997 to September 11,
1997. However, Filkor failed to turn over to petitioner the proceeds from the sale of the goods, or the goods
themselves as required by the trust receipts in case Filkor could not sell them.[4]
In the period from June 9, 1997 to October 1, 1997, Filkor also negotiated to petitioner the proceeds of seventeen
letters of credit issued by the Republic Bank of New York and the Banque Leumi France, S.A. to pay for goods
which Filkor sold to Segerman International, Inc. and Davyco, S.A. When petitioner tried to collect the proceeds
of the letters of credit by presenting the bills of exchange drawn to collect the proceeds, they were dishonored
because of discrepancies.[5]
Prior to all the foregoing, in order to secure payment of all its obligations, Filkor executed a Real Estate Mortgage
on February 9, 1996. It mortgaged to petitioner the improvements belonging to it constructed on the lot it was
leasing at the Cavite Export Processing Zone Authority.[6] Respondents Kim Eung Joe and Lee Han Sang also
executed Continuing Suretyships binding themselves jointly and severally with respondent Filkor to pay for the
latters obligations to petitioner.[7]
As respondents failed to make good on their obligations, petitioner filed Civil Case No. N-6689 in the Regional
Trial Court of Cavite City, docketed as Korea Exchange Bank vs. Filkor Business Integrated, Inc. In its complaint,
petitioner prayed that (a) it be paid by respondents under its twenty-seven causes of action; (b) the property
mortgaged be foreclosed and sold at public auction in case respondents failed to pay petitioner within ninety days
from entry of judgment; and (c) other reliefs just and equitable be granted.[8]
Petitioner moved for summary judgment pursuant to Section 1, Rule 35 of the 1997 Rules of Civil Procedure. On
March 12, 1999, the trial court rendered its order granting petitioners motion, reasoning as follows:
xxx
It appears that the only reason defendants deny all the material allegations in the complaint is because the
documents attached thereto are mere photocopies and not the originals thereof. Section 7, Rule 8 of the Rules of
Court allows copies of documents to be attached to the pleading as an exhibit. Defendants are, therefore, deemed
to have admitted the genuineness and due execution of all actionable documents attached to the complaint
inasmuch as they were not specifically denied, pursuant to Section 8 of the Rule 8 of the Rules of Court.
In the case at bar, there is clearly no substantial triable issue, hence, the motion for summary judgment filed by
plaintiff is proper.
A summary of judgment is one granted by the court upon motion by a party for an expeditious settlement of the
case, there appearing from the pleadings, depositions, admissions and affidavits that there are no important
questions or issues of fact involved (except as to the amount of damages) and that, therefore, the moving party is
entitled to a judgment as a matter of law (Sections 1, 2, 3, Rule 35, 1997 Rules of Civil Procedure).
The court having taken into account the pleadings of the parties as well as the affidavits attached to the motion
for summary judgment and having found that there is indeed no genuine issue as to any material fact and that
plaintiff is entitled to a summary of judgment as a matter of law, hereby renders judgment for the plaintiff and
against the defendants, ordering said defendants jointly and severally to pay plaintiff, as follows[9]
The trial court then rendered judgment in favor of petitioner, granting its prayers under all its twenty-seven causes
of action. It, however, failed to order that the property mortgaged by respondent Filkor be foreclosed and sold at
public auction in the event that Filkor fails to pay its obligations to petitioner.
Petitioner filed a motion for partial reconsideration of the trial courts order, praying that the aforesaid relief of
foreclosure and sale at public auction be granted. In an order dated April 16, 1999, the trial court denied petitioners
motion, ruling as follows:
Plaintiff, in opting to file a civil action for the collection of defendants obligations, has abandoned its mortgage
lien on the property subject of the real estate mortgage.
The issue has already been resolved in Danao vs. Court of Appeals, 154 SCRA 446, citing Manila Trading and
Supply Co. vs. Co Kim, et al., 71 Phil. 448, where the Supreme Court ruled that:
The rule is now settled that a mortgage creditor may elect to waive his security and bring, instead, an ordinary
action to recover the indebtedness with the right to execute a judgment thereon on all the properties of the debtor
including the subject matter of the mortgage, subject to the qualification that if he fails in the remedy by him
elected, he cannot pursue further the remedy he has waived.
WHEREFORE, the Partial Motion for Reconsideration filed by the plaintiff of the Courts Order dated March 12,
1999 is hereby denied for lack of merit.
SO ORDERED.[10]
Hence, the present petition, where petitioner ascribes the following error to the trial court.
THE REGIONAL TRIAL COURT OF CAVITE CITY ERRED IN RULING THAT PETITIONER HAD
ABANDONED THE REAL ESTATE MORTGAGE IN ITS FAVOR, BECAUSE IT FILED A SIMPLE
COLLECTION CASE.[11]
The resultant issue is whether or not petitioners complaint before the trial court was an action for foreclosure of
a real estate mortgage, or an action for collection of a sum of money. In addition, we must also determine if the
present appeal was correctly lodged before us rather than with the Court of Appeals.
In petitioners complaint before the trial court, Paragraph 183 thereof alleges:
183. To secure payment of the obligations of defendant Corporation under the First to the Twenty-Seventh Cause
of Action, on February 9, 1996, defendant Corporation executed a Real Estate Mortgage by virtue of which it
mortgaged to plaintiff the improvements standing on Block 13, Lot 1, Cavite Export Processing Zone, Rosario,
Cavite, belonging to defendant Corporation covered by Tax Declaration No. 5906-1 and consisting of a one-story
building called warehouse and spooling area, the guardhouse, the cutting/sewing area building and the packing
area building. (A copy of the Real Estate Mortgage is attached hereto as Annex SS and made an integral part
hereof.)[12]
This allegation satisfies in part the requirements of Section 1, Rule 68 of the 1997 Rules of Civil Procedure on
foreclosure of real estate mortgage, which provides:
SECTION 1. Complaint in action for foreclosure. In an action for the foreclosure of a mortgage or other
encumbrance upon real estate, the complaint shall set forth the date and due execution of the mortgage; its
assignments, if any; the names and residences of the mortgagor and the mortgagee; a description of the mortgaged
property; a statement of the date of the note or other documentary evidence of the obligation secured by the
mortgage, the amount claimed to be unpaid thereon; and the names and residences of all persons having or
claiming an interest in the property subordinate in right to that of the holder of the mortgage, all of whom shall
be made defendants in the action.
In Paragraph 183 above, the date and due execution of the real estate mortgage are alleged. The properties
mortgaged are stated and described therein as well. In addition, the names and residences of respondent Filkor,
as mortgagor, and of petitioner, as mortgagee, are alleged in paragraphs 1 and 2 of the complaint.[13] The dates of
the obligations secured by the mortgage and the amounts unpaid thereon are alleged in petitioners first to twenty-
seventh causes of action.[14] Moreover, the very prayer of the complaint before the trial court reads as follows:
WHEREFORE, it is respectfully prayed that judgment be rendered:
xxx
2. Ordering that the property mortgaged be foreclosed and sold at public auction in case defendants fail to pay
plaintiff within ninety (90) days from entry of judgment.
x x x[15]
Petitioners allegations in its complaint, and its prayer that the mortgaged property be foreclosed and sold at public
auction, indicate that petitioners action was one for foreclosure of real estate mortgage. We have consistently
ruled that what determines the nature of an action, as well as which court or body has jurisdiction over it, are the
allegations of the complaint and the character of the relief sought.[16] In addition, we find no indication whatsoever
that petitioner had waived its rights under the real estate mortgage executed in its favor. Thus, the trial court erred
in concluding that petitioner had abandoned its mortgage lien on Filkors property, and that what it had filed was
an action for collection of a sum of money.
Petitioners action being one for foreclosure of real estate mortgage, it was incumbent upon the trial court to order
that the mortgaged property be foreclosed and sold at public auction in the event that respondent Filkor fails to
pay its outstanding obligations. This is pursuant to Section 2 of Rule 68 of the 1997 Rules of Civil Procedure,
which provides:
SEC. 2. Judgment on foreclosure for payment or sale.- If upon the trial in such action the court shall find the facts
set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or
obligation, including interest and other charges as approved by the court, and costs, and shall render judgment
for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period
of not less than ninety (90) days nor more than one hundred twenty (120) days from entry of judgment, and that
in default of such payment the property shall be sold at public auction to satisfy the judgment. (Italics supplied.)
Accordingly, the dispositive portion of the decision of the trial court dated March 12, 1999, must be modified to
comply with the provisions of Section 2 of Rule 68 of the 1997 Rules of Civil Procedure. This modification is
subject to any appeal filed by respondents of said decision.
On the propriety of the present appeal, we note that what petitioner impugns is the determination by the trial court
of the nature of action filed by petitioner, based on the allegations in the complaint. Such a determination as to
the correctness of the conclusions drawn from the pleadings undoubtedly involves a question of law. [17] As the
present appeal involves a question of law, petitioner appropriately filed it with this Court, pursuant to Section 1
of Rule 45 of the 1997 Rules of Civil Procedure, which provides:
SECTION 1. Filing of petition with Supreme Court. A party desiring to appeal by certiorari from a judgment or
final order or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts
whenever authorized by law, may file with the Supreme Court a verified petition for review on certiorari. The
petition shall raise only questions of law which must be distinctly set forth. (Italics supplied).
There is no dispute with respect to the fact that when an appeal raises only pure questions of law, this Court has
jurisdiction to entertain the same.[18]
WHEREFORE, the petition is GRANTED. The Order dated March 12, 1999, of the Regional Trial Court of
Cavite City, Branch 88, in Civil Case No. N-6689 is hereby MODIFIED, to state that the mortgaged property of
respondent Filkor be ordered foreclosed and sold at public auction in the event said respondent fails to pay its
obligations to petitioner within ninety (90) days from entry of judgment.
No pronouncement as to costs.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, and De Leon, Jr., JJ., concur.
6. HUERTA ALBA RESORT, INC VS CA (11 pages)
PURISIMA, J.:
Litigation must at some time be terminated, even at the risk of occasional errors. Public policy dictates that once
a judgment becomes final, executory and unappealable, the prevailing party should not be denied the fruits of his
victory by some subterfuge devised by the losing party. Unjustified delay in the enforcement of a judgment sets
at naught the role of courts in disposing justiciable controversies with finality.
TheCase

At bar is a petition assailing the Decision, dated November 14, 1996, and Resolution, dated March 11, 1997, of
the Court of Appeals in CA-G.R. No. 38747, which set aside the Order, dated July 21, 1995, and Order, dated
September 4, 1997, of the Regional Trial Court of Makati City, in Civil Case No. 89-5424. The aforesaid orders
of the trial court held that petitioner had the right to redeem subject pieces of property within the one-year period
prescribed by Section 78 of Republic Act No. 337 otherwise known as the General Banking Act.
Section 78 of R.A. No. 337 provides that in case of a foreclosure of a mortgage in favor of a bank, banking or
credit institution, whether judicially or extrajudicially, the mortgagor shall have the right, within one year after
the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property.
TheFacts

The facts that matter are undisputed:

In a complaint for judicial foreclosure of mortgage with preliminary injunction filed on October 19, 1989,
docketed as Civil Case No. 89-5424 before the Regional Trial Court of Makati City, the herein private respondent
sought the foreclosure of four (4) parcels of land mortgaged by petitioner to Intercon Fund Resource, Inc.
(Intercon).
Private respondent instituted Civil Case No. 89-5424 as mortgagee-assignee of a loan amounting to P8.5 million
obtained by petitioner from Intercon, in whose favor petitioner mortgaged the aforesaid parcels of land as security
for the said loan.
In its answer below, petitioner questioned the assignment by Intercon of its mortgage right thereover to the private
respondent, on the ground that the same was ultra vires. Petitioner also questioned during the trial the correctness
of the charges and interest on the mortgage debt in question.
On April 30, 1992, the trial court, through the then Judge now Court of Appeals Justice Buenaventura J. Guerrero,
came out with its decision granting herein private respondent SMGIs complaint for judicial foreclosure of
mortgage, disposing as follows:
WHEREFORE, judgment is hereby rendered ordering defendant to pay plaintiff the following:
(1) P8,500,000.00 representing the principal of the amount due;
(2) P850,000.00 as penalty charges with interest at 6% per annum, until fully paid;
(3) 22% per annum interest on the above principal from September 6, 1998, until fully paid;
(4) 5% of the sum total of the above amounts, as reasonable attorneys fees; and,
(5) Costs.
All the above must be paid within a period of not less than 150 days from receipt hereof by the defendant. In
default of such payment, the four parcels of land subject matter of the suit including its improvements shall be
sold to realize the mortgage debt and costs, in the manner and under the regulations that govern sales of real estate
under execution.[1]
Petitioner appealed the decision of the trial court to the Court of Appeals, the appeal docketed as CA-G.R. CV
No. 39243 before the Sixth Division of the appellate court, which dismissed the case on June 29, 1993 on the
ground of late payment of docket fees.
Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner came to this Court via a petition for certiorari,
docketed as G.R. No. 112044, which this court resolved to dismiss on December 13, 1993, on the finding that the
Court of Appeals erred not in dismissing the appeal of petitioner.
Petitioners motion for reconsideration of the dismissal of its petition in G.R. No. 112044 was denied with finality
in this Courts Resolution promulgated on February 16, 1994. On March 10, 1994, leave to present a second motion
for reconsideration in G.R. No. 112044 or to submit the case for hearing by the Court en banc was filed, but to
no avail. The Court resolved to deny the same on May 11, 1994.
On March 14, 1994, the Resolution dated December 13, 1993, in G.R. No. 112044 became final and executory
and was entered in the Book of Entries of Judgment.
On July 4, 1994, private respondent filed with the trial court of origin a motion for execution of the Decision
promulgated on April 30, 1992 in Civil Case No. 89-5424. The said motion was granted on July 13, 1994.
Accordingly, on July 15, 1994 a writ of execution issued and, on July 20, 1994, a Notice of Levy and Execution
was issued by the Sheriff concerned, who issued on August 1, 1994 a Notice of Sheriffs Sale for the auction of
subject properties on September 6, 1994.
On August 23, 1994, petitioner filed with the same trial court an Urgent Motion to Quash and Set Aside Writ of
Execution ascribing to it grave abuse of discretion in issuing the questioned Writ of Execution. To support its
motion, petitioner invited attention and argued that the records of the case were still with the Court of Appeals
and therefore, issuance of the writ of execution was premature since the 150-day period for petitioner to pay the
judgment obligation had not yet lapsed and petitioner had not yet defaulted in the payment thereof since no
demand for its payment was made by the private respondent. In petitioners own words, the dispute between the
parties was principally on the issue as to when the 150-day period within which Huerta Alba may exercise its
equity of redemption should be counted.
In its Order of September 2, 1994, the lower court denied petitioners urgent motion to quash the writ of execution
in Civil Case No. 89-5424, opining that subject judgment had become final and executory and consequently,
execution thereof was a matter of right and the issuance of the corresponding writ of execution became its
ministerial duty.
Challenging the said order granting execution, petitioner filed once more with the Court of Appeals another
petition for certiorari and prohibition with preliminary injunction, docketed as C.A.-G.R. SP No. 35086,
predicated on the same grounds invoked for its Motion to Quash Writ of Execution.
On September 6, 1994, the scheduled auction sale of subject pieces of properties proceeded and the private
respondent was declared the highest bidder. Thus, private respondent was awarded subject bidded pieces of
property. The covering Certificate of Sale issued in its favor was registered with the Registry of Deeds on October
21, 1994.
On September 7, 1994, petitioner presented an Ex-Parte Motion for Clarification asking the trial court to clarify
whether or not the twelve (12) month period of redemption for ordinary execution applied in the case.
On September 26, 1994, the trial court ruled that the period of redemption of subject property should be governed
by the rule on the sale of judicially foreclosed property under Rule 68 of the Rules of Court.
Thereafter, petitioner then filed an Exception to the Order dated September 26, 1994 and Motion to Set Aside
Said Order, contending that the said Order materially altered the Decision dated April 30, 1992 which declared
that the satisfaction of the judgment shall be in the manner and under the regulation that govern sale of real estate
under execution.
Meanwhile, in its Decision of September 30, 1994, the Court of Appeals resolved the issues raised by the
petitioner in C.A.-G.R. SP No. 35086, holding that the one hundred-fifty day period within which petitioner may
redeem subject properties should be computed from the date petitioner was notified of the Entry of Judgment in
G.R. No. 112044; and that the 150-day period within which petitioner may exercise its equity of redemption
expired on September 11, 1994. Thus:
Petitioner must have received the resolution of the Supreme Court dated February 16, 1994 denying with finality
its motion for reconsideration in G.R. No. 112044 before March 14, 1994, otherwise the Supreme Court would
not have made an entry of judgment on March 14, 1994. While, computing the 150-day period, petitioner may
have until September 11, 1994, within which to pay the amounts covered by the judgment, such period has already
expired by this time, and therefore, this Court has no more reason to pass upon the parties opposing contentions,
the same having become moot and academic.[2](Underscoring supplied).
Petitioner moved for reconsideration of the Decision of the Court of Appeals in C.A.-G.R. SP No. 35086. In its
Motion for Reconsideration dated October 18, 1994, petitioner theorized that the period of one hundred fifty (150)
days should not be reckoned with from Entry of Judgment but from receipt on or before July 29, 1994 by the trial
court of the records of Civil Case No. 89-5424 from the Court of Appeals. So also, petitioner maintained that it
may not be considered in default, even after the expiration of 150 days from July 29, 1994, because prior demand
to pay was never made on it by the private respondent. According to petitioner, it was therefore, premature for
the trial court to issue a writ of execution to enforce the judgment.
The trial court deferred action on the Motion for Confirmation of the Certificate of Sale in view of the pendency
of petitioners Motion for Reconsideration in CA-G.R. SP No. 35086.
On December 23, 1994, the Court of Appeals denied petitioners motion for reconsideration in CA-G.R. SP No.
35086. Absent any further action with respect to the denial of the subject motion for reconsideration, private
respondent presented a Second Motion for Confirmation of Certificate of Sale before the trial court.
As regards the Decision rendered on September 30, 1994 by the Court of Appeals in CA G.R. SP No. 35086 it
became final and executory on January 25, 1995.
On February 10, 1995, the lower court confirmed the sale of subject properties to the private respondent. The
pertinent Order declared that all pending incidents relating to the Order dated September 26, 1994 had become
moot and academic. Conformably, the Transfer Certificates of Title to subject pieces of property were then issued
to the private respondent.
On February 27, 1995, petitioner filed with the Court of Appeals a Motion for Clarification seeking clarification
of the date of commencement of the one (1) year period for the redemption of the properties in question.
In its Resolution dated March 20, 1995, the Court of Appeals merely noted such Motion for Clarification since
its Decision promulgated on September 30, 1994 had already become final and executory; ratiocinating thus:
We view the motion for clarification filed by petitioner, purportedly signed by its proprietor, but which we believe
was prepared by a lawyer who wishes to hide under the cloak of anonymity, as a veiled attempt to buy time and
to delay further the disposition of this case.
Our decision of September 30, 1994 never dealt on the right and period of redemption of petitioner, but was
merely circumscribed to the question of whether respondent judge could issue a writ of execution in its Civil Case
No. 89-5424 xxx.
We further ruled that the one-hundred fifty day period within which petitioner may exercise its equity of
redemption should be counted, not from the receipt of respondent court of the records of Civil Case No. 89-5424
but from the date petitioner was notified of the entry of judgment made by the appellate court.
But we never made any pronouncement on the one- year right of redemption of petitioner because, in the first
place, the foreclosure in this case is judicial, and as such, the mortgagor has only the equity, not the right of
redemption xxx. While it may be true that under Section 78 of R.A. 337 as amended, otherwise known as the
General Banking Act, a mortgagor of a bank, banking or credit institution, whether the foreclosure was
done judicially or extrajudicially, has a period of one year from the auction sale within which to redeem the
foreclosed property, the question of whether the Syndicated Management Group, Inc., is a bank or credit
institution was never brought before us squarely, and it is indeed odd and strange that petitioner would now
sarcastically ask a rhetorical question in its motion for clarification.[3](Underscoring supplied).
Indeed, if petitioner did really act in good faith, it would have ventilated before the Court of Appeals in CA-G.R.
No. 35086 its pretended right under Section 78 of R.A. No. 337 but it never did so.
At the earliest opportunity, when it filed its answer to the complaint for judicial foreclosure, petitioner should
have averred in its pleading that it was entitled to the beneficial provisions of Section 78 of R.A. No. 337; but
again, petitioner did not make any such allegation in its answer.
From the said Resolution, petitioner took no further step such that on March 31, 1995, the private respondent filed
a Motion for Issuance of Writ of Possession with the trial court.
During the hearing called on April 21, 1995, the counsel of record of petitioner entered appearance and asked for
time to interpose opposition to the Motion for Issuance of /Writ of Possession.
On May 2, 1995, in opposition to private respondents Motion for Issuance of /writ of Possession, petitioner filed
a Motion to Compel Private Respondent to Accept Redemption. It was the first time petitioner ever asserted the
right to redeem subject properties under Section 78 of R.A. No. 337, the General Banking Act; theorizing that the
original mortgagee, being a credit institution, its assignment of the mortgage credit to petitioner did not remove
petitioner from the coverage of Section 78 of R.A. No. 337. Therefore, it should have the right to redeem subject
properties within one year from registration of the auction sale, theorized the petitioner which concluded that in
view of its right of redemption, the issuance of the titles over subject parcels of land to the private respondent was
irregular and premature.
In its Order of July 21, 1995, the trial court, presided over by Judge Napoleon Inoturan, denied private respondents
motion for a writ of possession, opining that Section 78 of the General Banking Act was applicable and therefore,
the petitioner had until October 21, 1995 to redeem the said parcels of land, said Order ruled as follows:
It is undisputed that Intercon is a credit institution from which defendant obtained a loan secured with a real estate
mortgage over four (4) parcels of land. Assuming that the mortgage debt had not been assigned to plaintiff, there
is then no question that defendant would have a right of redemption in case of foreclosure, judicially or
extrajudicially, pursuant to the above quoted Section 78 of RA 337, as amended.
However, the pivotal issue here is whether or not the defendant lost its right of redemption by virtue of the
assignment of its mortgage debt by Intercon to plaintiff, which is not a bank or credit institution. The issue is
resolved in the negative. The right of redemption in this case is vested by law and is therefore an absolute privilege
which defendant may not lose even though plaintiff-assignee is not a bank or credit institution (Tolentino versus
Court of Appeals, 106 SCRA 513). Indeed, a contrary ruling will lead to a possible circumvention of Section 78
because all that may be needed to deprive a defaulting mortgagor of his right of redemption is to assign his
mortgage debt from a bank or credit institution to one which is not. Protection of defaulting mortgagors, which is
the avowed policy behind the provision, would not be achieved if the ruling were otherwise. Consequently,
defendant still possesses its right of redemption which it may exercise up to October 21, 1995 only, which is one
year from the date of registration of the certificate of sale of subject properties (GSIS versus Iloilo, 175 SCRA 19,
citing Limpin versus IAC, 166 SCRA 87).
Since the period to exercise defendants right of redemption has not yet expired, the cancellation of defendants
transfer certificates of title and the issuance of new ones in lieu thereof in favor of plaintiff are therefore illegal
for being premature, thereby necessitating reconveyance (see Sec. 63 (a) PD 1529, as amended).
WHEREFORE, the Court hereby rules as follows:
(1) The Motion for Issuance of Writ of Possession is hereby denied;
(2) Plaintiff is directed to accept the redemption on or before October 21, 1995 in an amount computed according
to the terms stated in the Writ of Execution dated July 15, 1994 plus all other related costs and expenses mentioned
under Section 78, RA 337, as amended; and
(3) The Register of Deeds of Valenzuela, Bulacan is directed (a) to reconvey to the defendant the following titles
of the four (4) parcels of land, namely TCT Nos. V-38878, V-38879, V-38880, and V-38881, now in the name of
plaintiff, and (b) to register the certificate of sale dated October 7, 1994 and the Order confirming the sale dated
February 10, 1995 by a brief memorandum thereof upon the transfer certificates of title to be issued in the name
of defendant, pursuant to Sec. 63 (a) PD 1529, as amended.
The Omnibus Motion dated June 5, 1995, together with the Opposition thereto, is now deemed resolved.
SO ORDERED.[4]
Private respondent interposed a Motion for Reconsideration seeking the reversal of the Order but to no avail. In
its Order dated September 4, 1995, the trial court denied the same.
To attack and challenge the aforesaid order of July 21, 1995 and subsequent Order of September 4, 1995 of the
trial court, the private respondent filed with this court a Petition for Certiorari, Prohibition and Mandamus,
docketed as G.R. No. 121893, but absent any special and cogent reason shown for entertaining the same, the
Court referred the petition to the Court of Appeals, for proper determination.
Docketed as G.R. No. 387457 on November 14, 1996, the Court of Appeals gave due course to the petition and
set aside the trial courts Order dated July 21, 1995 and Order dated September 4, 1995.
In its Resolution of March 11, 1997, the Court of Appeals denied petitioners Motion for Reconsideration of the
Decision promulgated on November 14, 1996 in CA-G.R. No. 38747.
Undaunted, petitioner has come to this Court via the present petition, placing reliance on the assignment of errors,
that:
I
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT THE COURT OF
APPEALS (TWELFTH DIVISION) IN CA G.R. SP NO. 35086 HAD RESOLVED WITH FINALITY THAT
PETITIONER HUERTA ALBA HAD NO RIGHT OF REDEMPTION BUT ONLY THE EQUITY OF
REDEMPTION.
II
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN IGNORING THAT PETITIONER
HUERTA ALBA POSSESSES THE ONE-YEAR RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO.
337 (THE GENERAL BANKING ACT).
III
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT PRIVATE
RESPONDENT SYNDICATED MANAGEMENT GROUP, INC. IS ENTITLED TO THE ISSUANCE OF A
WRIT OF POSSESSION OVER THE SUBJECT PROPERTY.[5]
In its comment on the petition, private respondent countered that:
A. THE HONORABLE COURT OF APPEALS CORRECTLY HELD THAT IT RESOLVED WITH FINALITY
IN C.A.-G.R. SP NO. 35086 THAT PETITIONER ONLY HAD THE RIGHT OF REDEMPTION IN RESPECT
OF THE SUBJECT PROPERTIES.
B. THE PETITION IS AN INSIDIOUS AND UNDERHANDED ATTEMPT TO EVADE THE FINALITY OF
VARIOUS DECISIONS, RESOLUTIONS AND ORDERS WHICH HELD THAT PETITIONER ONLY
POSSESSES THE EQUITY OF REDEMPTION IN RESPECT OF THE SUBJECT PROPERTIES.
C. PETITIONER IS BARRED BY ESTOPPEL FROM BELATEDLY RAISING THE ISSUE OF ITS
ALLEGED RIGHT OF REDEMPTION.
D. IN HOLDING THAT THE PETITIONER HAD THE RIGHT OF REDEMPTION OVER THE SUBJECT
PROPERTIES, THE TRIAL COURT MADE A MOCKERY OF THE LAW OF THE CASE.[6]
And by way of Reply, petitioner argued, that:
I.
THE COURT OF APPEALS IN CA G.R. SP NO. 35086 COULD NOT HAVE POSSIBLY RESOLVED
THEREIN - WHETHER WITH FINALITY OR OTHERWISE - THE ISSUE OF PETITIONER HUERTA
ALBAS RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337.
II.
THERE IS NO ESTOPPEL HERE. PETITIONER HUERTA ALBA INVOKED ITS RIGHT OF REDEMPTION
UNDER SECTION 78, R.A. NO. 337 IN TIMELY FASHION, i.e., AFTER CONFIRMATION BY THE
COURT OF THE FORECLOSURE SALE, AND WITHIN ONE (1) YEAR FROM THE DATE OF
REGISTRATION OF THE CERTIFICATE OF SALE.
III.
THE PRINCIPLE OF THE LAW OF THE CASE HAS ABSOLUTELY NO BEARING HERE:
(1)
THE RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IS IN FACT PREDICATED UPON
THE FINALITY AND CORRECTNESS OF THE DECISION IN CIVIL CASE NO. 89-5424.
(2)
THUS, THE RTCS ORDER RECOGNIZING PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION
UNDER SECTION 78, R.A. NO. 37 DOES NOT IN ANY WAY HAVE THE EFFECT OF AMENDING,
MODIFYING, OR SETTING ASIDE THE DECISION IN CIVIL CASE NO. 89-5424.
The above arguments and counter-arguments advanced relate to the pivotal issue of whether or not the petitioner
has the one-year right of redemption of subject properties under Section 78 of Republic Act No. 337 otherwise
known as the General Banking Act.
The petition is not visited by merit.
Petitioners assertion of right of redemption under Section 78 of Republic Act No. 337 is premised on the
submission that the Court of Appeals did not resolve such issue in CA-G.R. SP No. 35086; contending thus:
(1)
BY NO STRETCH OF LOGIC CAN THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 BE
INTERPRETED TO MEAN THE COURT OF APPEALS HAD RESOLVED WITH FINALITY THE ISSUE
OF WHETHER PETITIONER HUERTA ALBA HAD THE RIGHT OF REDEMPTION WHEN ALL THAT
THE RESOLUTION DID WAS TO MERELY NOTE THE MOTION FOR CLARIFICATION.
(2)
THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 IS NOT A FINAL JUDGMENT, ORDER
OR DECREE. IT IS NOT EVEN A JUDGMENT OR ORDER TO BEGIN WITH. IT ORDERS NOTHING; IT
ADJUDICATES NOTHING.
(3)
PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 37 WAS NOT
AN ISSUE AND WAS NOT IN ISSUE, AND COULD NOT HAVE POSSIBLY BEEN AN ISSUE NOR IN
ISSUE, IN CA G.R. SP NO. 35086.
(4)
THE 30 SEPTEMBER 1994 DECISION IN CA G.R. SP NO. 35086 HAVING ALREADY BECOME FINAL
EVEN BEFORE THE FILING OF THE MOTION FOR CLARIFICATION, THE COURT OF APPEALS NO
LONGER HAD ANY JURISDICTION TO ACT OF THE MOTION OR ANY OTHER MATTER IN CA G.R.
SP NO. 35086, EXCEPT TO MERELY NOTE THE MOTION.
II.
IN STARK CONTRAST, THE ISSUE OF PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION
UNDER SECTION 78, R.A. NO. 337 WAS DIRECTLY RAISED AND JOINED BY THE PARTIES, AND
THE SAME DULY RESOLVED BY THE TRIAL COURT.
III.
THE RIGHT OF REDEMPTION UNDER SECTION 78 OF R.A. NO. 337 IS MANDATORY AND
AUTOMATICALLY EXISTS BY LAW. THE COURTS ARE DUTY-BOUND TO RECOGNIZE SUCH
RIGHT.
IV.
EQUITABLE CONSIDERATIONS WEIGH HEAVILY IN FAVOR OF PETITIONER HUERTA ALBA, NOT
THE LEAST OF WHICH IS THE WELL-SETTLED POLICY OF THE LAW TO AID RATHER THAN
DEFEAT THE RIGHT OF REDEMPTION.
V.
THEREFORE THE 21 JULY 1995 AND 04 SEPTEMBER 1995 ORDERS OF THE TRIAL COURT ARE
VALID AND PROPER IN ACCORDANCE WITH THE MANDATE OF THE LAW.
From the various decisions, resolutions and orders a quo it can be gleaned that what petitioner has been adjudged
to have was only the equity of redemption over subject properties.On the distinction between the equity of
redemption and right of redemption, the case of Gregorio Y. Limpin vs. Intermediate Appellate Court,[7] comes
to the fore. Held the Court in the said case:
The equity of redemption is, to be sure, different from and should not be confused with the right of redemption.
The right of redemption in relation to a mortgage - understood in the sense of a prerogative to re-acquire
mortgaged property after registration of the foreclosure sale - exists only in the case of
the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except only
where the mortgagee is the Philippine National Bank or a bank or banking institution.
Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within
one (1) year from the registration of the sheriffs certificate of foreclosure sale.
Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares
that a judicial foreclosure sale, when confirmed by an order of the court, x x shall operate to divest the rights of
all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may
be allowed by law. Such rights exceptionally allowed by law (i.e., even after confirmation by an order of the
court) are those granted by the charter of the Philippine National Bank (Acts No. 2747 and 2938), and the General
Banking Act (R.A. 337). These laws confer on the mortgagor, his successors in interest or any judgment creditor
of the mortgagor, the right to redeem the property sold on foreclosure - after confirmation by the court of the
foreclosure sale - which right may be exercised within a period of one (1) year, counted from the date of
registration of the certificate of sale in the Registry of Property.
But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is
not the PNB or a bank or banking institution. In such a case, the foreclosure sale, when confirmed by an order of
the court. x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser.
There then exists only what is known as the equity of redemption.This is simply the right of the defendant
mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the
90-day period after the judgment becomes final, in accordance with Rule 68, or even after the foreclosure sale
but prior to its confirmation.
Section 2, Rule 68 provides that -
x x If upon the trial x x the court shall find the facts set forth in the complaint to be true, it shall ascertain the
amount due to the plaintiff upon the mortgage debt or obligation, including interest and costs, and shall render
judgment for the sum so found due and order the same to be paid into court within a period of not less than ninety
(90) days from the date of the service of such order, and that in default of such payment the property be sold to
realize the mortgage debt and costs.
This is the mortgagors equity (not right) of redemption which, as above stated, may be exercised by him even
beyond the 90-day period from the date of service of the order, and even after the foreclosure sale itself, provided
it be before the order of confirmation of the sale. After such order of confirmation, no redemption can be effected
any longer.[8] (Underscoring supplied)
Petitioner failed to seasonably invoke its purported right under Section 78 of R.A. No. 337.
Petitioner avers in its petition that the Intercom, predecessor in interest of the private respondent, is a credit
institution, such that Section 78 of Republic Act No. 337 should apply in this case. Stated differently, it is the
submission of petitioner that it should be allowed to redeem subject properties within one year from the date of
sale as a result of the foreclosure of the mortgage constituted thereon.
The pivot of inquiry here therefore, is whether the petitioner seasonably invoked its asserted right under Section
78 of R.A. No. 337 to redeem subject properties.
Petitioner theorizes that it invoked its "right" in "timely fashion", that is, after confirmation by the court of the
foreclosure sale, and within one (1) year from the date of registration of the certificate of sale. Indeed, the facts
show that it was only on May 2, 1995 when, in opposition to the Motion for Issuance of Writ of Possession, did
petitioner file a Motion to Compel Private Respondent to Accept Redemption, invoking for the very first time its
alleged right to redeem subject properties under to Section 78 of R.A. No. 337.
In light of the aforestated facts, it was too late in the day for petitioner to invoke a right to redeem under Section
78 of R.A. No. 337. Petitioner failed to assert a right to redeem in several crucial stages of the Proceedings.
For instance, on September 7, 1994, when it filed with the trial court an Ex-part Motion for Clarification, petitioner
failed to allege and prove that private respondent's predecessor in interest was a credit institution and therefore,
Section 78 of R.A. No. 337 was applicable. Petitioner merely asked the trial court to clarify whether the sale of
subject properties was execution sale or judicial foreclosure sale.
So also, when it presented before the trial court an Exception to the Order and Motion to Set Aside Said Order
dated October 13, 1994, petitioner again was silent on its alleged right under Section 78 of R.A. No. 337, even as
it failed to show that private respondent's predecessor in interest is a credit institution. Petitioner just argued that
the aforementioned Order materially altered the trial court's Decision of April 30, 1992.
Then, too, nothing was heard from petitioner on its alleged right under Section 78 of R.A. No. 337 and of the
predecessor in interest of private respondent as a credit institution, when the trial court came out with an order on
February 10, 1995, confirming the sale of subject properties in favor of private respondent and declaring that all
pending incidents with respect to the Order dated September 26, 1994 had become moot and academic.
Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification with the Court of Appeals,
seeking "clarification" of the date of commencement of the one (1) year redemption period for the subject
properties, petitioner never intimated any alleged right under Section 78 of R.A. No. 337 nor did it invite attention
to its present stance that private respondent's predecessor-in-interest was a credit institution. Consequently, in its
Resolution dated March 20, 1995, the Court of Appeals ruled on the said motion thus:
But we never made any pronouncement on the one-year right of redemption of petitioner because, in the first
place, the foreclosure in this case is judicial, and as such, the mortgagor has only the equity, not the right of
redemption xxx. While it may be true that under Section 78 of R.A. 337 as amended, otherwise known as the
General Banking Act, a mortgagor of a bank, banking or credit institution, whether the foreclosure was
done judicially or extrajudicially, has a period of one year from the auction sale within which to redeem the
foreclosed property, the question of whether the Syndicated Management Group, Inc., is bank or credit institution
was never brought before us squarely, and it is indeed odd and strange that petitioner would now sarcastically ask
a rhetorical question in its motion for clarification.[9](Underscoring supplied).
If petitioner were really acting in good faith, it would have ventilated before the Court of Appeals in CA-G.R.
No. 35086 its alleged right under Section 78 of R.A. No. 337; but petitioner never did do so.
Indeed, at the earliest opportunity, when it submitted its answer to the complaint for judicial foreclosure, petitioner
should have alleged that it was entitled to the beneficial provisions of Section 78 of R.A. No. 337 but again, it did
not make any allegation in its answer regarding any right thereunder. It bears stressing that the applicability of
Section 78 of R.A. No. 337 hinges on the factual question of whether or not private respondents predecessor in
interest was a credit institution. As was held in Limpin, a judicial foreclosure sale, when confirmed by an order
of the court, xx shall operate to divest the rights of all the parties to the action and to vest their rights in the
purchaser, subject to such rights of redemption as may be allowed by law,[10]which confer on the mortgagor, his
successors in interest or any judgment creditor of the mortgagor, the right to redeem the property sold on
foreclosure after confirmation by the court of the judicial foreclosure sale. Thus, the claim that petitioner is
entitled to the beneficial provisions of Section 78 of R.A. No. 337 - since private respondents predecessor-in-
interest is a credit institution - is in the nature of a compulsory counterclaim which should have been averred in
petitioners answer to the compliant for judicial foreclosure.
xxx A counterclaim is, most broadly, a cause of action existing in favor of the defendant against the plaintiff. More
narrowly, it is a claim which, if established, will defeat or in some way qualify a judgment or relief to which
plaintiff is otherwise entitled. It is sometimes defined as any cause of action arising in contract available against
any action also arising in contract and existing at the time of the commencement of such an action. It is frequently
defined by the codes as a cause of action arising out of the contract or transaction set forth in the complaint as the
foundation of the plaintiffs claim, or connected with the subject of the action.[11] (underscoring supplied)
The counterclaim is in itself a distinct and independent cause of action, so that when properly stated as such, the
defendant becomes, in respect to the matters stated by him, an actor, and there are two simultaneous actions
pending between the same parties, wherein each is at the same time both a plaintiff and a defendant. Counterclaim
is an offensive as well as a defensive plea and is not necessarily confined to the justice of the plaintiffs claim. It
represents the right of the defendant to have the claims of the parties counterbalanced in whole or in part, and
judgment to be entered in excess, if any. A counterclaim stands on the same footing, and is to be tested by the
same rules, as if it were an independent action.[12] (underscoring supplied)
The very purpose of a counterclaim would have been served had petitioner alleged in its answer its purported
right under Section 78 of R.A. No. 337:
xxx The rules of counterclaim are designed to enable the disposition of a whole controversy of interested parties
conflicting claims, at one time and in one action, provided all parties be brought before the court and the matter
decided without prejudicing the rights of any party.[13]
The failure of petitioner to seasonably assert its alleged right under Section 78 of R.A. No. 337 precludes it from
so doing at this late stage of the case. Estoppel may be successfully invoked if the party fails to raise the question
in the early stages of the proceedings.[14] Thus, a party to a case who failed to invoked his claim in the main case,
while having the opportunity to do so, will be precluded, subsequently, from invoking his claim, even if it were
true, after the decision has become final, otherwise the judgment may be reduced to a mockery and the
administration of justice may be placed in disrepute.[15]
All things viewed in proper perspective, it is decisively clear that the trial court erred in still allowing petitioner
to introduce evidence that private respondents predecessor-in-interest was a credit institution, and to thereafter
rule that the petitioner was entitled to avail of the provisions of Section 78 of R.A. No. 337. In effect, the trial
court permitted the petitioner to accomplish what the latter failed to do before the Court of Appeals, that is, to
invoke its alleged right under Section 78 of R.A. No. 337 although the Court of Appeals in CA-G.R. no. 35086
already found that the question of whether the Syndicated Management Council Group, Inc. is a bank or credit
institution was never brought before (the Court of Appeals) squarely. The said pronouncement by the Court of
Appeals unerringly signified that petitioner did not make a timely assertion of any right under Section 78 of R.A.
No. 337 in all the stages of the proceedings below.
Verily, the petitioner has only itself to blame for not alleging at the outset that the predecessor-in-interest of the
private respondent is a credit institution. Thus, when the trial court, and the Court of Appeals repeatedly passed
upon the issue of whether or not petitioner had the right of redemption or equity of redemption over subject
properties in the decisions, resolutions and orders, particularly in Civil Case no. 89-5424, CA-G.R. CV No. 39243,
CA-G.R. SP No. 35086, and CA-G.R. SP No. 38747, it was unmistakable that the petitioner was adjudged to just
have the equity of redemption without any qualification whatsoever, that is, without any right of redemption
allowed by law.
The law of case holds that petitioner has the equity of redemption without any qualification.
There is, therefore, merit in private respondents contention that to allow petitioner to belatedly invoke its right
under Section 78 of R.A. No. 337 will disturb the law of the case. However, private respondents statement of
what constitutes the law of the case is not entirely accurate. The law of the case is not simply that the defendant
possesses an equity of redemption. As the Court has stated, the law of the case holds that petitioner has the equity
of the redemption without any qualification whatsoever, that is, without the right of redemption afforded by
Section 78 of R.A. No. 337. Whether or not the law of the case is erroneous is immaterial, it still remains the law
of the case. A contrary rule will contradict both the letter and spirit of the rulings of the Court of Appeals in CA-
G.R. SP No. 35086, CA-G.R. CV No. 39243, and CA-G.R. 38747, which clearly saw through the repeated
attempts of petitioner to forestall so simple a matter as making the security given for a just debt to answer for its
payment.
Hence, in conformity with the ruling in Limpin, the sale of the subject properties, as confirmed by the Order dated
February 10, 1995 of the trial court in Civil Case No. 89-5424 operated to divest the rights of all the parties to the
action and to vest their rights in private respondent. There then existed only what is known as the equity of
redemption, which is simply the right of the petitioner to extinguish the mortgage and retain ownership of the
property by paying the secured debt within the 90-day period after the judgment became final. There being an
explicit finding on the part of the Court of Appeals in its Decision of September 30, 1994 in CA-G.R. No. 35086
- that the herein petitioner failed to exercise its equity of redemption within the prescribed period, redemption can
no longer be effected. The confirmation of the sale and the issuance of the transfer certificates of title covering
the subject properties to private respondent was then, in order. The trial court therefore, has the ministerial duty
to place private respondent in the possession of subject properties.
WHEREFORE, the petition is DENIED, and the assailed decision of the Court of Appeals, declaring null and
void the Order dated 21 July 1995 and Order dated 4 September 1997 of the Regional Trial Court of Makati City
in Civil Case No. 89-5424, AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.
7. GRAND FARMS, INC. AND PHILIPPINE SHARES CORPORATION VS. CA (3 pages)

REGALADO, J.:
The propriety of a summary judgment is raised in issue in the instant petition, with herein petitioners appealing
the decision1 of respondent court in CA-G.R. SP No. 17535, dated November 29, 1989, which found no grave
abuse of discretion on the part of respondent judge in denying petitioners' motion for summary judgment.2
The antecedents of this case are clear and undisputed. Sometime on April 15, 1988, petitioners filed Civil Case
No. 2816-V88 in the Regional Trial Court of Valenzuela, Metro Manila for annulment and/or declaration of
nullity of the extrajudicial foreclosure proceedings over their mortgaged properties, with damages, against
respondents clerk of court, deputy sheriff and herein private respondent Banco Filipino Savings and Mortgage
Bank.3
Soon after private respondent had filed its answer to the complaint, petitioners filed a request for admission by
private respondent of the allegation, inter alia, that no formal notice of intention to foreclose the real estate
mortgage was sent by private respondent to petitioners.4
Private respondent, through its deputy liquidator, responded under oath to the request and countered that
petitioners were "notified of the auction sale by the posting of notices and the publication of notice in the
Metropolitan Newsweek, a newspaper of general circulation in the province where the subject properties are
located and in the Philippines on February 13, 20 and 28, 1988."5
On the basis of the alleged implied admission by private respondent that no formal notice of foreclosure was sent
to petitioners, the latter filed a motion for summary judgment contending that the foreclosure was violative of the
provisions of the mortgage contract, specifically paragraph (k) thereof which provides:
k) All correspondence relative to this Mortgage, including demand letters, summons, subpoena or notifications
of any judicial or extrajudical actions shall be sent to the Mortgagor at the address given above or at the address
that may hereafter be given in writing by the Mortgagor to the Mortgagee, and the mere act of sending any
correspondence by mail or by personal delivery to the said address shall be valid and effective notice to the
Mortgagor for all legal purposes, and the fact that any communication is not actually received by the Mortgagor,
or that it has been returned unclaimed to the Mortgagee, or that no person was found at the address given, or that
the address is fictitious, or cannot be located, shall not excuse or relieve the Mortgagor from the effects of such
notice;6
The motion was opposed by private respondent which argued that petitioners' reliance on said paragraph (k) of
the mortgage contract fails to consider paragraphs (b) and (d) of the same contract, which respectively provide as
follows:
b) . . . For the purpose of extra-judicial foreclosure, the Mortgagor (plaintiff) hereby appoints the Mortgagee (BF)
his attorney-in-fact to sell the property mortgaged, to sign all documents and perform any act requisite and
necessary to accomplish said purpose and to appoint its substitutes as such attorney-in-fact, with the same powers
as above-specified. The Mortgagor hereby expressly waives the term of thirty (30) days or any other term granted
or which may hereafter be granted him by law as the period which must elapse before the Mortgagee shall be
entitled to foreclose this mortgage, it being specifically understood and agreed that the said Mortgagee may
foreclose this mortgage at any time after the breach of any conditions hereof. . . .
xxx xxx xxx
d) Effective upon the breach of any conditions of the mortgage and in addition to the remedies herein stipulated,
the Mortgagee is hereby likewise appointed attorney-in-fact of the Mortgagor with full powers and authority, with
the use of force, if necessary, to take actual possession of the mortgaged property, without the necessity for any
judicial order or any permission of power to collect rents, to eject tenants, to lease or sell the mortgaged property,
or any part thereof, at public or private sale without previous notice or adverstisement of any kind and execute
the corresponding bills of sale, lease or other agreement that may be deemed convenient, to make repairs or
improvement to the mortgaged property and pay for the same and perform any other act which the Mortgagor
may deem convenient . . .7
On February 27, 1989, the trial court issued an order, denying petitioners' motion for summary
judgment.8Petitioners' motion for reconsideration was likewise denied by respondent-judge on the ground that
genuine and substantial issues exist which require the presentation of evidence during the trial, to wit: (a) whether
or not the loan has matured; (b) whether or not private respondent notified petitioners of the foreclosure of their
mortgage; (c) whether or not the notice by publication of the foreclosure constitutes sufficient notice to petitioners
under the mortgage contract; (d) whether or not the applicant for foreclosure of the mortgage was a duly
authorized representative of private respondent; and (e) whether or not the foreclosure was enjoined by a
resolution of this Court.9
Petitioners thereafter went on a petition for certiorari to respondent court attacking said orders of denial as having
been issued with grave abuse of discretion. As earlier adverted to, respondent court dismissed the petition, holding
that no personal notice was required to foreclose since private respondent was constituted by petitioners as their
attorney-in-fact to sell the mortgaged property. It further held that paragraph (k) of the mortgage contract merely
specified the address where correspondence should be sent and did not impose an additional condition on the part
of private respondent to notify petitioners personally of the foreclosure. Respondent court also denied petitioners
motion for reconsideration, hence the instant petition.
We rule for petitioners.
The Rules of Court authorize the rendition of a summary judgment if the pleadings, depositions and admissions
on file, together with the affidavits, show that, except as to the amount of damages, there is no issue as to any
material fact and that the moving party is entitled to a judgment as a matter of law.10 Although an issue may be
raised formally by the pleadings but there is no genuine issue of fact, and all the facts are within the judicial
knowledge of the court, summary judgment may be granted.11
The real test, therefore, of a motion for summary judgment is whether the pleadings, affidavits and exhibits in
support of the motion are sufficient to overcome the opposing papers and to justify a finding as a matter of law
that there is no defense to the action or that the claim is clearly meritorious.12
Applying said criteria to the case at bar, we find petitioners' action in the court below for annulment and/or
declaration of nullity of the foreclosure proceedings and damages ripe for summary judgment. Private respondent
tacitly admitted in its answer to petitioners' request for admission that it did not send any formal notice of
foreclosure to petitioners. Stated otherwise, and as is evident from the records, there has been no denial by private
respondent that no personal notice of the extrajudicial foreclosure was ever sent to petitioners prior thereto. This
omission, by itself, rendered the foreclosure defective and irregular for being contrary to the express provisions
of the mortgage contract. There is thus no further necessity to inquire into the other issues cited by the trial court,
for the foreclosure may be annulled solely on the basis of such defect.
While private respondent was constituted as their attorney-in-fact by petitioners, the inclusion of the aforequoted
paragraph (k) in the mortgage contract nonetheless rendered personal notice to the latter indispensable. As we
stated in Community Savings & Loan Association, Inc., et al. vs. Court of Appeals, et al.,13 where we had the
occasion to construe an identical provision:
On the other important point that militates against the petitioners' first ground for this petition is the fact that no
notice of the foreclosure proceedings was ever sent by CSLA to the deceased mortgagor Antonio Esguerra or his
heirs in spite of an express stipulation in the mortgage agreement to that effect. Said Real Estate Mortgage
provides, in Sec. 10 thereof that:
(10) All correspondence relative to this mortgage, including demand letters, summons, subpoenas,
or notifications of any judicial or extrajudicial actions shall be sent to the Mortgagor at the address given
above or at the address that may hereafter be given in writing by the Mortgagor to the Mortgagee, and the mere
act of sending any correspondence by mail or by personal delivery to the said address shall be valid and effective
notice to the Mortgagor for all legal purposes, . . . (Emphasis in the original text.)
The Court of Appeals, in appreciating the foregoing provision ruled that it is an additional stipulation between
the parties.1âwphi1 As such, it is the law between them and as it not contrary to law, morals, good customs and
public policy, the same should be complied with faithfully (Article 1306, New Civil Code of the Philippines).
Thus, while publication of the foreclosure proceedings in the newspaper of general circulation was complied with,
personal notice is still required, as in the case at bar, when the same was mutually agreed upon by the parties as
additional condition of the mortgage contract. Failure to comply with this additional stipulation would render
illusory Article 1306 of the New Civil Code of the Philippines (p. 37, Rollo).
On the issue of whether or not CSLA notified the private respondents of the extrajudicial foreclosure sale in
compliance with Sec. 10 of the mortgage agreement the Court of Appeals found as follows:
As the record is bereft of any evidence which even impliedly indicate that the required notice of the extrajudicial
foreclosure was ever sent to the deceased debtor-mortgagor Antonio Esguerra or to his heirs, the extrajudicial
foreclosure proceedings on the property in question are fatally defective and are not binding on the deceased
debtor-mortgagor or to his heirs (p. 37, Rollo)
Hence, even on the premise that there was no attendant fraud in the proceedings, the failure of the petitioner bank
to comply with the stipulation in the mortgage document is fatal to the petitioners' cause.
We do not agree with respondent court that paragraph (k) of the mortgage contract in question was intended
merely to indicate the address to which the communications stated therein should be sent. This interpretation is
rejected by the very text of said paragraph as above construed. We do not see any conceivable reason why the
interpretation placed on an identically worded provision in the mortgage contract involved in Community Savings
& Loan Association, Inc. should not be adopted with respect to the same provision involved in the case at bar.
Nor may private respondent validly claim that we are supposedly interpreting paragraph (k) in isolation and
without taking into account paragraphs (b) and (d) of the same contract. There is no irreconcillable conflict
between, as in fact a reconciliation should be made of, the provisions of paragraphs (b) and (d) which appear first
in the mortgage contract and those in paragraph (k) which follow thereafter and necessarily took into account the
provisions of the preceding two paragraphs.14 The notices respectively mentioned in paragraphs (d) and (k) are
addressed to the particular purposes contemplated therein. Those mentioned in paragraph (k) are specific and
additional requirements intended for the mortgagors so that, thus apprised, they may take the necessary legal steps
for the protection of their interests such as the payment of the loan to prevent foreclosure or to subsequently
arrange for redemption of the property foreclosed.
What private respondent would want is to have paragraph (k) considered as non-existent and consequently
disregarded, a proposition which palpably does not merit consideration. Furthermore, it bears mention that private
respondent having caused the formulation and preparation of the printed mortgage contract in question, any
obscurity that it imputes thereto or which supposedly appears therein should not favor it as a contracting party.
8. MEDIDA VS. CA (5 pages)
REGALADO, J.:
The core issue in this case is whether or not a mortgagor, whose property has been extrajudicially foreclosed and
sold at the corresponding foreclosure sale, may validly execute a mortgage contract over the same property in
favor of a third party during the period of redemption.
The present appeal by certiorari assails the decision 1 of respondent Court of Appeals in CA-G.R. CV No. 12678
where it answered the question posed by the foregoing issue in the negative and modified the decision 2 of the
then Court of First Instance of Cebu in Civil Case No. R-18616 wherein the validity of said subsequent mortgage
was assumed and the case was otherwise disposed of on other grounds.
The facts which gave rise to the institution of the aforesaid civil case in the trial court, as found by respondent
Court of Appeals, are as follows:
On October 10, 1974 plaintiff spouses, alarmed of losing their right of redemption over lot 4731 of the Cebu City
Cadastre and embraced under TCT No. 14272 from Mr. Juan Gandioncho, purchaser of the aforesaid lot at the
foreclosure sale of the previous mortgage in favor of Cebu City Development Bank, went to Teotimo Abellana,
president of defendant Association, to obtain a loan of P30,000.00. Prior thereto or on October 3, 1974, their son
Teofredo Dolino filed a similar loan application for Twenty-Five Thousand (P25,000.00) Pesos with lot No. 4731
offered as security for the Thirty Thousand (P30,000.00) Pesos loan from defendant association. Subsequently,
they executed a promissory note in favor of defendant association. Both documents indicated that the principal
obligation is for Thirty Thousand (P30,000.00) Pesos payable in one year with interest at twelve (12%)
percent per annum.
When the loan became due and demandable without plaintiff paying the same, defendant association caused the
extrajudicial foreclosure of the mortgage on March 16, 1976. After the posting and publication requirements were
complied with, the land was sold at public auction on April 19, 1976 to defendant association being the highest
bidder. The certificate of sale was issued on April 20, 1976 and registered on May 10, 1976 with the Register of
Deeds of Cebu.
On May 24, 1971 (sic, 1977), no redemption having been effected by plaintiff, TCT No. 14272 was cancelled and
in lieu thereof TCT No. 68041 was issued in the name of defendant association.3
xxx xxx xxx
On October 18, 1979, private respondents filed the aforestated Civil Case No. R-18616 in the court a quo for the
annulment of the sale at public auction conducted on April 19, 1976, as well as the corresponding certificate of
sale issued pursuant thereto.
In their complaint, private respondents, as plaintiffs therein, assailed the validity of the extrajudicial foreclosure
sale of their property, claiming that the same was held in violation of Act No. 3135, as amended, and prayed, inter
alia, for the cancellation of Transfer Certificate of Title No. 68041 issued in favor of therein defendant City
Savings and Loan Association, Inc., now known as City Savings Bank and one of the petitioners herein.
In its answer, the defendant association therein denied the material allegations of the complaint and averred,
among others, that the present private respondent spouses may still avail of their right of redemption over the land
in question.
On January 12, 1983, after trial on the merits, the court below rendered judgment upholding the validity of the
loan and the real estate mortgage, but annulling the extrajudicial foreclosure sale inasmuch as the same failed to
comply with the notice requirements in Act No. 3135, as amended, under the following dispositive part:
WHEREFORE, the foregoing premises considered and upon the view taken by the Court of this case, judgment
is hereby rendered, as follows:
1. Declaring ineffective the extrajudicial foreclosure of the mortgage over Lot No. 4731 of the Cadastral Survey
of Cebu;
2. Ordering the cancellation of Transfer Certificate of Title No. 68041 of the Registry of Deeds of the City of
Cebu in the name of defendant Cebu City Savings and Loan Association, Inc. the corresponding issuance of a
new transfer certificate to contain all the annotations made in TCT No. 14272 of the plaintiffs Pascuala Sabellano,
married to Andres Dolino;
3. Ordering the plaintiffs aforenamed to pay the defendant Cebu City Savings and Loan Association, Inc. the
unpaid balance of the loan, plus interest; and reimbursing said defendant the value of any necessary and useful
expenditures on the property after deducting any income derived by said defendant from the property.
For this purpose, defendant Association is given 15 days from receipt hereof within which to submit its statement
of the amount due it from the plaintiffs Dolino, with notice to them. The payment to be made by the plaintiffs
shall be within ninety (90) days from their receipt of the order approving the amount due the defendant Cebu City
Savings and Loan Association, Inc.
No award of damages or costs to either party.
SO ORDERED. 4
Not satisfied therewith, herein private respondents interposed a partial appeal to respondent court with respect to
the second and third paragraphs of the aforequoted decretal portion, contending that the lower court erred in (1)
declaring that the mortgage executed by the therein plaintiff spouses Dolino is valid; (2) permitting therein Cebu
City Savings and Loan Association, Inc. to collect interest after the same foreclosure proceedings and auction
sale which are null and void from the beginning; (3) not ordering the forfeiture of the capital or balance of the
loan with usurious interest; and (4) not sentencing therein defendant to pay damages and attorney's fees to
plaintiffs. 5
On September 28, 1990, respondent Court of Appeals promulgated its decision modifying the decision of the
lower court, with this adjudication:
WHEREFORE, PREMISES CONSIDERED, the decision appealed from is hereby MODIFIED declaring as void
and ineffective the real estate mortgage executed by plaintiffs in favor of defendant association. With this
modification, the decision is AFFIRMED in other respects. 6
Herein petitioners then filed a motion for reconsideration which was denied by respondent court in its resolution
dated March 5, 1991, hence the present petition which, in synthesis, postulates that respondent court erred in
declaring the real estate mortgage void, and also impugns the judgment of the trial court declaring ineffective the
extrajudicial foreclosure of said mortgage and ordering the cancellation of Transfer Certificate of Title No. 68041
issued in favor of the predecessor of petitioner bank. 7
The first submission assailing the judgment of respondent Court of Appeals is meritorious.
Said respondent court declared the real estate mortgage in question null and void for the reason that the mortgagor
spouses, at the time when the said mortgage was executed, were no longer the owners of the lot, having supposedly
lost the same when the lot was sold to a purchaser in the foreclosure sale under the prior mortgage. This holding
cannot be sustained.
Preliminarily, the issue of ownership of the mortgaged property was never alleged in the complaint nor was the
same raised during the trial, hence that issue should not have been taken cognizance of by the Court of Appeals.
An issue which was neither averred in the complaint nor ventilated during the trial in the court below cannot be
raised for the first time on appeal as it would be offensive to the basic rule of fair play, justice and due process. 8
Nonetheless, since respondent Court took cognizance thereof and, in fact, anchored its modificatory judgment on
its ratiocination of that issue, we are inclined to liberalize the rule so that we can in turn pass upon the correctness
of its conclusion. We may consider such procedure as analogous to the rule that an unassigned error closely related
to an error properly assigned, or upon which the determination of the question properly assigned is dependent,
may be considered by an appellate court. 9 We adopt this approach since, after all, both lower courts agreed upon
the invalidity of the extrajudicial foreclosure but differed only on the matter of the validity of the real estate
mortgage upon which the extrajudicial foreclosure was based.
In arriving at its conclusion, respondent court placed full reliance on what obviously is an obiter dictum laid down
in the course of the disquisition in Dizon vs. Gaborro, et al. which we shall analyze. 10 For, as explicitly stated
therein by the Court, "(t)he basic issue to be resolved in this case is whether the 'Deed of Sale with Assumption
of Mortgage' and the 'Option to Purchase Real Estate,' two instruments executed by and between petitioner Jose
P. Dizon and Alfredo G. Gaborro (defendant below) on the same day, October 6, 1959, constitute in truth and in
fact an absolute sale of the three parcels of land therein described or merely an equitable mortgage or conveyance
thereof by way of security for reimbursement or repayment by petitioner Jose P. Dizon of any and all sums which
may have been paid to the Development Bank of the Philippines and the Philippine National Bank by Alfredo G.
Gaborro . . . ." Said documents were executed by the parties and the payments were made by Gaborro for the debt
of Dizon to said banks after the Development Bank of the Philippines had foreclosed the mortgage executed by
Dizon and during the period of redemption after the foreclosure sale of the mortgaged property to said creditor
bank.
The trial court held that the true agreement between the parties therein was that Gaborro would assume and pay
the indebtedness of Dizon to the banks and, in consideration thereof, Gaborro was given the possession and
enjoyment of the properties in question until Dizon shall have reimbursed him for the amount paid to the creditor
banks. Accordingly, the trial court ordered the reformation of the documents to the extent indicated and such
particular relief was affirmed by the Court of Appeals. This Court held that the agreement between the parties is
one of those innominate contracts under Article 1307 of the Civil Code whereby the parties agreed "to give and
to do" certain rights and obligations, but partaking of the nature of antichresis.
Hence, on appeal to this Court, the judgment of the Court of Appeals in that case was affirmed but with the
following pronouncements:
The two instruments sought to be reformed in this case appear to stipulate rights and obligations between the
parties thereto pertaining to and involving parcels of land that had already been foreclosed and sold
extrajudicially, and purchased by the mortgage creditor, a third party. It becomes, therefore, necessary, to
determine the legality of said rights and obligations arising from the foreclosure and sale proceedings not only
between the two contracting parties to the instruments executed between them but also in so far as the agreement
affects the rights of the third party, the purchaser Bank.
xxx xxx xxx
Under the Revised Rules of Court, Rule 39, Section 33, the judgment debtor remains in possession of the property
foreclosed and sold, during the period of redemption. If the judgment debtor is in possession of the property sold,
he is entitled to retain it, and receive the fruits, the purchaser not being entitled to such possession. (Riosa vs.
Verzosa, 26 Phil. 86; Velasco vs. Rosenberg's, Inc., 32 Phil. 72; Pabico vs. Pauco, 43 Phil. 572; Power vs. PNB,
54 Phil. 54; Gorospe vs. Gochangco, L-12735, Oct. 30, 1959).
xxx xxx xxx
Upon foreclosure and sale, the purchaser is entitled to a certificate of sale executed by the sheriff. (Section 27,
Revised Rules of Court). After the termination of the period of redemption and no redemption having been made,
the purchaser is entitled to a deed of conveyance and to the possession of the properties. (Section 35, Revised
Rules of Court). The weight of authority is to the effect that the purchaser of land sold at public auction under a
writ of execution has only an inchoate right to the property, subject to be defeated and terminated within the
period of 12 months from the date of sale, by a redemption on the part of the owner. Therefore, the judgment
debtor in possession of the property is entitled to remain therein during the period for redemption. (Riosa vs.
Verzosa, 26 Phil. 86, 89; Gonzales vs. Calimbas, 51 Phil. 355).
In the case before Us, after the extrajudicial foreclosure and sale of his properties, petitioner Dizon retained the
right to redeem the lands, the possession, use and enjoyment of the same during the period of redemption. And
these are the only rights that Dizon could legally transfer, cede and convey unto respondent Gaborro under the
instrument captioned Deed of Sale with Assumption of Mortgage (Exh. A-Stipulation), likewise the same rights
that said respondent could acquire in consideration of the latter's promise to pay and assume the loan of petitioner
Dizon with DBP and PNB.
Such an instrument cannot be legally considered a real and unconditional sale of the parcels of land, firstly,
because there was absolutely no money consideration therefor, as admittedly stipulated, the sum of P131,831.91
mentioned in the document as the consideration "receipt of which was acknowledged" was not actually paid; and,
secondly, because the properties had already been previously sold by the sheriff at the foreclosure sale, thereby
divesting the petitioner of his full right as owner thereof to dispose and sell the lands. (Emphasis ours.)
It was apparently the second reason stated by the Court in said case which was relied upon by respondent court
in the present case on which to premise its conclusion. Yet, as demonstrated by the relevant excerpts above quoted,
not only was that obiter therein unnecessary since evidently no sale was concluded, but even inaccurate, if not
inconsistent, when considered in the context of the discussion in its entirety. If, as admitted, the purchaser at the
foreclosure sale merely acquired an inchoate right to the property which could ripen into ownership only upon
the lapse of the redemption period without his credit having been discharged, it is illogical to hold that during that
same period of twelve months the mortgagor was "divested" of his ownership, since the absurd result would be
that the land will consequently be without an owner although it remains registered in the name of the mortgagor.
That is why the discussion in said case carefully and felicitously states that what is divested from the mortgagor
is only his "full right as owner thereof to dispose (of) and sell the lands," in effect, merely clarifying that the
mortgagor does not have the unconditional power to absolutely sell the land since the same is encumbered by a
lien of a third person which, if unsatisfied, could result in a consolidation of ownership in the lienholder but only
after the lapse of the period of redemption. Even on that score, it may plausibly be argued that what is delimited
is not the mortgagor'sjus dispodendi, as an attribute of ownership, but merely the rights conferred by such act of
disposal which may correspondingly be restricted.
At any rate, even the foregoing considerations and arguments would have no application in the case at bar and
need not here be resolved since what is presently involved is a mortgage, not a sale, to petitioner bank. Such
mortgage does not involve a transfer, cession or conveyance of the property but only constitutes a lien thereon.
There is no obstacle to the legal creation of such a lien even after the auction sale of the property but during the
redemption period, since no distinction is made between a mortgage constituted over the property before or after
the auction sale thereof.
Thus, a redemptioner is defined as a creditor having a lien by attachment, judgment or mortgage on the property
sold, or on some part thereof, subsequent to the judgment under which the property was sold. 11 Of course, while
in extrajudicial foreclosure the sale contemplated is not under a judgment but the proceeding pursuant to which
the mortgaged property was sold, a subsequent mortgage could nevertheless be legally constituted thereafter with
the subsequent mortgagee becoming and acquiring the rights of a redemptioner, aside from his right against the
mortgagor.
In either case, what bears attention is that since the mortgagor remains as the absolute owner of the property
during the redemption period and has the free disposal of his property, there would be compliance with the
requisites of Article 2085 of the Civil Code for the constitution of another mortgage on the property. To hold
otherwise would create the inequitable situation wherein the mortgagor would be deprived of the opportunity,
which may be his last recourse, to raise funds wherewith to timely redeem his property through another mortgage
thereon.
Coming back to the present controversy, it is undisputed that the real estate mortgage in favor of petitioner bank
was executed by respondent spouses during the period of redemption. We reiterate that during said period it
cannot be said that the mortgagor is no longer the owner of the foreclosed property since the rule up to now is
that the right of a purchaser at a foreclosure sale is merely inchoate until after the period of redemption has expired
without the right being exercised. 12 The title to land sold under mortgage foreclosure remains in the mortgagor
or his grantee until the expiration of the redemption period and conveyance by the master's deed. 13 To repeat, the
rule has always been that it is only upon the expiration of the redemption period, without the judgment debtor
having made use of his right of redemption, that the ownership of the land sold becomes consolidated in the
purchaser. 14
Parenthetically, therefore, what actually is effected where redemption is seasonably exercised by the judgment or
mortgage debtor is not the recovery of ownership of his land, which ownership he never lost, but the elimination
from his title thereto of the lien created by the levy on attachment or judgment or the registration of a mortgage
thereon. The American rule is similarly to the effect that the redemption of property sold under a foreclosure sale
defeats the inchoate right of the purchaser and restores the property to the same condition as if no sale had been
attempted. Further, it does not give to the mortgagor a new title, but merely restores to him the title freed of the
encumbrance of the lien foreclosed. 15
We cannot rule on the plaint of petitioners that the trial court erred in declaring ineffective the extrajudicial
foreclosure and the sale of the property to petitioner bank. The court below spelled out at length in its decision
the facts which it considered as violative of the provisions of Act No. 3135, as amended, by reason of which it
nullified the extrajudicial foreclosure proceeding and its effects. Such findings and ruling of the trial court are
already final and binding on petitioners and can no longer be modified, petitioners having failed to appeal
therefrom.
An appellee who has not himself appealed cannot obtain from the appellate court any affirmative relief other than
the ones granted in the decision of the court below. 16 He cannot impugn the correctness of a judgment not
appealed from by him. He cannot assign such errors as are designed to have the judgment modified. All that said
appellee can do is to make a counter-assignment of errors or to argue on issues raised at the trial only for the
purpose of sustaining the judgment in his favor, even on grounds not included in the decision of the court a
quo nor raised in the appellant's assignment of errors or arguments.17
WHEREFORE, the decision of respondent Court of Appeals, insofar as it modifies the judgment of the trial court,
is REVERSED and SET ASIDE. The judgment of said trial court in Civil Case No. R-18616, dated January 12,
1983, is hereby REINSTATED.
SO ORDERED.
9. SPOUSES YAP VS. SPOUSES DY (12 pages)
VILLARAMA, JR., J.:
May persons to whom several mortgaged lands were transferred without the knowledge and consent of the creditor
redeem only several parcels if all the lands were sold together for a single price at the foreclosure sale? This is
the principal issue presented to us for resolution in these two petitions for review on certiorari assailing the May
17, 2005 Decision[1] and March 15, 2006 Resolution[2] of the Court of Appeals (CA) in CA-G.R. C.V. No. 57205.
The antecedents are as follows:
The spouses Tomas Tirambulo and Salvacion Estorco (Tirambulos) are the registered owners of several parcels
of land located in Ayungon, Negros Oriental, registered under Transfer Certificate of Title (TCT) Nos. T-14794,
T-14777, T-14780, T-14781, T-14783 and T-20301 of the Registry of Deeds of Negros Oriental, and more
particularly designated as follows:
(1) TCT No. T-14777 Lot 1 of Plan Pcs-11728 61,371 sq.m.
(2) TCT No. T-20301 Lot 3 of Plan Psu-124376 17,373 sq.m.
(3) TCT No. T-14780 Lot 4 of Plan Pcs-11728 27,875 sq.m.
(4) TCT No. T-14794 Lot 5 of Plan Psu-124376 2,900 sq.m.
(5) TCT No. T-14781 Lot 6 of Plan Pcs-11728 16,087 sq.m.
(6) TCT No. T-14783 Lot 8 of Plan Pcs-11728 39,888 sq.m
The Tirambulos likewise own a parcel of land denominated as Lot 846, covered by Tax Declaration No. 08109.
On December 3, 1976, the Tirambulos executed a Real Estate Mortgage[3] over Lots 1, 4, 5, 6 and 8 in favor of
the Rural Bank of Dumaguete, Inc., predecessor of Dumaguete Rural Bank, Inc. (DRBI), to secure a P105,000
loan extended by the latter to them. Later, the Tirambulos obtained a second loan for P28,000 and also executed
a Real Estate Mortgage[4] over Lots 3 and 846 in favor of the same bank on August 3, 1978.
Subsequently, on October 27, 1979, the Tirambulos sold all seven mortgaged lots to the spouses Zosimo Dy, Sr.
and Natividad Chiu (the Dys) and the spouses Marcelino C. Maxino and Remedios Lasola (the Maxinos) without
the consent and knowledge of DRBI. This sale, which was embodied in a Deed of Absolute Sale,[5] was followed
by a default on the part of the Tirambulos to pay their loans to DRBI. Thus, DRBI extrajudicially foreclosed
the December 3, 1976 mortgage and had Lots 1, 4, 5, 6 and 8 sold at public auction on March 31, 1982.
At the auction sale, DRBI was proclaimed the highest bidder and bought said lots for P216,040.93. The Sheriffs
Certificate of Sale[6] stated that the sale is subject to the rights of redemption of the mortgagor (s) or any other
persons authorized by law so to do, within a period of one (1) year from registration hereof. [7] The certificate of
sale, however, was not registered until almost a year later, or on June 24, 1983.
On July 6, 1983, or twelve (12) days after the sale was registered, DRBI sold Lots 1, 3 and 6 to the spouses
Francisco D. Yap and Whelma D. Yap (the Yaps) under a Deed of Sale with Agreement to Mortgage. [8] It is
important to note, however, that Lot 3 was not among the five properties foreclosed and bought by DRBI at
public auction.
On August 8, 1983, or well within the redemption period, the Yaps filed a Motion for Writ of
Possession[9] alleging that they have acquired all the rights and interests of DRBI over the foreclosed properties
and are entitled to immediate possession of the same because the one-year redemption period has lapsed without
any redemption being made. Said motion, however, was ordered withdrawn on August 22, 1983[10] upon motion
of the Yaps, who gave no reason therefor.[11] Three days later, or on August 25, 1983, the Yaps again filed a
Motion for Writ of Possession.[12] This time the motion was granted, and a Writ of Possession[13] over Lots 1, 3
and 6 was issued in favor of the Yaps on September 5, 1983. They were placed in possession of Lots 1, 3 and 6
seven days later.
On May 22, 1984, roughly a month before the one-year redemption period was set to expire, the Dys and the
Maxinos attempted to redeem Lots 1, 3 and 6. They tendered the amount of P40,000.00 to DRBI and the
Yaps,[14] but both refused, contending that the redemption should be for the full amount of the winning bid
of P216,040.93 plus interest for all the foreclosed properties.
Thus, on May 28, 1984, the Dys and the Maxinos went to the Office of the Sheriff of Negros Oriental and
paid P50,625.29 (P40,000.00 for the principal plus P10,625.29 for interests and Sheriffs Commission) to effect
the redemption.[15] Noticing that Lot 3 was not included in the foreclosure proceedings, Benjamin V. Diputado,
Clerk of Court and Provincial Sheriff, issued a Certificate of Redemption[16] in favor of the Dys and the Maxinos
only for Lots 1 and 6, and stated in said certificate that Lot 3 is not included in the foreclosure proceedings. By
letter[17] of even date, Atty. Diputado also duly notified the Yaps of the redemption of Lots 1 and 6 by the Dys
and the Maxinos, as well as the non-inclusion of Lot 3 among the foreclosed properties. He advised the Yaps to
personally claim the redemption money or send a representative to do so.
In a letter to the Provincial Sheriff on May 31, 1984, the Yaps refused to take delivery of the redemption price
arguing that one of the characteristics of a mortgage is its indivisibility and that one cannot redeem only some of
the lots foreclosed because all the parcels were sold for a single price at the auction sale.[18]
On June 1, 1984, the Provincial Sheriff wrote the Dys and the Maxinos informing them of the Yaps refusal to
take delivery of the redemption money and that in view of said development, the tender of the redemption money
was being considered as a consignation.[19]
On June 15, 1984, the Dys and the Maxinos filed Civil Case No. 8426 with the Regional Trial Court of Negros
Oriental for accounting, injunction, declaration of nullity (with regard to Lot 3) of the Deed of Sale with
Agreement to Mortgage, and damages against the Yaps and DRBI. In their complaint,[20] they prayed
a) That the Deed of Sale With Agreement to Mortgage be declared null and void ab initio;
b) That defendant Yap[s] possession of Lot No. 3, TCT No. T20301 based as it was on a void sale, be declared
illegal from the very beginning;
c) That defendants be ordered to render to plaintiffs a fair accounting of the harvests and income which
defendants made from said Lot No. 3 and, in addition, be ordered to pay to plaintiffs damages for wrongfully
depriving plaintiffs of the use and enjoyment of said property;
d) That the redemption which plaintiffs made of Lot No. 1, TCT No. 14777, and Lot No. 6, TCT No. 14781,
through the Provincial Sheriff of Negros Oriental, be declared valid and binding on the defendants, thereby
releasing and freeing said parcels of land from whatever liens or claims that said defendants might have on them;
e) That defendants be likewise ordered to render to plaintiffs full and fair accounting of all the harvests, fruits,
and income that they or either of them might have derived from said two parcels of land starting from the time
defendant Yap first took possession thereof and harvested the coconuts in September, 1983;
f) That, after the accounting herein prayed for, defendants be required to deliver to plaintiffs the net proceeds
of the income from the three parcels of land subject of this case, together with interest at the legal rate;
g) That for his acts of misrepresentation and deceit in obtaining a writ of possession over the three parcels of
land subject of this case, and for the highly irregular and anomalous procedures and maneuvers employed by
defendant Yap in securing said writ, as well as for harvesting the coconuts even after knowing that plaintiffs had
already fully redeemed the properties in question and, with respect to Lot No. 3, after knowing that the same was
not in fact included in the foreclosure and, therefore, could not have been validly sold by the bank to him, said
defendant Yap be condemned to pay plaintiffs moral damages in the amount of P200,000.00, plus punitive and
exemplary damages in the amount of P100,000.00;
h) That for falsifying the Sheriffs Certificate of Sale and selling unlawfully Lot No. 3, TCT No. T-20301, to
its co-defendant Yap, defendant DRBI be condemned to pay to plaintiffs actual damages in the amount
of P50,000.00; moral damages in the amount of P200,000.00; and punitive and exemplary damages in the amount
of P100,000.00;
i) That defendants be condemned to pay solidarily to plaintiffs attorneys fees in the amount of P50,000.00;
other legitimate expenses of litigation in the amount of P30,000.00; and the costs of suit;
j) That pending hearing of this case, a writ of preliminary injunction be issued enjoining and restraining the
defendants, particularly defendant Yap, from disturbing and interfering the plaintiffs possession and other rights
of ownership over the land in question;
k) That pending hearing of the petition for preliminary injunction, a temporary restraining order be issued
against the defendants, particularly against defendant Yap, to serve the same purpose for which the writ of
preliminary injunction is herein prayed for; and
l) That, after hearing of the main case, said preliminary injunction be made permanent.
Furthermore, plaintiffs pray for all other reliefs which may be just and equitable in the premises.[21]
Thereafter, on June 19, 1984, the Dys and the Maxinos consigned to the trial court an additional sum
of P83,850.50 plus sheriffs commission fee of P419.25 representing the remaining balance of the purchase price
that the Yaps still owed DRBI by virtue of the sale to them by the DRBI of Lots 1, 3 and 6.[22]
Meanwhile, by letter[23] dated June 27, 1984, the Yaps told DRBI that no redemption has been made by the
Tirambulos or their successors-in-interest and requested DRBI to consolidate its title over the foreclosed
properties by requesting the Provincial Sheriff to execute the final deed of sale in favor of the bank so that the
latter can transfer the titles of the two foreclosed properties to them.
On the same date, the Yaps also wrote the Maxinos informing the latter that during the last harvest of the lots
bought from DRBI, they excluded from the harvest Lot 3 to show their good faith. Also, they told the Maxinos
that they were formally turning over the possession of Lot 3 to the Maxinos, without prejudice to the final
determination of the legal implications concerning Lot 3. As to Lots 1 and 6, however, the Yaps stated that they
intended to consolidate ownership over them since there has been no redemption as contemplated by law. Included
in the letter was a liquidation of the copra proceeds harvested from September 7, 1983 to April 30, 1984 for Lots
1, 3 and 6.[24]
Later, on July 5, 1984, the Yaps filed Civil Case No. 8439 for consolidation of ownership, annulment of certificate
of redemption, and damages against the Dys, the Maxinos, the Provincial Sheriff of Negros Oriental and DRBI.
In their complaint,[25] the Yaps prayed
1. That [they] be declared the exclusive owners of Lot No. 1 covered by TCT No. T-14777 and Lot No. 6
covered by TCT No. T-14781 for failure on the part of defendants Zosimo Dy, Sr., and Marcelino Maxino to
redeem the properties in question within one (1) year from the auction sale.
2. That defendants be [declared] solidarily liable to pay moral damages in the amount of ONE HUNDRED
THOUSAND PESOS (P100,000.00), THIRTY[-]FIVE THOUSAND PESOS (P35,000.00) as attorneys fees and
FIFTEEN THOUSAND PESOS (P15,000.00) as exemplary damages;
3. That the Provincial Sheriff be required to execute the final Deed of Sale in favor of the bank and the bank
be in turn required to transfer the property to the plaintiffs in accordance with the Deed of Sale with Mortgage.
4. That the court grant such other relief as may be deemed just and equitable under the premises.[26]

Civil Case Nos. 8426 and 8439 were tried jointly.

On October 24, 1985, the Yaps, by counsel, filed a motion to withdraw from the provincial sheriff the redemption
money amounting to P50,373.42.[27] Said motion was granted on October 28, 1985 after a Special Power of
Attorney executed by Francisco Yap in favor of his brother Valiente Yap authorizing the latter to receive
the P50,373.42 redemption money was presented in court.[28]
On February 12, 1997, the trial court rendered decision[29] in favor of the Yaps. The fallo reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Dismissing the complaint of Dy and Maxino spouses in Civil Case No. 8426 as well as the bank and
the Yap spouses counterclaim for lack of factual and legal basis;
2. In Civil Case No. 8439:
a) Declaring the Yap spouses, plaintiffs therein, the exclusive owners of Lot No. 1 covered by TCT No. T-
14777 and Lot No. 6 covered by TCT No. T-14781 for failure on the part of the Dy and Maxino spouses,
defendants therein, to redeem the properties in question within one (1) year from the auction sale.
b) Directing the Provincial Sheriff of Negros Oriental to execute the Final Deed of Sale in favor of the bank
and the latter to transfer the subject properties to the Yap spouses in accordance with the Deed of Sale With
Mortgage.
SO ORDERED.[30]

On March 7, 1997, the trial court amended the above dispositive portion upon motion of DRBI, as follows:
Wherefore, judgment is hereby rendered as follows:
1. The Certificate of Redemption issued by the Provincial Sheriff (Exh. M) is hereby declared null and void;
2. The Provincial Sheriff of Negros Oriental is hereby ordered to execute a Final Deed of Sale of the foreclosed
properties in favor of the defendant Dumaguete Rural Bank, Inc., subject to the rights of the Yap spouses acquired
in accordance with the Deed of Sale with Mortgage;
3. The Deed of Sale dated [October] 27, 1979, made by Tirambulo and Estorco in favor of the Dys and Maxinos
covering all the seven (7) parcels of land in question, is hereby declared null and void;
4. In Civil Case No. 8439, declaring the Yap Spouses, the exclusive owners of Lot No. 1, covered by TCT No.
T-14777, and Lot No. 6, covered by TCT No. T-14781, for failure on the part of the Dy and Maxino Spouses, to
redeem said properties within one (1) year from the date of the registration of the auction sale;
5. All other claims and counterclaims are hereby dismissed for lack of merit.
SO ORDERED.[31]
The trial court held that the Dys and the Maxinos failed to formally offer their evidence; hence, the court could
not consider the same. It also upheld the Deed of Sale with Agreement to Mortgage between the Yaps and DRBI,
ruling that its genuineness and due execution has been admitted by the Dys and the Maxinos and that it is not
contrary to law, morals, good customs, public policy or public order. Thus, ownership of Lots 1, 3 and 6 was
transferred to the Yaps.
The trial court further held that the Dys and the Maxinos failed to exercise their rights of redemption properly and
timely. They merely deposited the amount of P50,625.29 with the Sheriff, whereas the amount due on the
mortgage deed is P216,040.93.
Aggrieved by the above ruling, the Dys and the Maxinos elevated the case to the CA. They argued that the trial
court erred in:
1) ... failing to consider plaintiffs evidence [testimonial, including the testimony of the Provincial Sheriff of
Negros Oriental (Attorney Benjamin V. Diputado) and plaintiff Attorney Marcelino C. Maxino] and documentary
[Exhibits A through TT (admitted under Order of 3 March 1995)];
2) failing to declare void or annul the purported contract of sale by Dumaguete Rural Bank, Inc. to Francisco
D. Yap and Whelma S. Yap of Lots 1, 3, and 6, during the redemption period [the purported seller (bank) not
being the owner thereof, and Lot 3 not being included in the foreclosure/auction sale and could not have been
acquired by the Bank thereat];
3) not holding that the parcels of land had been properly and validly redeemed in good faith, defendant Yap,
the Provincial Sheriff, the Clerk of Court, and Mr. Mario Dy, having accepted redemption/consignation (or, in
not fixing the redemption price and allowing redemption);
4) not holding that by withdrawing the redemption money consigned/deposited by plaintiffs to the Court, and
turning over possession of the parcels of land to plaintiffs, defendants Yap accepted, ratified, and confirmed
redemption by plaintiffs of the parcels of land acquired at foreclosure/auction sale by the Bank and purportedly
sold by it to and purchased by Yap;
5) not finding and holding that all the parcels of land covered by the foreclosed mortgage held by Dumaguete
Rural Bank had been acquired by and are in the possession of plaintiffs as owners and that defendants bank and
Yap had disposed of and/or lost their rights and interests and/or any cause of action and their claims had been
extinguished and mooted or otherwise settled, waived and/or merged in plaintiffs-appellants;
6) not holding that defendants Yap have no cause of action to quiet title as they had no title or possession of
the parcels of land in question and in declaring defendants Yap spouses the exclusive owners of Lot No. 1 covered
by TCT No. T-14777 and Lot No. 6 covered by TCT No. T-14781 and in directing the Provincial Sheriff to
execute the final deed of sale in favor of the bank and the latter to transfer the subject properties to the Yap spouses
in accordance with the Deed of Sale with Mortgage which included Lot No. 3 which was not foreclosed by the
Sheriff and was not included in the certificate of sale issued by him and despite their acceptance, ratification, and
confirmation of the redemption as well as acknowledgment of possession of the parcels of land by plaintiffs;
7) issuing an amended decision after perfection of plaintiffs appeal and without waiting for their comment
(declaring the Certificate of Redemption issued by the Provincial Sheriff (Exh. M) null and void; ordering the
Provincial Sheriff of Negros Oriental to execute a Final Deed of Sale of the foreclosed properties in favor of the
defendant Dumaguete Rural Bank, Inc., subject to the rights of the Yap spouses acquired in accordance with the
Deed of Sale with Mortgage (Exh. B-Maxino and Dy; Exh. 1 Yap); declaring null and void the Deed of Sale dated
Oct[ober] 27, 1979, made by Tirambulo and Estorco in favor of the Dys and Maxinos covering all the seven (7)
parcels of land in question; in Civil Case No. 8439, declaring the Yap spouses, the exclusive owners of Lot No.
1, covered by TCT No. T-14777, and Lot No. 6, covered by TCT No. T-14781, for failure on the part of the Dy
and Maxino spouses, to redeem said properties within (1) year from the date of registration of the auction sale)
after plaintiffs had perfected appeal of the 12 February 1997 decision, without hearing or awaiting plaintiffs
comment, and in the face of the records showing that the issues were never raised, much less litigated, insofar as
Tirambulo, as well in the face of the foregoing circumstances, especially dismissal of defendants claims and
counterclaims and acquisition of ownership and possession of the parcels of land by plaintiffs as well as
disposition and/or loss of defendants rights and interests and cause of action in respect thereof and/or settlement,
waiver, and/or extinguishment of their claims, and merger in plaintiffs-appellants, and without stating clearly the
facts and the law upon which it is based[; and]
8) not finding, holding and ruling that defendants acted in bad faith and in an abusive and oppressive manner,
if not contrary to law; and in not awarding plaintiffs damages.[32]
On May 17, 2005, the CA rendered a decision reversing the March 7, 1997 amended decision of the trial court.
The dispositive portion of the assailed CA decision reads:
IN LIGHT OF THE FOREGOING, this appeal is GRANTED. The decision as well as the amended decision of
the Regional Trial Court is REVERSED AND SET ASIDE. In lieu thereof[,] judgment is hereby rendered as
follows:
1. Declaring the sale made by Dumaguete Rural Bank Inc. to Sps. Francisco and Whelma Yap with respect to
Lot No. 3 under TCT No. T-20301 as null and void;
2. Declaring the redemption made by Spouses Dy and Spouses Maxino with regards to Lot No. 6 under TCT
No. T-14781 and Lot No. 1 under TCT No. [T-]14777 as valid;
3. Ordering defendants, Sps. Yap, to deliver the possession and ownership thereof to Sps. Dy and Sps. Maxino;
to give a fair accounting of the proceeds of these three parcels of land and to tender and deliver the corresponding
amount of income from October 24, 1985 until the finality of this judgment[; and]
4. Condemning the defendant bank to pay damages to Spouses Dy and Spouses Maxino the amount
of P20,000.00 as moral damages and P200,000.00 as exemplary damages and attorneys fees in the amount
of P50,000.00.
All other claims are dismissed.
Costs against the appellees.
SO ORDERED.[33]
The CA held that the trial court erred in ruling that it could not consider the evidence for the Dys and the Maxinos
allegedly because they failed to formally offer the same. The CA noted that although the testimonies of Attys.
Marcelino C. Maxino and Benjamin V. Diputado were not formally offered, the procedural lapse was cured when
the opposing counsel cross-examined said witnesses. Also, while the original TSNs of the witnesses for the
plaintiffs in Civil Case No. 8426 were burned, the latters counsel who had copies thereof, furnished the Yaps
copies for their scrutiny and comment. The CA further noted that the trial court also admitted all the documentary
exhibits of the Dys and the Maxinos on March 3, 1995. Unfortunately, however, the trial court simply failed to
locate the pertinent documents in the voluminous records of the cases.
On the merits, the CA ruled that the Dys and the Maxinos had proven their cause of action sufficiently. The CA
noted that their claim that Lot 3 was not among the properties foreclosed was duly corroborated by Atty.
Diputado, the Provincial Sheriff who conducted the foreclosure sale. The Yaps also failed to rebut their contention
regarding the formers acceptance of the redemption money and their delivery of the possession of the three parcels
of land to the Dys and the Maxinos. The CA also noted that not only did the Yaps deliver possession of Lot 3 to
the Dys and the Maxinos, they also filed a Motion to Withdraw the Redemption Money from the Provincial
Sheriff and withdrew the redemption money.
As to the question whether the redemption was valid or not, the CA found no need to discuss the issue. It found
that the bank was in bad faith and therefore cannot insist on the protection of the law regarding the need for
compliance with all the requirements for a valid redemption while estoppel and unjust enrichment operate against
the Yaps who had already withdrawn the redemption money.
Upon motion for reconsideration of the Yaps, however, the CA amended its decision on March 15, 2006 as
follows:
IN LIGHT OF THE FOREGOING, this appeal is GRANTED. The decision as well as the amended decision of
the Regional Trial Court is REVERSED AND SET ASIDE. In lieu thereof[,] judgment is hereby rendered as
follows:
1.Declaring the sale made by Dumaguete Rural Bank Inc. to Sps. Francisco and Whelma Yap with respect to Lot
No. 3 under TCT No. T-20301 null and void;
2.Declaring the redemption made by Spouses Dy and Spouses Maxino with regards to Lot No. 6 under TCT No.
T-14781 and Lot No. 1 under TCT No. [T-]14777 as valid;
3. Condemning the defendant bank to pay damages to Spouses Dy and Spouses Maxino the amount of P20,000.00
as moral damages and P200,000.00 as exemplary damages and attorneys fees in the amount of P50,000.00.

All other claims are dismissed.

Costs against the appellees.
SO ORDERED.[34]
Hence, the consolidated petitions assailing the appellate courts decision.
The Yaps argue in the main that there is no valid redemption of the properties extrajudicially foreclosed. They
contend that the P40,000.00 cannot be considered a valid tender of redemption since the amount of the auction
sale is P216,040.93. They also argue that a valid tender of payment for redemption can only be made to DRBI
since at that time, their rights were subordinate to the final consolidation of ownership by the bank.
DRBI, aside from insisting that all seven mortgaged properties (which thus includes Lot 3) were validly
foreclosed, argues, for its part, that the appellate court erred in sustaining the redemption made by the Dys and
Maxinos. It anchors its argument on the fact that the sale of the Tirambulos to the Dys and Maxinos was without
the banks consent. The Dys and Maxinos therefore could not have assumed the character of debtors because a
novation of the contract of mortgage between the Tirambulos and DRBI did not take place as such a novation is
proscribed by Article 1293 of the Civil Code. And there being no valid redemption within the contemplation of
law and DRBI being the highest bidder during the auction sale, DRBI has become the absolute owner of the
properties mortgaged when the redemption period expired.
DRBI further argues that it was unfair and unjust for them to be held liable for damages for supposedly wrongfully
foreclosing on Lot 3, depriving the Dys and the Maxinos of the use of the land, and registering the Certificate of
Sale which included Lot 3 when it should have excluded the same. DRBI argues that as a juridical person, it only
authorized and consented, through its Board of Directors, to lawful processes. The unlawful acts of the Sheriff,
who is considered as an agent of the bank in the foreclosure proceedings, cannot bind DRBI. Moreover, DRBI
cannot be liable for damages on the basis of an affidavit that was submitted only before the CA as the bank had
no chance to cross-examine the affiant and determine the veracity and propriety of the statements narrated in said
affidavit.
Thus, the issues to be resolved in the instant case are essentially as follows: (1) Is Lot 3 among the foreclosed
properties? (2) To whom should the payment of redemption money be made? (3) Did the Dys and Maxinos validly
redeem Lots 1 and 6? and (4) Is DRBI liable for damages?
As to the first issue, we find that the CA correctly ruled that the Dys and Maxinos were able to prove their claim
that Lot 3 was not among the properties foreclosed and that it was merely inserted by the bank in the Sheriffs
Certificate of Sale. As Atty. Diputado, the Provincial Sheriff, testified, the application for foreclosure was only
for five parcels of land, namely, Lots 1, 4, 5, 6 and 8. Accordingly, only said five parcels of land were included
in the publication and sold at the foreclosure sale. When he was shown a copy of the Sheriffs Certificate of Sale
consisting of three pages, he testified that it was altered because Lot 3 and Lot 846 were included beyond the xxx
that marked the end of the enumeration of the lots foreclosed.[35] Also, a perusal of DRBIs application for
foreclosure of real estate mortgage[36] shows that it explicitly refers to only one deed of mortgage to settle the
Tirambulos indebtedness amounting to P216,040.93. This is consistent with the Notice of Extrajudicial Sale of
Mortgaged Property, published in the Dumaguete Star Informer on February 18, 25 and March 4,
1982,[37] announcing the sale of Lots 1, 4, 5, 6 and 8 for the satisfaction of the indebtedness amounting
to P216,040.93. It is also consistent with the fact that Lots 1, 4, 5, 6 and 8 are covered by only one real estate
mortgage, the Real Estate Mortgage[38] dated December 3, 1976.Indeed, that the foreclosure sale refers only to
Lots 1, 4, 5, 6 and 8 is clear from the fact that Lots 1, 4, 5, 6 and 8 and Lot 3 are covered by two separate real
estate mortgages. DRBI failed to refute these pieces of evidence against it.
As to the second issue regarding the question as to whom payment of the redemption money should be made,
Section 31,[39] Rule 39 of the Rules of Court then applicable provides:
SEC. 31. Effect of redemption by judgment debtor, and a certificate to be delivered and recorded thereupon. To
whom payments on redemption made.If the judgment debtor redeem, he must make the same payments as are
required to effect a redemption by a redemptioner, whereupon the effect of the sale is terminated and he is restored
to his estate, and the person to whom the payment is made must execute and deliver to him a certificate of
redemption acknowledged or approved before a notary public or other officer authorized to take acknowledgments
of conveyances of real property. Such certificate must be filed and recorded in the office of the registrar of deeds
of the province in which the property is situated, and the registrar of deeds must note the record thereof on the
margin of the record of the certificate of sale. The payments mentioned in this and the last preceding sections
may be made to the purchaser or redemptioner, or for him to the officer who made the sale. (Emphasis
supplied.)
Here, the Dys and the Maxinos complied with the above-quoted provision. Well within the redemption period,
they initially attempted to pay the redemption money not only to the purchaser, DRBI, but also to the Yaps. Both
DRBI and the Yaps however refused, insisting that the Dys and Maxinos should pay the whole purchase price at
which all the foreclosed properties were sold during the foreclosure sale. Because of said refusal, the Dys and
Maxinos correctly availed of the alternative remedy by going to the sheriff who made the sale. As held in Natino
v. Intermediate Appellate Court,[40] the tender of the redemption money may be made to the purchaser of the land
or to the sheriff. If made to the sheriff, it is his duty to accept the tender and execute the certificate of redemption.
But were the Dys and Maxinos entitled to redeem Lots 1 and 6 in the first place? We rule in the affirmative.
The Dys and the Maxinos have legal personality to redeem the subject properties.
Contrary to petitioners contention, the Dys and Maxinos have legal personality to redeem the subject properties
despite the fact that the sale to the Dys and Maxinos was without DRBIs consent. In Litonjua v. L & R
Corporation,[41] this Court declared valid the sale by the mortgagor of mortgaged property to a third person
notwithstanding the lack of written consent by the mortgagee, and likewise recognized the third persons right to
redeem the foreclosed property, to wit:
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 right 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.[42]
Likewise, we rule that the Dys and the Maxinos validly redeemed Lots 1 and 6.
The requisites of a valid redemption are present
The requisites for a valid redemption are: (1) the redemption must be made within twelve (12) months from the
time of the registration of the sale in the Office of the Register of Deeds; (2) payment of the purchase price of the
property involved, plus 1% interest per month thereon in addition, up to the time of redemption, together with the
amount of any assessments or taxes which the purchaser may have paid thereon after the purchase, also with 1%
interest on such last named amount; and (3) written notice of the redemption must be served on the officer who
made the sale and a duplicate filed with the Register of Deeds of the province.[43]
There is no issue as to the first and third requisites. It is undisputed that the Dys and the Maxinos made the
redemption within the 12-month period from the registration of the sale. The Dys and Maxinos effected the
redemption on May 24, 1984, when they deposited P50,373.42 with the Provincial Sheriff, and on June 19, 1984,
when they deposited an additional P83,850.50. Both dates were well within the one-year redemption period
reckoned from the June 24, 1983 date of registration of the foreclosure sale. Likewise, the Provincial Sheriff who
made the sale was properly notified of the redemption since the Dys and Maxinos deposited with him the
redemption money after both DRBI and the Yaps refused to accept it.
The second requisite, the proper redemption price, is the main subject of contention of the opposing parties.
The Yaps argue that P40,000.00 cannot be a valid tender of redemption since the amount of the auction sale
was P216,040.93. They further contend that the mortgage is indivisible so in order for the tender to be valid and
effectual, it must be for the entire auction price plus legal interest.
We cannot subscribe to the Yaps argument on the indivisibility of the mortgage. As held in the case of Philippine
National Bank v. De los Reyes,[44] the doctrine of indivisibility of mortgage does not apply once the mortgage is
extinguished by a complete foreclosure thereof as in the instant case. The Court held:
The parties were accordingly embroiled in a hermeneutic disparity on their aforesaid contending positions. Yet,
the rule on the indivisibility of mortgage finds no application to the case at bar. The particular provision of
the Civil Code referred to provides:
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in
interest of the debtor or of the creditor.
Therefore, the debtors heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the
pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditors heir who received his share of the debt return the pledge or cancel the mortgage, to the
prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each
one of these guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the
debt for which each thing is specially answerable is satisfied.
From the foregoing, it is apparent that what the law proscribes is the foreclosure of only a portion of the property
or a number of the several properties mortgaged corresponding to the unpaid portion of the debt where before
foreclosure proceedings partial payment was made by the debtor on his total outstanding loan or obligation. This
also means that the debtor cannot ask for the release of any portion of the mortgaged property or of one or some
of the several lots mortgaged unless and until the loan thus, secured has been fully paid, notwithstanding the fact
that there has been a partial fulfillment of the obligation. Hence, it is provided that the debtor who has paid a part
of the debt cannot ask for the proportionate extinguishment of the mortgage as long as the debt is not completely
satisfied.
That the situation obtaining in the case at bar is not within the purview of the aforesaid rule on indivisibility is
obvious since the aggregate number of the lots which comprise the collaterals for the mortgage had already been
foreclosed and sold at public auction. There is no partial payment nor partial extinguishment of the obligation to
speak of. The aforesaid doctrine, which is actually intended for the protection of the mortgagee, specifically refers
to the release of the mortgage which secures the satisfaction of the indebtedness and naturally presupposes that
the mortgage is existing. Once the mortgage is extinguished by a complete foreclosure thereof, said doctrine
of indivisibility ceases to apply since, with the full payment of the debt, there is nothing more to
secure.[45] (Emphasis supplied.)
Nothing in the law prohibits the piecemeal redemption of properties sold at one foreclosure proceeding. In fact,
in several early cases decided by this Court, the right of the mortgagor or redemptioner to redeem one or some of
the foreclosed properties was recognized.
In the 1962 case of Castillo v. Nagtalon,[46] ten parcels of land were sold at public auction. Nagtalon, who owned
three of the ten parcels of land sold, wanted to redeem her properties. Though the amount she tendered was found
as insufficient to effectively release her properties, the Court held that the tender of payment was made timely
and in good faith and thus, in the interest of justice, Nagtalon was given the opportunity to complete the
redemption purchase of three of the ten parcels of land foreclosed.
Also, in the later case of Dulay v. Carriaga,[47] wherein Dulay redeemed eight of the seventeen parcels of land
sold at public auction, the trial court declared the piecemeal redemption of Dulay as void. Said order, however,
was annulled and set aside by the Court on certiorari and the Court upheld the redemption of the eight parcels of
land sold at public auction.
Clearly, the Dys and Maxinos can effect the redemption of even only two of the five properties foreclosed. And
since they can effect a partial redemption, they are not required to pay the P216,040.93 considering that it is the
purchase price for all the five properties foreclosed.
So what amount should the Dys and Maxinos pay in order for their redemption of the two properties be deemed
valid considering that when the five properties were auctioned, they were not separately valued?
Contrary to the Yaps contention, the amount paid by the Dys and Maxinos within the redemption period for the
redemption of just two parcels of land was not only P40,000.00 but totaled to P134,223.92 (P50,373.42 paid
on May 28, 1984 plus P83,850.50 paid on June 19, 1984). That is more than 60% of the purchase price for the
five foreclosed properties, to think the Dys and Maxinos were only redeeming two properties. We find that
it can be considered a sufficient amount if we were to base the proper purchase price on the proportion of the size
of Lots 1 and 6 with the total size of the five foreclosed properties, which had the following respective sizes:
Lot 1 61,371 square meters
Lot 6 16,087 square meters
Lot 5 2,900 square meters
Lot 4 27,875 square meters
Lot 8 39,888 square meters
TOTAL 148,121 square meters
The two subject properties to be redeemed, Lots 1 and 6, have a total area of 77,458 square meters or roughly
52% of the total area of the foreclosed properties. Even with this rough approximation, we rule that there is no
reason to invalidate the redemption of the Dys and Maxinos since they tendered 60% of the total purchase price
for properties constituting only 52% of the total area. However, there is a need to remand the case for computation
of the pro-rata value of Lots 1 and 6 based on their true values at that time of redemption for the purposes of
determining if there is any deficiency or overpayment on the part of the Dys and Maxinos.
As to the award of damages in favor of the Dys and Maxinos, we agree with the appellate court for granting the
same.
The CA correctly observed that the act of DRBI in falsifying the Sheriffs Certificate of Sale to include Lots 3 and
846, even if said additional lots were not among the properties foreclosed, was the proximate cause of the
pecuniary loss suffered by the Dys and Maxinos in the form of lost income from Lot 3.
Likewise, the CA also correctly awarded moral damages. Paragraph 10, Article 2219 of the Civil Code provides
that moral damages may be recovered in case of acts and actions referred to in Article 21 of the same Code.
Article 21 reads:
ART. 21 Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good
customs or public policy shall compensate the latter for the damage.
As previously discussed, DRBIs act of maliciously including two additional properties in the Sheriffs Certificate
of Sale even if they were not included in the foreclosed properties caused the Dys and Maxinos pecuniary loss.
Hence, DRBI is liable to pay moral damages.
The award of exemplary damages is similarly proper. Exemplary or corrective damages are imposed, by way of
example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory
damages.[48] We cannot agree more with the following ratio of the appellate court in granting the same:
Additionally, what is alarming to the sensibilities of the Court is the deception employed by the bank in adding
other properties in the certificate of sale under public auction without them being included in the public auction
conducted. It cannot be overemphasized that being a lending institution, prudence dictates that it should employ
good faith and due diligence with the properties entrusted to it. It was the bank which submitted the properties
ought to be foreclosed to the sheriff. It only submitted five (5) properties for foreclosure. Yet, it caused the
registration of the Certificate of Sale under public auction which listed more properties than what was foreclosed.
On this aspect, exemplary damages in the amount of P200,000.00 are in order.[49]
There being an award of exemplary damages, the award of attorneys fees is likewise proper as provided in
paragraph 1, Article 2208 of the Civil Code.
WHEREFORE, the petitions for review on certiorari are DENIED for lack of merit. The Decision dated May
17, 2005 and Resolution dated March 15, 2006 of the Court of Appeals in CA-G.R. C.V. No. 57205 are
hereby AFFIRMED with the MODIFICATION that the case is REMANDED to the Regional Trial Court of
Negros Oriental, Branch 44, Dumaguete City, for the computation of the pro-rata value of properties covered by
TCT No. T-14777 (Lot 1) and TCT No. T-14781 (Lot 6) of the Registry of Deeds of Negros Oriental at the time
of redemption to determine if there is a deficiency to be settled by or overpayment to be refunded to respondent
Spouses Zosimo Dy, Sr. and Natividad Chiu and Spouses Marcelino C. Maxino and Remedios Lasola with regard
to the redemption money they paid.
With costs against the petitioners.
SO ORDERED.
10. SUICO VS. PNB (7 pages)
CHICO-NAZARIO, J.:
Herein petitioners, Spouses Esmeraldo and Elizabeth Suico, obtained a loan from the Philippine National Bank
(PNB) secured by a real estate mortgage[1] on real properties in the name of the former. The petitioners were
unable to pay their obligation prompting the PNB to extrajudicially foreclose the mortgage over the subject
properties before the City Sheriff of Mandaue City under EJF Case No. 92-5-15.
The petitioners thereafter filed a Complaint against the PNB before the Regional Trial Court (RTC)
of Mandaue City, Branch 55, docketed as Civil Case No. MAN-2793 for Declaration of Nullity of Extrajudicial
Foreclosure of Mortgage.[2]
The Complaint alleged that on 6 May 1992, PNB filed with the Office of the Mandaue City Sheriff a petition for
the extrajudicial foreclosure of mortgage constituted on the petitioners properties (subject properties) for an
outstanding loan obligation amounting to P1,991,770.38 as of 10 March 1992. The foreclosure case before the
Office of the Mandaue City Sheriff, which was docketed as EJF Case No. 92-5-15, covered the following
properties:
TCT NO. 13196
A parcel of land (Lot 701, plan 11-5121 Amd-2) situated at Mandaue City, bounded on the NE., and SE., by lot
no. 700; on the SW. by lots nos. 688 and 702; on the NW. by lot no. 714, containing an area of 2,078 sq. m. more
or less.
TAX DECL. NO. 00553
A parcel of land situated at Tabok, Mandaue City, Cad. Lot No. 700-C-1; bounded on the North by Lot No. 701
& 700-B; on the South by Lot No. 700-C-3; on the East by lot no. 700-C-3 and on the West by Lot no. 688,
containing an area of 200 square meters, more or less
TAX DECL. NO. 00721
Two (2) parcels of land situated at Tabok, Mandaue City, Cad. lot nos. 700-C-3 and 700-C-2; bounded on the
North by Lot Nos. 700-C-1 and 700-B; on the South by Lot No. 700-D; on the East by Lot Nos. 695 and 694; and
on the West by Lot Nos. 688 and 700-C-1, containing an aggregate area of 1,683 sq. m. more or less.
TAX DECL. NO. 0237
A parcel of land situated at Tabok, Mandaue City, Cad. Lot no. 700-B. Bounded on the NE. by (Lot 699) 109,
(Lot No. 69) 110, on the SE (Lot 700-C) 115, on the NW. (Lot 700-A) 112 and on the SW. (Lot 701) 113;
containing an area of .1785 HA more or less.
TAX DECL. NO. 9267
A parcel of land situated at Tabok, Mandaue City, Cad. Lot no. 700-A. Bounded on the NE. by (Lot 699) 109,
on the South West by (Lot 701) 113, on the SE. by (Lot 700-B) 111, and on the NW. by (lot 714) 040039;
containing an area of .1785 HA more or less.[3]
Petitioners claimed that during the foreclosure sale of the subject properties held on 30 October 1992, PNB, as
the lone bidder, offered a bid in the amount of P8,511,000.00. By virtue of the said bid, a Certificate of Sale of
the subject properties was issued by the Mandaue City Sheriff in favor of PNB. PNB did not pay to the Sheriff
who conducted the auction sale the amount of its bid which was P8,511,000.00 or give an accounting of how said
amount was applied against petitioners outstanding loan, which, as of 10 March 1992, amounted only
to P1,991,770.38. Since the amount of the bid grossly exceeded the amount of petitioners outstanding obligation
as stated in the extrajudicial foreclosure of mortgage, it was the legal duty of the winning bidder, PNB, to deliver
to the Mandaue City Sheriff the bid price or what was left thereof after deducting the amount of petitioners
outstanding obligation. PNB failed to deliver the amount of their bid to the Mandaue City Sheriff or, at the very
least, the amount of such bid in excess of petitioners outstanding obligation.
One year after the issuance of the Certificate of Sale, PNB secured a Certificate of Final Sale from
the Mandaue City Sheriff and, as a result, PNB transferred registration of all the subject properties to its name.
Owing to the failure of PNB as the winning bidder to deliver to the petitioners the amount of its bid or even just
the amount in excess of petitioners obligation, the latter averred that the extrajudicial foreclosure conducted over
the subject properties by the Mandaue City Sheriff, as well as the Certificate of Sale and the Certificate of Finality
of Sale of the subject properties issued by the Mandaue City Sheriff, in favor of PNB, were all null and void.
Petitioners, in their Complaint in Civil Case No. MAN-2793, prayed for:
a) Declaring the Nullity of Extra-judicial Foreclosure of Mortgage under EJF Case No. 92-5-15 including the
certificate of sale and the final deed of sale of the properties affected;
b) Order[ing] the cancellation of the certificates of titles and tax declaration already in the name of [herein
respondent] PNB and revert the same back to herein [petitioners] name;
c) Ordering the [PNB] to pay [petitioners] moral damages amounting to more than P1,000,000,00; Exemplary
damages of P500,000.00; Litigation expenses of P100,000.00 and attorneys fees of P300,000.00.[4]
PNB filed a Motion to Dismiss[5] Civil Case No. MAN-2793 citing the pendency of another action between the
same parties, specifically Civil Case No. CEB-15236 before the RTC of Cebu City entitled, PNB
v. Sps. Esmeraldo and Elizabeth Suico where PNB was seeking the payment of the balance of petitioners
obligation not covered by the proceeds of the auction sale held on 30 October 1992. PNB argued that these two
cases involve the same parties. Petitioners opposed the Motion to Dismiss filed by PNB.[6] Subsequently, the
Motion to Dismiss Civil Case No. MAN-2793 was denied in the Order of the RTC dated 15 July 1997;[7] thus,
PNB was constrained to file its Answer.[8]
PNB disputed petitioners factual narration. PNB asserted that petitioners had other loans which had likewise
become due. Petitioners outstanding obligation of P1,991,770.38 as of 10 March 1992 was exclusive of attorneys
fees, and other export related obligations which it did not consider due and demandable as of said date. PNB
maintained that the outstanding obligation of the petitioners under their regular and export- related loans was
already more than the bid price of P8,511,000.00, contradicting the claim of surplus proceeds due the
petitioners. Petitioners were well aware that their total principal outstanding obligation on the date of the auction
sale was P5,503,293.21.
PNB admitted the non-delivery of the bid price to the sheriff and the execution of the final deed of sale, but
claimed that it had not transferred in its name all the foreclosed properties because the petition to register in its
name Transfer Certificates of Title (TCT) No. 37029 and No. 13196 were still pending.
On 2 February 1999, the RTC rendered its Decision[9] in Civil Case No. MAN-2793 for the declaration of nullity
of the extrajudicial foreclosure of mortgage, the dispositiveportion of which states:
WHEREFORE, based on the foregoing, judgment is rendered in favor of [herein petitioners] Sps. Esmeraldo &
Elizabeth Suico and against [herein respondent], Philippine National Bank (PNB), declaring the nullity of
Extrajudicial Foreclosure of Mortgage under EJF Case No. 92-5-15, including the certificate of sale and the final
deed of sale of the subject properties; ordering the cancellation of the certificates of titles and tax declaration
already in the name of [respondent] PNB, if any, and revert the same back to the [petitioners] name; ordering
[respondent] PNB to cause a new foreclosure proceeding, either judicially or extra-judicially.
Furnish parties thru counsels copy of this order.[10]
In granting the nullification of the extrajudicial foreclosure of mortgage, the RTC reasoned that given that
petitioners had other loan obligations which had not yet matured on 10 March 1992 but became due by the date
of the auction sale on 30 October 1992, it does not justify the shortcut taken by PNB and will not excuse it from
paying to the Sheriff who conducted the auction sale the excess bid in the foreclosure sale. To allow PNB to do
so would constitute fraud, for not only is the filing fee in the said foreclosure inadequate but, worse, the same
constitutes a misrepresentation regarding the amount of the indebtedness to be paid in the foreclosure sale as
posted and published in the notice of sale.[11] Such misrepresentation is fatal because in an extrajudicial
foreclosure of mortgage, notice of sale is jurisdictional. Any error in the notice of sale is fatal and invalidates the
notice.[12]
When the PNB appealed its case to the Court of Appeals,[13] the appellate court rendered a Decision[14] dated 12
April 2005, the fallo of which provides:
WHEREFORE, premises considered, the instant appeal is GRANTED. The questioned decision of
the Regional Trial Court of Mandaue City, Branch 55 dated February 2, 1999 is hereby REVERSED and SET
ASIDE. Accordingly, the extra judicial foreclosure of mortgage under EJF 92-5-15 including the certificate of
sale and final deed of sale executed appurtenant thereto are hereby declared to be valid and binding. [15]
In justifying reversal, the Court of Appeals held:
A careful scrutiny of the evidence extant on record would show that in a letter dated January 12, 1994, [petitioners]
expressly admitted that their outstanding principal obligation amounted to P5.4 Million and in fact offered to
redeem the properties at P6.5 Million. They eventually increased their offer at P7.5 Million as evidenced by that
letter dated February 4, 1994. And finally on May 16, 1994, they offered to redeem the foreclosed properties by
paying the whole amount of the obligation by installment in a period of six years. All those offers made by the
[petitioners] not only contradicted their very assertion that their obligation is merely that amount appearing on
the petition for foreclosure but are also indicative of the fact that they have admitted the validity of the extra
judicial foreclosure proceedings and in effect have cured the impugned defect. Thus, for the [petitioners] to insist
that their obligation is only over a million is unworthy of belief. Oddly enough, it is evident from their acts that
they themselves likewise believe otherwise.
Even assuming that indeed there was a surplus and the [PNB] is retaining more than the proceeds of the sale than
it is entitled, this fact alone will not affect the validity of the sale but simply gives the [petitioners] a cause of
action to recover such surplus. In fine, the failure of the [PNB] to remit the surplus, if any, is not tantamount to a
non-compliance of statutory requisites that could constitute a jurisdictional defect invalidating the sale. This
situation only gives rise to a cause of action on the part of the [petitioners] to recover the alleged surplus from the
[PNB]. This ruling is in harmony with the decisional rule that in suing for the return of the surplus proceeds, the
mortgagor is deemed to have affirmed the validity of the sale since nothing is due if no valid sale has been
made.[16]
Petitioners filed a Motion for Reconsideration[17] of the foregoing Decision, but the Court of Appeals was not
persuaded. It maintained the validity of the foreclosure sale and, in its Amended Decision dated 28 September
2005, it merely directed PNB to pay the deficiency in the filing fees, holding thus:
WHEREFORE, Our decision dated April 12, 2005 is hereby AMENDED. [Herein respondent PNB] is hereby
required to pay the deficiency in the filing fees due on the petition for extra judicial foreclosure sale to be based
on the actual amount of mortgage debts at the time of filing thereof. In all other respects, Our decision subject of
herein petitioners] motion for reconsideration is hereby AFFIRMED.[18]
Unflinching, petitioners elevated the case before this Court via the present Petition for Review essentially seeking
the nullification of the extrajudicial foreclosure of the mortgage constituted on the subject properties. Petitioners
forward two reasons for declaring null and void the said extrajudicial foreclosure: (1) the alleged defect or
misrepresentation in the notice of sheriffs sale; and/or (2) failure of PNB to pay and tender the price of its bid or
the surplus thereof to the sheriff.
Petitioners argue that since the Notice of Sheriffs Sale stated that their obligation was only P1,991,770.38 and
PNB bidded P8,511,000.00, the said Notice as well as the consequent sale of the subject properties were null and
void.
It is true that statutory provisions governing publication of notice of mortgage foreclosure sales must be strictly
complied with, and that even slight deviations therefrom will invalidate the notice and render the sale at
least voidable.[19] Nonetheless, we must not also lose sight of the fact that the purpose of the publication of the
Notice of Sheriffs Saleis to inform all interested parties of the date, time and place of the foreclosure sale of the
real property subject thereof. Logically, this not only requires that the correct date, time and place of the
foreclosure sale appear in the notice, but also that any and all interested parties be able to determine that what is
about to be sold at the foreclosure sale is the real property in which they have an interest.[20]
Considering the purpose behind the Notice of Sheriffs Sale, we disagree with the finding of the RTC that the
discrepancy between the amount of petitioners obligation as reflected in the Notice of Sale and the amount
actually due and collected from the petitioners at the time of the auction sale constitute fraud which renders the
extrajudicial foreclosure sale null and void.
Notices are given for the purpose of securing bidders and to prevent a sacrifice of the property. If these objects
are attained, immaterial errors and mistakes will not affect the sufficiency of the notice; but if mistakes or
omissions occur in the notices of sale, which are calculated to deter or mislead bidders, to depreciate the value of
the property, or to prevent it from bringing a fair price, such mistakes or omissions will be fatal to the validity of
the notice, and also to the sale made pursuant thereto.[21]
All these considered, we are of the view that the Notice of Sale in this case is valid. Petitioners failed to convince
this Court that the difference between the amount stated in the Notice of Sale and the amount of PNBs bid resulted
in discouraging or misleading bidders, depreciated the value of the property or prevented it from commanding a
fair price.
The cases cited by the RTC in its Decision do not apply herein. San Jose v. Court of Appeals[22] refers to a Notice
of Sheriffs Sale which did not state the correct number of the transfer certificates of title of the property to be
sold. This Court considered the oversight as a substantial and fatal error which resulted in invalidating the entire
notice. The case of Community Savings and Loan Association, Inc. v. Court of Appeals[23] is also inapplicable,
because the said case refers to an extrajudicial foreclosure tainted with fraud committed by therein petitioners,
which denied therein respondents the right to redeem the property. It actually has no reference to a Notice of
Sale.
We now proceed to the effect of the non-delivery by PNB of the bid price or the surplus to the petitioners.
The following antecedents are not disputed:
For failure to pay their loan obligation secured by a real estate mortgage on the subject properties, PNB foreclosed
the said mortgage. In its petition for foreclosure sale under ACT No. 3135 filed before the Mandaue City Sheriff,
PNB stated therein that petitioners total outstanding obligation amounted to P1,991,770.38.[24] PNB bidded the
amount of P8,511,000.00. Admittedly, PNB did not pay its bid in cash or deliver the excess either to the City
Sheriff who conducted the bid or to the petitioners after deducting the difference between the amount of its bid
and the amount of petitioners obligation in the Notice of Sale. The petitioners then sought to declare the nullity
of the foreclosure, alleging that their loan obligation amounted only to P1,991,770.38 in the Notice of Sale, and
that PNB did not pay its bid in cash or deliver to petitioner the surplus, which is required under the law.[25]
On the other hand, PNB claims that petitioners loan obligation reflected in the Notice of Sale dated 10 March
1992 did not include their other obligations, which became due at the date of the auction sale on 10 October 1992;
as well as interests, penalties, other charges, and attorneys fees due on the said obligation.[26]
Pertinent provisions under Rule 39 of the Rules of Court on extrajudicial foreclosure sale provide:
SEC. 21. Judgment obligee as purchaser. When the purchaser is the judgment obligee, and no third-party claim
has been filed, he need not pay the amount of the bid if it does not exceed the amount of his judgment. If it
does, he shall pay only the excess. (Emphasis supplied.)
SEC. 39. Obligor may pay execution against obligee. After a writ of execution against property has been issued,
a person indebted to the judgment obligor may pay to the sheriff holding the writ of execution the amount of his
debt or so much thereof as may be necessary to satisfy the judgment, in the manner prescribed in section 9 of this
Rule, and the sheriffs receipt shall be a sufficient discharge for the amount so paid or directed to be credited by
the judgment obligee on the execution.
Conspicously emphasized under Section 21 of Rule 39 is that if the amount of the loan is equal to the amount of
the bid, there is no need to pay the amount in cash. Same provision mandates that in the absence of a third-party
claim, the purchaser in an execution sale need not pay his bid if it does not exceed the amount of the judgment;
otherwise, he shall pay only the excess.[27]
The raison de etre is that it would obviously be senseless for the Sheriff or the Notary Public conducting the
foreclosure sale to go through the idle ceremony of receiving the money and paying it back to the creditor, under
the truism that the lawmaking body did not contemplate such a pointless application of the law in requiring that
the creditor must bid under the same conditions as any other bidder. It bears stressing that the rule holds true only
where the amount of the bid represents the total amount of the mortgage debt.[28]
The question that needs to be addressed in this case is: considering the amount of PNBs bid of P8,511,000.00 as
against the amount of the petitioners obligation of P1,991,770.38 in the Notice of Sale, is the PNB obliged to
deliver the excess?
Petitioners insist that the PNB should deliver the excess. On the other hand PNB counters that on the date of the
auction sale on 30 October 1992, petitioners other loan obligation already exceeded the amount of P1,991,770.38
in the Notice of Sale.
Rule 68, Section 4 of the Rules of Court provides:
SEC. 4. Disposition of proceeds of sale.- The amount realized from the foreclosure sale of the mortgaged property
shall, after deducting the costs of the sale, be paid to the person foreclosing the mortgage, and when there shall
be any balance or residue, after paying off the mortgage debt due, the same shall be paid to
junior encumbrancers in the order of their priority, to be ascertained by the court, or if there be no
such encumbrancers or there be a balance or residue after payment to them, then to the mortgagor or his duly
authorized agent, or to the person entitled to it.
Under the above rule, the disposition of the proceeds of the sale in foreclosure shall be as follows:
(a) first, pay the costs
(b) secondly, pay off the mortgage debt
(c) thirdly, pay the junior encumbrancers, if any in the order of priority
(d) fourthly, give the balance to the mortgagor, his agent or the person entitled to it.[29]
Based on the foregoing, after payment of the costs of suit and satisfaction of the claim of the first mortgagee/senior
mortgagee, the claim of the second mortgagee/junior mortgagee may be satisfied from the surplus proceeds. The
application of the proceeds from the sale of the mortgaged property to the mortgagors obligation is an act of
payment, not payment by dacion; hence, it is the mortgagees duty to return any surplus in the selling price to the
mortgagor. Perforce, a mortgagee who exercises the power of sale contained in a mortgage is considered a
custodian of the fund and, being bound to apply it properly, is liable to the persons entitled thereto if he fails to
do so. And even though the mortgagee is not strictly considered a trustee in a purely equitable sense, but as far as
concerns the unconsumed balance, the mortgagee is deemed a trustee for the mortgagor or owner of the equity of
redemption.[30]
Thus it has been held that if the mortgagee is retaining more of the proceeds of the sale than he is entitled to, this
fact alone will not affect the validity of the sale but simply give the mortgagor a cause of action to recover such
surplus.[31]
In the case before us, PNB claims that petitioners loan obligations on the date of the auction sale were already
more than the amount of P1,991,770.38 in the Notice of Sale. In fact, PNB claims that on the date of the auction
sale, petitioners principal obligation, plus penalties, interests, attorneys fees and other charges were already
beyond the amount of its bid of P8,511,000.00.
After a careful review of the evidence on record, we find that the same is insufficient to
support PNBs claim. Instead, what is available on record is petitioners Statement of Account as prepared by PNB
and attached as Annex A[32] to its Answer with counterclaim.[33] In this Statement of Account, petitioners principal
obligation with interest/penalty and attorneys fees as of 30 October 1992 already amounted to P6,409,814.92.
Although petitioners denied the amounts reflected in the Statement of Account from PNB, they did not interpose
any defense to refute the computations therein. Petitioners mere denials, far from being compelling, had nothing
to offer by way of evidence. This then enfeebles the foundation of petitioners protestation and will not suffice to
overcome the computation of their loan obligations as presented in the Statement of Account submitted by
PNB.[34]
Noticeably, this Statement of Account is the only piece of evidence available before us from which we can
determine the outstanding obligations of petitioners to PNB as of the date of the auction sale on 10 October 1992.
It did not escape the attention of this Court that petitioners wrote a number of letters to PNB almost two years
after the auction sale,[35] in which they offered to redeem the property. In their last letter, petitioners offered to
redeem their foreclosed properties for P9,500,000.00. However, these letters by themselves cannot be used as
bases to support PNBs claim that petitioners obligation is more than its bid of P8,500,000.00, without any other
evidence. There was no computation presented to show how petitioners obligation already
reached P9,500,000.00. Petitioners could very well have offered such an amount on the basis of the value of the
foreclosed properties rather than their total obligation to PNB. We cannot take petitioners offer to redeem their
properties in the amount of P9,500,000.00 on its face as an admission of the amount of their obligation to PNB
without any supporting evidence.
Given that the Statement of Account from PNB, being the only existing documentary evidence to support its
claim, shows that petitioners loan obligations to PNB as of 30 October 1992 amounted to P6,409,814.92, and
considering that the amount of PNBs bid is P8,511,000.00, there is clearly an excess in the bid price which PNB
must return, together with the interest computed in accordance with the guidelines laid down by the court
in Eastern Shipping Lines v. Court of Appeals,[36] regarding the manner of computing legal interest, viz:
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall,
in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.
In Philippine National Bank v. Court of Appeals,[37] it was held that:
The rate of 12% interest referred to in Cir. 416 applies only to:
Loan or forbearance of money, or to cases where money is transferred from one person to another and the
obligation to return the same or a portion thereof is adjudged. Any other monetary judgment which does not
involve or which has nothing to do with loans or forbearance of any, money, goods or credit does not fall within
its coverage for such imposition is not within the ambit of the authority granted to the Central Bank. When an
obligation not constituting a loan or forbearance of money is breached then an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of 6% per annum in accordance with Art. 2209
of the Civil Code. Indeed, the monetary judgment in favor of private respondent does not involve a loan or
forbearance of money, hence the proper imposable rate of interest is six (6%) per cent.
Using the above rule as yardstick, since the responsibility of PNB arises not from a loan or forbearance of money
which bears an interest rate of 12%, the proper rate of interest for the amount which PNB must return to the
petitioners is only 6%. This interest according to Eastern Shipping shall be computed from the time of the filing
of the complaint.However, once the judgment becomes final and executory, the "interim period from the finality
of judgment awarding a monetary claim and until payment thereof, is deemed to be equivalent to a forbearance
of credit. Thus, in accordance with the pronouncement in Eastern Shipping, the rate of 12% per annum should be
imposed, to be computed from the time the judgment becomes final and executory until fully satisfied.
It must be emphasized, however, that our holding in this case does not preclude PNB from proving and recovering
in a proper proceeding any deficiency in the amount of petitioners loan obligation that may have accrued after the
date of the auction sale.
WHEREFORE, premises considered, the Decision of the Court of Appeals dated 12 April
2005 is MODIFIED in that the PNB is directed to return to the petitioners the amount of P2,101,185.08 with
interest computed at 6% per annum from the time of the filing of the complaint until its full payment before
finality of judgment. Thereafter, if the amount adjudged remains unpaid, the interest rate shall be 12% per
annum computed from the time the judgment became final and executory until fully satisfied. Costs against
private respondent.
SO ORDERED.