THIRD DIVISION

[G.R. No. 130913. June 21, 2005.]

OLIVERIO LAPERAL and FILIPINAS GOLF & COUNTRY

CLUB INC., petitioners, vs. SOLID HOMES, INC., respondent.

SOUTHRIDGE VILLAGE HOMEOWNERS ASSOCIATION,

intervenor.

DECISION

GARCIA, J : p

Before us is this petition for review on certiorari under Rule 45 of the Rules of Court to
nullify and set aside the following issuances of the Court of Appeals in CA-G.R. CV No.
37853, to wit:

1. Decision dated September 18, 1996, 1 affirming with modification an earlier

decision of the Regional Trial Court at Laguna, Br. XXV, in an action
for reformation of document thereat commenced by herein respondent
Solid Homes, Inc. against the petitioners; and

2. Resolution dated September 23, 1997, 2 denying the parties' respective

motions for reconsideration.

As found by the Court of Appeals in the decision under review, the material facts may be
briefly stated, as follows:

On June 6, 1981, Filipinas Golf Sales and Development Corporation (FGSDC),

predecessor-in-interest of petitioner Filipinas Golf and Country Club, Inc. (FGCCI),
represented by its then President, the other petitioner herein, Oliverio Laperal, entered
into a Development and Management Agreement 3 (Agreement, for short) with herein
respondent Solid Homes, Inc., a registered subdivision developer, involving several
parcels of land owned by Laperal and FGSDC with an aggregate area of approximately
42 hectares and located at Bo. San Antonio, San Pedro, Laguna.

Under the terms and conditions of the aforementioned Agreement and the Supplement 4
thereto dated January 19, 1982, respondent Solid Homes, Inc., undertook to convert at its
own expense the land subject of the agreement into a first-class residential subdivision, in
consideration of which respondent will get 45% of the lot titles of the saleable area in the
entire project.

On different dates, or more specifically on June 8, 1983, June 22, 1983 and July 29, 1983,
Victorio V. Soliven, President and General Manager of respondent Solid Homes, Inc.,
wrote Oliverio Laperal, President of FGSDC, requesting Laperal to furnish Solid Homes,
Inc., with the owner's duplicate copies of the Torrens titles covering the subject land in
order to facilitate the processing of respondent's application with the Human Settlements
Regulatory Commission (HSRC) for a license to sell subdivision lots, as required under
Presidential Decree No. 957.

Despite repeated requests, however, Laperal did not comply. DcaSIH

On October 7, 1983, the aforementioned Agreement was cancelled by the parties, and, in
lieu thereof, two (2) contracts identically denominated Revised Development and
Management Agreement 5 (Revised Agreements, for short) were entered into by
respondent with the two (2) successors-in-interest of FGSDC, to wit: (1) one, with
petitioner Oliverio Laperal as owner of the 181,075-square meter area of the subject land;
and (2) another, with petitioner FGCCI as owner of the 399,075-square meter area
thereof.

Unlike the original agreement, both Revised Agreements omitted the obligation of herein
petitioners Laperal and FGCCI to make available to respondent Solid Homes, Inc. the
owner's duplicate copies of the titles covering the subject parcels of land.

And, because there were still other matters which were inadvertently omitted in the said
Revised Agreements, the parties executed an Addendum 6 thereto dated November 11,
1983.

In addition to the provision on the automatic rescission of the Revised Agreements in case
of breach of the terms and conditions thereof under paragraph 10 of the same, the parties
further agreed in the Addendum that upon a showing that respondent deliberately
abandoned or discontinued work in the subject project, all improvements of whatever
nature and kind it may have introduced in the property and existing as of the date of the
violation shall be forfeited in favor of the petitioners without any obligation on their part
to pay respondent therefor. Likewise, the parties agreed in the same Addendum to a
forfeiture of all advances made and remittances of proceeds from reservations and sales
upon occurrence of the aforesaid default or violation of any of the terms and conditions
of the Revised Agreements and the Addendum. Under the Addendum, abandonment is
deemed to have occurred upon failure or absence of any work for development for any
ten (10) days.
It appears, however, that even as the Revised Agreements already provided for the non-
surrender of the owner's duplicate copies of the titles, respondent persisted in its request
for the delivery thereof, explaining that said owner's duplicate copies were necessary for:
(1) the issuance by the HSRC of the license to sell; (2) the segregation of the golf course
portion from the rest of the subdivision area; (3) the segregation of the individual titles
for portions which are supposed to be made available for PAG-IBIG take-outs; and (4)
the preparation of the technical description of nine (9) blocks already approved by the
Bureau of Lands.

Then, in a letter dated December 7, 1983 addressed to herein petitioners, respondent,

through its Executive Vice-President and Treasurer, Purita R. Soliven, explained that it
was unable to meet the November 30, 1983 deadline for the payment of P1 Million as
provided for in the Revised Agreements because there was delay in the processing of its
license to sell, which, in turn, is due to petitioners' continued refusal to deliver the
owner's duplicate copies of the titles, contrary to what was allegedly agreed upon by the
parties. Respondent reiterated in the same letter that in the absence of such license from
HSRC, it would not be able to comply with the rest of its undertakings within the allotted
periods since the projected collection of amounts from sales and reservations of the
subdivision lots did not materialize. Nonetheless, in order to demonstrate that it was not
reneging on its commitments under the Revised Agreements despite its difficulties to
generate more funds, respondent proposed that it be allowed to assign to petitioners
P1Million out of its receivables worth P1,209,000.00 from loan proceeds due in its favor
under the PAG-IBIG housing program, which it expected to receive for some of the
completed housing units.

In separate letters both dated December 9, 1983, however, petitioners rejected

respondent's proposal and instead insisted on the payment of P1Million to each of them.
AScTaD

It was only at this point, as alleged in respondent's reply letter dated December 13, 1983,
that respondent supposedly realized that instead of providing for the payment of only
P500,000.00 in each contract, or a total of P1Million for both Revised Agreements, the
total amount of P1Million was erroneously carried over in each of the Revised
Agreements, with the consequence that under said two (2) Revised Agreements, it was
bound to pay a total of P2Million to the petitioners.

Meanwhile, in subsequent letters dated January 6, 1984, January 17, 1984 and February
6, 1984, respondent continued to press petitioners for the delivery of the owner's
duplicate copies of their titles covering the subject parcel of land.

Then, on March 9, 1984, petitioners served on respondent notices of rescission of the

Revised Agreements with a demand to vacate the subject properties and yield possession
thereof to them. In the same letter, petitioners made it clear that they are enforcing the
rescission clause of the Revised Agreements on account of respondents' failure to: (1) pay
them P1Million each on November 30, 1983; (2) complete the development of Phase I-A
of the project not later than February 15, 1984; and (3) obtain from the HSRC the license
to sell subdivision lots.

In its response-letter dated March 14, 1984, respondent, through counsel, objected to the
announced rescission, arguing that the proximate cause of its inability to meet its
contractual obligations was petitioners' own failure and refusal to deliver their owner's
duplicate copies of the titles for processing by the HSRC, PAG-IBIG, accredited banks,
and other government agencies, adding that on account of petitioners' failure to do so, it
was not issued the necessary license to sell, thus resulting in the slowdown in the
development works in the project due to its inability to generate additional funds and to
the slackening of its sales campaign.

Such was the state of things when, on April 2, 1984, in the Regional Trial Court (RTC) at
Bian, Laguna respondent Solid Homes, Inc. instituted the complaint in this case praying
for the reformation of the Revised Agreements and the Addendum on the ground that
these contracts failed to express the true intent of the parties. In the same complaint,
respondent prayed for the issuance of a temporary restraining order (TRO) and a writ of
preliminary injunction to prevent petitioners from exercising their rights as owners of the
subject properties. Docketed with the same court as Civil Case No. B-2069, the complaint
was raffled to Branch XXV thereof.

On the very day that the complaint was filed, the trial court issued a TRO to prevent
petitioners from implementing the unilateral rescission of the Revised Agreements and the
Addendum.

Later, in an order dated May 23, 1984, 7 the same court granted respondent's application
for a writ of preliminary injunction upon its posting of a bond in the amount of
P1Million.

On April 18, 1985, 8 the Southridge Village Homeowner's Association filed a complaint-
in-intervention praying that the rights and preferential status of its members who have
been occupying some of the completed units in the subdivision project be respected by
whoever between the principal litigants may later be adjudged as the prevailing party.

Both the petitioners and respondent filed their respective answers to the aforesaid
complaint-in-intervention, commonly alleging intervenor's lack of capacity to sue.
Petitioners added in their answer that it should be respondent which must be made solely
liable to the intervenor for whatever claims its members may be entitled to. For its part,
respondent prayed for the cancellation, in whole or in part, of its contracts with the
members of the intervenor Association to the extent compatible with prevailing economic
conditions.
Upon petitioners' motion, the trial court issued an order on May 20, 1985 lifting the writ
of preliminary injunction over the entire property except as to Phase I-A thereof, and
reducing respondent's injunction bond from P1Million to only P200,000.00.

Petitioners then filed a motion for reconsideration. Finding merit in the motion, the trial
court, in its order of August 15, 1985, 9 as clarified in its order of September 27, 1985, 10
completely lifted the writ of preliminary injunction so as to include the area covered by
Phase I-A, and cancelled the bond of P200,000.00 earlier posted by respondent.

To these orders, both parties filed their respective motions for reconsideration. In its
subsequent order dated November 8, 1985, 11 the trial court modified its August 15, 1985
order by maintaining the complete lifting of the writ of preliminary injunction but
ordering the restoration of respondent's P1Million bond or its substitution with another if
the same had already been cancelled, to answer for whatever damages that may be proven
by the petitioners during the trial of the case.

The above-mentioned orders, namely, orders dated May 20, 1985, August 15, 1985,
September 27, 1985 and November 8, 1985 involving the dissolution of the writ of
preliminary injunction over the entire property and the maintenance of the P1Million
bond against respondent, became the subject of a petition for certiorari filed by
respondent before the Court of Appeals docketed therein as CA-G.R. SP No. 47885.

In a decision dated October 9, 1987, the Court of Appeals dismissed the petition.

Therefrom, respondent went to this Court in G.R. No. 80290 but later abandoned the
same, prompting this Court, in its Resolution dated February 22, 1988, to consider the
Court of Appeals' dismissal of respondent's petition final and executory. ACcDEa

Meanwhile, upon respondent's application, a notice of lis pendens was annotated on the
Torrens titles covering the properties in litigation. Said notice, however, was lifted by the
trial court in its orders of April 12, 1988 and May 21, 1991.

Eventually, after due proceedings in the main case, the trial court, in a decision dated
December 19, 1991, 12 rendered judgment dismissing respondent's complaint for
reformation. We quote the dispositive portion of the same decision:

IN THE LIGHT OF THE FOREGOING, judgment is hereby rendered in favor

of the defendants and against the plaintiff dismissing the complaint with costs:

On defendants' recovery upon the bond posted by the plaintiff to answer to

whatever damages that the party enjoined may suffer by reason of the
injunction, resolution as to the propriety of its award is hereby held in abeyance
until after proper application by the defendants and hearing thereon, as reserved
by the defendants in their memorandum.
 As regards the Intervenors, the defendants are directed to respect and
acknowledge their preferential rights over said Intervenors' occupied houses and
lots.

SO ORDERED.

Therefrom, respondent went to the Court of Appeals via ordinary appeal in CA-G.R. CV
No. 37853.

As stated at the threshold hereof, the Court of Appeals, in a decision dated September 18,
1996, 13 affirmed with modification the appealed decision of the trial court, thus:

WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision appealed

from is AFFIRMED with the modification that [petitioners] are ordered to
reimburse [respondent], jointly and severally, the amount of Five Million Two
Hundred Thousand Eight Hundred Thirty Three Pesos and Twenty Seven
Centavos (P5,200,833.27) representing the actual cost of the development and
the completed improvements on the project. In all other respects, the judgment
of the trial court is AFFIRMED.

SO ORDERED.

Both parties separately moved for reconsideration, but their respective motions were
denied by the appellate court in its resolution of September 23, 1997. 14

And, as they did not agree with the judgment, petitioners are now appealing to this Court
for relief via the present recourse, it being their submission that the Court of Appeals
erred

I.

. . . IN HOLDING THAT PETITIONERS' TERMINATION OF THE

REVISED AGREEMENT AND ADDENDUM, BECAUSE OF THE
CONTRACTUAL BREACH COMMITTED BY RESPONDENT SOLID
HOMES, CARRIED WITH IT THE EFFECT PROVIDED UNDER ARTICLE
1385 OF THE NEW CIVIL CODE.

II.

. . . IN VOIDING THE FORFEITURE CLAUSES OF THE ADDENDUM,

AND IN ORDERING THE REFUND OF THE SUM OF P5,200,833.27 TO
RESPONDENT SOLID HOMES.

III.
 . . . IN HOLDING, IN EFFECT, THAT PETITIONERS ARE NOT ENTITLED
TO DAMAGES.

The Court finds merit in the petition.

While this Court does not agree with petitioners that the right to rescind under Article
1191 of the Civil Code does not carry with it the corresponding obligation for restitution,
we do not subscribe to the Court of Appeals' conclusion that: (1) "the forfeiture/penalty
clause under paragraphs Nos. 2 and 3 of the 'Addendum to the Revised Development and
Management Agreements' is, under the factual milieu of this case, unreasonable and
unconscionable and, therefore, void for being contrary to morals and good customs" 15 ;
and (2) petitioners must reimburse respondent the actual cost of development and
completed improvements on the project in the total amount of P5,200,833.27. 16

It is petitioners' thesis that inasmuch as the rescission of the Revised Agreements and its
Addendum was made pursuant to Article 1191 of the Civil Code, the provision of Article
1385 17 of the same Code, which requires mutual restitution should not apply because
Article 1385 applies only if the rescission is made under the instances enumerated in
Article 1381 18 of the Code. cSITDa

We do not agree.

Mutual restitution is required in cases involving rescission under Article 1191. In Velarde
vs. Court of Appeals, 19 this Court, in no uncertain terms, squarely ruled on this matter:

Considering that the rescission of the contract is based on Article 1191 of the
Civil Code, mutual restitution is required to bring back the parties to their
original situation prior to the inception of the contract. Accordingly, the initial
payment of P800,000 and the corresponding mortgage payments in the amounts
of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by
petitioners should be returned by private respondents, lest the latter unjustly
enrich themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be
carried out only when the one who demands rescission can return whatever he
may be obliged to restore (citing Co v. Court of Appeals, 312 SCRA 528,
August 17, 1999; and Vitug, Compendium of Civil Law and Jurisprudence,
1993 revised ed., p. 556). To rescind is to declare a contract void at its inception
and to put an end to it as though it never was. It is not merely to terminate it and
release the parties from further obligations to each other, but to abrogate it from
the beginning and restore the parties to their relative positions as if no contract
has been made (citing Ocampo v. Court of Appeals, 233 SCRA 551, June 30,
1994).

Article 1191 of the Civil Code provides:

 Art. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.

The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of the period.

This is understood without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage
Law. (1124)

Despite the fact that Article 1124 of the old Civil Code from whence Article 1191 was
taken, used the term "resolution", the amendment thereto (presently, Article 1191)
explicitly and clearly used the term "rescission". Unless Article 1191 is subsequently
amended to revert back to the term "resolution", this Court has no alternative but to apply
the law, as it is written.

Again, since Article 1385 of the Civil Code expressly and clearly states that "rescission
creates the obligation to return the things which were the object of the contract, together
with their fruits, and the price with its interest," the Court finds no justification to sustain
petitioners' position that said Article 1385 does not apply to rescission under Article
1191.

In Palay, Inc. vs. Clave, 20 this Court applied Article 1385 in a case involving
"resolution" under Article 1191, thus:

Regarding the second issue on refund of the installment payments made by

private respondent. Article 1385 of the Civil Code provides:

"ART. 1385. Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price
with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.

"Neither shall rescission take place when the things which are the object
of the contract are legally in the possession of third persons who did not
act in bad faith.EcICSA

"In this case, indemnity for damages may be demanded from the person
causing the loss."
 As a consequence of the resolution by petitioners, rights to the lot should be
restored to private respondent or the same should be replaced by another
acceptable lot. However, considering that the property had already been sold to
a third person and there is no evidence on record that other lots are still
available, private respondent is entitled to the refund of installments paid plus
interest at the legal rate of 12% computed from the date of the institution of the
action. It would be most inequitable if petitioners were to be allowed to retain
private respondent's payments and at the same time appropriate the proceeds of
the second sale to another.

Applying the clear language of the law and the consistent jurisprudence on the matter,
therefore, the Court rules that rescission under Article 1191 in the present case, carries
with it the corresponding obligation of restitution.

This notwithstanding, the Court does not agree with the Court of Appeals that, as a
consequence of the obligation of mutual restitution in this case, petitioners should return
the amount of P5,200,833.27 to respondent.

Article 1191 states that "the injured party may choose between fulfillment and rescission
of the obligation, with the payment of damages in either case." In other words, while
petitioners are indeed obliged to return the said amount to respondent under Article 1385,
assuming said figure is correct, respondent is at the same time liable to petitioners in the
same amount as liquidated damages by virtue of the forfeiture/penalty clause as freely
stipulated upon by the parties in the Addendum, paragraphs 1 and 2 21 of which
respectively read:

WHEREAS, included as part of said agreement are the following:

1. Further to the stipulations on paragraph 10, upon default of performances,

violations and/or non-compliance with the terms and conditions herein agreed
upon by the DEVELOPER wherein it appears that the DEVELOPER
deliberately abandoned or discontinued the work on the project, said party shall
lose any entitlement, if any, to any refund and/or advances it may have incurred
in connection with or relative to previous development works in the subdivision;
likewise, all improvements of whatever nature and kind introduced by the
DEVELOPER on the property, existing as of the date of default or violation,
shall automatically belong to the OWNER without obligation on his part to pay
for the costs thereof.

2. Similarly with the same condition of default or violation obtaining, as stated

in paragraph 10 of said agreement, all advances made and remittances of
proceeds from reservations and sales given by the DEVELOPER to the
OWNER as provided for in this agreement shall be deemed absolutely forfeited
 in favor of the OWNER, resulting to waiver of DEVELOPER's rights, if any,
with respect to said amount(s).

If this Court recognized the right of the parties to stipulate on an extrajudicial rescission
22 under Article 1191, there is no reason why this Court will not allow the parties to
stipulate on the matter of damages in case of such rescission under Book IV, Title VIII,
Chapter 3, Section 2 of the Civil Code governing liquidated damages. 23

For sure, we find no factual and legal justification to sustain the appellate court's
conclusion that the agreed forfeiture/penalty clause is unreasonable and unconscionable
unless respondent had sufficiently shown that it had completely accounted for the
proceeds of the sale of subdivision lots it made during the effectivity of the agreement. It
must be stressed that the lots sold by respondent were owned by petitioners Laperal and
FGCCI. How then could there be unjust enrichment in favor of petitioners in such a case?

Furthermore, a substantial part of the funds spent by respondent in the construction works
which by the Court of Appeals required to be reimbursed by petitioners admittedly came
from the proceeds of the sale of the real property still owned by petitioners. This may be
gleaned from the fact that one of the main reasons respondent raised in its complaint for
reformation before the trial court was that it was unable to proceed with the construction
works due to lack of funds on account of the slackening of its sales campaign resulting
from the alleged refusal, which is after all justified, of the petitioners to surrender their
titles to respondent. SEIDAC

Finally, even assuming that the foregoing forfeiture/penalty clause in the "Addendum"
would result in considerable losses on the part of respondent, it is not for this Court to
release said party from its obligation. Our pronouncement in Esguerra vs. Court of
Appeals 24 is apt and pertinent:

. . . It is a long established doctrine that the law does not relieve a party from the
effects of an unwise, foolish, or disastrous contract, entered into with all the
required formalities and with full awareness of what he was doing. Courts have
no power to relieve parties from obligations voluntarily assumed, simply
because their contracts turned out to be disastrous deals or unwise investments."
...

WHEREFORE, the petition is hereby GRANTED. Accordingly, the assailed decision and
resolution of the Court of appeals are REVERSED and SET ASIDE and the decision
dated December 19, 1991 of the Regional Trial Court in Civil Case No. B-2069
REINSTATED.

No pronouncement as to costs.

SO ORDERED.
Panganiban, Sandoval-Gutierrez, Corona and Carpio Morales, JJ., concur.

||| (Laperal v. Solid Homes Inc., G.R. No. 130913, [June 21, 2005], 499 PHIL 367-384)
 THIRD DIVISION

[G.R. No. 133705. March 31, 2005.]

C-J YULO & SONS, INC., petitioner, vs. ROMAN CATHOLIC

BISHOP OF SAN PABLO, INC., respondent.

DECISION

GARCIA, J : p

Appealed to this Court by way of a petition for review on certiorari are the Decision 1
dated December 19, 1997 and Resolution 2 dated April 30, 1998 of the Court of Appeals
in CA-G.R. CV No. 45392, reversing an earlier decision of the Regional Trial Court at
Calamba, Laguna, Branch 34, which ruled in favor of the herein petitioner C-J Yulo &
Sons, Inc., in a suit for revocation of donation with reconveyance of title, thereat
commenced by the petitioner against the herein respondent, Roman Catholic Bishop of
San Pablo, Inc.

The facts are not at all disputed:

On September 24, 1977, petitioner donated unto respondent a parcel of land at

Canlubang, Calamba, Laguna with an area of 41,117 square meters and registered in its
name under Transfer Certificate of Title (TCT) No. T-82803. The deed of donation which
also bears the acceptance of the donee recites the considerations therefor and the
conditions thereto attached, to wit:

WHEREAS, Donee is a religious corporation engaged in much (sic)

humanitarian Christian work in Laguna and elsewhere, educating and forming
the young, caring for the infirm and the aged in the fulfillment of its mission;

WHEREAS, Donor recognizes the need for a privately endowed institution that
will care for the homeless and destitute old people in the community, as well as
the other senior citizens who for some reason or other find themselves without
family with whom to live the last years of their life:

WHEREFORE, Donor is willing, in order to help establish and support such an

institution to donate the land necessary for its housing, as well as an area of land
whereon it may raise crops for its support and for the sustenance of its residents;
WHEREAS, Donee is willing and able, with the wanted help of Donor and of
other benefactors, to establish, operate and maintain such a home for the aged.
DcTAIH

NOW, THEREFORE, in consideration of all the foregoing premises, Donor

hereby transfers and conveys to Donee by way of donation all its rights, title and
interest in that certain parcel of land covered by TCT No. T-82803 of the Land
Records of Laguna, the technical descriptions of which are recited above,
subject to the following conditions and covenants, each of which is a material
consideration for this Deed:

1. So much of the land as may be necessary shall be used for the

construction of a home for the aged and infirm, regardless of religion or
creed, but preferably those coming from Canlubang, Calamba, Laguna;
provided that retired and/or aged priests may be admitted to the home;
and provided further that any senior citizen from the area who has
retired from business or work may likewise be admitted to the home,
subject to the payment to the institution of such sum as he may afford
for his support.

2. A Green Belt that is 15 meters wide shall be established and

maintained by the Donor along the length of the land to separate and
insulate it from the projected highway.

3. Such part of land as may not be needed for the residence and the
Green Belt shall be devoted by Donee with the help of such residents of
the home as are able, to the raising of agricultural crops for the
consumption of the residents of the home, and of such other crops that
may be sold to defray the cost of running the home and feeding its
residents; provided, that should the area later become so fully urbanized
as to make this limitation on use economically, impractical, any portion
of the land may, with the written consent of the Donor, be put to
commercial use by the Donee by leasing the same for wholesome and
socially-acceptable activities; provided further that the rentals from such
commercial leases shall be used, first, to meet the expenses of the home;
second, to enlarge its population and expand its facilities; and finally for
other charitable purposes in Laguna, in that order.

4. Donee acknowledges that Donor's generous act will greatly aid Donee
in accomplishing its mission on earth, and, recognizing the generosity of
the Yulo family as the reason for such act, Donee undertakes to cause
every year the celebration of masses for the intention of the various
members of the family of Mr. Jose Yulo, Sr., on festive and solemn
occasions in the said family.

5. Except with prior written consent of the Donor or its successor, the
Donee shall not use the land except for the purpose as provided above in
 paragraph 1 hereof, nor sell or dispose the land for any reason
whatsoever, nor convey any portion of the same except in lease for
commercial use as provided above in paragraph 3 hereof, otherwise the
said land with all real improvements thereon shall revert in trust to the
Donor for prompt disposition in favor of some other charitable
organization that Donor may deem best suited to the care of the aged.
(Underscoring supplied).

On the basis of the same deed, TCT No. T-82803 of the donor was cancelled and
replaced by TCT No. T-91348 in the name of donee Roman Catholic Bishop of San
Pablo, Inc.

Thereafter, or sometime in 1980, the donee, for purposes of generating funds to build the
perimeter fence on the donated property and the construction of a nucleus building for the
aged and the infirm, leased a portion of the donated property to one Martin Gomez who
planted said portion with sugar cane. There is no dispute that the lease agreement was
entered into by the donee without the prior written consent of the donor, as required in
the deed of donation. The lease to Gomez ended in 1985. HSaIET

The following year, 1986, a portion of the donated property was again leased by the
donee, this time to one Jose Bostre who used the leased area as a ranch. As explained by
the donee, it entered into a lease agreement with Bostre to protect the premises from
vandals and for the electrification of the nucleus building of the home for the aged and in
the infirm, which was named as "Casa dela Merced." As before, however, the donee
executed the lease contract without the prior written consent of the donor.

After the termination of the Bostre lease agreement, the donee, for the third time, leased a
portion of the donated property to one Rudy Caballes who used the leased area for
fattening cattles. The donee explained that the lease agreement with Bostre was also for
the purposes of generating funds for the completion of "Casa dela Merced." Again,
however, the donee did not secure the prior written consent of the donor.

Hence, on September 20, 1990, pursuant to a board resolution, the donor, through its
president Miguel A. Yulo, addressed a letter to the donee informing the latter that it was
revoking the donation in accordance with Section 5 of the deed due to the donee's non-
compliance with and material breach of the conditions thereunder stipulated. In the same
letter, the donor requested for the turn-over of the donee's TCT No. T-91348 over the
donated property.

In a reply-letter dated November 5, 1990, the donee, through Bishop Pedro N. Bantigue,
D.D., denied any material breach of the conditions of the deed of donation and
manifested its continued and faithful compliance with the provisions thereof. In the same
letter, the donee refused the turn-over of its title to the donor.
It was against the foregoing backdrop of events when, on November 19, 1990, in the
Regional Trial Court at Calamba, Laguna the donor, alleging non-compliance with and
violation by the donee of the conditions of the deed of donation, filed its complaint in this
case against donee Roman Catholic Archbishop of San Pablo, Inc., therein reciting the
imputed non-compliance and violations by the donee of the terms and conditions of the
deed of donation, as follows:

a) non-construction of the home for the aged and infirmed in the lot despite the
lapse of a reasonable and considerable length of time;

b) present land use of the area is a cattle farm, the owner of which has a lease
contract with the donee; and

c) no prior written consent of the donor has been obtained for the present and
actual use of the property donated,

and accordingly prayed that the subject deed of donation be adjudged revoked and
void and the donee ordered to return and/or reconvey the property donated.

In its answer, defendant donee alleged that it was doing its best to comply with the
provisions of the deed of donation relative to the establishment of the home for the aged
and the infirm, adding that the leases of portions of the land were with the express, albeit
unwritten consent, of Jesus Miguel Yulo himself. In the same answer, defendant donee
interposed the defense that the donor's cause of action for revocation, if any, had already
prescribed because the leases were known to the latter since 1980.

In a decision dated December 22, 1995, the trial court rendered judgment for donor-
plaintiff C-J Yulo & Sons, Inc., thus:

WHEREFORE, judgment is hereby rendered for plaintiff and against the

defendant, declaring the Deed of Donation dated September 24, 1977 (Exh.
"C") REVOKED, affirming plaintiff's revocation of the same in the letter dated
September 20, 1990 (Exh. "D"). ESCTIA

Defendant and all persons claiming rights under them are hereby ordered to
immediately vacate the premises of the donated property and to hand over to
plaintiff the peaceful possession of the aforesaid premises.

To avoid multiplicity of suits, the Register of Deeds of Calamba, Laguna, is

hereby ordered to require the defendant to surrender Transfer Certificate of Title
No. T-91348 (Exh. "B") and thereafter cancel the same and issue, upon payment
of the required fees, a new Transfer Certificate of Title in favor of plaintiffs,
with cost against the defendant.

SO ORDERED.
Therefrom, donee-defendant Roman Catholic Bishop of San Pablo, Inc., went to the
Court of Appeals in CA-G.R. CV No. 45392.

In the herein assailed Decision dated December 19, 1997, 3 the Court of Appeals
reversed that of the trial court and upheld the donation in question, to wit:

WHEREFORE, the decision of the trial court dated December 22, 1993 is
hereby REVERSED and the donation dated September 24, 1977 (Exhibit C)
which conveyed title to the donated property in the appellee's name is hereby
UPHELD.

SO ORDERED.

Its motion for reconsideration having been denied by the same court in its Resolution of
April 30, 1998, 4 donor C-J Yulo & Sons, Inc., has come to this Court via the present
recourse on its sole submission that

THE RULING OF THE COURT OF APPEALS (THAT THE REVOCATION

OF THE DONATION BY PETITIONER WAS IMPROPER) IS CONTRARY
TO LAW AND APPLICABLE JURISPRUDENCE.

We DENY.

The Court of Appeals sustained the trial court's finding that the donation is an onerous
one since the donee was burdened with the establishment on the donated property of a
home for the aged and the infirm. It likewise agreed with the trial court that there were
violations of the terms and conditions of the deed of donation when the donee thrice
leased a portion of the property without the prior written consent of the donor. Likewise
upheld by the appellate court is the ruling of the trial court that the prescriptive period of
the donor's right to revoke the donation is ten (10) years based on Article 1144 of the
Civil Code, instead of four (4) years per Article 764 of the same Code, and therefore the
action for revocation filed by the petitioner is not barred by prescription.

Even then, the Court of Appeals reversed the trial court's decision, the reversal being
premised on the appellate court's finding that the breaches thrice committed by the
respondent were merely casual breaches which nevertheless did not detract from the
purpose of which the donation was made: the establishment of a home for the aged and
the infirm.

We agree.
Petitioner contends that the case at bar is similar to the 1995 case of Central Philippine
University vs. Court of Appeals, 5 where the donee failed for more than 50 years to
establish, as required, a medical school on the land donated, and where this Court
declared the donation to have been validly revoked.

To the mind of the Court, what is applicable to this case is the more recent [2001] case of
Republic vs. Silim, 6 where respondent Silim donated a 5,600-square meter parcel of land
in favor of the Bureau of Public Schools, Municipality of Malangas, Zamboanga del Sur
with the condition that the said property should be used exclusively and forever for
school purposes only. Although a school building was constructed on the property
through the efforts of the Parent-Teachers Association of Barangay Kauswagan, the funds
for a Bagong Lipunan school building could not be released because the government
required that it be built on a one-hectare parcel of land. This led the donee therein to
exchange the donated property for a bigger one. DTAHEC

In Silim, the Court distinguished the four (4) types of donations:

Donations, according to its purpose or cause, may be categorized as: (1) pure or
simple; (2) remuneratory or compensatory; (3) conditional or modal; and (4)
onerous. A pure or simple donation is one where the underlying cause is plain
gratuity. This is donation in its truest form. On the other hand, a remuneratory
or compensatory donation is one made for the purpose of rewarding the donee
for past services, which services do not amount to a demandable debt. A
conditional or modal donation is one where the donation is made in
consideration of future services or where the donor imposes certain conditions,
limitations or charges upon the donee, the value of which is inferior than that of
the donation given. Finally, an onerous donation is that which imposes upon the
donee a reciprocal obligation or, to be more precise, this is the kind of donation
made for a valuable consideration, the cost of which is equal to or more than the
thing donated.

Of all the foregoing classifications, donations of the onerous type are the most
distinct. This is because, unlike the other forms of donation, the validity of and
the rights and obligations of the parties involved in an onerous donation is
completely governed not by the law on donations but by the law on contracts. In
this regard, Article 733 of the New Civil Code provides:

ARTICLE 733 Donations with onerous cause shall be governed by the

rules on contracts, and remuneratory donations by the provisions of the
present Title as regards that portion which exceeds the value of the
burden imposed.

The donation involved in the present controversy is one which is onerous since
there is a burden imposed upon the donee to build a school on the donated
property.
Here, the Court of Appeals correctly applied the law on contracts instead of the law on
donations because the donation involved in this case is onerous, saddled as it is by a
burden imposed upon the donee to put up and operate a home for the aged and the infirm.
We thus quote with approval the terse ruling of the appellate court in the challenged
decision:

First, the violations of the conditions of the donation committed by the donee
were merely casual breaches of the conditions of the donation and did not
detract from the purpose by which the donation was made, i.e., for the
establishment of a home for the aged and the infirm. In order for a contract
which imposes a reciprocal obligation, which is the onerous donation in this
case wherein the donor is obligated to donate a 41,117 square meter property in
Canlubang, Calamba, Laguna on which property the donee is obligated to
establish a home for the aged and the infirm (Exhibit C), may be rescinded per
Article 1191 of the New Civil Code, the breach of the conditions thereof must
be substantial as to defeat the purpose for which the contract was perfected
(Tolentino, "Civil Code of the Philippines," Vol. IV, pp. 179-180; Universal
Food Corp. v. Court of Appeals, 33 SCRA 1, 18; Ocampo v. Court of Appeals,
233 SCRA 551, 562). Thus, in the case of "Ocampo v. C.A." (ibid), citing the
case of "Angeles v. Calasanz" (135 SCRA 323, 330), the Supreme Court ruled:

The right to rescind the contract for non-performance of one of its

stipulations . . . is not absolute. In Universal Food Corp. v. Court of
Appeals (33 SCRA 1) the Court stated that:

The general rule is that rescission of a contract will not be

permitted for a slight or casual breach, but only for such
substantial and fundamental breach as would defeat the very
object of the parties in making the agreement (Song Fo & Co. v.
Hawaiian-Philippine Co., 47 Phil. 821,827). The question of
whether a breach of a contract is substantial depends upon the
attendant circumstances (Corpus v. Hon. Alikpala, et al., L-
23707 & L-23720, Jan. 17, 1968). CADSHI

The above ruling of the Court of Appeals is completely in tune with this Court's
disposition in Republic vs. Silim, supra. The donor therein sought to revoke the donation
on the ground that the donee breached the condition to exclusively and forever use the
land for school purpose only, but this Court ruled in favor of the donee:

Without the slightest doubt, the condition for the donation was not in any way
violated when the lot donated was exchanged with another one. The purpose for
the donation remains the same, which is for the establishment of a school. The
exclusivity of the purpose was not altered or affected. In fact, the exchange of
the lot for a much bigger one was in furtherance and enhancement of the
purpose of the donation. The acquisition of the bigger lot paved way for the
 release of funds for the construction of Bagong Lipunan school building which
could not be accommodated by the limited area of the donated lot.

As in Silim, the three (3) lease contracts herein entered into by the donee were for the sole
purpose of pursuing the objective for which the donation was intended. In fact, such lease
was authorized by the donor by express provision in the deed of donation, albeit the prior
written consent therefor of the donor is needed. Hence, considering that the donee's acts
did not detract from the very purpose for which the donation was made but precisely to
achieve such purpose, a lack of prior written consent of the donor would only constitute
casual breach of the deed, which will not warrant the revocation of the donation.

Besides, this Court cannot consider the requirement of a prior written consent by the
donor for all contracts of lease to be entered into by the donee as an absolute ground for
revocation of the donation because such a condition, if not correlated with the purpose of
the donation, would constitute undue restriction of the donee's right of ownership over
the donated property.

Instructive on this point is the ruling of this Court in The Roman Catholic Archbishop of
Manila vs. Court of Appeals, 7 viz:

Donation, as a mode of acquiring ownership, results in an effective transfer of

title over the property from the donor to the donee. Once a donation is accepted,
the donee becomes the absolute owner of the property donated. Although the
donor may impose certain conditions in the deed of donation, the same must not
be contrary to law, morals, good customs, public order and public policy.

xxx xxx xxx

In the case at bar, we hold that the prohibition in the deed of donation against
the alienation of the property for an entire century, being an unreasonable
emasculation and denial of an integral attribute of ownership, should be
declared as an illegal or impossible condition within the contemplation of
Article 727 of the Civil Code. Consequently, as specifically stated in said
statutory provision, such condition shall be considered as not imposed. No
reliance may accordingly be placed on said prohibitory paragraph in the deed of
donation. The net result is that, absent said proscription, the deed of sale
supposedly constitutive of the cause of action for the nullification of the deed of
donation is not in truth violative of the latter, hence, for lack of cause of action,
the case for private respondents must fail.

If petitioner would insist that the lack of prior written consent is a resolutory condition
that is absolute in character, the insistence would not stand the validity test under the
foregoing doctrine. What would have been casual breaches of the terms and conditions of
the donation, may, in that event, even be considered as no breach at all when the Court
strikes down such absolute condition of prior written consent by the donor in all instances
without any exception whatsoever. The Court, however, understands that such a
condition was written with a specific purpose in mind, which is, to ensure that the
primary objective for which the donation was intended is achieved. A reasonable
construction of such condition rather than totally striking it would, therefore, be more in
accord with the spirit of the donation. Thus, for as long as the contracts of lease do not
detract from the purpose for which the donation was made, the complained acts of the
donee will not be deemed as substantial breaches of the terms and conditions of the deed
of donation to merit a valid revocation thereof by the donor. aTAEHc

Finally, anent petitioner's contention that the Court of Appeals failed to consider that
respondent had abandoned the idea of constructing a home for the aged and infirm, the
explanation in respondent's comment is enlightening. Petitioner relies on Bishop
Bantigue's letter 8 dated June 21, 1990 as its basis for claiming that the donee had
altogether abandoned the idea of constructing a home for the aged and the infirm on the
property donated. Respondent, however, explains that the Bishop, in his letter, written in
the vernacular, expressed his concern that the surrounding area was being considered to
be re-classified into an industrial zone where factories are expected to be put up. There is
no question that this will definitely be disadvantageous to the health of the aged and the
infirm. Thus, the Bishop asked permission from the donor for a possible exchange or sale
of the donated property to ultimately pursue the purpose for which the donation was
intended in another location that is more appropriate.

The Court sees the wisdom, prudence and good judgment of the Bishop on this point, to
which it conforms completely. We cannot accede to petitioner's view, which attributed
the exact opposite meaning to the Bishop's letter seeking permission to sell or exchange
the donated property.

In Silim, supra, this Court ruled that such exchange does not constitute breach of the
terms and conditions of the donation. We see no reason for the Court to think otherwise
in this case. To insist that the home for the aged and infirm be constructed on the donated
property, if the industrialization indeed pushes through, defies rhyme and reason. Any act
by the donor to prevent the donee from ultimately achieving the purpose for which the
donation was intended would constitute bad faith, which the Court will not tolerate.

WHEREFORE, the instant petition is DENIED and the assailed decision of the Court of
Appeals AFFIRMED in toto.

No pronouncement as to costs.

SO ORDERED.
Panganiban, Sandoval-Gutierrez, Corona and Carpio Morales, JJ., concur.

(C-J Yulo & Sons Inc. v. Roman Catholic Bishop of San Pablo Inc., G.R. No. 133705,
|||

[March 31, 2005], 494 PHIL 282-296)

 SECOND DIVISION

[G.R. No. 139523. May 26, 2005.]

SPS. FELIPE AND LETICIA CANNU, petitioners, vs. SPS. GIL AND
FERNANDINA GALANG AND NATIONAL HOME MORTGAGE
FINANCE CORPORATION, respondents.

DECISION

CHICO-NAZARIO, J : p

Before Us is a Petition for Review on Certiorari which seeks to set aside the decision 1 of
the Court of Appeals dated 30 September 1998 which affirmed with modification the
decision of Branch 135 of the Regional Trial Court (RTC) of Makati City, dismissing the
complaint for Specific Performance and Damages filed by petitioners, and its Resolution
2 dated 22 July 1999 denying petitioners' motion for reconsideration.

A complaint 3 for Specific Performance and Damages was filed by petitioners-spouses

Felipe and Leticia Cannu against respondents-spouses Gil and Fernandina Galang and the
National Home Mortgage Finance Corporation (NHMFC) before Branch 135 of the RTC
of Makati, on 24 June 1993. The case was docketed as Civil Case No. 93-2069.

The facts that gave rise to the aforesaid complaint are as follows:

Respondents-spouses Gil and Fernandina Galang obtained a loan from Fortune Savings
& Loan Association for P173,800.00 to purchase a house and lot located at Pulang Lupa,
Las Pias, with an area of 150 square meters covered by Transfer Certificate of Title
(TCT) No. T-8505 in the names of respondents-spouses. To secure payment, a real estate
mortgage was constituted on the said house and lot in favor of Fortune Savings & Loan
Association. In early 1990, NHMFC purchased the mortgage loan of respondents-spouses
from Fortune Savings & Loan Association for P173,800.00.

Respondent Fernandina Galang authorized 4 her attorney-in-fact, Adelina R. Timbang, to

sell the subject house and lot.

Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to assume the
balance of the mortgage obligations with the NHMFC and with CERF Realty 5 (the
Developer of the property). cEDIAa

Of the P120,000.00, the following payments were made by petitioners:

 Date Amount Paid

July 19, 1990 P40,000.00 6

March 13, 1991 15,000.00 7

April 6, 1991 15,000.00 8

November 28, 1991 5,000.00 9

Total P75,000.00
Thus, leaving a balance of P45,000.00.

A Deed of Sale with Assumption of Mortgage Obligation 10 dated 20 August 1990 was
made and entered into by and between spouses Fernandina and Gil Galang (vendors) and
spouses Leticia and Felipe Cannu (vendees) over the house and lot in question which
contains, inter alia, the following:

NOW, THEREFORE, for and in consideration of the sum of TWO HUNDRED

FIFTY THOUSAND PESOS (P250,000.00), Philippine Currency, receipt of
which is hereby acknowledged by the Vendors and the assumption of the
mortgage obligation, the Vendors hereby sell, cede and transfer unto the
Vendees, their heirs, assigns and successor in interest the above-described
property together with the existing improvement thereon.

It is a special condition of this contract that the Vendees shall assume and
continue with the payment of the amortization with the National Home
Mortgage Finance Corporation Inc. in the outstanding balance of
P_______________, as of __________ and shall comply with and abide by the
terms and conditions of the mortgage document dated Feb. 27, 1989 and
identified as Doc. No. 82, Page 18, Book VII, S. of 1989 of Notary Public for
Quezon City Marites Sto. Tomas Alonzo, as if the Vendees are the original
signatories.

Petitioners immediately took possession and occupied the house and lot.

Petitioners made the following payments to the NHMFC:

Date Amount Receipt No.

July 9, 1990 P14,312.47 D-503986 11

March 12, 1991 8,000.00 D-729478 12

February 4, 1992 10,000.00 D-999127 13

 March 31, 1993 6,000.00 E-563749 14

April 19, 1993 10,000.00 E-582432 15

April 27, 1993 7,000.00 E-618326 16

P55,312.47

Petitioners paid the "equity" or second mortgage to CERF Realty. 17

Despite requests from Adelina R. Timbang and Fernandina Galang to pay the balance of
P45,000.00 or in the alternative to vacate the property in question, petitioners refused to
do so.

In a letter 18 dated 29 March 1993, petitioner Leticia Cannu informed Mr. Fermin T.
Arzaga, Vice President, Fund Management Group of the NHMFC, that the ownership
rights over the land covered by TCT No. T-8505 in the names of respondents-spouses
had been ceded and transferred to her and her husband per Deed of Sale with Assumption
of Mortgage, and that they were obligated to assume the mortgage and pay the remaining
unpaid loan balance. Petitioners' formal assumption of mortgage was not approved by the
NHMFC. 19

Because the Cannus failed to fully comply with their obligations, respondent Fernandina
Galang, on 21 May 1993, paid P233,957.64 as full payment of her remaining mortgage
loan with NHMFC. 20

Petitioners opposed the release of TCT No. T-8505 in favor of respondents-spouses

insisting that the subject property had already been sold to them. Consequently, the
NHMFC held in abeyance the release of said TCT. TSHIDa

Thereupon, a Complaint for Specific Performance and Damages was filed asking, among
other things, that petitioners (plaintiffs therein) be declared the owners of the property
involved subject to reimbursements of the amount made by respondents-spouses
(defendants therein) in preterminating the mortgage loan with NHMFC.

Respondent NHMFC filed its Answer. 21 It claimed that petitioners have no cause of
action against it because they have not submitted the formal requirements to be
considered assignees and successors-in-interest of the property under litigation.

In their Answer, 22 respondents-spouses alleged that because of petitioners-spouses'

failure to fully pay the consideration and to update the monthly amortizations with the
NHMFC, they paid in full the existing obligations with NHMFC as an initial step in the
rescission and annulment of the Deed of Sale with Assumption of Mortgage. In their
counterclaim, they maintain that the acts of petitioners in not fully complying with their
obligations give rise to rescission of the Deed of Sale with Assumption of Mortgage with
the corresponding damages.

After trial, the lower court rendered its decision ratiocinating:

On the basis of the evidence on record, testimonial and documentary, this Court
is of the view that plaintiffs have no cause of action either against the spouses
Galang or the NHMFC. Plaintiffs have admitted on record they failed to pay the
amount of P45,000.00 the balance due to the Galangs in consideration of the
Deed of Sale With Assumption of Mortgage Obligation (Exhs. "C" and "3").
Consequently, this is a breach of contract and evidently a failure to comply with
obligation arising from contracts. . . In this case, NHMFC has not been duly
informed due to lack of formal requirements to acknowledge plaintiffs as legal
assignees, or legitimate transferees and, therefore, successors-in-interest to the
property, plaintiffs should have no legal personality to claim any right to the
same property. 23

The decretal portion of the decision reads:

Premises considered, the foregoing complaint has not been proven even by
preponderance of evidence, and, as such, plaintiffs have no cause of action
against the defendants herein. The above-entitled case is ordered dismissed for
lack of merit.

Judgment is hereby rendered by way of counterclaim, in favor of defendants and

against plaintiffs, to wit:

1. Ordering the Deed of Sale With Assumption of Mortgage Obligation (Exhs.

"C" and "3") rescinded and hereby declared the same as nullified without
prejudice for defendants-spouses Galang to return the partial payments made by
plaintiffs; and the plaintiffs are ordered, on the other hand, to return the physical
and legal possession of the subject property to spouses Galang by way of mutual
restitution;SIDEaA

2. To pay defendants spouses Galang and NHMFC, each the amount of

P10,000.00 as litigation expenses, jointly and severally;

3. To pay attorney's fees to defendants in the amount of P20,000.00, jointly and

severally; and

4. The costs of suit.

5. No moral and exemplary damages awarded. 24

A Motion for Reconsideration 25 was filed, but same was denied. Petitioners appealed the
decision of the RTC to the Court of Appeals. On 30 September 1998, the Court of
Appeals disposed of the appeal as follows:

Obligations arising from contract have the force of law between the contracting
parties and should be complied in good faith. The terms of a written contract are
binding on the parties thereto.

Plaintiffs-appellants therefore are under obligation to pay defendants-appellees

spouses Galang the sum of P250,000.00, and to assume the mortgage.

Records show that upon the execution of the Contract of Sale or on July 19,
1990 plaintiffs-appellants paid defendants-appellees spouses Galang the amount
of only P40,000.00.

The next payment was made by plaintiffs-appellants on March 13, 1991 or eight
(8) months after the execution of the contract. Plaintiffs-appellants paid the
amount of P5,000.00.

The next payment was made on April 6, 1991 for P15,000.00 and on November
28, 1991, for another P15,000.00.

From 1991 until the present, no other payments were made by plaintiffs-
appellants to defendants-appellees spouses Galang.

Out of the P250,000.00 purchase price which was supposed to be paid on the
day of the execution of contract in July, 1990 plaintiffs-appellants have paid, in
the span of eight (8) years, from 1990 to present, the amount of only
P75,000.00. Plaintiffs-appellants should have paid the P250,000.00 at the time
of the execution of contract in 1990. Eight (8) years have already lapsed and
plaintiffs-appellants have not yet complied with their obligation.

We consider this breach to be substantial.

The tender made by plaintiffs-appellants after the filing of this case, of the
Managerial Check in the amount of P278,957.00 dated January 24, 1994 cannot
be considered as an effective mode of payment.

Performance or payment may be effected not by tender of payment alone but by

both tender and consignation. It is consignation which is essential in order to
extinguish plaintiffs-appellants obligation to pay the balance of the purchase
price.
 In addition, plaintiffs-appellants failed to comply with their obligation to pay
the monthly amortizations due on the mortgage. SDIACc

In the span of three (3) years from 1990 to 1993, plaintiffs-appellants made only
six payments. The payments made by plaintiffs-appellants are not even
sufficient to answer for the arrearages, interests and penalty charges.

On account of these circumstances, the rescission of the Contract of Sale is

warranted and justified.

xxx xxx xxx

WHEREFORE, foregoing considered, the appealed decision is hereby

AFFIRMED with modification. Defendants-appellees spouses Galang are
hereby ordered to return the partial payments made by plaintiff-appellants in the
amount of P135,000.00.

No pronouncement as to cost. 26

The motion for reconsideration 27 filed by petitioners was denied by the Court of Appeals
in a Resolution 28 dated 22 July 1999.

Hence, this Petition for Certiorari.

Petitioners raise the following assignment of errors:

1. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD

THAT PETITIONERS' BREACH OF THE OBLIGATION WAS
SUBSTANTIAL.

2. THE HONORABLE COURT OF APPEALS ERRED WHEN IN EFFECT IT

HELD THAT THERE WAS NO SUBSTANTIAL COMPLIANCE WITH THE
OBLIGATION TO PAY THE MONTHLY AMORTIZATION WITH
NHMFC.

3. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED

TO CONSIDER THE OTHER FACTS AND CIRCUMSTANCES THAT
MILITATE AGAINST RESCISSION.

4. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED

TO CONSIDER THAT THE ACTION FOR RESCISSION IS SUBSIDIARY.
29

Before discussing the errors allegedly committed by the Court of Appeals, it must be
stated a priori that the latter made a misappreciation of evidence regarding the
consideration of the property in litigation when it relied solely on the Deed of Sale with
Assumption of Mortgage executed by the respondents-spouses Galang and petitioners-
spouses Cannu.

As above-quoted, the consideration for the house and lot stated in the Deed of Sale with
Assumption of Mortgage is P250,000.00, plus the assumption of the balance of the
mortgage loan with NHMFC. However, after going over the record of the case, more
particularly the Answer of respondents-spouses, the evidence shows the consideration
therefor is P120,000.00, plus the payment of the outstanding loan mortgage with
NHMFC, and of the "equity" or second mortgage with CERF Realty (Developer of the
property). 30

Nowhere in the complaint and answer of the petitioners-spouses Cannu and respondents-
spouses Galang shows that the consideration is "P250,000.00." In fact, what is clear is
that of the P120,000.00 to be paid to the latter, only P75,000.00 was paid to Adelina
Timbang, the spouses Galang's attorney-in-fact. This debunks the provision in the Deed
of Sale with Assumption of Mortgage that the amount of P250,000.00 has been received
by petitioners.SEAHID

Inasmuch as the Deed of Sale with Assumption of Mortgage failed to express the true
intent and agreement of the parties regarding its consideration, the same should not be
fully relied upon. The foregoing facts lead us to hold that the case on hand falls within
one of the recognized exceptions to the parole evidence rule. Under the Rules of Court, a
party may present evidence to modify, explain or add to the terms of the written
agreement if he puts in issue in his pleading, among others, its failure to express the true
intent and agreement of the parties thereto. 31

In the case at bar, when respondents-spouses enumerated in their Answer the terms and
conditions for the sale of the property under litigation, which is different from that stated
in the Deed of Sale with Assumption with Mortgage, they already put in issue the matter
of consideration. Since there is a difference as to what the true consideration is, this Court
has admitted evidence aliunde to explain such inconsistency. Thus, the Court has looked
into the pleadings and testimonies of the parties to thresh out the discrepancy and to
clarify the intent of the parties.

As regards the computation 32 of petitioners as to the breakdown of the P250,000.00

consideration, we find the same to be self-serving and unsupported by evidence.

On the first assigned error, petitioners argue that the Court erred when it ruled that their
breach of the obligation was substantial.

Settled is the rule that rescission or, more accurately, resolution, 33 of a party to an
obligation under Article 1191 34 is predicated on a breach of faith by the other party that
violates the reciprocity between them. 35 Article 1191 reads:
 Art. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.

The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.

Rescission will not be permitted for a slight or casual breach of the contract. Rescission
may be had only for such breaches that are substantial and fundamental as to defeat the
object of the parties in making the agreement. 36 The question of whether a breach of
contract is substantial depends upon the attending circumstances 37 and not merely on the
percentage of the amount not paid.

In the case at bar, we find petitioners' failure to pay the remaining balance of P45,000.00
to be substantial. Even assuming arguendo that only said amount was left out of the
supposed consideration of P250,000.00, or eighteen (18%) percent thereof, this
percentage is still substantial. Taken together with the fact that the last payment made
was on 28 November 1991, eighteen months before the respondent Fernandina Galang
paid the outstanding balance of the mortgage loan with NHMFC, the intention of
petitioners to renege on their obligation is utterly clear. ECSHAD

Citing Massive Construction, Inc. v. Intermediate Appellate Court, 38 petitioners ask that
they be granted additional time to complete their obligation. Under the facts of the case,
to give petitioners additional time to comply with their obligation will be putting
premium on their blatant non-compliance of their obligation. They had all the time to do
what was required of them (i.e., pay the P45,000.00 balance and to properly assume the
mortgage loan with the NHMFC), but still they failed to comply. Despite demands for
them to pay the balance, no payments were made. 39

The fact that petitioners tendered a Manager's Check to respondents-spouses Galang in

the amount of P278,957.00 seven months after the filing of this case is of no moment.
Tender of payment does not by itself produce legal payment, unless it is completed by
consignation. 40 Their failure to fulfill their obligation gave the respondents-spouses
Galang the right to rescission.

Anent the second assigned error, we find that petitioners were not religious in paying the
amortization with the NHMFC. As admitted by them, in the span of three years from
1990 to 1993, their payments covered only thirty months. 41 This, indeed, constitutes
another breach or violation of the Deed of Sale with Assumption of Mortgage. On top of
this, there was no formal assumption of the mortgage obligation with NHMFC because of
the lack of approval by the NHMFC 42 on account of petitioners' non-submission of
requirements in order to be considered as assignees/successors-in-interest over the
property covered by the mortgage obligation. 43

On the third assigned error, petitioners claim there was no clear evidence to show that
respondents-spouses Galang demanded from them a strict and/or faithful compliance of
the Deed of Sale with Assumption of Mortgage.

We do not agree.

There is sufficient evidence showing that demands were made from petitioners to comply
with their obligation. Adelina R. Timbang, attorney-in-fact of respondents-spouses, per
instruction of respondent Fernandina Galang, made constant follow-ups after the last
payment made on 28 November 1991, but petitioners did not pay. 44 Respondent
Fernandina Galang stated in her Answer 45 that upon her arrival from America in October
1992, she demanded from petitioners the complete compliance of their obligation by
paying the full amount of the consideration (P120,000.00) or in the alternative to vacate
the property in question, but still, petitioners refused to fulfill their obligations under the
Deed of Sale with Assumption of Mortgage. Sometime in March 1993, due to the fact
that full payment has not been paid and that the monthly amortizations with the NHMFC
have not been fully updated, she made her intentions clear with petitioner Leticia Cannu
that she will rescind or annul the Deed of Sale with Assumption of Mortgage.

We likewise rule that there was no waiver on the part of petitioners to demand the
rescission of the Deed of Sale with Assumption of Mortgage. The fact that respondents-
spouses accepted, through their attorney-in-fact, payments in installments does not
constitute waiver on their part to exercise their right to rescind the Deed of Sale with
Assumption of Mortgage. Adelina Timbang merely accepted the installment payments as
an accommodation to petitioners since they kept on promising they would pay. However,
after the lapse of considerable time (18 months from last payment) and the purchase price
was not yet fully paid, respondents-spouses exercised their right of rescission when they
paid the outstanding balance of the mortgage loan with NHMFC. It was only after
petitioners stopped paying that respondents-spouses moved to exercise their right of
rescission.AEaSTC

Petitioners cite the case of Angeles v. Calasanz 46 to support their claim that respondents-
spouses waived their right to rescind. We cannot apply this case since it is not on all fours
with the case before us. First, in Angeles, the breach was only slight and casual which is
not true in the case before us. Second, in Angeles, the buyer had already paid more than
the principal obligation, while in the instant case, the buyers (petitioners) did not pay
P45,000.00 of the P120,000.00 they were obligated to pay.
We find petitioners' statement that there is no evidence of prejudice or damage to justify
rescission in favor of respondents-spouses to be unfounded. The damage suffered by
respondents-spouses is the effect of petitioners' failure to fully comply with their
obligation, that is, their failure to pay the remaining P45,000.00 and to update the
amortizations on the mortgage loan with the NHMFC. Petitioners have in their
possession the property under litigation. Having parted with their house and lot,
respondents-spouses should be fully compensated for it, not only monetarily, but also as
to the terms and conditions agreed upon by the parties. This did not happen in the case
before us.

Citing Seva v. Berwin & Co., Inc., 47 petitioners argue that no rescission should be
decreed because there is no evidence on record that respondent Fernandina Galang is
ready, willing and able to comply with her own obligation to restore to them the total
payments they made. They added that no allegation to that effect is contained in
respondents-spouses' Answer.

We find this argument to be misleading.

First, the facts obtaining in Seva case do not fall squarely with the case on hand. In the
former, the failure of one party to perform his obligation was the fault of the other party,
while in the case on hand, failure on the part of petitioners to perform their obligation
was due to their own fault.

Second, what is stated in the book of Justice Edgardo L. Paras is "[i]t (referring to the
right to rescind or resolve) can be demanded only if the plaintiff is ready, willing and able
to comply with his own obligation, and the other is not." In other words, if one party has
complied or fulfilled his obligation, and the other has not, then the former can exercise
his right to rescind. In this case, respondents-spouses complied with their obligation when
they gave the possession of the property in question to petitioners. Thus, they have the
right to ask for the rescission of the Deed of Sale with Assumption of Mortgage.

On the fourth assigned error, petitioners, relying on Article 1383 of the Civil Code,
maintain that the Court of Appeals erred when it failed to consider that the action for
rescission is subsidiary.

Their reliance on Article 1383 is misplaced.

The subsidiary character of the action for rescission applies to contracts enumerated in
Article 1381 48 of the Civil Code. The contract involved in the case before us is not one
of those mentioned therein. The provision that applies in the case at bar is Article 1191.
In the concurring opinion of Justice Jose B.L. Reyes in Universal Food Corp. v. Court of
Appeals, 49 rescission under Article 1191 was distinguished from rescission under Article
1381. Justice J.B.L. Reyes said:

. . . The rescission on account of breach of stipulations is not predicated on

injury to economic interests of the party plaintiff but on the breach of faith by
the defendant, that violates the reciprocity between the parties. It is not a
subsidiary action, and Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder is subordinated to anything
other than the culpable breach of his obligations by the defendant. This
rescission is a principal action retaliatory in character, it being unjust that a
party be held bound to fulfill his promises when the other violates his. As
expressed in the old Latin aphorism: "Non servanti fidem, non est fides
servanda." Hence, the reparation of damages for the breach is purely secondary.
ScAIaT

On the contrary, in the rescission by reason of lesion or economic prejudice, the

cause of action is subordinated to the existence of that prejudice, because it is
the raison d tre as well as the measure of the right to rescind. Hence, where the
defendant makes good the damages caused, the action cannot be maintained or
continued, as expressly provided in Articles 1383 and 1384. But the operation
of these two articles is limited to the cases of rescission for lesion enumerated in
Article 1381 of the Civil Code of the Philippines, and does not apply to cases
under Article 1191.

From the foregoing, it is clear that rescission ("resolution" in the Old Civil Code) under
Article 1191 is a principal action, while rescission under Article 1383 is a subsidiary
action. The former is based on breach by the other party that violates the reciprocity
between the parties, while the latter is not.

In the case at bar, the reciprocity between the parties was violated when petitioners failed
to fully pay the balance of P45,000.00 to respondents-spouses and their failure to update
their amortizations with the NHMFC.

Petitioners maintain that inasmuch as respondents-spouses Galang were not granted the
right to unilaterally rescind the sale under the Deed of Sale with Assumption of
Mortgage, they should have first asked the court for the rescission thereof before they
fully paid the outstanding balance of the mortgage loan with the NHMFC. They claim
that such payment is a unilateral act of rescission which violates existing jurisprudence.

In Tan v. Court of Appeals, 50 this court said:

. . . [T]he power to rescind obligations is implied in reciprocal ones in case one

of the obligors should not comply with what is incumbent upon him is clear
from a reading of the Civil Code provisions. However, it is equally settled that,
in the absence of a stipulation to the contrary, this power must be invoked
 judicially; it cannot be exercised solely on a party's own judgment that the other
has committed a breach of the obligation. Where there is nothing in the contract
empowering the petitioner to rescind it without resort to the courts, the
petitioner's action in unilaterally terminating the contract in this case is
unjustified.

It is evident that the contract under consideration does not contain a provision authorizing
its extrajudicial rescission in case one of the parties fails to comply with what is
incumbent upon him. This being the case, respondents-spouses should have asked for
judicial intervention to obtain a judicial declaration of rescission. Be that as it may, and
considering that respondents-spouses' Answer (with affirmative defenses) with
Counterclaim seeks for the rescission of the Deed of Sale with Assumption of Mortgage,
it behooves the court to settle the matter once and for all than to have the case re-litigated
again on an issue already heard on the merits and which this court has already taken
cognizance of. Having found that petitioners seriously breached the contract, we,
therefore, declare the same is rescinded in favor of respondents-spouses. aCSDIc

As a consequence of the rescission or, more accurately, resolution of the Deed of Sale
with Assumption of Mortgage, it is the duty of the court to require the parties to surrender
whatever they may have received from the other. The parties should be restored to their
original situation. 51

The record shows petitioners paid respondents-spouses the amount of P75,000.00 out of
the P120,000.00 agreed upon. They also made payments to NHMFC amounting to
P55,312.47. As to the petitioners' alleged payment to CERF Realty of P46,616.70, except
for petitioner Leticia Cannu's bare allegation, we find the same not to be supported by
competent evidence. As a general rule, one who pleads payment has the burden of
proving it. 52 However, since it has been admitted in respondents-spouses' Answer that
petitioners shall assume the second mortgage with CERF Realty in the amount of
P35,000.00, and that Adelina Timbang, respondents-spouses' very own witness, testified
53 that same has been paid, it is but proper to return this amount to petitioners. The three
amounts total P165,312.47 the sum to be returned to petitioners.

WHEREFORE, premises considered, the decision of the Court of Appeals is hereby

AFFIRMED with MODIFICATION. Spouses Gil and Fernandina Galang are hereby
ordered to return the partial payments made by petitioners in the amount of P165,312.47.
With costs.

SO ORDERED.

Puno, Austria-Martinez and Callejo, Sr., JJ., concur.

Tinga, J., is out of the country.

 (Spouses Cannu v. Spouses Galang, G.R. No. 139523, [May 26, 2005], 498 PHIL 128-
|||

147)
 THIRD DIVISION

[G.R. No. 133803. September 16, 2005.]

BIENVENIDO M. CASIO, JR., petitioner, vs. THE COURT OF

APPEALS and OCTAGON REALTY DEVELOPMENT
CORPORATION, respondents.

George L. Howard for petitioner.

Angelica Y. Santiago for respondents.

SYLLABUS

1.REMEDIAL LAW; EVIDENCE; FACTUAL FINDINGS OF THE COURT OF

APPEALS, PARTICULARLY WHEN AFFIRMATORY OF THOSE OF THE TRIAL
COURT, ARE BINDING; EXCEPTIONS; CASE AT BAR. Indeed, there can be
denying of petitioner's breach of his contractual obligation, more so when, as here, the two
courts below were one in holding so. This brings to mind the settled rule of jurisprudence
that factual findings of the Court of Appeals, particularly when affirmatory of those of the
trial court, are binding upon this Court. Unless the evidence on record clearly do not
support such findings or that the same were arrived at based on a patent misunderstanding
of facts, situations which do not obtain in this case, this Court is not at liberty to disturb
what has been found below and supplant them with its own.

2.ID.; CIVIL PROCEDURE; APPEALS; PETITIONS FOR REVIEW ON CERTIORARI;

ONLY QUESTIONS OF LAW MAY BE RAISED THEREIN. This is, as it should be.
For, in petitions for review on certiorari as a mode of appeal under Rule 45, only questions
of law may be raised. This Court is not the proper venue to consider factual issues as it is
not a trier of facts.

3.CIVIL LAW; OBLIGATIONS AND CONTRACTS; OBLIGATIONS; RECIPROCAL

OBLIGATIONS; RIGHT TO RESCIND IS IMPLIED SUCH THAT ABSENT ANY
PROVISION PROVIDING FOR A RIGHT TO RESCIND, THE PARTIES MAY
NEVERTHELESS RESCIND THE CONTRACT SHOULD THE OTHER OBLIGOR
FAIL TO COMPLY WITH ITS OBLIGATIONS. With the reality that petitioner has
failed to comply with his prestations under his contract with respondent, the latter is vested
by law with the right to rescind the parties' agreement, conformably with Article 1191 of
the Civil Code, which partly reads: . . . . Explicit it is from the foregoing that "in reciprocal
obligations," or those which arise from the same cause, and in which each party is a debtor
and a creditor of the other, in the sense that the obligation of one is dependent upon the
obligation of the other, the right to rescind is implied such that "absent any provision
providing for a right to rescind, the parties may nevertheless rescind the contract should
the other obligor fail to comply with its obligations."

4.ID.; ID.; ID.; ID.; ID.; RIGHT TO RESCIND PERMITTED ONLY FOR
SUBSTANTIAL AND FUNDAMENTAL VIOLATIONS; CASE AT BAR. It must be
stressed, though, that the right to rescind a contract for non-performance of its stipulations
is not absolute. The general rule is that rescission of a contract will not be permitted for a
slight or casual breach, but only for such substantial and fundamental violations as would
defeat the very object of the parties in making the agreement. Here, contrary to petitioner's
asseveration, the breach he committed cannot, by any measure, be considered as "slight or
casual." For sure, petitioner's failure to make complete delivery and installation way
beyond the time stipulated despite respondent's demands, is doubtless a substantial and
fundamental breach, more so when viewed in the light of the large amount of money
respondent had to pay another contractor to complete petitioner's unfinished work.

5.ID.; ID.; ID.; ID.; ID.; THE PARTY WHO DEEMS THE CONTRACT VIOLATED
MAY CONSIDER IT RESOLVED OR RESCINDED WITHOUT PRIOR NEED OF
RESORTING TO JUDICIAL ACTION. Likewise, contrary to petitioner's claim, it
cannot be said that he had no inkling whatsoever of respondent's recourse to rescission.
True, "the act of a party in treating a contract as cancelled or resolved on account of
infractions by the other party must be made known to the other". In this case, however,
petitioner cannot feign ignorance of respondent's intention to rescind, fully aware, as he
was, of his non-compliance with what was incumbent upon him, not to mention the several
letters respondent sent to him demanding compliance with his obligation. In fine, we thus
rule and so hold that respondent acted well within its rights in unilaterally terminating its
contract with petitioner and in entering into a new one with a third person in order to
minimize its losses, without prior need of resorting to judicial action. As we once said in
University of the Philippines v. De los Angeles, involving the question of whether the
injured party may consider the contract as rescinded even before any judicial
pronouncement has been made to that effect: . . . the party who deems the contract violated
may consider it resolved or rescinded, and act accordingly, without previous court action,
but it proceeds at its own risk. For it is only the final judgment of the corresponding court
that will conclusively and finally settle whether the action taken was or was not correct in
law. But the law definitely does not require that the contracting party who believes itself
injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to passively
sit and watch its damages accumulate during the pendency of the suit until the final
judgment of rescission is rendered when the law itself requires that he should exercise due
diligence to minimize its own damages. . . . We see no conflict between this ruling and the
previous jurisprudence of this Court invoked by respondent declaring that judicial action
is necessary for the resolution of a reciprocal obligation; (Ocejo, Perez & Co. v.
International Banking Corp., 37 Phil. 631; Republic v. Hospital de San Juan de Dios, et al.,
84 Phil. 820) since in every case where the extrajudicial resolution is contested only the
final award of the court of competent jurisdiction can conclusively settle whether the
resolution was proper or not. It is in this sense that judicial action will be necessary, as
without it, the extrajudicial resolution will remain contestable and subject to judicial
invalidation, unless attack thereon should become barred by acquiescence, estoppel or
prescription.

6.ID.; DAMAGES; ACTUAL OR COMPENSATORY DAMAGES; AWARDED IN

SATISFACTION OF OR IN RECOMPENSE FOR LOSS OR INJURY SUSTAINED;
KINDS. Under Articles 2199 and 2200 of the Civil Code, actual or compensatory
damages are those awarded in satisfaction of or in recompense for loss or injury sustained.
They proceed from a sense of natural justice and are designed to repair the wrong that has
been done. Citing Producers Bank of the Philippines vs. CA, this Court, in the subsequent
case of Terminal Facilities and Services Corporation vs. Philippine Ports Authority ruled:
There are two kinds of actual or compensatory damages: one is the loss of what a person
already possesses, and the other is the failure to receive as a benefit that which would have
pertained to him. . . . In the latter instance, the familiar rule is that damages consisting of
unrealized profits, frequently referred as 'ganacias frustradas' or 'lucrum cessans,' are not
to be granted on the basis of mere speculation, conjecture, or surmise, but rather by
reference to some reasonably definite standard such as market value, established
experience, or direct inference from known circumstances.

7.ID.; ID.; ID.; UNREALIZED PROFITS; ABSOLUTE CERTAINTY, IS NOT

NECESSARY TO ESTABLISH THE AMOUNT OF "GANACIAS FRUSTRADAS" OR
"LUCRUM CESSANS" WHEN THE EXISTENCE OF A LOSS IS ESTABLISHED.
Absolute certainty, however, is not necessary to establish the amount of "ganacias
frustradas" or "lucrum cessans." As we have said in Producers Bank of the Philippines,
supra: When the existence of a loss is established, absolute certainty as to its amount is not
required. The benefit to be derived from a contract which one of the parties has absolutely
failed to perform is of necessity to some extent, a matter of speculation, but the injured
party is not to be denied for this reason alone. He must produce the best evidence of which
his case is susceptible and if that evidence warrants the inference that he has been damaged
by the loss of profits which he might with reasonable certainty have anticipated but for the
defendant's wrongful act, he is entitled to recover. Gauged by the aforequoted test, the
evidence adduced by respondent is sufficient enough to substantiate its claim for actual or
compensatory damages in the amount of P2,111,061.69.

8.ID.; ID.; ATTORNEYS FEES; AWARD THEREOF WARRANTED IN CASE AT

BAR. Finally, on the matter of attorney's fees, respondent's entitlement thereto is beyond
cavil, what with the fact that respondent was compelled to litigate and incurred expenses
relative thereto by reason of petitioner's breach of his contractual obligations.
 DECISION

GARCIA, J : p

Via this petition for review on certiorari under Rule 45 of the 1997 Rules of Court,
petitioner Bienvenido M. Casio, Jr. seeks the annulment and setting aside of the following
issuances of the Court of Appeals (CA) in C.A. G.R. CV No. 47702, to wit:

1.Decision dated January 21, 1997, 1 affirming an earlier decision of the

Regional Trial Court at Pasig which upheld private respondent's
rescission of its contract with petitioner; and

2.Resolution dated May 20, 1998, 2 denying petitioner's motion for

reconsideration.

On October 2, 1991 in the Regional Trial Court at Pasig City, respondent Octagon Realty
Development Corporation, a corporation duly organized and existing under Philippine
laws, filed a complaint for rescission of contract with damages against petitioner
Bienvenido M. Casio, Jr., owner and proprietor of the Casio Wood Parquet and Sanding
Services, relative to the parties' agreement for the supply and installation by petitioner of
narra wood parquet ordered by respondent.

As recited by the Court of Appeals in the decision under review, the parties' principal
pleadings in the Regional Trial Court disclose the following:

In its complaint, [respondent] alleges that on December 22, 1989, it entered into
a contract with [petitioner] for the supply and installation by the latter of narra
wood parquet (kiln dried) to the Manila Luxury Condominium Project, of which
[respondent] is the developer, covering a total area of 60,973 sq. ft. for a total
price of P1,158,487.00; that the contract stipulated that full delivery by
[petitioner] of labor and materials was in May 1990; that in accordance with the
terms of payment in the contract, [respondent] paid to [petitioner] the amount
P463,394.50, representing 40% of the total contract price; that after delivering
only 26,727.02 sq. ft. of wood parquet materials, [petitioner] incurred in delay in
the delivery of the remainder of 34,245.98 sq. ft.; that [petitioner] misrepresented
to [respondent] that he is qualified to do the work contracted when in truth and in
fact he was not and, furthermore, he lacked the necessary funds to execute the
work as he was totally dependent on the funds advanced to him by [respondent];
that due to [petitioner's] unlawful and malicious refusal to comply with its
obligations, [respondent] incurred actual damages in the amount of P912,452.39
representing estimated loss on the new price, unliquidated damages and cost of
money; that in order to minimize losses, the [respondent] contracted the services
of Hilvano Quality Parquet and Sanding Services to complete the [petitioner's]
unfinished work, [respondent] thereby agreeing to pay the latter P1,198,609.30.

The [respondent] in its complaint prays for rescission of contract, actual damages
of P912,452.39, reimbursement in the amount of P1,198,609.30, moral damages
of P200,000.00, and attorney's fees of P50,000.00 plus a fee of P1,000.00 per
appearance and other expenses of the suit.

In his answer to the complaint, the [petitioner] admits the execution of the
December 22, 1989 contract with the [respondent], the terms thereof relating to
total price and scope of work, as well as the payment by the [respondent] of the
40% downpayment. He, however, avers that the manner of payment, period of
delivery and completion of work and/or full delivery of labor and materials were
modified; that the delivery and completion of the work could not be done upon
the request and/or representations by the [respondent] because he failed to make
available and/or to prepare the area in a suitable manner for the work contracted,
preventing the [petitioner] from complying with the delivery schedule under the
contract; that [petitioner] delivered the required materials and performed the work
despite these constraints; that the [petitioner] delivered a total of 29,209.82 sq. ft.
of wood parquet; that the [respondent] failed to provide for a safe and secure area
for the materials and work in process or worked performed, thus exposing them
to the elements and destroying the materials and/or work; that the [respondent]
failed to pay the [petitioner's] second and third billings for deliveries and work
performed in the sum of P105,425.68, which amount the [petitioner] demanded
from the [respondent] with the warning of suspension of deliveries or rescission
for contract for non-payment; that the [petitioner] was fully qualified and had the
experience of at least nine years to perform the work; and that it was the
[respondent], after failing to prepare the area suitable for the delivery and
installation of the wood parquet, [respondent] . . . who advised or issued orders
to the [petitioner] to suspend the delivery and installation of the wood parquet,
which created a storage problem for the [petitioner].

Set up by the [petitioner] as special and affirmative defenses, are that the filing of
the case is premature; that the [respondent] has no cause of action; that the
obligation has been waived/extinguished; that the [respondent's] failure to accept
deliveries compelled the [petitioner] to store the materials in his warehouse/s and
to use valuable space in his premises, which he could have utilized for the storage
of materials for other customers, and also prevented him from accepting new
orders from other customer causing him actual and potential losses of income;
that the [respondent's] extrajudicial rescission of contract is void since there is no
breach or violation thereof by the [petitioner]; and that it was [respondent] which
violated the terms/conditions of the contract, entitling [petitioner] to have the
same judicially rescinded.
 The [petitioner] pleaded counterclaims of rescission of contract and payment by
the [respondent] of P597,392.90 with legal interest from the filing of the
complaint until fully paid or, in the alternative payment of the cost of the billings
in the sum of P105,425.68 plus legal interest; actual and compensatory damages
of P600,000.00 and P30,000.00, respectively; moral damages of P100,000.00,
attorney's fees of P40,000.00; and litigation expenses and costs of the suit. 3
(Words in bracket ours).

In a decision dated June 2, 1994, the trial court, upon a finding that petitioner is the one
who breached the parties' agreement, rendered judgment for respondent, to wit:

WHEREFORE, based on the foregoing, this Court finds and so holds that the
rescission of contract effected by [respondent] is valid, and [petitioner]t is
thereby ordered to pay the[respondent] the following:

1.P2,111,061.69 by way of actual and compensatory damages; and,

2.P50,000.00, as attorney's fees.

No pronouncement as to cost.

SO ORDERED. 4

Explains the trial court in its decision:

. . . [T]he contract clearly and categorically stipulates that full delivery by

[petitioner] of labor and materials was to be in May 1990. However, as of January
30, 1991, no deliveries have been made by [petitioner] necessitating the sending
by [respondent] of a demand letter . . . . Thereafter, while [petitioner] started
mobilization, the workers assigned were insufficient resulting in the very slow
progress of the works for which reason Engr. Alcain sent a letter to [petitioner]
instructing [petitioner] to make 'full-blast delivery' of the materials. This,
incidentally, effectively negates [petitioner's] contention that [respondent] had
requested for the suspension of deliveries.

xxx xxx xxx

Finally, it was established that out of the total 60,973 sq. ft. of wood parquet,
[petitioner] was able to deliver only 26,727.02 sq. ft.. In this connection
[petitioner] denied this and insisted that he was actually able to deliver 29,109.82
sq. ft. Whichever of the two figures is correct, the fact remains that [petitioner]
was unable to deliver the full quantity contracted by [respondent]. For purposes
of the record, however, this Court believes the figure given by [respondent],
which is supported by [petitioner's] own statements of account where the total
amount of deliveries jibes with [respondent's] alleged figure.
 On the basis of the foregoing findings, this Court hereby finds that [respondent]
has established its right to rescind the contract dated December 22, 1989, on the
strength of Art. 1191 of the Civil Code.

In this case, [respondent], after [petitioner's] breach of his contractual obligations,

considered the contract as rescinded and proceeded to contract with Hilvano
Quality Parquet & Sanding Services, in order to minimize losses in view of the
delay in the completion schedule of its condominium project. 5 (Words in bracket
ours).

On petitioner's appeal to the Court of Appeals in CA-G.R. CV No. 47702, the appellate
court, in the herein assailed Decision 6 dated January 21, 1997, affirmed that of the trial
court but modified the same by reducing the amount of damages awarded, thus:

WHEREFORE, the decision appealed from is AFFIRMED with the

MODIFICATION that the [petitioner] be made to pay the [respondent] as actual
and compensatory damages, the amount of P1,662,003.80, with interest thereon
at the legal rate from the finality of this judgment until fully paid.

SO ORDERED. (Words in bracket ours).

In time, petitioner and respondent filed their respective Motion for Reconsideration and
Motion for Partial Reconsideration. In its Resolution dated May 20, 1998, 7 the appellate
court denied petitioner's motion for lack of merit but found that of respondent as well-
grounded. Accordingly, and noting that "the amount of P97,699.67 . . . had already been
factored in, in the computation of the amount of P912,452.39, under the decision of the
court a quo", the Court of Appeals amended its original Decision by affirming in toto the
decision of the trial court, as follows:

WHEREFORE, [petitioner's] appeal is dismissed. The Decision appealed from is

AFFIRMED IN TOTO. With costs against the [petitioner]. SO ORDERED.
(Words in bracket ours).

Undaunted, petitioner is now with us via the present recourse on his submissions that:

A.THE SUBJECT DECISION DECLARING THE RESCISSION OF THE

QUESTIONED CONTRACT BY PRIVATE RESPONDENT AS
VALID AND HOLDING THE PETITIONER LIABLE FOR BREACH
OF CONTRACT IS CONTRARY TO OR IN VIOLATION OF ART.
1191, NEW CIVIL CODE;

B.THE AWARD TO PRIVATE RESPONDENT OF ACTUAL AND

COMPENSATORY DAMAGES OF P1,662,003.80 WITH LEGAL
 INTEREST WAS NOT LEGALLY JUSTIFIED, OR PROVEN WITH
REASONABLE DEGREE OF CERTAINTY; and

C.THE SAME WAS ISSUED WITH GRAVE ABUSE OF DISCRETION

AMOUNTING TO LACK OF OR IN EXCESS OF JURISDICTION,
AND/OR CONTRARY TO THE FACTS, EVIDENCE,
JURISPRUDENCE AND LAW. 8

The petition lacks merit.

It is undisputed that under their contract, petitioner and respondent had respective
obligations, i.e., the former to supply and deliver the contracted volume of narra wood
parquet materials and install the same at respondent's condominium project by May, 1990,
and the latter, to pay for said materials in accordance with the terms of payment set out
under the parties' agreement. But while respondent was able to fulfill that which is
incumbent upon it by making a downpayment representing 40% of the agreed price upon
the signing of the contract and even paid the first billing of petitioner, 9 the latter failed to
comply with his contractual commitment. For, after delivering only less than one-half of
the contracted materials, petitioner failed, by the end of the agreed period, to deliver and
install the remainder despite demands for him to do so. Doubtless, it is petitioner who
breached the contract.

Petitioner asserts that while he was ready to comply with his obligation to deliver and
install the remaining wood parquet, yet respondent was not ready to accept deliveries due
to the unsuitability of the work premises for the installation of the materials. Petitioner's
contention flies in the light of the following observations of the appellate court, to which
we are in full accord:

. . . no sufficient proof was presented by the [petitioner] to substantiate his

allegation. On the other hand, the [respondent] was able to prove by substantial
evidence that as of May, 1990, the time when the [petitioner] was supposed to
make complete delivery 'there was already available in the condominium building
any space from the basement to the fourteenth floor', and the [petitioner] could
have chosen from any of those. (Words in bracket ours).

Indeed, there can be no denying of petitioner's breach of his contractual obligation, more
so when, as here, the two courts below were one in holding so. This brings to mind the
settled rule of jurisprudence that factual findings of the Court of Appeals, particularly when
affirmatory of those of the trial court, are binding upon this Court. 10 Unless the evidence
on record clearly do not support such findings or that the same were arrived at based on a
patent misunderstanding of facts, 11 situations which do not obtain in this case, this Court
is not at liberty to disturb what has been found below and supplant them with its own.
This is, as it should be. For, in petitions for review on certiorari as a mode of appeal under
Rule 45, only questions of law 12 may be raised. This Court is not the proper venue to
consider factual issues as it is not a trier of facts. 13

With the reality that petitioner has failed to comply with his prestations under his contract
with respondent, the latter is vested by law with the right to rescind the parties' agreement,
conformably with Article 1191 of the Civil Code, which partly reads:

Art. 1191.The power to rescind obligations is implied in reciprocal ones, in case

one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission even after he has chosen fulfillment, if the latter should become
impossible.

xxx xxx xxx

Explicit it is from the foregoing that "in reciprocal obligations", or those which arise from
the same cause, and in which each party is a debtor and a creditor of the other, in the sense
that the obligation of one is dependent upon the obligation of the other, 14 the right to
rescind is implied such that "absent any provision providing for a right to rescind, the
parties may nevertheless rescind the contract should the other obligor fail to comply with
its obligations". 15

It must be stressed, though, that the right to rescind a contract for non-performance of its
stipulations is not absolute. The general rule is that rescission of a contract will not be
permitted for a slight or casual breach, but only for such substantial and fundamental
violations as would defeat the very object of the parties in making the agreement. 16

Here, contrary to petitioner's asseveration, the breach he committed cannot, by any

measure, be considered as "slight or casual". For sure, petitioner's failure to make complete
delivery and installation way beyond the time stipulated despite respondent's demands, is
doubtless a substantial and fundamental breach, more so when viewed in the light of the
large amount of money respondent had to pay another contractor to complete petitioner's
unfinished work. Again, to quote from the challenged decision of the appellate court: DAaIEc

The [petitioner] also asserts that the breach was merely casual that does not
warrant a rescission. While apparently, the [petitioner] agreed to complete
delivery and installation of the narra wood parquet to the [respondent's]
condominium project by May, 1990, yet on three occasions the [respondent's]
counsel sent letters demanding compliance with the [petitioner's] obligation. At
that time, only 26,727.02 sq. ft. of parquet out of a total of 60,973 sq. ft., or less
than one half of the contracted volume, had been delivered. Hence, the
[respondent] was finally forced to contract the services of another company and
 had to pay the sum of P1,198,609.30 for the completion of the unfinished work.
The large cost of completion of the [petitioner's] unfinished work can only
evidence the gravity of the [petitioner's] failure to comply with the terms of the
contract. 17 (Words in bracket ours).

Likewise, contrary to petitioner's claim, it cannot be said that he had no inkling whatsoever
of respondent's recourse to rescission. True, "the act of a party in treating a contract as
cancelled or resolved on account of infractions by the other party must be made known to
the other". 18 In this case, however, petitioner cannot feign ignorance of respondent's
intention to rescind, fully aware, as he was, of his non-compliance with what was
incumbent upon him, not to mention the several letters 19 respondent sent to him
demanding compliance with his obligation.

In fine, we thus rule and so hold that respondent acted well within its rights in unilaterally
terminating its contract with petitioner and in entering into a new one with a third person
in order to minimize its losses, without prior need of resorting to judicial action. As we
once said in University of the Philippines v. De los Angeles, 20 involving the question of
whether the injured party may consider the contract as rescinded even before any judicial
pronouncement has been made to that effect:

. . . the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at
its own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in
law. But the law definitely does not require that the contracting party who
believes itself injured must first file suit and wait for a judgment before taking
extrajudicial steps to protect its interest. Otherwise, the party injured by the
other's breach will have to passively sit and watch its damages accumulate during
the pendency of the suit until the final judgment of rescission is rendered when
the law itself requires that he should exercise due diligence to minimize its own
damages . . . .

We see no conflict between this ruling and the previous jurisprudence of this
Court invoked by respondent declaring that judicial action is necessary for the
resolution of a reciprocal obligation; (Ocejo, Perez & Co. v. International
Banking Corp., 37 Phil. 631; Republic v. Hospital de San Juan de Dios, et al., 84
Phil. 820) since in every case where the extrajudicial resolution is contested only
the final award of the court of competent jurisdiction can conclusively settle
whether the resolution was proper or not. It is in this sense that judicial action
will be necessary, as without it, the extrajudicial resolution will remain
contestable and subject to judicial invalidation, unless attack thereon should
become barred by acquiescence, estoppel or prescription.

This brings us to the propriety of the award for actual or compensatory damages, attorney's
fees and litigation expenses.
Under Articles 2199 and 2200 of the Civil Code, 21 actual or compensatory damages are
those awarded in satisfaction of or in recompense for loss or injury sustained. They proceed
from a sense of natural justice and are designed to repair the wrong that has been done.

Citing Producers Bank of the Philippines vs. CA, 22 this Court, in the subsequent case of
Terminal Facilities and Services Corporation vs. Philippine Ports Authority 23 ruled:

There are two kinds of actual or compensatory damages: one is the loss of what
a person already possesses, and the other is the failure to receive as a benefit that
which would have pertained to him . . . . In the latter instance, the familiar rule is
that damages consisting of unrealized profits, frequently referred as 'ganacias
frustradas' or 'lucrum cessans,' are not to be granted on the basis of mere
speculation, conjecture, or surmise, but rather by reference to some reasonably
definite standard such as market value, established experience, or direct inference
from known circumstances.

Absolute certainty, however, is not necessary to establish the amount of "ganacias

frustradas" or "lucrum cessans". As we have said in Producers Bank of the Philippines,
supra:

When the existence of a loss is established, absolute certainty as to its amount is

not required. The benefit to be derived from a contract which one of the parties
has absolutely failed to perform is of necessity to some extent, a matter of
speculation, but the injured party is not to be denied for this reason alone. He
must produce the best evidence of which his case is susceptible and if that
evidence warrants the inference that he has been damaged by the loss of profits
which he might with reasonable certainty have anticipated but for the defendant's
wrongful act, he is entitled to recover.

Gauged by the aforequoted test, the evidence adduced by respondent is sufficient enough
to substantiate its claim for actual or compensatory damages in the amount of
P2,111,061.69. As found by the trial court and affirmed by the Court of Appeals:

Clearly, [respondent] must be indemnified for the following damages it sustained

by reason of [petitioner's] breach of contract. Finding [respondent's] claim
justified, this court awards the following: P912,452.39, representing
[respondent's] estimated losses on new price, unliquidated damages and cost of
money, as substantiated by Exhibit 'Q'; and P1,198,609.30, representing the cost
incurred by [respondent] in engaging the services of Hilvano Quality Parquet and
Sanding Services for the completion of the work unfinished by [petitioner]
(Exhibit 'C-4', par. 24) . . . . 24 (Words in bracket ours).
Finally, on the matter of attorney's fees, respondent's entitlement thereto is beyond cavil,
what with the fact that respondent was compelled to litigate and incurred expenses relative
thereto by reason of petitioner's breach of his contractual obligations.

WHEREFORE, the instant petition is DENIED and the assailed Decision and Resolution
of the appellate court AFFIRMED.

Costs against petitioner. AcTDaH

SO ORDERED.

Panganiban, Sandoval-Gutierrez, Corona and Carpio Morales, JJ., concur.

(Casio Jr. v. Court of Appeals, G.R. No. 133803, [September 16, 2005], 507 PHIL 59-
|||

74)
 THIRD DIVISION

[G.R. No. 157480. May 6, 2005.]

PRYCE CORPORATION (formerly PRYCE PROPERTIES

CORPORATION), petitioner, vs. PHILIPPINE AMUSEMENT AND
GAMING CORPORATION, respondent.

DECISION

PANGANIBAN, J : p

In legal contemplation, the termination of a contract is not equivalent to its rescission.

When an agreement is terminated, it is deemed valid at inception. Prior to termination, the
contract binds the parties, who are thus obliged to observe its provisions. However, when
it is rescinded, it is deemed inexistent, and the parties are returned to their status quo ante.
Hence, there is mutual restitution of benefits received. The consequences of termination
may be anticipated and provided for by the contract. As long as the terms of the contract
are not contrary to law, morals, good customs, public order or public policy, they shall be
respected by courts. The judiciary is not authorized to make or modify contracts; neither
may it rescue parties from disadvantageous stipulations. Courts, however, are empowered
to reduce iniquitous or unconscionable liquidated damages, indemnities and penalties
agreed upon by the parties.

The Case

Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, assailing the May
22, 2002 Decision 2 of the Court of Appeals (CA) in CA-GR CV No. 51629 and its March
4, 2003 Resolution 3 denying petitioner's Motion for Reconsideration. The assailed
Decision disposed thus:

"WHEREFORE, in view of the foregoing, judgment is hereby rendered as

follows: (1) In Civil Case No. 93-68266, the appealed decision[,] is AFFIRMED
with MODIFICATION[,] ordering [Respondent] Philippine Amusement and
Gaming Corporation to pay [Petitioner] Pryce Properties Corporation the total
amount of P687,289.50 as actual damages representing the accrued rentals for the
quarter September to November 1993 with interest and penalty at the rate of two
percent (2%) per month from date of filing of the complaint until the amount shall
have been fully paid, and the sum of P50,000.00 as attorney's fees; (2) In Civil
Case No. 93-68337, the appealed decision is REVERSED and SET ASIDE and a
new judgment is rendered ordering [Petitioner] Pryce Properties Corporation to
 reimburse [Respondent] Philippine Amusement and Gaming Corporation the
amount of P687,289.50 representing the advanced rental deposits, which amount
may be compensated by [Petitioner] Pryce Properties Corporation with its award
in Civil Case No. 93-68266 in the equal amount of P687,289.50." 4

The Facts

According to the CA, the facts are as follows:

"Sometime in the first half of 1992, representatives from Pryce Properties

Corporation (PPC for brevity) made representations with the Philippine
Amusement and Gaming Corporation (PAGCOR) on the possibility of setting up
a casino in Pryce Plaza Hotel in Cagayan de Oro City. [A] series of negotiations
followed. PAGCOR representatives went to Cagayan de Oro City to determine
the pulse of the people whether the presence of a casino would be welcomed by
the residents. Some local government officials showed keen interest in the casino
operation and expressed the view that possible problems were surmountable.
Their negotiations culminated with PPC's counter-letter proposal dated October
14, 1992.

"On November 11, 1992, the parties executed a Contract of Lease . . . involving
the ballroom of the Hotel for a period of three (3) years starting December 1, 1992
and until November 30, 1995. On November 13, 1992, they executed an
addendum to the contract . . . which included a lease of an additional 1000 square
meters of the hotel grounds as living quarters and playground of the casino
personnel. PAGCOR advertised the start of their casino operations on December
18, 1992.

"Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City passed
Resolution No. 2295 . . . dated November 19, 1990 declaring as a matter of policy
to prohibit and/or not to allow the establishment of a gambling casino in Cagayan
de Oro City. Resolution No. 2673 . . . dated October 19, 1992 (or a month before
the contract of lease was executed) was subsequently passed reiterating with vigor
and vehemence the policy of the City under Resolution No. 2295, series of 1990,
banning casinos in Cagayan de Oro City. On December 7, 1992, the Sangguniang
Panlungsod of Cagayan de Oro City enacted Ordinance No. 3353 . . . prohibiting
the issuance of business permits and canceling existing business permits to any
establishment for using, or allowing to be used, its premises or any portion thereof
for the operation of a casino.HIDCTA

"In the afternoon of December 18, 1992 and just hours before the actual formal
opening of casino operations, a public rally in front of the hotel was staged by
some local officials, residents and religious leaders. Barricades were placed
[which] prevented some casino personnel and hotel guests from entering and
exiting from the Hotel. PAGCOR was constrained to suspend casino operations
because of the rally. An agreement between PPC and PAGCOR, on one hand,
and representatives of the rallyists, on the other, eventually ended the rally on the
20th of December, 1992.

"On January 4, 1993, Ordinance No. 3375-93 . . . was passed by the Sangguniang
Panlungsod of Cagayan de Oro City, prohibiting the operation of casinos and
providing for penalty for violation thereof. On January 7, 1993, PPC filed a
Petition for Prohibition with Preliminary Injunction . . . against then public
respondent Cagayan de Oro City and/or Mayor Pablo P. Magtajas . . . before the
Court of Appeals, docketed as CA G.R. SP No. 29851 praying inter alia, for the
declaration of unconstitutionality of Ordinance No. 3353. PAGCOR intervened
in said petition and further assailed Ordinance No. 4475-93 as being violative of
the non-impairment of contracts and equal protection clauses. On March 31,
1993, the Court of Appeals promulgated its decision . . ., the dispositive portion
of which reads:

'IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and

Ordinance No. 3375-93 are hereby DECLARED
UNCONSTITUTIONAL and VOID and the respondents and all other
persons acting under their authority and in their behalf are
PERMANENTLY ENJOINED from enforcing those ordinances.

'SO ORDERED.'

"Aggrieved by the decision, then public respondents Cagayan de Oro City, et al.
elevated the case to the Supreme Court in G.R. No. 111097, where, in an En Banc
Decision dated July 20, 1994 . . ., the Supreme Court denied the petition and
affirmed the decision of the Court of Appeals.

"In the meantime, PAGCOR resumed casino operations on July 15, 1993, against
which, however, another public rally was held. Casino operations continued for
some time, but were later on indefinitely suspended due to the incessant
demonstrations. Per verbal advice . . . from the Office of the President of the
Philippines, PAGCOR decided to stop its casino operations in Cagayan de Oro
City. PAGCOR stopped its casino operations in the hotel prior to September,
1993. In two Statements of Account dated September 1, 1993 . . ., PPC apprised
PAGCOR of its outstanding account for the quarter September 1 to November
30, 1993. PPC sent PAGCOR another Letter dated September 3, 1993 . . . as a
follow-up to the parties' earlier conference. PPC sent PAGCOR another Letter
dated September 15, 1993 . . . stating its Board of Directors' decision to collect
the full rentals in case of pre-termination of the lease.

"PAGCOR sent PPC a letter dated September 20, 1993 . . . [stating] that it was
not amenable to the payment of the full rentals citing as reasons unforeseen legal
and other circumstances which prevented it from complying with its obligations.
PAGCOR further stated that it had no other alternative but to pre-terminate the
lease agreement due to the relentless and vehement opposition to their casino
 operations. In a letter dated October 12, 1993 . . ., PAGCOR asked PPC to refund
the total of P1,437,582.25 representing the reimbursable rental deposits and
expenses for the permanent improvement of the Hotel's parking lot. In a letter
dated November 5, 1993 . . ., PAGCOR formally demanded from PPC the
payment of its claim for reimbursement.

"On November 15, 1993 . . ., PPC filed a case for sum of money in the Regional
Trial Court of Manila docketed as Civil Case No. 93-68266. On November 19,
1993, PAGCOR also filed a case for sum of money in the Regional Trial Court
of Manila docketed as Civil Case No. 93-68337.

"In a letter dated November 25, 1993, PPC informed PAGCOR that it was
terminating the contract of lease due to PAGCOR's continuing breach of the
contract and further stated that it was exercising its rights under the contract of
lease pursuant to Article 20 (a) and (c) thereof.

"On February 2, 1994, PPC filed a supplemental complaint . . . in Civil Case No.
93-68266, which the trial court admitted in an Order dated February 11, 1994. In
an Order dated April 27, 1994, Civil Case No. 93-68377 was ordered consolidated
with Civil Case No. 93-68266. These cases were jointly tried by the court a quo.
On August 17, 1995, the court a quo promulgated its decision. Both parties
appealed." 5

In its appeal, PPC faulted the trial court for the following reasons: 1) failure of the court to
award actual and moral damages; 2) the 50 percent reduction of the amount PPC was
claiming; and 3) the court's ruling that the 2 percent penalty was to be imposed from the
date of the promulgation of the Decision, not from the date stipulated in the Contract.

On the other hand, PAGCOR criticized the trial court for the latter's failure to rule that the
Contract of Lease had already been terminated as early as September 21, 1993, or at the
latest, on October 14, 1993, when PPC received PAGCOR's letter dated October 12, 1993.
The gaming corporation added that the trial court erred in 1) failing to consider that PPC
was entitled to avail itself of the provisions of Article XX only when PPC was the party
terminating the Contract; 2) not finding that there were valid, justifiable and good reasons
for terminating the Contract; and 3) dismissing the Complaint of PAGCOR in Civil Case
No. 93-68337 for lack of merit, and not finding PPC liable for the reimbursement of
PAGCOR'S cash deposits and of the value of improvements.

Ruling of the Court of Appeals

First, on the appeal of PAGCOR, the CA ruled that the PAGCOR'S pretermination of the
Contract of Lease was unjustified. The appellate court explained that public demonstrations
and rallies could not be considered as fortuitous events that would exempt the gaming
corporation from complying with the latter's contractual obligations. Therefore, the
Contract continued to be effective until PPC elected to terminate it on November 25, 1993.

Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil
Code,PPC had the right to ask for (1) rescission of the Contract and indemnification for
damages; or (2) only indemnification plus the continuation of the Contract. These two
remedies were alternative, not cumulative, ruled the CA.

As PAGCOR had admitted its failure to pay the rentals for September to November 1993,
PPC correctly exercised the option to terminate the lease agreement. Previously, the
Contract remained effective, and PPC could collect the accrued rentals. However, from the
time it terminated the Contract on November 25, 1993, PPC could no longer demand
payment of the remaining rentals as part of actual damages, the CA added. CTSAaH

Denying the claim for moral damages, the CA pointed out the failure of PPC to show that
PAGCOR had acted in gross or evident bad faith in failing to pay the rentals from
September to November 1993. Such failure was shown especially by the fact that PPC still
had in hand three (3) months advance rental deposits of PAGCOR. The former could have
simply applied this deposit to the unpaid rentals, as provided in the Contract. Neither did
PPC adequately show that its reputation had been besmirched or the hotel's goodwill eroded
by the establishment of the casino and the public protests.

Finally, as to the claimed reimbursement for parking lot improvement, the CA held that
PAGCOR had not presented official receipts to prove the latter's alleged expenses. The
appellate court, however, upheld the trial court's award to PPC of P50,000 attorney's fees.

Hence this Petition. 6

Issues

In their Memorandum, petitioner raised the following issues:

"MAIN ISSUE:

"Did the Honorable Court of Appeals commit . . . grave and reversible error by
holding that Pryce was not entitled to future rentals or lease payments for the
unexpired period of the Contract of Lease between Pryce and PAGCOR?

"Sub-Issues:

"1. Were the provisions of Sections 20(a) and 20(c) of the Contract of Lease
relative to the right of PRYCE to terminate the Contract for cause and to moreover
collect rentals from PAGCOR corresponding to the remaining term of the lease
valid and binding?
 "2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and 20(c) of
the Contract, PRYCE having 'rescinded' the Contract of Lease?

"3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al. and the other
cases cited by PAGCOR support its position that PRYCE was not entitled to
future rentals?

"4. Would the collection by PRYCE of future rentals not give rise to unjust
enrichment?

"5. Could we not have 'harmonized' Article 1659 of the Civil Code and Article 20
of the Contract of Lease?

"6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written in
contracts, particularly in the PRYCE-PAGCOR Contract of Lease?" 7

The Court's Ruling

The Petition is partly meritorious.

Main Issue:
Collection of Remaining Rentals

PPC anchors its right to collect future rentals upon the provisions of the Contract. Likewise,
it argues that termination, as defined under the Contract, is different from the remedy of
rescission prescribed under Article 1659 of the Civil Code.On the other hand, PAGCOR
contends, as the CA ruled, that Article 1659 of the Civil Code governs; hence, PPC is
allegedly no longer entitled to future rentals, because it chose to rescind the Contract.

Contract Provisions
Clear and Binding

Article 1159 of the Civil Code provides that "obligations arising from contracts have the
force of law between the contracting parties and should be complied with in good faith." 8
In deference to the rights of the parties, the law 9 allows them to enter into stipulations,
clauses, terms and conditions they may deem convenient; that is, as long as these are not
contrary to law, morals, good customs, public order or public policy. Likewise, it is settled
that if the terms of the contract clearly express the intention of the contracting parties, the
literal meaning of the stipulations would be controlling. 10

In this case, Article XX of the parties' Contract of Lease provides in part as follows:

"XX. BREACH OR DEFAULT

 "a) The LESSEE agrees that all the terms, conditions and/or covenants herein
contained shall be deemed essential conditions of this contract, and in the event
of default or breach of any of such terms, conditions and/or covenants, or should
the LESSEE become bankrupt, or insolvent, or compounds with his creditors, the
LESSOR shall have the right to terminate and cancel this contract by giving them
fifteen (15 days) prior notice delivered at the leased premises or posted on the
main door thereof. Upon such termination or cancellation, the LESSOR may
forthwith lock the premises and exclude the LESSEE therefrom, forcefully or
otherwise, without incurring any civil or criminal liability. During the fifteen (15)
days notice, the LESSEE may prevent the termination of lease by curing the
events or causes of termination or cancellation of the lease.

"b) . . .

"c) Moreover, the LESSEE shall be fully liable to the LESSOR for the rentals
corresponding to the remaining term of the lease as well as for any and all
damages, actual or consequential resulting from such default and termination of
this contract.

"d) . . . " (Italics supplied)

The above provisions leave no doubt that the parties have covenanted 1) to give PPC the
right to terminate and cancel the Contract in the event of a default or breach by the lessee;
and 2) to make PAGCOR fully liable for rentals for the remaining term of the lease, despite
the exercise of such right to terminate. Plainly, the parties have voluntarily bound
themselves to require strict compliance with the provisions of the Contract by stipulating
that a default or breach, among others, shall give the lessee the termination option, coupled
with the lessor's liability for rentals for the remaining term of the lease.

For sure, these stipulations are valid and are not contrary to law, morals, good customs,
public order or public policy. Neither is there anything objectionable about the inclusion
in the Contract of mandatory provisions concerning the rights and obligations of the parties.
11 Being the primary law between the parties, it governs the adjudication of their rights
and obligations. A court has no alternative but to enforce the contractual stipulations in the
manner they have been agreed upon and written. 12 It is well to recall that courts, be they
trial or appellate, have no power to make or modify contracts. 13 Neither can they save
parties from disadvantageous provisions. HTSaEC

Termination or Rescission?

Well-taken is petitioner's insistence that it had the right to ask for "termination plus the full
payment of future rentals" under the provisions of the Contract, rather than just rescission
under Article 1659 of the Civil Code.This Court is not unmindful of the fact that
termination and rescission are terms that have been used loosely and interchangeably in
the past. But distinctions ought to be made, especially in this controversy, in which the
terms mean differently and lead to equally different consequences.

The term "rescission" is found in 1) Article 1191 14 of the Civil Code,the general provision
on rescission of reciprocal obligations; 2) Article 1659, 15 which authorizes rescission as
an alternative remedy, insofar as the rights and obligations of the lessor and the lessee in
contracts of lease are concerned; and 3) Article 1380 16 with regard to the rescission of
contracts.

In his Concurring Opinion in Universal Food Corporation v. CA, 17 Justice J. B. L. Reyes

differentiated rescission under Article 1191 from that under Article 1381 et seq. as follows:

". . . The rescission on account of breach of stipulations is not predicated on injury

to economic interests of the party plaintiff but on the breach of faith by the
defendant, that violates the reciprocity between the parties. It is not a subsidiary
action, and Article 1191 may be scanned without disclosing anywhere that the
action for rescission thereunder is subordinated to anything other than the
culpable breach of his obligations to the defendant. This rescission is a principal
action retaliatory in character, it being unjust that a party be held bound to fulfill
his promises when the other violates his. As expressed in the old Latin aphorism:
'Non servanti fidem, non est fides servanda.' Hence, the reparation of damages for
the breach is purely secondary.

"On the contrary, in rescission by reason of lesion or economic prejudice, the

cause of action is subordinated to the existence of that prejudice, because it is the
raison d'etre as well as the measure of the right to rescind. . . ." 18

Relevantly, it has been pointed out that resolution was originally used in Article 1124 of
the old Civil Code,and that the term became the basis for rescission under Article 1191
(and, conformably, also Article 1659). 19

Now, as to the distinction between termination (or cancellation) and rescission (more
properly, resolution), Huibonhoa v. CA 20 held that, where the action prayed for the
payment of rental arrearages, the aggrieved party actually sought the partial enforcement
of a lease contract. Thus, the remedy was not rescission, but termination or cancellation, of
the contract. The Court explained:

". . . By the allegations of the complaint, the Gojoccos' aim was to cancel or
terminate the contract because they sought its partial enforcement in praying for
rental arrearages. There is a distinction in law between cancellation of a contract
and its rescission. To rescind is to declare a contract void in its inception and to
put an end to it as though it never were. It is not merely to terminate it and release
parties from further obligations to each other but to abrogate it from the
beginning and restore the parties to relative positions which they would have
occupied had no contract ever been made.
 ". . . The termination or cancellation of a contract would necessarily entail
enforcement of its terms prior to the declaration of its cancellation in the same
way that before a lessee is ejected under a lease contract, he has to fulfill his
obligations thereunder that had accrued prior to his ejectment. However,
termination of a contract need not undergo judicial intervention. . . ." 21 (Italics
supplied)

Rescission has likewise been defined as the "unmaking of a contract, or its undoing from
the beginning, and not merely its termination." Rescission may be effected by both parties
by mutual agreement; or unilaterally by one of them declaring a rescission of contract
without the consent of the other, if a legally sufficient ground exists or if a decree of
rescission is applied for before the courts. 22 On the other hand, termination refers to an
"end in time or existence; a close, cessation or conclusion." With respect to a lease or
contract, it means an ending, usually before the end of the anticipated term of such lease or
contract, that may be effected by mutual agreement or by one party exercising one of its
remedies as a consequence of the default of the other. 23

Thus, mutual restitution is required in a rescission (or resolution), in order to bring back
the parties to their original situation prior to the inception of the contract. 24 Applying this
principle to this case, it means that PPC would re-acquire possession of the leased premises,
and PAGCOR would get back the rentals it paid the former for the use of the hotel space.

In contrast, the parties in a case of termination are not restored to their original situation;
neither is the contract treated as if it never existed. Prior to its termination, the parties are
obliged to comply with their contractual obligations. Only after the contract has been
cancelled will they be released from their obligations.

In this case, the actions and pleadings of petitioner show that it never intended to rescind
the Lease Contract from the beginning. This fact was evident when it first sought to collect
the accrued rentals from September to November 1993 because, as previously stated, it
actually demanded the enforcement of the Lease Contract prior to termination. Any intent
to rescind was not shown, even when it abrogated the Contract on November 25, 1993,
because such abrogation was not the rescission provided for under Article 1659. aSTECA

Future Rentals

As to the remaining sub-issue of future rentals, Rios v. Jacinto 25 is inapplicable, because

the remedy resorted to by the lessors in that case was rescission, not termination. The rights
and obligations of the parties in Rios were governed by Article 1659 of the Civil Code;
hence, the Court held that the damages to which the lessor was entitled could not have
extended to the lessee's liability for future rentals.
Upon the other hand, future rentals cannot be claimed as compensation for the use or
enjoyment of another's property after the termination of a contract. We stress that by
abrogating the Contract in the present case, PPC released PAGCOR from the latter's future
obligations, which included the payment of rentals. To grant that right to the former is to
unjustly enrich it at the latter's expense.

However, it appears that Section XX (c) was intended to be a penalty clause. That fact is
manifest from a reading of the mandatory provision under subparagraph (a) in conjunction
with subparagraph (c) of the Contract. A penal clause is "an accessory obligation which
the parties attach to a principal obligation for the purpose of insuring the performance
thereof by imposing on the debtor a special prestation (generally consisting in the payment
of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately
fulfilled." 26

Quite common in lease contracts, this clause functions to strengthen the coercive force of
the obligation and to provide, in effect, for what could be the liquidated damages resulting
from a breach. 27 There is nothing immoral or illegal in such indemnity/penalty clause,
absent any showing that it was forced upon or fraudulently foisted on the obligor. 28

In obligations with a penal clause, the general rule is that the penalty serves as a substitute
for the indemnity for damages and the payment of interests in case of noncompliance; that
is, if there is no stipulation to the contrary, 29 in which case proof of actual damages is not
necessary for the penalty to be demanded. 30 There are exceptions to the aforementioned
rule, however, as enumerated in paragraph 1 of Article 1226 of the Civil Code: 1) when
there is a stipulation to the contrary, 2) when the obligor is sued for refusal to pay the
agreed penalty, and 3) when the obligor is guilty of fraud. In these cases, the purpose of
the penalty is obviously to punish the obligor for the breach. Hence, the obligee can recover
from the former not only the penalty, but also other damages resulting from the
nonfulfillment of the principal obligation. 31

In the present case, the first exception applies because Article XX (c) provides that, aside
from the payment of the rentals corresponding to the remaining term of the lease, the lessee
shall also be liable "for any and all damages, actual or consequential, resulting from such
default and termination of this contract." Having entered into the Contract voluntarily and
with full knowledge of its provisions, PAGCOR must be held bound to its obligations. It
cannot evade further liability for liquidated damages.

Reduction of Penalty

In certain cases, a stipulated penalty may nevertheless be equitably reduced by the courts.
32 This power is explicitly sanctioned by Articles 1229 and 2227 of the Civil Code,which
we quote:
 "Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if
there has been no performance, the penalty may also be reduced by the courts if
it is iniquitous or unconscionable."

"Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty,

shall be equitably reduced if they are iniquitous or unconscionable."

The question of whether a penalty is reasonable or iniquitous is addressed to the sound

discretion of the courts. To be considered in fixing the amount of penalty are factors such
as but not limited to the type, extent and purpose of the penalty; the nature of the
obligation; the mode of the breach and its consequences; the supervening realities; the
standing and relationship of the parties; and the like. 33

In this case, PAGCOR's breach was occasioned by events that, although not fortuitous in
law, were in fact real and pressing. From the CA's factual findings, which are not contested
by either party, we find that PAGCOR conducted a series of negotiations and consultations
before entering into the Contract. It did so not only with the PPC, but also with local
government officials, who assured it that the problems were surmountable. Likewise,
PAGCOR took pains to contest the ordinances 34 before the courts, which consequently
declared them unconstitutional. On top of these developments, the gaming corporation was
advised by the Office of the President to stop the games in Cagayan de Oro City, prompting
the former to cease operations prior to September 1993.

Also worth mentioning is the CA's finding that PAGCOR's casino operations had to be
suspended for days on end since their start in December 1992; and indefinitely from July
15, 1993, upon the advice of the Office of President, until the formal cessation of operations
in September 1993. Needless to say, these interruptions and stoppages meant that
PAGCOR suffered a tremendous loss of expected revenues, not to mention the fact that it
had fully operated under the Contract only for a limited time.

While petitioner's right to a stipulated penalty is affirmed, we consider the claim for future
rentals to the tune of P7,037,835.40 to be highly iniquitous. The amount should be
equitably reduced. Under the circumstances, the advanced rental deposits in the sum of
P687,289.50 should be sufficient penalty for respondent's breach.

WHEREFORE, the Petition is GRANTED in part. The assailed Decision and Resolution
are hereby MODIFIED to include the payment of penalty. Accordingly, respondent is
ordered to pay petitioner the additional amount of P687,289.50 as penalty, which may be
set off or applied against the former's advanced rental deposits. Meanwhile, the CA's award
to petitioner of actual damages representing the accrued rentals for September to November
1993 with interest and penalty at the rate of two percent (2%) per month, from the date
of filing of the Complaint until the amount shall have been fully paid as well as the
P50,000 award for attorney's fees, is AFFIRMED. No costs. EcHTDI
SO ORDERED.

Sandoval-Gutierrez, Corona, Carpio Morales and Garcia, JJ., concur.

(Pryce Corp. v. Philippine Amusement and Gaming Corp., G.R. No. 157480, [May 6,
|||

2005], 497 PHIL 490-511)

 FIRST DIVISION

[G.R. No. 118692. July 28, 2006.]

COASTAL PACIFIC TRADING, INC., petitioner, vs. SOUTHERN

ROLLING MILLS, CO., INC. (now known as Visayan Integrated
Steel Corporation), FAR EAST BANK & TRUST COMPANY,
PHILIPPINE COMMERCIAL INDUSTRIAL 1 BANK,
EQUITABLE BANKING CORPORATION, PRUDENTIAL BANK,
BOARD OF TRUSTEES-CONSORTIUM OF BANKS-VISCO,
UNITED COCONUT PLANTERS BANK, CITYTRUST BANKING
CORPORATION, ASSOCIATED BANK, INSULAR BANK OF
ASIA AND AMERICA, INTERNATIONAL CORPORATE BANK,
COMMERCIAL BANK OF MANILA, BANK OF THE PHILIPPINE
ISLANDS, NATIONAL STEEL CORPORATION, THE
PROVINCIAL SHERIFF OF BOHOL, and DEPUTY SHERIFF
JOVITO DIGAL, 2 respondents.

DECISION

PANGANIBAN, C.J : p

Directors owe loyalty and fidelity to the corporation they serve and to its creditors. When
these directors sit on the board as representatives of shareholders who are also major
creditors, they cannot be allowed to use their offices to secure undue advantage for those
shareholders, in fraud of other creditors who do not have a similar representation in the
board of directors.

The Case

Before us is a Petition for Review 3 under Rule 45 of the Rules of Court, assailing the
September 27, 1994 Decision 4 and the January 5, 1995 Resolution 5 of the Court of
Appeals (CA) in CA-G.R. CV No. 39385. The challenged Decision disposed as follows:

"WHEREFORE, the decision of the Regional Trial Court is hereby AFFIRMED

in toto." 6

The challenged Resolution denied reconsideration.

The Facts
Respondent Southern Rolling Mills Co., Inc. was organized in 1959 for the purpose of
engaging in a steel processing business. It was later renamed Visayan Integrated Steel
Corporation (VISCO). 7

On December 11, 1961, VISCO obtained a loan from the Development Bank of the
Philippines (DBP) in the amount of P836,000. This loan was secured by a duly recorded
Real Estate Mortgage over VISCO's three (3) parcels of land, including all the machineries
and equipment found there. 8

On August 15, 1963, VISCO entered into a Loan Agreement 9 with respondent banks (later
referred to as "Consortium" 10 ) for the amount of US$5,776,186.71 or P21,745,707.36 (at
the then prevailing exchange rate) to finance its importation of various raw materials. To
secure the full and faithful performance of its obligation, VISCO executed on August 3,
1965, a second mortgage 11 over the same land, machineries and equipment in favor of
respondent banks. This second mortgage remained unrecorded. 12

VISCO eventually defaulted in the performance of its obligation to respondent banks. This
prompted the Consortium to file on January 26, 1966, Civil Case No. 1841, which was a
Petition for Foreclosure of Mortgage with Petition for Receivership. 13 This case was
eventually dismissed for failure to prosecute. 14

Afterwards, negotiations were conducted between VISCO and respondent banks for the
conversion of the unpaid loan into equity in the corporation. 15 Vicente Garcia, vice-
president of VISCO and of Far East Bank and Trust Company (FEBTC), 16 testified that
sometime in 1966, the creditor banks were given management of and control over VISCO.
17 In time, 18 in order to reorganize it, its principal creditors agreed to group themselves
into a creditors' consortium. 19 As a result of the reorganized corporate structure of VISCO,
respondent banks acquired more than 90 percent of its equity. Notwithstanding this
conversion, it remained indebted to the Consortium in the amount of P16,123,918.02. 20

Meanwhile from 1964 to 1965, VISCO also entered into a processing agreement with
Petitioner Coastal Pacific Trading, Inc. ("Coastal"). Pursuant to that agreement, petitioner,
delivered 3,000 metric tons of hot rolled steel coils to VISCO for processing into block
iron sheets. Contrary to their agreement, the latter was able to process and deliver to
petitioner only 1,600 metric tons of those sheets. Hence, a total of 1,400 metric tons of hot
rolled steel coils remained unaccounted for. 21 The fact that petitioner was among the
major creditors of VISCO was recognized by the latter's vice-president, Vicente Garcia. 22
Indeed, on October 9, 1970, it forwarded to petitioner a proposal for a Compromise
Agreement. 23 Subsequent developments indicate, however, that the parties did not arrive
at a compromise. 2005jurcd

Two years later, on October 20, 1972, Garcia wrote Arturo P. Samonte, representative of
FEBTC 24 and director of VISCO, 25 a letter that reads as follows:
 In the light of recent development on IISMI and Elirol which were taken over by
the government, I suggest that we take certain precautionary measures to protect
the interests of the Consortium of Banks. One such step may be to insure the
safety of the unexpended funds of VISCO from any contingencies in the future.
As of now VISCO's account with the Far East Bank is in the name of BOARD
OF TRUSTEES VISCO CONSORTIUM OF BANKS. It may be better to
eliminate the term VISCO and just call the account BOARD OF TRUSTEES
CONSORTIUM OF BANKS." 26

According to a notation on this letter, an FEBTC assistant cashier named Silverio duly
complied with the above request. 27 Indeed, events would later reveal that the bank held a
deposit account in the name of the "Board of Trustees-Consortium of Banks." 28

On September 20, 1974, respondent banks held a luncheon meeting 29 in the FEBTC
Boardroom to discuss how they would address the insistent demands of the DBP for
VISCO to settle its obligations. Jose B. Fernandez, Jr., VISCO's then chairman and
concurrent FEBTC President, 30 expressed his apprehension that either the DBP or the
government would soon pursue extra-judicial foreclosure against VISCO.

In this regard, Fernandez informed the members of the Consortium that he had received
letter-offers from two corporations that were interested in purchasing VISCO's generator
sets. 31 After deliberating on the matter, the members decided to approve the sale of these
two generator sets to Filmag (Phil.), Inc. It was also agreed that the proceeds of the sale
would be used to pay VISCO's indebtedness to DBP and to secure the release of the first
mortgage. 32 The Consortium agreed with Filmag on the following payment procedure:

"The payment procedure will be as follows: Filmag pays to VISCO; VISCO pays
the Consortium; and then the Consortium pays the DBP with the arrangement that
the Consortium subrogates to the rights of the DBP as first mortgagee to the
VISCO plant. The Consortium further agreed to call a meeting of the VISCO
board of directors for the purpose of considering and formally approving the
proposed sale of the 2 generators to Filmag." 33

Accordingly, on October 4, 1974, the VISCO board of directors had a meeting in the
FEBTC Boardroom. 34 The board was asked to decide how VISCO would settle its debt
to DBP: whether by asking the Consortium to put up the necessary amount or by accepting
Filmag's offer to purchase VISCO's generator sets. 35 The latter option was unanimously
chosen 36 in a Resolution worded as follows:

"RESOLVED, That the offer of Filmag (Philippines) Inc. in their letters of

December 14, 1973 and March 19, 1974 to purchase two (2) units of generator
sets, including standard accessories, of VISCO is hereby accepted under the
following terms and conditions:

xxx xxx xxx

 "2. The price for the two (2) generator sets is PESOS: ONE MILLION FIVE
HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY TWO ONLY
(P1,550,572) . . . and shall be payable upon signing of a letter-agreement and
which shall be later formalized into a Deed of Sale. The amount, however, shall
be held by the depositary bank of VISCO, Far East Bank and Trust Company, in
escrow and shall be at VISCO's disposal upon the signing of Filmag of the
receipt/s of delivery of the said two (2) generator sets.

xxx xxx xxx

"FURTHER RESOLVED, That the sales proceeds of PESOS: ONE MILLION

FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY TWO
ONLY (P1,550,572) shall be utilized to pay the liability of VISCO with the
Development Bank of the Philippines." 37

The sale of the generator sets to Filmag took place and, according to the testimony of
Garcia, the proceeds were deposited with FEBTC in a special account held in trust for the
Consortium. 38

A year after, on May 22, 1975, petitioner filed with the Pasig Regional Trial Court (RTC)
a Complaint 39 for Recovery of Property and Damages with Preliminary Injunction and
Attachment. 40 Petitioner's allegation was that VISCO had fraudulently misapplied or
converted the finished steel sheets entrusted to it. 41 On June 3, 1975, Judge Pedro A.
Revilla issued a Writ of Preliminary Attachment over its properties that were not exempt
from execution. 42

In compliance with the Writ, Sheriff Andres R. Bonifacio attempted to garnish the account
of VISCO in FEBTC, 43 which denied holding that account. Instead, the bank admitted
that what it had was a deposit account in the name of the Board of Trustees-Consortium of
Banks, particularly Account No. 2479-1. 44 FEBTC reported to Sheriff Bonifacio that it
had instructed its accounting department to hold the account, "subject to the prior liens or
rights in favor of [FEBTC] and other entities." 45

While petitioner's case was pending, VISCO's vice-president (Garcia) and director (Arturo
Samonte) requested from FEBTC a cash advance of P1,342,656.88 for the full settlement
of VISCO's account with DBP. 46 On June 29, 1976, FEBTC complied by issuing Check
No. FE239249 for P1,342,656.88, payable to "[DBP] for [the] account of VISCO." 47 On
even date, DBP executed a Deed of Assignment of Mortgage Rights Interest and
Participation 48 in favor of Respondent Consortium of Banks. The deed stated that, in
consideration of the payment made, all of DBP's rights under the mortgage agreement with
VISCO were being transferred and conveyed to the Consortium. 49 Thus did the latter
obtain DBP's recorded primary lien over the real and chattel properties of VISCO. CcSTHI
On September 23, 1980, the Consortium filed a Petition for Extra Judicial Foreclosure with
the Office of the Provincial Sheriff of Bohol. 50 The Notice of Extrajudicial Foreclosure
of Mortgage, published in the Bohol Newsweek on October 10, 1980, announced that the
auction sale was scheduled for November 11, 1980. 51

On November 3, 1980, Southern Industrial Projects, Inc. (SIP), which was a judgment
creditor 52 of VISCO, filed Civil Case No. 3383. It was a Complaint 53 for Declaration of
Nullity of the Mortgage and Injunction to Restrain the Consortium from Proceeding with
the Auction Sale. SIP argued that DBP had actually been paid by VISCO with the proceeds
from the sale of the generator sets. Hence, the mortgage in favor of that bank had been
extinguished by the payment and could not have been assigned to the Consortium. 54 A
temporary restraining order against the latter was thus successfully obtained; the provincial
sheriff could not proceed with the auction sale of the mortgaged assets. 55 But SIP's victory
was short-lived. On March 2, 1984, Civil Case No. 3383 was decided in favor of the
Consortium 56 Judge Andrew S. Namocatcat ruled thus:

"The evidence of the plaintiff is only anchored on the fact that the deed of
assignment executed by the DBP in favor of the defendant banks is an act which
would defraud creditors. It is the thinking of the court that the payment of
defendant banks to DBP of VISCO's loan and the execution of the DBP of the
deed of assignment of credit and rights to the defendant banks is in accordance
with Article 1302 and 1303 of the New Civil Code, and said transaction is not to
defraud creditors because the defendant banks are also creditors of VISCO." 57

On June 14, 1985, this Decision was affirmed by the Intermediate Appellate Court in CA-
G.R. No. 03719. 58

The auction sale of VISCO's mortgaged properties took place on March 19, 1985 and the
Consortium emerged as the highest bidder. 59 The Certificate of Sale 60 in its favor was
registered on May 22, 1985. 61

On June 27, 1985, VISCO executed through Vicente Garcia, a Deed of Assignment of
Right of Redemption 62 in favor of the National Steel Corporation, (NSC), in consideration
of P100,000. 63 On the same day, the Consortium sold the foreclosed real and personal
properties of VISCO to the NSC. 64

On August 16, 1985, petitioner filed against respondents Civil Case No. 3929, which was
a Complaint for Annulment or Rescission of Sale, Damages with Preliminary Injunction.
65 Coastal alleged that, despite the Writ of Attachment issued in its favor in the still
pending Civil Case No. 21272, the Consortium had sold the properties to NSC. Further,
despite the attachment of the properties, the Consortium was allegedly able to sell and place
them beyond the reach of VISCO's other creditors. 66 Thus imputing bad faith to
respondent banks' actions, petitioner said that the sale was intended to defraud VISCO's
other creditors.
Petitioner further contended that the assignment in favor of the Consortium was fraudulent,
because DBP had been paid with the proceeds from the sale of the generator sets owned by
VISCO, and not with the Consortium's own funds. 67 Petitioner offered as proof the
minutes of the meeting 68 in which the transaction was decided. Respondent Consortium
countered that the minutes would in fact readily disclose that the intention of its members
was to apply the proceeds to a partial payment to DBP. 69 Respondent insisted that it used
its own funds to pay the bank. 70

On August 20, 1985, a temporary restraining order (TRO) 71 was issued by judge
Mercedes Gozo-Dadole against VISCO, enjoining it from proceeding with the removal or
disposal of its properties; the execution and/or consummation of the foreclosure sale; and
the sale of the foreclosed properties to NSC. On September 6, 1985, the trial court issued
an Order requiring the Consortium to post a bond of P25 million in favor of Coastal for
damages that petitioner may suffer from the lifting of the TRO. The bond filed was then
approved by the RTC in its Order of September 13, 1985. 72

On December 15, 1986, Civil Case No. 21272 was finally decided by Judge Nicolas P.
Lapena, Jr., in favor of Coastal. 73 VISCO was ordered to pay petitioner the sum of
P851,316.19 with interest at the legal rate, plus attorney's fees of P50,000.00 and costs. 74
Coastal filed a Motion for Execution, 75 but the judgment has remained unsatisfied to date.

On January 5, 1992, a Decision 76 on Civil Case No. 3929 was rendered as follows:

"WHEREFORE, this Court hereby renders judgment in favor of the defendants

and against the plaintiff Coastal Pacific Trading, Inc. BY WAY OF THE MAIN
COMPLAINT, to wit:

"1. Declaring the extrajudicial foreclosure sale conducted by the sheriff

and the corresponding certificate of sale executed by the defendant
sheriffs on March 15, 1985 relative to the real properties of the defendant
SRM/VISCO of Cortes, Bohol, Philippines, which were registered in the
Register of Deeds of Bohol, on May 22, 1985 and the Transfer of
Assignment to the defendant National Steel Corporation of any or part of
the foreclosed properties arising from the extrajudicial foreclosure sale as
valid and legal;

"2. Ordering the plaintiff Coastal Pacific Trading Inc. to pay the defendant
Consortium of Banks[,] Southern Rolling Mills, Co., Inc., Far East Bank
& Trust Company, Philippine Commercial Industrial Bank, Equitable
Banking Corporation, Prudential Bank, Board of Trustees-Consortium of
Banks-[VISCO], United Coconut Planters Bank, City Trust Banking
Corporation, Associated Bank, Insular Bank of Asia and America,
International Corporate Bank, Commercial Bank of Manila, Bank of the
Philippine Islands and the National Steel Corporation in the instant case
 the amount of FIVE HUNDRED THOUSAND PESOS (P500,000.00)
representing damages; cAIDEa

"3. Ordering the plaintiff The (sic) Coastal Pacific Trading Inc. to pay the
defendants the amount of FIFTEEN THOUSAND PESOS (P15,000.00)
representing attorney's fees;

"4. Dismissing the Amended Complaint of the plaintiff;

"5. Ordering the plaintiff to pay the cost; AND

"BY WAY OF CROSS CLAIM INTERPOSED

"BY THE DEFENDANT National Steel Corporation against the

Consortium of Banks and SRM/VISCO, the same is dismissed for lack of
merit, without pronouncement as to cost." 77

Insisting that the trial court erred in holding that it had failed to prove its case by
preponderance of evidence, Coastal filed an appeal with the CA. Allegedly, the purported
insufficiency of proof was based on the sole ground that petitioner did not file an objection
when the properties were sold on execution. It contended that the court a quo had arrived
at this erroneous conclusion by relying on inapplicable jurisprudence. 78

Additionally, Coastal argued that the trial court had erred in not annulling the foreclosure
proceedings and sale for being fictitious and done to defraud petitioner as VISCO's
creditor. Supposedly, the DBP mortgage had already been extinguished by payment; thus,
the bank could not have assigned the contract to the Consortium. 79

Petitioner also prayed for the annulment of the sale in favor of NSC on the ground that the
latter was a party to the fraudulent foreclosure and, hence, not a buyer in good faith. 80

Ruling of the Court of Appeals

At the outset, the CA stressed that the validity of the Consortium's mortgage, foreclosure,
and assignments had already been upheld in CA-G.R. CV No. 03719, entitled Southern
Industrial Projects v. United Coconut Planters Bank 81 Citing Valencia v. RTC of Quezon
City, Br. 90 82 and Vda. de Cruzo v. Carriaga, 83 the CA explained that the absolute
identity of parties was not necessary for the application of res judicata. All that was
required was a shared identity of interests, as shown by the identity of reliefs sought by one
person in a prior case and by another in a subsequent case.

While Coastal was not a party to Southern Industrial Projects, it should nevertheless be
bound by that Decision, because it had raised substantially the same claim and cause of
action as SIP, according to the appellate court. The CA held that the basic reliefs sought by
Coastal and SIP were substantially the same: the nullification of the Deed of Assignment
in favor of the Consortium, the foreclosure sale, and the subsequent sale to NSC. Because
this identity of reliefs sought showed an identity of interests, the CA concluded that it need
not rule on those issues. 84

As to the issue that the DBP mortgage had been extinguished by payment, the CA quoted
its earlier Decision in Southern Industrial Projects:

"The evidence shows that the proceeds of the sale of the two generating sets were
applied by defendants-appellees in the payment of the outstanding obligation of
VISCO. It appears that said proceeds were deposited in the bank account of the
consortium of creditors to avoid it being garnished by the creditors
notwithstanding the set-off, VISCO was still indebted to the defendants-
appellees.

"The evidence . . . shows that upon VISCO's request for [cash] advance, the Far
East Banks (sic) and Trust Co., the manager of the consortium of creditors, issued
FEBTC check No. 239249 on June 29, 1976 in the amount of P1,342,656.68
payable to the DBP to pay off its loan to the latter.

xxx xxx xxx

". . . . A public document celebrated with all the legal formalities under the
safeguard of notarial certificate is evidence against a party, and a high degree [of]
proof is necessary to overcome the legal presumption that the recital is true. The
biased and interested testimony of one of the parties to such instrument who
attempts to vary or repudiate what it purports to be, cannot overcome the
evidentiary force of what is recited in the document." 85

The appellate court also rejected petitioner's contention that the Consortium's Petition for
Extrajudicial Foreclosure was already barred by the earlier resort to a judicial foreclosure.
The CA clarified that in filing a Petition for Judicial Foreclosure, the Consortium had
pursued its right as junior encumbrancer. On the other hand, the Consortium filed a Petition
for Extrajudicial Foreclosure as a first encumbrancer by virtue of DBP's assignment in its
favor. 86

The CA also rejected petitioner's theory of extinguishment of obligation by merger. It

observed that the merger could not have possibly taken place, because respondent banks
and VISCO were not creditors and debtors in their own right. 87

Petitioner's Motion for Reconsideration, 88 which was received by the CA on November

15, 1994, 89 was denied for lack of merit.
Hence, this Petition. 90

Issues

Petitioner raises the following issues for our consideration:

"I

"Respondent Court of Appeals, seemingly to avoid the irrefutable evidence of

fraud and collusion practised by [respondents] against [Petitioner] Coastal,
erroneously sustained the trial court's holding that the present case is barred by
res judicata because of the previous decision in the case of Southern Industrial
Projects, Inc., vs. United Coconut Planters Bank, CA-G.R. No. 03719,
considering that the elements that call for the application of this rule are not
present in the case at bar, and the exceptions allowed by this Honorable Supreme
Court are not applicable here for variance or distinction in facts and issues, . . . :"
91

"II

"Respondent Court of Appeals further erred in not annulling the Deed of

Assignment of the DBP mortgage . . ., the extrajudicial foreclosure proceedings
of the two mortgages . . ., and the separate sale of the land and machineries as real
and personal properties by the foreclosing banks to NSC, as well as the
assignment or waiver of SRM/Visco's legal right of redemption over the
foreclosed properties, for being fraudulently executed through collusion among
the [respondents] and in fraud of SRM/Visco's creditor, [Petitioner] Coastal, . .
.;" 92

Stripped of nonessentials, the two issues may be restated as follows:

1. Whether the present action is barred by res judicata

2. Whether respondents disposed of VISCO's assets in fraud of the creditors

The Court's Ruling

The Petition is meritorious.

First Issue:
Res judicata

The CA cited Valencia v. RTC of Quezon City 93 to support the finding that SIP and Coastal
were substantially the same parties. We distinguish.
In Valencia, the plaintiff-intervenor in the first case, Cario, claimed Lot 4 based on an
alleged purchase of Valencia's "squatter's rights" over the property. The trial court
dismissed the claim and held that no such purchase ever took place. 94 It also held that, on
the assumption that a sale had taken place, the sale was null and void for being contrary to
the pertinent housing law. It also found that all current occupants of Lot 4 were illegal
squatters; thus, it ordered their ejectment.

When this first case attained finality, Cario's daughter, Catbagan, filed another suit against
Valencia. Catbagan challenged the applicability of the ejectment Order issued to her; as an
occupant of the lot, she was allegedly not a party to the first case. Her Petition was denied
for lack of merit. 95

The execution of the Decision in the first case was again forestalled when Llanes, Cario's
sister-in-law who was another occupant of Lot 4, filed another suit against the same
respondent. Like Cario, Llanes insisted on having purchased the subject lot from
Valencia. 96 This Court ruled that the suit was barred by res judicata. There was a
substantial identity of parties, because the right claimed by both Cario and Llanes were
based on each one's alleged purchase of Valencia's "squatter's rights." 97

In the first case, sales of "squatter's rights" were already categorically declared null and
void for being contrary to law. Thus, Llanes' admission that she had purchased Valencia's
"squatter's rights" placed her in the same category as Cario. The purchase could not be
treated differently, because the final and executory Decision held that all purchases of
"squatter's rights" (regardless of who the purchasers were) were null and void. 98

Further, the earlier ruling held that "the present occupants are illegal squatters." That ruling
included Llanes, who was admittedly one of the occupants. 99 Simply put, she and
Valencia were considered identical parties for purposes of res judicata, because they were
obviously litigating under the same void title and capacity as vendees of "squatter's rights"
and as occupants of Lot 4.

Moreover, we held in Valencia that Llanes' suit was merely a clear attempt to prevent or
delay the execution of the judgment in the first case, which had become final by reason of
the three affirmances by this Court. The pattern to obstruct the execution of the first
judgment was obvious: after Cario lost the first case, her daughter filed a second one.
When the daughter lost the second, the daughter-in-law filed a third case. It may be
observed that the three successive plaintiffs were all occupants of the same property and
belonged to the same family; this fact was also indicative of their privity. CTcSIA

Given this background, it becomes clear that the finding of a substantial identity of parties
in Valencia was based on its peculiar factual circumstances, which are different from those
in the present case.
Unlike Llanes, Coastal is not asserting a right that has been categorically declared null and
void in a prior case. In fact, its right based on the processing agreement was upheld in Civil
Case No. 21272. Clearly, Coastal cannot be treated in the same manner as Llanes.

The CA erred in applying Southern Industrial Projects v. United Coconut Planters Bank
100 as a bar by res judicata with respect to the present case. For this principle to apply, the
following elements must concur: a) the former judgment was final; b) the court that
rendered it had jurisdiction over the subject matter and the parties; c) the judgment was
based on the merits; and, d) between the first and the second actions, there is an identity of
parties, subject matters, and causes of action. 101

It is axiomatic that res judicata does not require an absolute, but only a substantial, identity
of parties. There is a substantial identity when there is privity between the two parties or
they are successors-in-interest by title subsequent to the commencement of the action,
litigating for the same thing, under the same title, and in the same capacity. 102 Petitioner
was not acting in the same capacity as SIP when it filed Civil Case No. 3383, which
eventually became AC-G.R. CV No. 03719. It brought this latter action as a creditor under
a processing agreement with VISCO; on the other hand, the latter was sued by SIP, based
on an alleged breach of their management contract. Very clearly, their rights were entirely
distinct and separate from each other. In no manner were these two creditors privies of each
other.

The causes of action in the two Complaints were also different. Causes of action arise from
violations of rights. A single right may be violated by several acts or omissions, in which
case the plaintiff has only one cause of action. Likewise, a single act or omission may
violate several rights at the same time, as when the act constitutes a violation of separate
and distinct legal obligations. 103 The violation of each of these separate rights is a
separate cause of action in itself. 104 Hence, although these causes of action arise from the
same state of facts, they are distinct and independent and may be litigated separately;
recovery on one is not a bar to subsequent actions on the others. 105

In the present case, the right of SIP (arising from its management contract with VISCO) is
totally distinct and separate from the right of Coastal (arising from its processing contract
with VISCO). SIP and Coastal are asserting distinct rights arising from different legal
obligations of the debtor corporation. Thus, VISCO's violation of those separate rights has
given rise to separate causes of action.

The confusion in the resolution of the issue of identity of parties occurred, because the two
creditors were assailing the same transactions of VISCO on the same grounds. Since the
two cases they filed presented similar legal issues, the appellate court held that its ruling in
AC-G.R. CV No. 03719 was also applicable to the instant case.
Common but palpable is this misconception of the doctrine of res judicata. Persons do not
become privies by the mere fact that they are interested in the same question or in proving
the same set of facts, or that one person is interested in the result of a litigation involving
the other. Hence, several creditors of one debtor cannot be considered as identical parties
for the purpose of assailing the acts of the debtor. They have distinct credits, rights, and
interests, such that the failure of one to recover should not preclude the other creditors from
also pursuing their legal remedies.

Further, petitioner, which was not a party to Southern Industrial Projects (their causes of
action being separate and distinct), did not have the opportunity to be heard in that case,
much less to present its own evidence. Thus, to bind petitioner to the Decision in that case
would clearly violate its rights to due process. As a separate party, it has the right to have
its arguments and evidence evaluated on their own merits.

Second Issue:
Fraud of Creditors

We now come to the heart of the Petition. Coastal alleges that the assignment of mortgage,
the extrajudicial foreclosure proceedings, and the sale of the properties of VISCO should
all be rescinded on the ground that they were done to defraud the latter's creditors.

The CA found no merit in petitioner's arguments. It ruled that the assignment conformed
to the requirements of law; that the consideration for the assignment had allegedly been
given by FEBTC; and that, hence, the Consortium had a right to foreclose on the mortgaged
properties.

By focusing on the innate validity of these Contracts, the CA totally overlooked the issue
of fraud as a ground for rescission. Elementary is the principle that the validity of a contract
does not preclude its rescission. Under Articles 1380 and 1381 (3) of the Civil Code,
contracts that are otherwise valid between the contracting parties may nonetheless be
subsequently rescinded by reason of injury to third persons, like creditors. 106 In fact,
rescission implies that there is a contract that, while initially valid, produces a lesion or
pecuniary damage to someone. 107 Thus, when the CA confined itself to the issue of the
validity of these contracts, it did not at all address the heart of petitioner's cause of action:
whether these transactions had been undertaken by the Consortium to defraud VISCO's
other creditors.

There is more than a preponderance of evidence showing the Consortium's deliberate plan
to defraud VISCO's other creditors. CScTED

Consortium Banks as Directors

It will be recalled that Respondent Consortium took over management and control of
VISCO by acquiring 90 percent of the latter's equity. Thus, 9 out of the 10 directors of the
corporation were all officials of the Consortium, 108 which may thus be said to have
effectively occupied and/or controlled the board. Significantly, nowhere in the records can
we find any denial by respondent of this allegation by petitioner. 109

As directors of VISCO, the officials of the Consortium were in a position of trust; thus,
they owed it a duty of loyalty. This trust relationship sprang from the fact that they had
control and guidance over its corporate affairs and property. 110 Their duty was more
stringent when it became insolvent or without sufficient assets to meet its outstanding
obligations that arose. Because they were deemed trustees of the creditors in those
instances, they should have managed the corporation's assets with strict regard for the
creditors' interests. When these directors became corporate creditors in their own right,
they should not have permitted themselves to secure any undue advantage over other
creditors. 111 In the instant case, the Consortium miserably failed to observe its duty of
fidelity towards, VISCO and its creditors.

Duty of the Consortium Banks

to VISCO's Creditors

Recall that as early as 1966, the Consortium, through its directors on the board of VISCO,
had already assumed management and control over the latter. Hence, when VISCO
recognized its outstanding liability to petitioner in 1970 and offered a Compromise
Agreement, 112 respondent banks were already at the helm of the debtor corporation. The
members of the Consortium, therefore, cannot deny that they were aware of those claims
against the corporation. Nonetheless, they did not adopt any measure to protect petitioner's
credit.

Quite the opposite, they even took steps to hide VISCO's unexpended funds. Garcia's 1972
letter to Samonte unmistakably reveals that they kept those funds in an account named
"Board of Trustees VISCO Consortium of Banks." This fact alone shows an effort to hide,
with the evident intent to keep, those funds for themselves. The letter even says that, for
the protection of the Consortium, the name "VISCO" should be eliminated entirely, so that
the account name would read "Board of Trustees Consortium of Banks." Clearly, this
particular move was found to be necessary to avoid a takeover by the government, which
was also a creditor of VISCO. 113 This express intent of the latter, under the direction and
for the benefit of the Consortium, corroborated petitioner's contention that respondent
banks had defrauded VISCO's creditors.

Assignment of Mortgage
in Favor of the Consortium Banks
The assignment of mortgage in favor of the Consortium also bears the earmarks of fraud.
Initially, respondent banks had agreed that VISCO should sell two of its generator sets, so
that the proceeds could be utilized to pay DBP. This plan was direct, simple, and would
extinguish the encumbrance in favor of the bank.

Then, quite surprisingly, the Consortium set down the following payment procedure:
Filmag would pay VISCO; the latter would pay the Consortium, which would pay DBP;
and the Consortium would then subrogate DBP to the latter's rights as first mortgagee. One
is then led to ask: if the intention was to pay DBP; from the sales proceeds of the generator
sets, why did the money have to pass through the Consortium?

The answer lies in the nature of respondent's mortgage. It will be recalled that this mortgage
remained unrecorded and not legally binding on the other creditors. 114 Thus, if DBP had
been directly paid by VISCO, the latter could have freed up its properties to the satisfaction
of all its other creditors. This procedure would have been fair to all, but it was not followed
by the Consortium.

Instead, the proceeds from the sale of the generator sets were first paid to respondent banks,
which used the money to pay DBP. The last step in the payment procedure explains the
reason for this preferred though roundabout manner of payment. This final step entitled the
Consortium to obtain DBP's primary lien through an assignment by allowing it to pay
VISCO's loan to the bank, without incurring additional expenses.

In the end, by collecting the money from VISCO, respondent banks recovered what they
had ostensibly remitted to DBP. Moreover, the primary lien that respondent banks acquired
allowed them, as unsecured creditors of VISCO, to foreclose on the assets of the
corporation without regard to its inferior claims. It was a clever ruse that would have
worked, were it not done by creditors who were duty-bound, as directors, not to take clever
advantage of other creditors.

To be sure, there was undue advantage. The payment scheme devised by the Consortium
continued the efficacy of the primary lien, this time in its favor, to the detriment of the
other creditors. When one considers its knowledge that VISCO's assets might not be
enough to meet its obligations to several creditors, 115 the intention to defraud the other
creditors is even more striking. Fraud is present when the debtor knows that its actions
would cause injury. 116

The assignment in favor of the Consortium was a rescissible contract for having been
undertaken in fraud of creditors. 117 Article 1385 of the Civil Code provides for the effect
of rescission, as follows:

"Rescission creates the obligation to return the things which were the object of
the contract, together with their fruits, and the price with its interest;
 consequently, it can be carried out only when he who demands rescission can
return whatever he may be obliged to restore. aCITEH

"Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith.

"In this case, indemnity for damages may be demanded from the person causing
the loss."

Indeed, mutual restitution is required in all cases involving rescission. But when it is no
longer possible to return the object of the contract, an indemnity for damages operates as
restitution. The important consideration is that the indemnity for damages should restore
to the injured party what was lost.

In the case at bar, it is no longer possible to order the return of VISCO's properties. They
have already been sold to the NSC, which has not been shown to have acted in bad faith.
The party alleging bad faith must establish it by competent proof. Sans that proof,
purchasers are deemed to be in good faith, and their interest in the subject property must
not be disturbed. Purchasers in good faith are those who buy the property of another without
notice that some other person has a right to or interest in the property; and who pay the full
and fair price for it at the time of the purchase, or before they get notice of some other
persons' claim of interest in the property. 118

In the present case, petitioner failed to discharge its burden of proving bad faith on the part
of NSC. There is insufficient evidence on record that the latter participated in the design to
defraud VISCO's creditors. To NSC, petitioner imputes fraud from the sole fact that the
former was allegedly aware that its vendor, the Consortium, had taken control over VISCO
including the corporation's assets. 119 We cannot appreciate how knowledge of the
takeover would necessarily implicate anyone in the Consortium's fraudulent designs.
Besides, NSC was not shown to be privy to the information that VISCO had no other assets
to satisfy other creditors' respective claims.

The right of an innocent purchaser for value must be respected and protected, even if its
vendors obtained their title through fraud. 120 Pursuant to this principle, the remedy of the
defrauded creditor is to sue for damages against those who caused or employed the fraud.
Hence, petitioner is entitled to damages from the Consortium.

Award of Damages

It is essential that for damages to be awarded, a claimant must satisfactorily prove during
the trial that they have a factual basis, and that the defendant's acts have a causal connection
to them. 121 Thus, the question of damages should normally call for a remand of the case
to the lower court for further proceedings. Considering, however, the length of time that
petitioner's just claim has been thwarted, we find it in the best interest of substantial justice
to decide the issue of damages now on the basis of the available records. A remand for
further proceedings would only result in a needless delay.

Going over the records of the case, we find that petitioner has a final and executory
judgment in its favor in Civil Case No. 21272. The judgment in that case reads as follows:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs ordering

defendant VISCO/SRM to pay the plaintiffs the sum of P851,316.19 with interest
thereon at the legal rate from the filing of this complaint, plus attorney's fees of
P50,000.00 and to pay the Costs." 122

The foregoing is the judgment credit that petitioner cannot enforce against VISCO because
of Respondent Consortium's fraudulent disposition of the corporation's assets. In other
words, the above amounts define the extent of the actual damage suffered by Coastal and
the amount that respondent has to restore pursuant to Article 1385.

On the basis of the finding of fraud, the award of exemplary damages is in order, to serve
as a warning to other creditors not to abuse their rights. Under Article 2229 of the Civil
Code, exemplary or corrective damages are imposed by way of example or correction for
the public good. By their nature, exemplary damages should be imposed in an amount
sufficient and effective to deter possible future similar acts by respondent banks. The court
finds the amount of P250,000 sufficient in the instant case.

As a rule, a corporation is not entitled to moral damages because, not being a natural
person, it cannot experience physical suffering or sentiments like wounded feelings, serious
anxiety, mental anguish and moral shock. 123 The only exception to this rule is when the
corporation has a good reputation that is debased, resulting in its humiliation in the business
realm. 124 In the present case, the records do not show any evidence that the name or
reputation of petitioner has been sullied as a result of the Consortium's fraudulent acts.
Accordingly, moral damages are not warranted.

WHEREFORE, the Petition is GRANTED. The assailed Decision of the Court of Appeals
dated September 27, 1994, and its Resolution dated January 5, 1995, are hereby
REVERSED and SET ASIDE. Respondent Consortium of Banks is ordered to PAY
Petitioner Coastal Pacific Trading, Inc., the sum adjudged by the Regional Trial Court of
Pasig, Branch 167, in Civil Case No. 21272 entitled Coastal Pacific Trading, Felix de la
Costa, and Aurora del Banco v. Visayan Integrated Corporation, to wit: ". . . the sum of
P851,316.19 with interest thereon at the legal rate from the filing of [the] [C]omplaint, plus
attorney's fees of P50,000 and . . . the costs." Respondent Consortium of Banks is further
ordered to pay petitioner exemplary damages in the amount of P250,000. TEIHDa

SO ORDERED.
Ynares-Santiago, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.

(Coastal Pacific Trading, Inc. v. Southern Rolling Mills Co., Inc., G.R. No. 118692,
|||

[July 28, 2006], 529 PHIL 10-42)

 THIRD DIVISION

[G.R. No. 125283. February 10, 2006.]

PAN PACIFIC INDUSTRIAL SALES CO., INC., petitioner, vs.

COURT OF APPEALS and NICOLAS CAPISTRANO, respondents.

Bengson Narciso Cudala Jimenez Gonzalez & Liwanag and Lagamon Barba
Lupeba & Associates for private respondent.

SYLLABUS

1. REMEDIAL LAW; EVIDENCE; BURDEN OF PROOF AND PRESUMPTION;

NOTARIAL DOCUMENT HAS IN ITS FAVOR THE PRESUMPTION OF
REGULARITY WHICH MAY ONLY BE REBUTTED BY EVIDENCE SO CLEAR,
STRONG AND CONVINCING AS TO EXCLUDE ALL CONTROVERSY AS TO
THE FALSITY OF THE CERTIFICATE. Deeply embedded in our jurisprudence is
the rule that notarial documents celebrated with all the legal requisites under the
safeguard of a notarial certificate is evidence of a high character and to overcome its
recitals, it is incumbent upon the party challenging it to prove his claim with clear,
convincing and more than merely preponderant evidence. A notarized document carries
the evidentiary weight conferred upon it with respect to its due execution, and it has in its
favor the presumption of regularity which may only be rebutted by evidence so clear,
strong and convincing as to exclude all controversy as to the falsity of the certificate.
Absent such, the presumption must be upheld. The burden of proof to overcome the
presumption of due execution of a notarial document lies on the one contesting the same.
Furthermore, an allegation of forgery must be proved by clear and convincing evidence,
and whoever alleges it has the burden of proving the same.

2. ID.; ID.; ID.; DUE EXECUTION AND AUTHENTICITY OF PRIVATE

DOCUMENT MUST BE ADEQUATELY PROVED; PRESENT IN CASE AT BAR.
From the perspective of the law on evidence, however, the presumption of regularity does
not hold true with respect to the Marital Consent which is a private writing. It is subject
to the requirement of proof under Section 20, Rule 132 of the Rules of Court which
states: Section 20. Proof of private document. Before any private document offered as
authentic is received in evidence, its due execution and authenticity must be proved
either: (a) By anyone who saw the document executed or written; or (b) By evidence of
the genuineness of the signature or handwriting of the maker. Any other private
document need only be identified as that which is claimed to be. The requirement of
proof of the authenticity of the Marital Consent was adequately met, in this case, through
the testimony of Cruz to the effect that, together with the other witnesses to the
document, he was present when Capistrano's wife affixed her signature thereon before
notary public Benedicto. Viewed against this positive declaration, Capistrano's negative
and self-serving assertions that his wife's signature on the document was forged because
"(I)t is too beautiful" and that his wife could not have executed the Marital Consent
because it was executed on her natal day and she was somewhere else, crumble and
become unworthy of belief. That the Marital Consent was executed prior to the Deed of
Absolute Sale also does not indicate that it is phoney. A fair assumption is that it was
executed in anticipation of the Deed of Absolute Sale which was accomplished a scant
six (6) days later.

3. CIVIL LAW; SPECIAL CONTRACTS; SALES; PARTIES MAY STIPULATE

THAT TITLE MAY PASS EVEN IF PURCHASER HAS NOT FULLY PAID THE
PRICE. Article 1478 of the Civil Code states that "the parties may stipulate that
ownership in the thing shall not pass to the purchaser until he has fully paid the price." A
sensu contrario, the parties may likewise stipulate that the ownership of the property may
pass even if the purchaser has not fully paid the price.

4. ID.; CONTRACTS; DEED OF CONVEYANCE; ABSENCE OF

ACKNOWLEDGMENT DOES NOT RENDER A DEED INVALID. The use of a
jurat, instead of an acknowledgement does not elevate the Marital Consent to the level of
a public document but instead consigns it to the status of a private writing. The lack of
acknowledgment, however, does not render a deed invalid. The necessity of a public
document for contracts which transmit or extinguish real rights over immovable property,
as mandated by Article 1358 of the Civil Code, is only for convenience; it is not essential
for validity or enforceability.

DECISION

TINGA, J : p

Petitioner Pan Pacific Industrial Sales Co., Inc. (Pan Pacific) filed the instant Petition for
Review on Certiorari 1 assailing the Decision 2 dated 4 June 1996 of the Court of
Appeals Fourteenth Division in C.A. G.R. No. CV-41112. The challenged Decision
affirmed in toto the Decision 3 dated 24 April 1992 of the Regional Trial Court (RTC) of
Manila, Branch 18 in Civil Case No. 88-46720.

The case arose when on 22 December 1988, private respondent Nicolas Capistrano
(Capistrano) filed an Amended Complaint 4 before the RTC of Manila against Severo C.
Cruz III (Cruz), his spouse Lourdes Yap Miranda, and Atty. Alicia Guanzon, 5 pleading
two causes of action. 6
The first cause of action is for the nullification, or alternatively, for the "rescission," of a
Deed of Absolute Sale 7 covering a parcel of land that Capistrano owned, located at 1821
(Int.), Otis Street (now Paz Guanzon Street), Paco, Manila, and covered by Transfer
Certificate of Title (TCT) No. 143599 to Cruz. 8 This is the subject lot. Capistrano denied
having executed the deed.

The second cause of action is for the rescission of another agreement with an alternative
prayer for specific performance. Capistrano alleged that he agreed to sell another parcel
of land in the same vicinity to Cruz. According to Capistrano, Cruz only paid
P100,000.00 of the stipulated purchase price, thereby leaving P250,000.00 still unpaid. 9

The operative facts follow.

On 10 September 1982, Capistrano executed a Special Power of Attorney 10 authorizing

Cruz to mortgage the subject lot in favor of Associated Bank (the Bank) as security for
the latter's loan accommodation. 11

Shortly, by virtue of the Special Power of Attorney, Cruz obtained a loan in the amount
of P500,000.00 from the Bank. Thus, he executed a Real Estate Mortgage 12 over the
subject lot in favor of the Bank. 13

Capistrano and Cruz then executed a letter-agreement dated 23 September 1982 whereby
Cruz agreed to buy the subject lot for the price of P350,000.00, of which P200,000.00
would be paid out of the loan secured by Cruz, and the balance of P150,000.00 in eight
(8) quarterly payments of P18,750.00 within two (2) years from 30 October 1982,
without need of demand and with interest at 18% in case of default. 14

On 15 March 1983, Capistrano executed the Deed of Absolute Sale 15 over the subject
lot in favor of Cruz. Two (2) days later, on 17 March 1983, Notary Public Vicente J.
Benedicto (Benedicto) notarized the deed. However, it was earlier or on 9 March 1983
that Capistrano's wife, Josefa Borromeo Capistrano, signed the Marital Consent 16
evidencing her conformity in advance to the sale. The Marital Consent was also sworn to
before Benedicto. ATDHSC

Following the execution of the deed of sale, Cruz continued payments to Capistrano for
the subject lot. Sometime in October 1985, Capistrano delivered to Cruz a Statement of
Account 17 signed by Capistrano, showing that as of 30 October 1985, Cruz's balance
stood at P19,561.00 as principal, and P3,520.98 as interest, or a total of P23,081.98.

Thus, in May 1987, with the mortgage on the subject lot then being in danger of
foreclosure by the Bank, Cruz filed a case with the RTC of Manila, Branch 11, docketed
as Civil Case No. 87-40647, to enjoin the foreclosure. Cruz impleaded Capistrano and his
spouse Josefa Borromeo Capistrano as defendants, the title to the subject lot not having
been transferred yet to his name. 18

Cruz also devised a way to save the subject lot from foreclosure by seeking a buyer for it
and eventually arranging for the buyer to pay the mortgage debt. Towards this end, Cruz
succeeded in engaging Pan Pacific. Thus, on 22 September 1988, Pan Pacific paid off
Cruz's debt in the amount of P1,180,000.00. 19 Consequently, on 23 September 1988, the
Bank executed a Cancellation of Real Estate Mortgage. 20 On even date, Cruz executed a
Deed of Absolute Sale 21 over the subject lot in favor of Pan Pacific, attaching thereto
the previous Deed of Absolute Sale executed by Capistrano in favor of Cruz.

Surprisingly, on 20 October 1988, Capistrano filed a Revocation of Special Power of

Attorney 22 with the Register of Deeds of Manila. Less than a week later, Capistrano sent
the Register of Deeds another letter informing said officer of his having come to know of
the sale of the subject lot by Cruz to Pan Pacific and requesting the officer to withhold
any action on the transaction. 23

Before long, in November 1988, Capistrano filed the precursory complaint before the
Manila RTC in Civil Case No. 88-46720.

Pan Pacific, which bought the subject lot from the Cruz spouses, was allowed to
intervene in the proceedings and joined Cruz, et al. in resisting the complaint insofar as
the first cause of action on the subject lot is concerned. 24

Then on 24 April 1992, a Decision was rendered by the trial court in favor of Capistrano
on both causes of action, the dispositive portion of which reads as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against

the defendant, Severo E. (sic) Cruz III, his spouse, Lourdes Miranda Cruz, and
the intervenor, Pan Pacific Industrial Sales Co., Inc., as follows:

1. Declaring the Letter-Agreement, dated September 23, 1982, Exhibit "C", as

resolved and/or rescinded;

2. Declaring both the Deed of Absolute Sale, Exhibit "H", and the document
entitled, "Marital Consent", Exhibit "K", null and void;

3. Declaring the Deed of Absolute Sale executed by the spouses Severo C. Cruz,
III and Lourdes Miranda Cruz in favor of the intervenor, Pan Pacific Industrial
Sales, Co., Inc., Exhibit "8", null and void;

4. Making the writ of preliminary injunction issued by this Court on November

23, 1988, permanent;
 5. Ordering the intervenor, thru its legal counsel and corporate secretary, Atty.
Senen S. Burgos, who has possession of the owner's copy of TCT No. 143599
of the Register of Deeds of Manila, in the name of the plaintiff, to surrender the
same to this Court within ten days from finality of the decision for turn over to
the plaintiff;
DaTICE

6. Ordering Defendant Register of Deeds of Manila to reject and not give due
course to the documents submitted to it, which have for their purpose the
transfer of the real estate property covered by TCT No. 143599 from the name
of the plaintiff to Defendant Cruz and/or to the intervenor; and

7. Ordering the spouses Severo C. Cruz, III and Lourdes Miranda Cruz to pay
the plaintiff the sum of P69,561.00 as net amount due to the latter as per the
computation in the end-part of this decision.

The counterclaims of both Severo C. Cruz, III and spouse, and of the intervenor,
Pan Pacific Industrial Sales Co., Inc., are both dismissed, for lack of merit.

Double costs against the defendants-Cruz spouses.

SO ORDERED. 25

To arrive at the conclusion that the first Deed of Absolute Sale and the Marital Consent
are spurious, the trial court mainly relied on Capistrano's disavowal of his signature and
that of his wife's, together with extrinsic factors which in its opinion evinced the
spuriousness.

Pan Pacific and the Cruz spouses interposed separate appeals to the Court of Appeals,
their common concern being the trial court's finding that the Deed of Absolute Sale and
the Marital Consent were spurious. 26

In assailing this finding, Pan Pacific and the Cruz spouses contended that Capistrano
failed to present clear and convincing evidence to overturn the presumption of regularity
of public documents like the documents in question. 27

The Court of Appeals affirmed the RTC Decision. Concerning the subject lot, it held that
while a notarial document cannot be disproved by the mere denial of the signer, the
denial in this case should be taken together with the other circumstances of the case
which in sum constitute clear and convincing evidence sufficient to overcome the
presumption of regularity of the documents. 28

The Cruz spouses did not elevate the Court of Appeals' Decision to this Court. Thus, the
RTC Decision became final as to them.
Pan Pacific, however, filed the instant Petition solely concerning the first cause of action
in the Amended Complaint. Pan Pacific contends that the genuineness and due execution
of the Deed of Absolute Sale and Marital Consent cannot be overridden by the self-
serving testimony of Capistrano. It stresses that the trial court cannot rely on irrelevant
extrinsic factors to rule against the genuineness of the deed. 29 Finally, it points out that
Capistrano cannot contest the sale of the subject lot to Cruz, as the sale had already been
consummated. 30

For his part, Capistrano posits in his Memorandum 31 that Pan Pacific is not an innocent
purchaser for value and in good faith as Cruz was never the registered owner of the
subject lot. Pan Pacific was bound at its peril to investigate the right of Cruz to transfer
the property to it. Moreover, Capistrano asserts that the legal presumption of regularity of
public documents does not obtain in this case as the documents in question were not
properly notarized. He adds that the parties never appeared before the notary public as in
fact the deed had only been delivered by Capistrano to the house of Cruz's mother.

Furthermore, Capistrano maintains that his spouse's signature on the Marital Consent is a
forgery as it was virtually impossible for her to have signed the same. Lastly, Capistrano
disputes Cruz's assertion that the sale had been consummated, pointing out that the
Amended Complaint consisted of two (2) causes of action pertaining to two (2) separate
lots, and Cruz had only paid P100,000.00 of the total price of the lot subject of the second
cause of action.

The petition is imbued with merit.

Pan Pacific disputes the common conclusion reached by the courts below that the
presumption of regularity of the Deed of Absolute Sale and the Marital Consent, which in
its estimation are both public documents, has been rebutted by Capistrano's
countervailing evidence. The correctness of the conclusions on the alleged spuriousness
of the documents in question drawn by the courts below from the facts on record is before
this Court. The issue is a question of law cognizable by the Court. 32

Deeply embedded in our jurisprudence is the rule that notarial documents celebrated with
all the legal requisites under the safeguard of a notarial certificate is evidence of a high
character and to overcome its recitals, it is incumbent upon the party challenging it to
prove his claim with clear, convincing and more than merely preponderant evidence. 33

A notarized document carries the evidentiary weight conferred upon it with respect to its
due execution, and it has in its favor the presumption of regularity which may only be
rebutted by evidence so clear, strong and convincing as to exclude all controversy as to
the falsity of the certificate. Absent such, the presumption must be upheld. The burden of
proof to overcome the presumption of due execution of a notarial document lies on the
one contesting the same. Furthermore, an allegation of forgery must be proved by clear
and convincing evidence, and whoever alleges it has the burden of proving the same. 34

Evidently, as he impugns the genuineness of the documents, Capistrano has the burden of
making out a clear-cut case that the documents are bogus. The courts below both
concluded that Capistrano had discharged this burden. However, this Court does not
share the conclusion. Indeed, Capistrano failed to present evidence of the forgery that is
enough to overcome the presumption of authenticity. IaDcTC

To support the allegation of the spuriousness of his signature on the Deed of Absolute
Sale and that of his wife on the Marital Consent, Capistrano relied heavily on his bare
denial, at the same time taking sanctuary behind other circumstances which supposedly
cast doubt on the authenticity of the documents. Capistrano did not bother to present
corroborating witnesses much less an independent expert witness who could declare with
authority and objectivity that the challenged signatures are forged. It befuddles the Court
why both the courts below did not find this irregular considering that the Court has
previously declared in Sy Tiangco v. Pablo and Apao, 35 "that the execution of a
document that has been ratified before a notary public cannot be disproved by the mere
denial of the alleged signer."

The case of Chilianchin v. Coquinco 36 also finds application in this regard wherein we
stated that:

As the lower court correctly said, the plaintiff did not even present a sample of
his authentic signature to support his contention that it is not his the (sic)
signature appearing in said document. He did not call a handwriting expert to
prove his assertion. His attorney, at the beginning of the trial, made it of record
that if the defendant present an expert in hand-writing to show that the signature
in question is genuine, the plaintiff will also present an expert to the contrary, as
if it were incumbent upon the defendant to show that the signature of the
plaintiff in Exhibit A is genuine . . . . 37

Corollarily, he who disavows the authenticity of his signature on a public document bears
the responsibility to present evidence to that effect. Mere disclaimer is not sufficient. At
the very least, he should present corroborating witnesses to prove his assertion. At best,
he should present an expert witness.

On the other hand, the Court cannot understand why an unfavorable inference arose not
from Capistrano's but from Cruz's failure to have the documents examined by an expert
witness of the National Bureau Investigation (NBI) and to present the notary public as
witness. Specifically, the courts below took Cruz's inability to obtain the NBI
examination of the documents as he had somehow undertaken as an indication that the
documents are counterfeit. 38
The courts below may have forgotten that on Capistrano lies the burden to prove with
clear and convincing evidence that the notarized documents are spurious. Nothing in law
or jurisprudence reposes on Cruz the obligation to prove that the documents are genuine
and duly executed. Hence it is not incumbent upon Cruz to call the notary public or an
expert witness. In contrast, Capistrano should have called the expert witness, the notary
public himself or the witnesses to the document to prove his contention that he never
signed the deed of sale, that its subscribing witnesses never saw him sign the same, and
that he never appeared before the notary public before whom the acknowledgment was
made.

In fact, there is no evidence that the notarization of the documents did not take place. All
that Capistrano could say on this matter was that he had not seen Benedicto, the notary
public. 39 The assertion that the parties to the deed never appeared before the notary
public is not supported by evidence either. The courts below drew an inference to that
effect from Cruz's testimony that the deed of sale was dropped or delivered to his
mother's house. 40 That is not a reasonable deduction to make as it is plainly conjectural.
No conclusion can be derived therefrom which could destroy the genuineness of the deed.
The testimony means what it declares: that the copy of the deed was dropped at the house
of Cruz's mother. That is all.

Nor can the Court lend credence to the thinking of the courts below that since Cruz had a
balance of P132,061.00 owing to Capistrano as of the date of the deed of sale, the latter
could not have possibly executed the deed. This is plain guesswork. From the existence
of Cruz's outstanding balance, the non-existence of the deed of sale does not necessarily
follow. DcSTaC

Indeed, a vendor may agree to a deed of absolute sale even before full payment of the
purchase price. Article 1478 of the Civil Code states that "the parties may stipulate that
ownership in the thing shall not pass to the purchaser until he has fully paid the price." A
sensu contrario, the parties may likewise stipulate that the ownership of the property may
pass even if the purchaser has not fully paid the price.

The courts below also assigned an adverse connotation to Cruz's impleading of the
Capistrano spouses as party-defendants in the action against the Bank to enjoin the
foreclosure of the mortgage on the subject lot. Cruz's move is congruent with both his
strong desire to protect his interest in the subject lot and the reality that there was an
existing deed of sale in his favor. Precisely, his interest in the lot is borne out and had
arisen from the deed of sale. As purchaser of the lot, he had to avert the foreclosure of the
mortgage thereon. And to ensure against the dismissal of the action for failure to join a
real party-in-interest, he had to implead Capistrano in whose name the title to the subject
lot was registered still.
Apart from Capistrano's abject failure to overcome the presumption of regularity and
genuineness with which the Deed of Absolute Sale is impressed as a public document,
Capistrano's cause is eviscerated by his own acts in writing before and after the execution
of the deed. Said written acts constitute indelible recognition of the existence and
genuineness of the Deed of Absolute Sale.

First is the letter-agreement 41 dated 23 September 1982 made and signed by Capistrano
in favor of Cruz, which the latter also signed subsequently, stating that Cruz will, as he
did, purchase the subject lot for P350,000.00 to be paid according to the terms provided
therein.

Second is the Statement of Account 42 signed by Capistrano, which he delivered to Cruz,

showing that as of 30 October 1985, Cruz's balance of the stipulated purchase price
consisted of P19,561.00 as principal and P3,520.98 as interest, or a total of P23,081.98.

Third is Capistrano's Amended Complaint itself which illustrates his own manifest
uncertainty as to the relief he was seeking in court. He demanded that the Deed of
Absolute Sale be nullified yet he prayed in the same breath for the "rescission" of the
same 43 evidently, a self-defeating recognition of the contract. In asking for
"rescission," Capistrano obviously was invoking Article 1191 of the Civil Code which
provides that the "power to rescind," which really means to resolve or cancel, is implied
in reciprocal obligations "in case one of the obligors should not comply with what is
incumbent upon him." When a party asks for the resolution or cancellation of a contract it
is implied that he recognizes its existence. A non-existent contract need not be cancelled.

These are unmistakable written admissions of Capistrano that he really intended to sell
the subject lot to Cruz and that he received payments for it from the latter as late as the
year 1985. It is thus a little baffling why in 1988, he decided to disown the Deed of
Absolute Sale. The most plausible explanation for his sudden change of mind would be
his belated realization that he parted with the subject lot for too small an amount
(P350,000.00), compared to the price pegged by Cruz (P1,800,000.00) in the sale to Pan
Pacific.

Now, to the Marital Consent. The fact that the document contains a jurat, not an
acknowledgment, should not affect its genuineness or that of the related document of
conveyance itself, the Deed of Absolute Sale. In this instance, a jurat suffices as the
document only embodies the manifestation of the spouse's consent, 44 a mere appendage
to the main document.

The use of a jurat, instead of an acknowledgement does not elevate the Marital Consent
to the level of a public document but instead consigns it to the status of a private writing.
45 The lack of acknowledgment, however, does not render a deed invalid. The necessity
of a public document for contracts which transmit or extinguish real rights over
immovable property, as mandated by Article 1358 of the Civil Code, is only for
convenience; it is not essential for validity or enforceability. 46

From the perspective of the law on evidence, however, the presumption of regularity does
not hold true with respect to the Marital Consent which is a private writing. It is subject
to the requirement of proof under Section 20, Rule 132 of the Rules of Court which
states:

Section 20. Proof of private document. Before any private document offered
as authentic is received in evidence, its due execution and authenticity must be
proved either:

(a) By anyone who saw the document executed or written; or

(b) By evidence of the genuineness of the signature or handwriting of

the maker.

Any other private document need only be identified as that which is claimed to
be.

The requirement of proof of the authenticity of the Marital Consent was adequately met,
in this case, through the testimony of Cruz to the effect that, together with the other
witnesses to the document, he was present when Capistrano's wife affixed her signature
thereon before notary public Benedicto. 47 Viewed against this positive declaration,
Capistrano's negative and self-serving assertions that his wife's signature on the document
was forged because "(i)t is too beautiful" and that his wife could not have executed the
Marital Consent because it was executed on her natal day and she was somewhere else,
crumble and become unworthy of belief.

That the Marital Consent was executed prior to the Deed of Absolute Sale also does not
indicate that it is phoney. A fair assumption is that it was executed in anticipation of the
Deed of Absolute Sale which was accomplished a scant six (6) days later.

With respect to whatever balance Cruz may still owe to Capistrano, the Court believes
that this is not a concern of Pan Pacific as the latter is not a party to the Deed of Absolute
Sale between Capistrano and Cruz. But of course, Pan Pacific should enjoy full
entitlement to the subject lot as it was sold to him by Cruz who earlier had acquired title
thereto absolutely and unconditionally by virtue of the Deed of Absolute Sale. Otherwise
laid down, Cruz had the right to sell the subject lot to Pan Pacific in 1988, as he in fact
did. Thus, the question of whether or not Pan Pacific is a purchaser in good faith should
be deemed irrelevant. HCSAIa
WHEREFORE, the Petition is GRANTED. The Decision dated 4 June 1996 of the Court
of Appeals in CA-G.R. CV No. 41112 is REVERSED and SET ASIDE. Respondent
Nicolas Capistrano is ordered to surrender the owner's duplicate certificate of Transfer of
Certificate of Title No. 143599 to the Register of Deeds of Manila to enable the issuance
of a new title over the subject lot in the name of petitioner Pan Pacific Industrial Sales,
Inc. Costs against respondent Nicolas Capistrano.

SO ORDERED.

Quisumbing, Carpio and Carpio-Morales, JJ., concur.

(Pan Pacific Industrial Sales Co., Inc. v. Court of Appeals, G.R. No. 125283, [February
|||

10, 2006], 517 PHIL 380-395)

 SECOND DIVISION

[G.R. No. 133208. July 31, 2006.]

LAURENCIO C. RAMEL, SOCORRO B. RAMEL and RENE

LEMAR B. RAMEL, petitioners, vs. DANIEL AQUINO and
GUADALUPE ABALAHIN, respondents.

BENJAMIN AQUINO and VIRGINIA AQUINO, respondents-

intervenors.

DECISION

PUNO, J : p

At bar is a Petition for Review on Certiorari of the Decision and Resolution of the Court
of Appeals in CA-G.R. CV No. 28654 dated April 16, 1997 and March 25, 1998,
respectively, affirming the decision of the Regional Trial Court of Santiago, Isabela,
Branch 21, in Civil Case No. 0302.

The instant case originated from a suit filed by petitioners Laurencio C. Ramel, Socorro
B. Ramel and Rene Lemar B. Ramel against respondent Daniel Aquino, married to
respondent Guadalupe Abalahin, for Specific Performance with Preliminary Injunction
and Damages.

Daniel Aquino is the registered owner of Lot No. 2080, a 14.1825-hectare land situated in
Tanggal, Cordon, Isabela under Transfer Certificate of Title (TCT) No. T-36937. On
October 21, 1975, Aquino mortgaged the property to the Development Bank of the
Philippines (DBP), Ilagan Branch, Ilagan, Isabela for P50,000.00. In 1983, the property
was in danger of being foreclosed as respondents had no means to pay for the loan. Thus,
on August 7, 1983, they offered to sell to petitioners 8.2030 hectares of the mortgaged
property.

Petitioners agreed to purchase the property but the agreement was not reduced into
writing. Petitioners were to buy the 8.2030 hectares at P13,500.00 per hectare or at a total
sum of around P110,700.00. Petitioners would assume the remaining mortgage obligation
of respondents with DBP as of July 31, 1983 in the amount of P85,543.00 and the
balance of about P25,000.00 shall be paid to respondents on installment. 1
On the same day that the offer was made and accepted, petitioners gave respondents an
earnest money of P5,000.00. 2 Further additional partial payments were made on
September 7, 1983 in the sum of P15,000.00 3 and P4,800.00 4 on February 12, 1984.
All three payments were duly receipted by respondents.

Petitioners also made the following payments to DBP: 5 P10,000.00 on September 7,

1983; P3,097.00 on November 18, 1983; and, P10,000.00 on April 2, 1984, for a total of
P23,097.00.

Respondents also sold to petitioners 2,484 square meters of the southern portion of the
mortgaged property for P2,700.00. Petitioners paid the full amount on September 7,
1983. 6 On even date, petitioners were allowed by respondents to take possession of the
parcels of land sold. Since then, they allegedly introduced improvements 7 to the
property, such as rice paddies, drainage canal, fence and a house.aSITDC

On November 18, 1983, petitioners applied for a re-structuring of the mortgage loan with
the DBP for a period of ten years, allegedly with the conformity of respondents. The bank
approved the loan re-structuring. 8 Under the new scheme, the loan was to be paid with a
semi-annual amortization of P8,634.15 beginning May 21, 1984 for five years.
Thereafter, the loan shall be paid with a semi-annual amortization of P4,904.60 starting
on the 6th to the 10th year. 9

On October 1, 1984, petitioners went to DBP to pay for the amortization but they found
out that respondents had paid the bank P72,703.06. Petitioners offered to return to
respondents the said sum but the latter refused to accept the offer. Instead, respondents
told petitioners that they would return whatever they have paid for the land, and
threatened to withdraw the certificate of title of the land from the bank. The manager of
the bank accepted the money tendered by respondents as "deposit" and gave the parties
time to settle the matter on their own, but to no avail. On October 9, 1984, petitioners
filed with the trial court for Specific Performance with Preliminary Injunction and
Damages. On October 12, 1984, the trial court restrained the respondents from
withdrawing the certificate of title and the Release of Mortgage. The bank was also
enjoined from releasing the title to respondents. On even date, respondents withdrew the
amount of P72,703.06 which they had paid to the bank.

Meanwhile, during the pendency of the case, petitioners made the following payments to
DBP in full settlement of the loan: P30,000.00 on November 29, 1984; P50,000.00 on
April 30, 1986; and P5,118.42 on May 2, 1986, or a total of around P108,216.00. The
DBP then deposited the Release of Mortgage to the Clerk of Court.

Respondent spouses alleged that petitioners agreed to pay them P35,000.00, not
P25,000.00. They further alleged that petitioners agreed to assume in full the then
remaining mortgage loan with DBP and to withdraw the certificate of title of the land not
later than December 31, 1983. Respondents allegedly set this period because they needed
the title to claim the area taken by the NIA for an irrigation canal. However, petitioners
defaulted to pay the bank within the period agreed upon and re-structured the loan
without their consent. Upon learning of petitioners re-structuring the loan, respondents
decided to revoke the sale, sold a portion of Lot No. 2080 and tendered P72,703.06 from
its proceeds to DBP on October 1, 1984 in full settlement of the loan.

Respondents-Intervenors Benjamin Aquino and Virginia Aquino are the siblings of

respondent Aquino and intervened as co-owners of Lot No. 2080. An amicable settlement
10 was entered into between respondent Aquino and the intervenors on March 2, 1985.

The trial court issued an Order dated March 11, 1986 stating the following material parts
of the stipulations of the parties during the pre-trial conference:

STIPULATIONS OF FACTS

xxx xxx xxx

2. That the 8.2030 hectares of riceland located at Cordon, Isabela is covered by

Transfer Certificate of Title No. 36937, Isabela Registry, in the name of
Daniel Aquino;

xxx xxx xxx

5. That the payments made by Rene Lemar R. Ramel and duly receipted are:

(1) On Feb. 12, 1983, 11 the amount of P4,800.00 . . . ;

(2) On August 7, 1983, the amount of P5,000.00 . . . ;

(3) On Sept. 7, 1983, the amount of P15,000.00 . . . ;

(4) On Sept. 7, 1983, the amount of P2,700.00 . . . ;

and admitted by all the parties. 12

On June 28, 1990, the trial court decided as follows, viz.:

WHEREFORE, in light of the foregoing considerations[,] judgment is hereby

rendered: cITaCS

1. ORDERING the spouses Daniel Aquino and Guadalupe Aquino to execute a

deed of sale over a portion of lot 2080 located and bounded by Ilut Creek on the
south, Juan Mariano's lot on the east, portion of lot 2080 on the north and
 Castillo's lot on the west, containing an area of [2,484] square meters more or
less, in favor of Rene Lemar Ramel.

2. DECLARING that the oral contract of sale between the plaintiff Rene Lemar
Ramel and the defendants spouses Daniel and Guadalupe Aquino as rescinded.

3. ORDERING the defendants spouses Daniel and Guadalupe Aquino to pay to

the plaintiff Rene Lemar Ramel the sums of P29,800.00 representing the
amount received by said defendants for the land, plus P108,216.00 representing
the amount paid by the plaintiffs to the bank.

4. ORDERING the plaintiffs to return the peaceful possession of the land, lot
2080[,] after they shall have been paid the aforesaid amount by the defendants.

5. ORDERING the intervenors Benjamin Aquino and Virginia Aquino to

reimburse to the defendant Daniel Aquino their one-third share each of the
amount of P138,016[.00] which the latter paid to the plaintiff.

6. DECLARING that the intervenors Benjamin Aquino and Virginia Aquino are
the co-owners of the 8.2030 southern portion of lot 2080 in equal shares. 13

Petitioners appealed to the Court of Appeals which affirmed the decision of the trial court
and denied their Motion for Reconsideration. Hence, this petition assailing the decision of
the appellate court, viz.:

I.A. BASED NOT ONLY ON MISAPPREHENSION AND APPRECIATION

OF FACTS, BUT ALSO ON THE FINDINGS WHICH MANIFESTLY
OVERLOOKED CERTAIN RELEVANT FACTS NOT DISPUTED BY THE
PARTIES AND WHICH, IF PROPERLY CONSIDERED, WOULD JUSTIFY
A DIFFERENT CONCLUSION, AS WELL AS ON AN INFERENCE WHICH
IS MANIFESTLY MISTAKEN.

I.B. BASED ON A FALSE, FABRICATED AND SELF-SERVING

TESTIMONY OF THE RESPONDENTS.

I.C. BASED ON THE FINDINGS OF FACTS WHICH ARE CONTRARY TO

THOSE OF THE TRIAL COURT AND CONTRARY TO THE ADMISSION
OF THE RESPONDENTS HEREIN.

II. THE JUDGMENT OF THE TRIAL COURT WHICH WAS AFFIRMED

BY THE COURT OF APPEALS IS NOT IN ACCORD WITH THE
EXISTING LAWS AND THE APPLICABLE DECISIONS OF THIS
HONORABLE COURT, BEING AN ERRONEOUS APPLICATION OF
ARTICLES 1191 AND 1545 OF THE CIVIL CODE AND THE APPLICABLE
JURISPRUDENCE. 14
The hinge issues are the following: (1) whether petitioners substantially breached their
obligation warranting the rescission of the contract and (2) whether there is legal ground
to order the offsetting of the claim of improvements by petitioners to the claim of fruits
derived from the land by respondents.

First to be determined is the total amount paid by petitioners to respondents to show the
former's compliance or non-compliance with their obligation.

There is no question that petitioners were obligated to pay the remaining mortgage
obligation of respondents with the DBP as of July 31, 1983. The official receipt 15 dated
September 7, 1983 issued by DBP shows that the remaining mortgage obligation of
respondents as of September 7, 1983 was P75,544.92, that is after petitioners had paid
the bank P10,000.00 on the same date. Hence, the total remaining mortgage obligation as
of July 31, 1983 which was supposed to be assumed by petitioners was P85,544.92.
Deducting this from the total value of the land which is about P110,700.00, the balance of
about P25,000.00, and not P35,000.00, was to be paid by petitioners to respondents. ICHDca

The courts a quo erred in concluding that petitioners were able to pay respondents a total
sum of P29,800.00. Per stipulation by the parties themselves, petitioners paid to
respondents the total sum of P27,500.00. 16 This even includes the amount of P2,700.00
which petitioners paid for the additional 2,484-square meter strip of land which they
purchased from respondents. Deducting this P2,700.00 from the total payments made for
the 8.2030 hectares, petitioners were able to pay a sum of P24,800.00 of the P25,000.00
balance for the subject parcel. This small discrepancy is not a ground for respondents to
rescind their contract with petitioners.

We look, however, to the other ground the failure of petitioners to pay the remaining
balance of the mortgage obligation of respondents to the DBP. The record shows that at
the time petitioners filed the case with the trial court on October 9, 1984, they were able
to pay only P23,097.00 of the then P85,544.92 outstanding mortgage obligation of
respondents. Instead of petitioners paying the remaining balance on or before December
31, 1983, they asked the DBP to re-structure the payment of the loan for ten years in
November 1983. They did so without the consent of respondents. Their claim to the
contrary is not substantiated by evidence.

First, after respondents learned that petitioners had re-structured the loan, respondents
paid the amount of P72,703.06 to DBP. The fact that respondents later on withdrew the
amount cannot operate against them because the trial court had enjoined them from
withdrawing the certificate of title and the bank from releasing the same.
Second, the subject property was facing foreclosure that December of 1983. It was
precisely due to the impending foreclosure that respondents offered to sell the subject
property to petitioners. It was never the intention of respondents to be left at the mercy of
petitioners as to when the latter would complete payment of the remaining mortgage
obligation. It goes against the common sense of man and the ordinary course of business
that an owner of land sells his property without any definite agreement as to when the
obligation shall be paid, especially if his property is facing foreclosure. Though
petitioners were able to subsequently fully settle the mortgage loan in May 1986 two
years and five months from December 1983, and one and a half years after they filed this
case the fact remains that they reneged on their obligation to pay within the agreed
period. They could have asked respondents to give them a grace period to settle the
remaining loan obligation but they did not.

It is true that petitioners sent a Notice of Loan Approval 17 dated November 24, 1983
addressed to respondent Aquino informing that the application for loan re-structuring had
been approved by the DBP. But this does not prove their claim that respondents
authorized the loan re-structuring for the following reasons: one, it was petitioners
themselves who applied for the loan re-structuring; two, the document is a mere notice;
three, the notice does not even show that it was received by respondents; and four, after
the manager of the DBP informed respondents about the loan re-structuring, respondents
rushed to sell another portion of their land so they could pay the remaining obligation.
They later withdrew the amount because of the restraining order issued by the trial court
and not because they waived their right to rescind the contract.

With the breach committed by petitioners, the trial court ruled and the appellate court
rightly affirmed that petitioners substantially violated their obligation. Hence,
respondents are entitled to a rescission of the contract under Article 1191 of the Civil
Code, viz.:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in

case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.

The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.

xxx xxx xxx

Petitioners can not argue that their breach is merely casual and slight, especially that they
were able to subsequently pay the loan and the purpose of the contract has been fulfilled
by petitioners, i.e., that the mortgage obligation shall be paid and respondents shall be
able to retain at least the rest of the land free from any liens or encumbrances. 18 The
ruling of the trial court on this issue is correct, viz.:

. . . It is admitted that the underlying purpose of the Aquinos to sell a portion of

the land was in order that their mortgage obligation shall be paid and they shall
be able to retain at least the rest of the land free from any liens and
encumbrances. It was imperative then for Rene Ramel to pay the mortgage
obligation. He did not do so. . . . . More important[,] he did not even intend to
pay the bank because he had the loan re-structured so as to be payable in ten
years. Of course, he finally paid the mortgage loan but only after one and one-
half years after the filing of this case. To the mind of the [c]ourt, the non-
payment of the mortgage obligation until after one and one-half years after the
filing of this case constitutes a substantial breach that entitles the Aquinos to
rescind the contract. 19

Rightly, the appellate court affirmed the ruling, viz.:

Since Ramel failed to settle Aquino's mortgage obligation on or before

December 31, 1983 as in fact he restructured it for a period of ten years, he
committed a substantial breach of his agreement with Aquino. That the breach is
substantial is all the more appreciated when note is taken of the fact that the
entire 14.1825-hectare property, not just the 8.2030 hectares portion thereof sold
to Ramel, remained encumbered beyond the agreed deadline of December 31,
1983, thus restricting the owners' rights thereto. 20

Petitioners further invoke Article 1592 of the Civil Code and argue that respondents are
not entitled to rescission because no demand has been made upon them either judicially
or by notarial act. They contend that respondents "merely raised rescission as a defense in
this case of Specific Performance and they have never informed the Ramels about their
alleged decision to exercise the said right before this case was filed . . . ." 21 They aver
that the act of the Aquinos in tendering payment to DBP does not constitute demand as
the term is defined under Article 1592, 22 viz.:

Art. 1592. In the sale of immovable property, even though it may have been
stipulated that upon failure to pay the price at the time agreed upon the
rescission of the contract shall of right take place, the vendee may pay, even
after the expiration of the period, as long as no demand for rescission of the
contract has been made upon him either judicially or by a notarial act. After the
demand, the court may not grant him a new term. EScIAa

Again, we reject the argument. We held in the case of Luzon Brokerage Co., Inc. v.
Maritime Building Co., Inc. 23 that even a cross-claim found in the Answer filed in the
trial court constitutes judicial demand for rescission that satisfies the requirements of
Article 1592. Further, in Iringan v. Court of Appeals, 24 we held that an action for
Judicial Confirmation of Rescission and Damages before the Regional Trial Court
complied with the requirement of the law for judicial demand of rescission even if the
intention of the moving party was to compel the other party to formalize in a public
document their extrajudicial mutual agreement to rescind. In this case, the mutual
agreement to rescind was forged when the injured party sent to the defaulting party a
letter stating that he had considered the contract rescinded and that he would not accept
any further payment. The defaulting party replied that he was not opposing the revocation
of the sale, save for some reimbursements. We held that though the letter declaring the
intention to rescind did not satisfy the "demand" required by the law, the subsequent case
filed for a judicial confirmation of the rescission did meet the requirement for a valid
demand.

We rule that respondents satisfied Article 1592 when they raised rescission as a defense
in their Answer. To be sure, petitioners learned of respondents' intention to rescind even
before they filed their Answer. Petitioners knew the intent to rescind when respondents
deposited the amount of P72,703.06 with DBP to fully settle their remaining obligation.
Petitioners were told by respondents that they were rescinding the contract after the
mortgage was re-structured without their consent. Indeed, it was this declaration by
respondents that prompted petitioners to file the case of Specific Performance with the
trial court.

Finally, petitioners question the ruling of the courts a quo offsetting the claim of
improvements by petitioners and the claim of the fruits derived from the land by
respondents. Petitioners claim that the offsetting of claims is erroneous citing Articles
546 and 547 of the Civil Code, viz.:

Art. 546. Necessary expenses shall be refunded to every possessor; but only the
possessor in good faith may retain the thing until he has been reimbursed
therefor.

Useful expenses shall be refunded only to the possessor in good faith with the
same right of retention, the person who has defeated him in the possession
having the option of refunding the amount of the expenses or of paying the
increase in value which the thing may have acquired by reason thereof.

Art. 547. If the useful improvements can be removed without damage to the
principal thing, the possessor in good faith may remove them, unless the person
who recovers the possession exercises the option under paragraph 2 of the
preceding article.

Under these provisions, petitioners argue that as possessors in good faith and in the
concept of an owner, they are entitled to the fruits received before possession was legally
interrupted and they must be reimbursed for their expenses or for the increase in the value
the subject property may have acquired by reason thereof. 25
The records show that both parties failed to prove their claims through any receipt or
document. Despite the lack of proof, the trial court ordered that whatever improvements
spent on the land shall be offset from the fruits derived therefrom, viz.: 26

The plaintiffs claimed that they were able to improve the land after possession
was given to them. No receipts were shown to guide the [c]ourt as to how much
[were] the costs of the improvements. Likewise the defendants claimed that the
plaintiffs were able to cultivate the land and harvest palay although their
testimonies to this effect [are] based on their presumptions and calculations not
on actual harvest such that the [c]ourt also cannot make determination of the
real fruits derived from the land. This being so, the [c]ourt shall just offset the
claim of improvements to the claim of fruits derived from the land and then
place the parties in their previous positions before the agreement. Whatever
improvements spent on the land shall be compensated from the fruits derived
therefrom. 27

The appellate court found the setting off by the trial court to be in order, viz.:

[W]e find in order the Solomonic setting off by the court a quo the appellants'
claim of improvements on, with the appellees' claims for value of the fruits of,
the subject land, given the paucity of evidence on the matter. Along the same
vein, We find it just and fair to set off the compensation arising from the
possession and enjoyment of the fruits of subject lot by appellants during the
pendency of the case with the interests due on the amounts paid by them to the
Aquinos and to the DBP. 28

We can not order an offsetting of the claims as did the trial court and the appellate court.
The evidence show that both parties failed to prove their respective claims. In the absence
of evidence from both parties on their claims, offsetting is improper. The right to offset
may exist but the question of how much is to be offset is factual in nature and needs to be
proved by proper evidence. ACcEHI

IN VIEW WHEREOF, the Decision and the Resolution of the Court of Appeals in CA-
G.R. CV No. 28654 dated April 16, 1997 and March 25, 1998, respectively, are
AFFIRMED with the MODIFICATION that respondents are ordered to pay petitioners
the sum of P24,800.00, not P29,800.00 as ordered by the trial court, representing the
amounts they received from petitioners, plus the sum of P108,216.00 representing the
amounts petitioners paid to DBP. The order on the offsetting of claims is DELETED for
lack of evidence. Respondents-intervenors, as co-owners, are likewise ordered to
reimburse respondent Aquino their one-third share each of the total amount to be paid by
Aquino to petitioners.

SO ORDERED.
Sandoval-Gutierrez, Corona, Azcuna and Garcia, JJ., concur.

||| (Ramel v. Aquino, G.R. No. 133208, [July 31, 2006], 529 PHIL 167-181)
 SECOND DIVISION

[G.R. No. 152347. June 21, 2006.]

UNION BANK OF THE PHILIPPINES, petitioner, vs. SPS.

ALFREDO ONG AND SUSANA ONG and JACKSON LEE,
respondents.

DECISION

GARCIA, J : p

By this petition for review under Rule 45 of the Rules of Court, petitioner Union Bank of
the Philippines (Union Bank) seeks to set aside the decision 1 dated December 5, 2001 of
the Court of Appeals (CA) in CA-G.R. No. 66030 reversing an earlier decision of the
Regional Trial Court (RTC) of Pasig City in Civil Case No. 61601, a suit thereat
commenced by the petitioner against the herein respondents for annulment or rescission
of sale in fraud of creditors.

The facts:

Herein respondents, the spouses Alfredo Ong and Susana Ong, own the majority capital
stock of Baliwag Mahogany Corporation (BMC). On October 10, 1990, the spouses
executed a Continuing Surety Agreement in favor of Union Bank to secure a
P40,000,000.00-credit line facility made available to BMC. The agreement expressly
stipulated a solidary liability undertaking.

On October 22, 1991, or about a year after the execution of the surety agreement, the
spouses Ong, for P12,500,000.00, sold their 974-square meter lot located in Greenhills,
San Juan, Metro Manila, together with the house and other improvements standing
thereon, to their co-respondent, Jackson Lee (Lee, for short). The following day, Lee
registered the sale and was then issued Transfer Certificate of Title (TCT) No. 4746-R.
At about this time, BMC had already availed itself of the credit facilities, and had in fact
executed a total of twenty-two (22) promissory notes in favor of Union Bank.

On November 22, 1991, BMC filed a Petition for Rehabilitation and for Declaration of
Suspension of Payments with the Securities and Exchange Commission (SEC). To protect
its interest, Union Bank lost no time in filing with the RTC of Pasig City an action for
rescission of the sale between the spouses Ong and Jackson Lee for purportedly being in
fraud of creditors.
In its complaint, docketed as Civil Case No. 61601 and eventually raffled to Branch 157
of the court, Union Bank assailed the validity of the sale, alleging that the spouses Ong
and Lee entered into the transaction in question for the lone purpose of fraudulently
removing the property from the reach of Union Bank and other creditors. The fraudulent
design, according to Union Bank, is evidenced by the following circumstances: (1)
insufficiency of consideration, the purchase price of P12,500,000.00 being below the fair
market value of the subject property at that time; (2) lack of financial capacity on the part
of Lee to buy the property at that time since his gross income for the year 1990, per the
credit investigation conducted by the bank, amounted to only P346,571.73; and (3) Lee
did not assert absolute ownership over the property as he allowed the spouses Ong to
retain possession thereof under a purported Contract of Lease dated October 29, 1991. HTacDS

Answering, herein respondents, as defendants a quo, maintained, in the main, that both
contracts of sale and lease over the Greenhills property were founded on good and valid
consideration and executed in good faith. They also scored Union Bank for forum
shopping, alleging that the latter is one of the participating creditors in BMC's petition for
rehabilitation.

Issues having been joined, trial followed. On September 27, 1999, the trial court,
applying Article 1381 of the Civil Code and noting that the evidence on record
"present[s] a holistic combination of circumstances distinctly characterized by badges of
fraud," rendered judgment for Union Bank, the Deed of Sale executed on October 22,
1991 by the spouses Ong in favor of Lee being declared null and void.

Foremost of the circumstances adverted to relates to the execution of the sale against the
backdrop of the spouses Ong, as owners of 70% of BMC's stocks, knowing of the
company's insolvency. This knowledge was the reason why, according to the court, the
spouses Ong disposed of the subject property leaving the bank without recourse to
recover BMC's indebtedness. The trial court also made reference to the circumstances
which Union Bank mentioned in its complaint as indicia of conveyance in fraud of
creditors.

Therefrom, herein respondents interposed an appeal to the CA which docketed their

recourse as CA-G.R. No. 66030.

In its Decision dated December 5, 2001, the CA reversed and set aside the trial court's
ruling, observing that the contract of sale executed by the spouses Ong and Lee, being
complete and regular on its face, is clothed with the prima facie presumption of regularity
and legality. Plodding on, the appellate court said:

In order that rescission of a contract made in fraud of creditors may be decreed,

it is necessary that the complaining creditors must prove that they cannot
recover in any other manner what is due them. . . . .
 There is no gainsaying that the basis of liability of the appellant spouses in their
personal capacity to Union Bank is the Continuing Surety Agreement they have
signed . . . on October 10, 1990. However, the real debtor of Union Bank is
BMC, which has a separate juridical personality from appellants Ong. Granting
that BMC was already insolvent at the time of the sale, still, there was no
showing that at the time BMC filed a petition for suspension of payment that
appellants Ong were themselves bankrupt. In the case at bench, no attempt was
made by Union Bank, not even a feeble or half-hearted one, to establish that
appellants spouses have no other property from which Union Bank, as creditor
of BMC, could obtain payment. While appellants Ong may be independently
liable directly to Union Bank under the Continuing Surety Agreement, all that
Union Bank tried to prove was that BMC was insolvent at the time of the
questioned sale. No competent evidence was adduced showing that appellants
Ong had no leviable assets other than the subject property that would justify
challenge to the transaction. 2

Petitioner moved for a reconsideration of the above decision but its motion was denied by
the appellate court in its resolution of February 21, 2002. 3

Hence, petitioner's present recourse on its submission that the appellate court erred:

I. . . . WHEN IT CONSIDERED THAT THE SALE TRANSACTION

BETWEEN [ RESPONDENTS SPOUSES O AND LEE] ENJOYS THE
PRESUMPTION OF REGULARITY AND LEGALITY AS THERE EXISTS
ALSO A PRESUMPTION THAT THE SAID SALE WAS ENTERED IN
FRAUD OF CREDITORS. PETITIONER THEREFORE NEED NOT PROVE
THAT RESPONDENTS SPOUSES ONG DID NOT LEAVE SUFFICIENT
ASSETS TO PAY THEIR CREDITORS. BUT EVEN THEN, PETITIONER
HAS PROVEN THAT THE SPOUSES HAVE NO OTHER ASSETS. IHCESD

II. IN CONCLUDING, ASSUMING EX-GRATIA ARGUMENTI THAT THE

SALE BETWEEN DEFENDANT-APPELLANTS ENJOY THE
PRESUMPTION OF REGULARITY AND LEGALITY, THAT THE
EVIDENCE ADDUCED BY THE PETITIONER . . . WAS NOT SUFFICIENT
TO OVERCOME THE PRESUMPTION.

III . . . IN FINDING THAT IT WAS [RESPONDENT] LEE WHO HAS

SUFFICIENTLY PROVEN THAT THERE WAS A VALID AND
SUFFICIENT CONSIDERATION FOR THE SALE.

IV. . . . IN NOT FINDING THAT JACKSON LEE WAS IN BAD FAITH

WHEN HE PURCHASED THE PROPERTY. 4

Petitioner maintains, citing China Banking Corporation vs. Court of Appeals, 5 that the
sale in question, having been entered in fraud of creditor, is rescissible. In the same
breath, however, petitioner would fault the CA for failing to consider that the sale
between the Ongs and Lee is presumed fraudulent under Section 70 of Act No. 1956, as
amended, or the Insolvency Law . Elaborating on this point, petitioner states that the
subject sale occurred thirty (30) days prior to the filing by BMC of a petition for
suspension of payment before the SEC, thus rendering the sale not merely rescissible but
absolutely void.

We resolve to deny the petition.

In effect, the determinative issue tendered in this case resolves itself into the question of
whether or not the Ong-Lee contract of sale partakes of a conveyance to defraud Union
Bank. Obviously, this necessitates an inquiry into the facts and this Court eschews factual
examination in a petition for review under Rule 45 of the Rules of Court, save when, as
in the instant case, a clash between the factual findings of the trial court and that of the
appellate court exists, 6 among other exceptions.

As between the contrasting positions of the trial court and the CA, that of the latter
commends itself for adoption, being more in accord with the evidence on hand and the
laws applicable thereto.

Essentially, petitioner anchors its case on Article 1381 of the Civil Code which lists as
among the rescissible contracts "[T]hose undertaken in fraud of creditors when the latter
cannot in any other manner collect the claim due them."

Contracts in fraud of creditors are those executed with the intention to prejudice the rights
of creditors. They should not be confused with those entered into without such mal-
intent, even if, as a direct consequence thereof, the creditor may suffer some damage. In
determining whether or not a certain conveying contract is fraudulent, what comes to
mind first is the question of whether the conveyance was a bona fide transaction or a trick
and contrivance to defeat creditors. 7 To creditors seeking contract rescission on the
ground of fraudulent conveyance rest the onus of proving by competent evidence the
existence of such fraudulent intent on the part of the debtor, albeit they may fall back on
the disputable presumptions, if proper, established under Article 1387 of the Code. 8

In the present case, respondent spouses Ong, as the CA had determined, had sufficiently
established the validity and legitimacy of the sale in question. The conveying deed, a duly
notarized document, carries with it the presumption of validity and regularity. Too, the
sale was duly recorded and annotated on the title of the property owners, the spouses
Ong. As the transferee of said property, respondent Lee caused the transfer of title to his
name.
There can be no quibbling about the transaction being supported by a valid and sufficient
consideration. Respondent Lee's account, while on the witness box, about this angle of
the sale was categorical and straightforward. An excerpt of his testimony:

Atty. De Jesus :

Before you prepared the consideration of this formal offer, as standard operating
procedure of buy and sell, what documents were prepared?

xxx xxx xxx

Jackson Lee:

A. There is a downpayment.

Q. And how much was the downpayment?

A. P2,500,000.00.

Q. Was that downpayment covered by a receipt signed by the seller?

A. Yes, Sir, P500,000.00 and P2,000,000.00

xxx xxx xxx

Q. Are you referring to the receipt dated October 19, 1991, how about the other
receipt dated October 21, 1991?

A. Yes, Sir, this is the same receipt.

xxx xxx xxx

Q. Considering that the consideration of this document is for P12,000,000.00

and you made mention only of P2,500,000.00, covered by the receipts,
do you have evidence to show that, finally, Susana Ong received the
balance of P10,000,000.00?

A. Yes, Sir.

Q. Showing to you a receipt denominated as Acknowledgement Receipt, dated

October 25, 1991, are you referring to this receipt to cover the balance of
P10,000,000.00?

A. Yes, sir. 9
The foregoing testimony readily proves that money indeed changed hands in connection
with the sale of the subject property. Respondent Lee, as purchaser, paid the stipulated
contract price to the spouses Ong, as vendors. Receipts presented in evidence covered
and proved such payment. Accordingly, any suggestion negating payment and receipt of
valuable consideration for the subject conveyance, or worse, that the sale was fictitious
must simply be rejected.

In a bid to attach a badge of fraud on the transaction, petitioner raises the issue of
inadequate consideration, alleging in this regard that only P12,500,000.00 was paid for
property having, during the period material, a fair market value of P14,500,000.00.

We do not agree.

The existence of fraud or the intent to defraud creditors cannot plausibly be presumed
from the fact that the price paid for a piece of real estate is perceived to be slightly lower,
if that really be the case, than its market value. To be sure, it is logical, even expected, for
contracting minds, each having an interest to protect, to negotiate on the price and other
conditions before closing a sale of a valuable piece of land. The negotiating areas could
cover various items. The purchase price, while undeniably an important consideration, is
doubtless only one of them. Thus, a scenario where the price actually stipulated may, as a
matter of fact, be lower than the original asking price of the vendor or the fair market
value of the property, as what perhaps happened in the instant case, is not out of the
ordinary, let alone indicative of fraudulent intention. That the spouses Ong acquiesced to
the price of P12,500,000.00, which may be lower than the market value of the house and
lot at the time of alienation, is certainly not an unusual business phenomenon.

Lest it be overlooked, the disparity between the price appearing in the conveying deed
and what the petitioner regarded as the real value of the property is not as gross to
support a conclusion of fraud. What is more, one Oliver Morales, a licensed real estate
appraiser and broker, virtually made short shrift of petitioner's claim of gross inadequacy
of the purchase price. Mr. Morales declared that there exists no gross disparity between
the market value of the subject property and the price mentioned in the deed as
consideration. He explained why:

ATTY. EUFEMIO:

Q. I am showing to you the said two (2) exhibits Mr. Morales and I would like
you to go over the terms and conditions stated therein and as an expert in
real estate appraiser (sic) and also as a real estate broker, can you give
this Honorable Court your considered opinion whether the consideration
stated therein P12,500,000.00 in the light of all terms and conditions of
the said Deed of Absolute Sale and Offer to Purchase could be deemed
fair and reasonable?
 xxx xxx xxx

MR. MORALES:

A. My opinion generally a Deed of Absolute Sale indicated prescribed not only

the amount of the consideration. There are also other expenses involved
in the sales. I do not see here other payment of who takes care of capital
gains stocks (sic) in this Deed of Sale neither who shouldered the
documentary stamps or even transfer tax. That is my comment regarding
this. HCaDIS

Q. Precisely Mr. Witness we have also shown to you the Offer to Purchase
which has been marked as Exhibit "9" as to the terms which we are
asking?

xxx xxx xxx

A. Well, it says here in item C of the conditions the Capital Gains Stocks (sic),
documentary stamps, transfer tax registration and broker's fee for the
buyer's account. I do not know how much is this worth. If at all in
condition (sic) to the 12.5 million which is the selling price, may I,
therefore aside (sic) how much is the total cost pertaining to this. The
capital gains tax on (sic), documentary stamps, transfer tax are all
computed on the basis of the consideration which is P12.5 M, the capital
gain stocks (sic) is 5%, 5% of 12.5 M.

xxx xxx xxx

Yes sir if the 5% capital gains tax and documentary stamps respectively shall
be added to the 12.5 Million before the inclusion of the transfer tax, the
amount will be already in the vicinity of P13,250.000.

Q. With such consideration Mr. Witness and in the light of the terms and
conditions in the said Offer to Purchase and Deed of Absolute Sale
could you give your opinion as to whether the consideration is fair and
reasonable.

xxx xxx xxx

A. With our proposal of P14.5 M as compared now to P13,250,000.00 may I

give my opinion that generally there will be two appraisers. In fairness
to the situation, they should not vary by as much as 7% down so we are
playing at a variance actually of about 15%. In my experience in this
profession for the last 27 years as I have said in fairness if there is
another appraisal done by another person, that kind of difference is very
marginal should at least indicate the fairness of the property and so
 therefore the only way to find out is to determine the difference between
the P14.5 M and the P13,250,000.00. My computation indicates that it is
close to 10% something like that difference. What is the question again?

Q. Whether it is fair and reasonable under the circumstances.

A. I have answered already the question and I said maximum of 15%.

Q. So based on your computation this is about 10% which is fair and

reasonable.

A. That is right sir. 10

Withal, the consideration of the sale is fair and reasonable as would justify the conclusion
that the sale is undoubtedly a true and genuine conveyance to which the parties thereto
are irrevocably and undeniably bound.

It may be stressed that, when the validity of sales contract is in issue, two veritable
presumptions are relevant: first, that there was sufficient consideration of the contract 11 ;
and, second, that it was the result of a fair and regular private transaction. 12 If shown to
hold, these presumptions infer prima facie the transaction's validity, except that it must
yield to the evidence adduced 13 which the party disputing such presumptive validity has
the burden of overcoming. Unfortunately for the petitioner, it failed to discharge this
burden. Its bare allegation respecting the sale having been executed in fraud of creditors
and without adequate consideration cannot, without more, prevail over the respondents'
evidence which more than sufficiently supports a conclusion as to the legitimacy of the
transaction and the bona fides of the parties.

Parenthetically, the rescissory action to set aside contracts in fraud of creditors is accion
pauliana, essentially a subsidiary remedy accorded under Article 1383 of the Civil Code
which the party suffering damage can avail of only when he has no other legal means to
obtain reparation for the same. 14 In net effect, the provision applies only when the
creditor cannot recover in any other manner what is due him. aDICET

It is true that respondent spouses, as surety for BMC, bound themselves to answer for the
latter's debt. Nonetheless, for purposes of recovering what the eventually insolvent BMC
owed the bank, it behooved the petitioner to show that it had exhausted all the properties
of the spouses Ong. It does not appear in this case that the petitioner sought other
properties of the spouses other than the subject Greenhills property. The CA categorically
said so. Absent proof, therefore, that the spouses Ong had no other property except their
Greenhills home, the sale thereof to respondent Lee cannot simplistically be considered
as one in fraud of creditors.
Neither was evidence adduced to show that the sale in question peremptorily deprived the
petitioner of means to collect its claim against the Ongs. Where a creditor fails to show
that he has no other legal recourse to obtain satisfaction for his claim, then he is not
entitled to the rescission asked. 15

For a contract to be rescinded for being in fraud of creditors, both contracting parties
must be shown to have acted maliciously so as to prejudice the creditors who were
prevented from collecting their claims. 16 Again, in this case, there is no evidence
tending to prove that the spouses Ong and Lee were conniving cheats. In fact, the
petitioner did not even attempt to prove the existence of personal closeness or business
and professional interdependence between the spouses Ong and Lee as to cast doubt on
their true intent in executing the contract of sale. With the view we take of the evidence
on record, their relationship vis--vis the subject Greenhills property was no more than
one between vendor and vendee dealing with each other for the first time. Any
insinuation that the two colluded to gyp petitioner bank is to read in a relationship
something which, from all indications, appears to be purely business.

It cannot be overemphasized that rescission is generally unavailing should a third person,

acting in good faith, is in lawful possession of the property, 17 that is to say, he is
protected by law against a suit for rescission by the registration of the transfer to him in
the registry.

As recited earlier, Lee was and may still be in lawful possession of the subject
property as the transfer to him was by virtue of a presumptively valid onerous contract of
sale. His possession is evidenced by no less than a certificate of title issued him by the
Registry of Deeds of San Juan, Metro Manila, after the usual registration of the
corresponding conveying deed of sale. On the other hand, the bona fides of his
acquisition can be deduced from his conduct and outward acts previous to the sale. As
testified to by him and duly noted by the CA, respondent Lee undertook what amounts to
due diligence on the possible defects in the title of the Ongs before proceeding with the
sale. As it were, Lee decided to buy the property only after being satisfied of the absence
of such defects. 18

Time and again, the Court has held that one dealing with a registered parcel of land need
not go beyond the certificate of title as he is charged with notice only of burdens which
are noted on the face of the register or on the certificate of title. 19 The Continuing Surety
Agreement, it ought to be particularly pointed out, was never recorded nor annotated on
the title of spouses Ong. There is no evidence extant in the records to show that Lee had
knowledge, prior to the subject sale, of the surety agreement adverted to. In fine, there is
nothing to remotely suggest that the purchase of the subject property was characterized
by anything other than good faith.
Petitioner has made much of respondent Lee not taking immediate possession of the
property after the sale, stating that such failure is an indication of his participation in the
fraudulent scheme to prejudice petitioner bank.

We are not persuaded. ITScHa

Lee, it is true, allowed the respondent spouses to continue occupying the premises even
after the sale. This development, however, is not without basis or practical reason. The
spouses' continuous possession of the property was by virtue of a one-year lease 20 they
executed with respondent Lee six days after the sale. As explained by the respondent
spouses, they insisted on the lease arrangement as a condition for the sale in question.
And pursuant to the lease contract aforementioned, the respondent Ongs paid and Lee
collected rentals at the rate of P25,000.00 a month. Contrary thus to the petitioner's
asseveration, respondent Lee, after the sale, exercised acts of dominion over the said
property and asserted his rights as the new owner. So, when the respondent spouses
continued to occupy the property after its sale, they did so as mere tenants. While the
failure of the vendee to take exclusive possession of the property is generally recognized
as a badge of fraud, the same cannot be said here in the light of the existence of what
appears to be a genuine lessor-lessee relationship between the spouses Ong and Lee. To
borrow from Reyes vs. Court of Appeals, 21 possession may be exercised in one's own
name or in the name of another; an owner of a piece of land has possession, either when
he himself physically occupies the same or when another person who recognizes his right
as owner is in such occupancy.

Petitioner's assertion regarding respondent Lee's lack of financial capacity to acquire the
property in question since his income in 1990 was only P346,571.73 is clearly untenable.
Assuming for argument that petitioner got its figure right, it is clearly incorrect to
measure one's purchasing capacity with one's income at a given period. But the more
important consideration in this regard is the uncontroverted fact that respondent Lee paid
the purchase price of said property. Where he sourced the needed cash is, for the nonce,
really of no moment.

The cited case of China Banking 22 cannot plausibly provide petitioner with a winning
card. In that case, the Court, applying Article 1381 (3) of the Civil Code, rescinded an
Assignment of Rights to Redeem owing to the failure of the assignee to overthrow the
presumption that the said conveyance/assignment is fraudulent. In turn, the presumption
was culled from Article 1387, par. 2, of the Code pertinently providing that "[A]lienation
by onerous title are also presumed fraudulent when made by persons against whom some
judgment has been rendered in any instance or some writ of attachment has been issued."

Indeed, when the deed of assignment was executed in China Banking, the assignor
therein already faced at that time an adverse judgment. In the same case, moreover, the
Court took stock of other signs of fraud which tainted the transaction therein and which
are, significantly, not obtaining in the instant case. We refer, firstly, to the element of
kinship, the assignor, Alfonso Roxas Chua, being the father of the assignee, Paulino.
Secondly, Paulino admitted knowing his father to be insolvent. Hence, the Court,
rationalizing the rescission of the assignment of rights, made the following remarks:

The mere fact that the conveyance was founded on valuable consideration does
not necessarily negate the presumption of fraud under Article 1387 of the Civil
Code. There has to be valuable consideration and the transaction must have
been made bona fide. 23

There lies the glaring difference with the instant case.

Here, the existence of fraud cannot be presumed, or, at the very least, what were
perceived to be badges of fraud have been proven to be otherwise. And, unlike Alfonso
Roxas Chua in China Banking, a judgment has not been rendered against respondent
spouses Ong or that a writ of attachment has been issued against them at the time of the
disputed sale.

In a last-ditch attempt to resuscitate a feeble cause, petitioner cites Section 70 of the

Insolvency Law which, unlike the invoked Article 1381 of the Civil Code that deals with
a valid but rescissible contract, treats of a contractual infirmity resulting in nullity no less
of the transaction in question. Insofar as pertinent, Section 70 of the Insolvency Law
provides:

Sec. 70. If any debtor, being insolvent, or in contemplation of insolvency,

within thirty days before the filing of a petition by or against him, with a view to
giving a preference to any creditor or person having a claim against him . . .
makes any . . . sale or conveyance of any part of his property, . . . such . . . sale,
assignment or conveyance is void, and the assignee, or the receiver, may
recover the property or the value thereof, as assets of such insolvent debtor. . . . .
Any payment, pledge, mortgage, conveyance, sale, assignment, or transfer of
property of whatever character made by the insolvent within one (1) month
before the filing of a petition in insolvency by or against him, except for a
valuable pecuniary consideration made in good faith shall be void. . . . .
(Emphasis added) HScDIC

Petitioner avers that the Ong-Lee sales contract partakes of a fraudulent transfer and is
null and void in contemplation of the aforequoted provision, the sale having occurred on
October 22, 1991 or within thirty (30) days before BMC filed a petition for suspension of
payments on November 22, 1991.

Petitioner's reliance on the afore-quoted provision is misplaced for the following reasons:
First, Section 70, supra, of the Insolvency Law specifically makes reference to
conveyance of properties made by a "debtor" or by an "insolvent" who filed a petition, or
against whom a petition for insolvency has been filed. Respondent spouses Ong have
doubtlessly not filed a petition for a declaration of their own insolvency. Neither has one
been filed against them. And as the CA aptly observed, it was never proven that
respondent spouses are likewise insolvent, petitioner having failed to show that they were
down to their Greenhills property as their only asset.

It may be that BMC had filed a petition for rehabilitation and suspension of payments
with the SEC. The nagging fact, however is that BMC is a different juridical person from
the respondent spouses. Their seventy percent (70%) ownership of BMC's capital stock
does not change the legal situation. Accordingly, the alleged insolvency of BMC cannot,
as petitioner postulates, extend to the respondent spouses such that transaction of the
latter comes within the purview of Section 70 of the Insolvency Law.

Second, the real debtor of petitioner bank in this case is BMC. The fact that the
respondent spouses bound themselves to answer for BMC's indebtedness under the surety
agreement referred to at the outset is not reason enough to conclude that the spouses are
themselves debtors of petitioner bank. We have already passed upon the simple reason
for this proposition. We refer to the basic precept in this jurisdiction that a corporation,
upon coming into existence, is invested by law with a personality separate and distinct
from those of the persons composing it. 24 Mere ownership by a single or small group of
stockholders of nearly all of the capital stock of the corporation is not, without more,
sufficient to disregard the fiction of separate corporate personality. 25

Third, Section 70 of the Insolvency Law considers transfers made within a month after
the date of cleavage void, except those made in good faith and for valuable pecuniary
consideration. The twin elements of good faith and valuable and sufficient consideration
have been duly established. Given the validity and the basic legitimacy of the sale in
question, there is simply no occasion to apply Section 70 of the Insolvency Law to nullify
the transaction subject of the instant case.

All told, we are far from convinced by petitioner's argumentation that the circumstances
surrounding the sale of the subject property may be considered badges of fraud.
Consequently, its failure to show actual fraudulent intent on the part of the spouses Ong
defeats its own cause.

WHEREFORE, the instant petition is DENIED and the assailed decision of the Court of
Appeals is AFFIRMED. DCATHS

Costs against petitioner.

SO ORDERED.

Puno, Sandoval-Gutierrez, Corona and Azcuna, JJ., concur.

(Union Bank of the Philippines v. Spouses Ong, G.R. No. 152347, [June 21, 2006], 525
|||

PHIL 58-81)
 SECOND DIVISION

[G.R. No. 156303. December 19, 2007.]

PHILIPPINE LEISURE AND RETIREMENT AUTHORITY

(formerly Philippine Retirement Authority), petitioner, vs. THE
HONORABLE COURT OF APPEALS, THE HONORABLE
REGIONAL TRIAL COURT, BRANCH 57, and PHILIPPINE
RETIREMENT AUTHORITY ASSOCIATION (PRAMA),
respondents.

DECISION

VELASCO, JR., J : p

Petitioner Philippine Leisure and Retirement Authority (PLRA), formerly Philippine

Retirement Authority, is a government-owned and controlled corporation created by
Executive Order No. 1037, entitled Creating the Philippine Retirement Park System,
Providing Funds Therefor and for Other Purposes. The PLRA was created to develop
and promote the Philippines as a retirement haven. PLRA implemented the Philippine
Retirement Program (program) to attract former Filipinos, now foreigners (balikbayans),
to invest in the Philippines. Under the program, all foreign nationals, except those
classified as restricted by the Department of Foreign Affairs, and balikbayans, holders of
foreign passports who are at least 35 years old, upon compliance with requirements, and
payment of required fees, may be granted Special Resident Retirees Visa by the Bureau
of Immigration through applications processed by PLRA.

Sometime in 1989, 12 principal retirees of PLRA organized and registered with the
Securities and Exchange Commission (SEC) the Philippine Retirement Authority
Members Association, Inc. (PRAMAI). In 1994, Atty. Ramon M. Collado, a principal
retiree of PLRA, registered with the SEC another association, the P.R.A. Members
Association Foundation, Inc. (PRAMA). PRAMAI was one of the incorporators of
PRAMA. Atty. Collado, then a consultant of PLRA for Special Projects and Investments,
envisioned PRAMA as a non-governmental foundation to assist PLRA in implementing
the PLRA's programs.

Initially, PRAMA held its office in the office of PLRA and shared its accounting and
other office systems. Subsequently, on November 17, 1997, PRAMA transferred and set
up its own office systems.
After its incorporation, PRAMA executed several Memoranda of Agreement (MOAs)
with PLRA's short-listed banks to promote the banks' services among PRAMA members
who were PLRA's principal retirees. In the MOAs, the banks agreed to pay PRAMA a
marketing fee of one-half (1/2) of 1% of the total outstanding balance of the principal
retirees' deposits in the listed banks.

In late December 1995, PLRA issued a resolution 1 requiring PLRA principal retirees to
become PRAMA members. The resolution provided that PLRA would collect the annual
membership fee of PhP2,000. When PRAMA transferred offices, PLRA remitted to
PRAMA the membership fees it collected in the amounts of PhP114,000 for 1997,
PhP472,000 for 1998, PhP858,000 for 1998, and PhP1,444,000 for 2000, 2 all duly
acknowledged and receipted by PRAMA.

Meanwhile, on December 9, 1997, the PLRA Board issued another resolution 3

approving the request of PRAMA to include in their website PLRA retirement program
materials and the creation of a committee composed of PLRA and PRAMA members to
study all the aspects, possibilities, and the support PLRA can give PRAMA, at no cost to
the government. It was aimed to enhance the program of the government, and grant
authority to the Chief Executive Officer (CEO) and General Manager of PLRA to enter
into a MOA with PRAMA. With the favorable opinion of the Office of the Government
Corporate Counsel (OGCC), on May 28, 1999, the parties entered into a MOA. 4

Subsequently, on March 31, 2000, after collecting PRAMA's annual membership fees
since 1996, PLRA sent PRAMA a letter 5 to the effect that it would continue to collect
PRAMA's membership fees for a five percent service fee based on total collections
effective January 2000, in accordance with Section 44 of the Government Accounting
and Auditing Manual, Vol. 1 and Administrative Order No. 197. PRAMA objected.

Thereafter, in its August 2000 issue of PRAMA Updates, Volume VI, Number 2, Special
Health Care Issue, under the editorial column entitled Notes from the President and What
is PLRA up to?, 6 some derogatory allegations and pejorative remarks were leveled
against PLRA. PLRA promptly complained and communicated its objections to PRAMA.

In a meeting on August 24, 2000, the officers of PLRA and PRAMA tried to iron out
their differences such as discrepancies in their respective records on the number of
principal retirees, and the actual annual membership fee collections. PRAMA claimed
that its external auditor, Alba Romeo & Co., found that about 40% of its member-retirees
had not paid their annual membership dues.

On September 26, 2000, PRAMA wrote PLRA to inform the latter that it was sending its
accountant, Eleonora D. Gamaru, to the latter's office to reconcile the records of the
member-retirees with the remittances to PRAMA. 7 On September 27, 2000, PLRA sent
PRAMA a letter 8 expressing both gratitude and exception to the two editorials in the
PRAMA Updates August 2000 issue.

When Gamaru went to the PLRA office to reconcile records, she complained she was not
given all the records. PLRA denied her allegations in a letter dated October 2, 2000, 9
explaining that it furnished Gamaru records pertaining only to the annual membership
dues of the retirees which were the object of Gamaru's reconciliation. It did not furnish
Gamaru records on visitorial and ID fees of the principal retirees as these payments
concerned only PLRA.

On October 9, 2000, PLRA wrote another letter 10 to PRAMA concerning the amount of
PhP10,811,433 allegedly due to PRAMA based on PRAMA's schedule of membership
fees for the years 1997 through August 23, 2000. PLRA also requested for photocopies of
PRAMA's receipt books for these years to verify the figures and to identify the retirees
who have not yet paid their membership fees.

Earlier, on October 6, 2000, in PRAMA's letter/reply, it explained that, among others, it

still needed to reconcile and update their records. PRAMA said PLRA had not given it
accurate data on the final figures of member-retirees and, consequently, it could not give
accurate figures of their collections. In particular, PRAMA explained that Gamaru had
worked only for two days, and after she reviewed the files for October 1996, she
discovered that several retirees paid the annual membership dues but these were not
remitted by PLRA. She also claimed that PLRA Acting Deputy General Manager
Bernardino and PLRA CEO and General Manager Atty. Vernette Umali-Paco refused her
access to the November and December 1996 files such that she could not continue her
review of the files.

PRAMA also said that the discrepancies reflected in the records were increasing and had
been unreported for years; hence, it informed PLRA of its resolution authorizing Atty.
Collado to conduct an investigation on what seemed were anomalies and to take legal
action.

Exchanges of letters between PRAMA and PLRA ensued.

Meanwhile, on November 8, 2000, PRAMA asked PLRA for an updated list of investor
retiree-members with their addresses and nationality to offer them insurance development
services, e.g., comprehensive Philam health care, memorial plans, Philamlife and Golden
Village finance management, etc. 11 PLRA explained PRAMA's request could not be
acted upon since it did not have these data.

PRLA accused PRAMA of sowing seeds of discontent and suspicion among PLRA's
principal retirees, and of breach of the MOA. PLRA referred the rescission of the MOA
to the OGCC. The OGCC opined that PLRA through its Board of Trustees could
unilaterally rescind the MOA because PRAMA violated the MOA. Consequently, in a
meeting on December 11, 2000, the PLRA Board of Trustees resolved to terminate the
MOA.

On January 25, 2001, PRAMA instituted a Complaint for Specific Performance with
Prayer for Preliminary Injunction, 12 docketed as Civil Case No. 01-112, against PLRA
before the Makati City Regional Trial Court (RTC). PRAMA alleged that the termination
of the MOA was illegal and PLRA had yet to remit all membership fee collections
covering 1996 to 2000.

The RTC granted preliminary injunction

After the hearings on the preliminary injunction, the RTC through its April 30, 2001
Order 13 granted PRAMA's prayer for an injunctive writ. The trial court found that the
parties had agreed verbally that PRAMA would acquire and develop the facilities and
benefits for the retirees, while PLRA would remit to PRAMA PhP2,000 per retiree as
membership dues per year to fund expenses. The trial court also found that PLRA,
without prior notice and without addressing the problem of reconciling the records,
unilaterally terminated the MOA; terminated the appointment of Atty. Collado as
consultant of PLRA for Special Projects and Investments; and rescinded the authorization
for compulsory membership of PLRA retirees to the PRAMA. The trial court concluded
that PRAMA had established its right in esse to be protected; PLRA had no legal cause to
rescind the MOA; and the MOA did not contain any provision authorizing automatic
cancellation of the MOA. The RTC concluded that court intervention was needed in the
event that the terms of the MOA were violated. The RTC granted and issued the
preliminary mandatory injunction against PLRA.

The April 30, 2001 Order disposed:

WHEREFORE, upon posting a bond in the amount of PHP One (1) Million
(P1,000,000.00), the same to be approved by the Court, let a writ of preliminary
mandatory injunction issue compelling the defendant to reinstate the MOA and
for the defendant to faithfully comply with the remittance of all monies due the
plaintiff.

SO ORDERED.

Aggrieved, PLRA assailed the April 30, 2001 RTC Order before the Court of Appeals
(CA).

On January 31, 2002, the CA rendered the assailed Decision 14 denying PLRA's petition
for certiorari. The fallo reads:
 WHEREFORE, the petition is DENIED. The Order, dated 30 April 2001 issued
by the public respondent is hereby AFFIRMED. Accordingly, let this case be
remanded to the Regional Trial Court, Makati City, Branch 57 for further
proceedings and proper disposition with dispatch. Needless to state, petitioner
PRA's motion for the issuance of a writ of preliminary injunction is rendered
moot and academic.

The appellate court said that the RTC did not commit grave abuse of discretion in
granting the preliminary mandatory injunction as the injunction fulfilled all requirements
and was well supported by sufficient evidence.

On February 14, 2002, the RTC issued an Order 15 resolving PRAMA's Motion to Order
Defendant to Comply with the Implementation of the Preliminary Mandatory Injunction
and to Cite for Contempt and Motion to Implement the April 30, 2001 Order, which were
duly opposed by PLRA.

On March 4, 2002, PLRA concurrently filed its Motion for Reconsideration of the
January 31, 2002 CA Decision, which was denied by the CA only on November 27,
2002.

On April 29, 2002, the RTC issued two orders. The First Order 16 denied PRAMA's
motion to cite PLRA for contempt 17 for failure to comply with the February 14, 2002
Order. At the same time, it put PLRA on notice to comply within five (5) days from date
of receipt; otherwise, it would be cited for contempt without further notice. The Second
Order 18 denied PLRA's motion for reconsideration of the February 14, 2002 Order.

On May 8, 2002, PLRA filed a Manifestation informing the RTC that the reinstatement
of the MOA and of Atty. Collado as consultant of PLRA was already included in the
agenda of the next board meeting of the PLRA trustees, and that PLRA had already sent
appropriate letters to the banks.

On June 13, 2002, the RTC issued an Order 19 granting PRAMA's Motion for
Clarificatory Order, and disregarding PLRA's Comment to the motion. The dispositive
portion reads:

Above premises considered, this Court hereby GRANTS the Motion of the
plaintiff [in] toto and reinstate the Order dated 14 February 2002 as follows:

WHEREFORE, defendant through its Board of Trustees and General Manager

and Chief Executive Officer is ordered to do the following:
 1. Reinstate the Memorandum of Agreement (MOA) that was terminated on
December 11, 2000;

2. Reinstate Mr. Ramon M. Collado as the Consultant of PRA for Special

Projects and Investments;

3. Pay to PRAMA Foundation Inc. the one half percent (0.5%) of the
commission received by PRA from the accredited banks since January 2001 up
to today, representing the one half percent (0.5%) of the total deposit of the
retiree-members; and

4. Give necessary instruction to the depositary banks, namely: Equitable PCI

Bank, Solid Bank (now Metropolitan Bank and Trust Company), Bank of
Commerce, and Chinatrust that from now on, to pay PRAMA Foundation Inc.
the fee of one half percent (0.5%) per annum of the total average daily balance
of funds deposited by foreign retirees under the program of PRA with the banks
to be paid monthly.

Defendant's failure to comply with this Order upon receipt hereof shall be
construed by the Court as deliberate disobedience to its processes and shall be
cited for contempt. Defendant is therefore ordered to report to the Court on its
compliance of this Order specifically the proof of the reinstatement of the
MOA, proof of payment to PRAMA Foundation, Inc. and give necessary
instruction to the depositary banks to pay PRAMA Foundation, Inc. the fee of
one half percent (0.5%) per annum monthly, and the reinstatement of Mr.
Ramon Collado as the Consultant of PRA for Special Projects and Investment
on the next day from receipt of this Order.

SO ORDERED.

The following day, OIC Erlina P. Lozada filed a Motion with Manifestation. 20

On June 18, 2002, the RTC issued an Order prompted by PRAMA's Manifestation 21
which asked the court to cite for contempt the PLRA Board of Trustees and PLRA
officers Atty. Umali-Paco and OIC Lozada. The dispositive portion of the Order reads:

WHEREFORE, pursuant to the Order of the Court dated 14 February 2002 as

clarified in the Order dated 13 June 2002 and noting the Manifestation of the
plaintiff with its attachments and the more than considerable lapse of time from
the date of issuance of the original Order, the non-compliance of which is in
utter disregard of this Court's Authority, the Court hereby cites in CONTEMPT
Philippine Retirement Authority and the following officers, namely, MANUEL
A. ROXAS III, RICHARD S. GORDON, ANDREA DOMINGO, RAFAEL B.
BUENAVENTURA, and ERLINA P. LOZADA, as Officer-in-Charge, and
particularly ATTY. VERNETTE UMALI-PACO and hereby orders said
officers detained until they comply with the Order of this Court.
 SO ORDERED. 22

On June 24, 2002, the RTC issued an Order giving due course to PLRA's Notice of
Appeal and allowing its officers to post PhP 20,000 bail, while at the same time finding
PLRA, its Board of Trustees, and officers guilty anew of Indirect Contempt for which
they were each fined PhP 30,000.

Both appeals assailing the June 18, 2002 and June 24, 2002 Orders are now pending
before the CA.

On October 27, 2006, PRAMA filed an Ex-Parte Urgent Motion for the Immediate
Issuance of a Writ of Preliminary Mandatory Injunction 23 before the RTC which was
granted through the November 8, 2006 Order, 24 and an Alias Writ of Preliminary
Mandatory Injunction 25 was issued on November 9, 2006. This prompted PLRA to file
before this Court on November 13, 2006 an Urgent Motion for Issuance of a Temporary
Restraining Order (TRO) and/or Injunction 26 which we granted through our November
15, 2006 Resolution 27 with the corresponding TRO 28 promptly issued.

PRAMA, however, filed before the RTC on November 13, 2006 a Very Urgent Ex-Parte
Motion for a Supplemental Order to Prevent Dissipation of Bank Deposits 29 which was
granted by the trial court through a Supplemental Order dated November 14, 2006,
decreeing thus:

WHEREFORE, premises considered, the Court hereby orders all of Philippine

Retirement Authority's depositary banks namely Land Bank of the Philippines,
Equitable PCI Bank, and Development Bank of the Philippines not to allow any
withdrawals from defendant's corresponding various accounts, and further
orders all the accredited banks, namely: Allied Bank, Bank of Commerce, East
West Bank, Equitable PCIBank, Export Bank, PS Bank, RCBC, Union Bank,
Bank of China, KEB (Korean Bank), Maybank, Robinson's Bank, RCBC
Savings Bank, Security Bank, and Tong Yang Bank to refrain from remitting to
PRA the management fees until PRA has faithfully complied with the Alias
Writ of Preliminary Mandatory Injunction date[d] November 9, 2006 in
accordance with this Court's Orders of February 14, 2002 as clarified in the
Order of June 13, 2002.

SO ORDERED.

Through a Manifestation and Motion dated November 28, 2006, PLRA informed the
Court that the above supplemental order was promptly served on the concerned banks
despite receipt by the RTC of the TRO we have issued on November 15, 2006.

The Issues
In this Petition for Review on Certiorari under Rule 45, PLRA raises the following
issues:

WHETHER OR NOT THE DECISION OF THE TRIAL COURT, AS

AFFIRMED BY THE COURT OF APPEALS, IS IN ACCORD WITH LAW
AND OBTAINING JURISPRUDENCE

II

WHETHER THE MANDATORY INJUNCTION ISSUED MAY INCLUDE

RELIEFS NOT STATED OR PRAYED FOR IN THE COMPLAINT ITSELF
OR EVEN TAKEN UP DURING THE HEARING CONDUCTED FOR THE
PURPOSE. 32

In gist, the issues are: (1) Was the preliminary mandatory injunction issued in accordance
with law?; and (2) May the Court include reliefs not prayed for?

The Court's Ruling

The petition is meritorious.

Petitioner argues that the preliminary mandatory injunction affirmed by the CA was not
in accord with law and jurisprudence as courts cannot compel a party to execute and/or
renew a contract. Petitioner posits that the power to do so is in the full discretion of the
Board of the corporation and the court cannot substitute its judgment to those of
petitioner's officers and directors. Also, petitioner avers that the MOA may be
unilaterally rescinded. Petitioner contends that the preliminary mandatory injunctive writ
was issued with grave abuse of discretion, and that PRAMA had not shown that it would
be irreparably injured if the writ was not issued, a legal requirement for the issuance of
the writ. Petitioner asserts that even if the requisites were present, the writ was issued
with grave abuse of discretion since the Orders dated February 14, 2002 and June 13,
2002 granted reliefs not taken up during the hearing for the issuance of the injunctive writ
and the grant of which resulted in the resolution of the main case.

Judicial determination of unilateral rescission

Prefatorily, we find that petitioner is mistaken to say that the courts cannot interfere with
the decision of a corporation's officers and Board of Trustees, nor can a party not be
allowed to unilaterally rescind an agreement. The right to rescind is provided for in
Article 1191 of the Civil Code, which states:
 ART. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.

The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.

Thus, even if a provision providing for a right to rescind is not in the agreement, a party
may still rescind a contract should one obligor fail to comply with its obligations.

While PLRA may have the right to rescind the MOA, treat the contract as cancelled, and
communicate the rescission to PRAMA, the cancellation of the MOA is still subject to
judicial scrutiny, should the cancellation be contested and brought to court. In University
of the Philippines v. De Los Angeles, this Court stressed and explained, thus:

[T]he party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at
its own risk. For it is only the final judgment of the corresponding court that
will and finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who believes
itself injured must first file suit and wait for a judgment before taking
extrajudicial steps to protect its interest. Otherwise, the party, injured by the
other's breach will have to passively sit and watch its damages accumulate
during the pendency of the suit until the final judgment of rescission is rendered
when the law itself requires that he should exercise due diligence to minimize
its own damages (Civil Code, Article 2203). 33 (Emphasis supplied.)

In the instant case, PRAMA judicially questioned the unilateral rescission by PLRA, and
the trial court still has to determine whether the unilateral rescission was justified. PLRA
is wrong to say that the courts may not interfere with its decision to rescind in the
exercise of its management prerogatives.

Requisites for issuance of a mandatory injunctive writ

Now, as to the regularity and propriety in the issuance of the writ of preliminary
mandatory injunction, Sec. 3, Rule 58 of the 1997 Revised Rules of Civil Procedure
provides that the issuance of a writ of preliminary injunction may be granted if the
following requisites are met:
 (1) The applicant must have a clear and unmistakable right, that is a right in
esse;

(2) There is a material and substantial invasion of such right; and

(3) There is an urgent need for the writ to prevent irreparable injury to the
applicant; and no other ordinary, speedy, and adequate remedy exists to
prevent the infliction of irreparable injury.

In numerous instances and recently in Marquez v. The Presiding Judge (Hon. Ismael B.
Sanchez), RTC Br. 58, Lucena City, 34 we explained that the writ of preliminary
injunction is issued to prevent threatened or continuous irremediable injury to some of
the parties before their claims can be thoroughly studied and adjudicated. Its sole aim is
to preserve the status quo until the merits of the case can be heard fully. Thus, it will be
issued only upon a showing of a clear and unmistakable right that is violated. Moreover,
an urgent necessity for its issuance must be shown by the applicant.

We held in Marquez:

It is basic that the issuance of a writ of preliminary injunction is addressed to the

sound discretion of the trial court, conditioned on the existence of a clear and
positive right of the applicant which should be protected. It is an extraordinary,
peremptory remedy available only on the grounds expressly provided by law,
specifically Section 3, Rule 58 of the Rules of Court. Moreover, extreme
caution must be observed in the exercise of such discretion. It should be granted
only when the court is fully satisfied that the law permits it and the emergency
demands it. The very foundation of the jurisdiction to issue a writ of injunction
rests in the existence of a cause of action and in the probability of irreparable
injury, inadequacy of pecuniary compensation, and the prevention of
multiplicity of suits. Where facts are not shown to bring the case within these
conditions, the relief of injunction should be refused.

The trial court while having sound discretion on its issuance must still satisfy the strict
requirements of the law. We have consistently held that the exercise of sound judicial
discretion by the lower court in injunctive matters should not be interfered with except in
cases of manifest abuse. 35

PRAMA failed to show a right in esse to be protected

In the instant case, our review of the records shows that the trial court gravely abused its
discretion in issuing the assailed preliminary mandatory injunction.

First, the requirement of a clear and unmistakable right, a right in esse that must be
protected, is not met. PRAMA alleges in its complaint that the unilateral rescission of the
subject MOA would well nigh paralyze its operations as the payment of the membership
fees of its member-retirees would not be collected. The records show, however, that the
parties had only verbally agreed on the manner of collection before 1996, when
mandatory membership of PLRA principal retirees to PRAMA was imposed. Even as
early as 1996, PLRA started collecting the membership dues. The MOA was executed
only on May 28, 1999. Nowhere in the MOA does it show that PLRA was legally bound
to collect the membership dues for PRAMA. In short, the arrangement to let PLRA
collect the membership fees for PRAMA was merely an accommodation to PRAMA that
PLRA could terminate at will. The collection scheme was not a contractual obligation.
The membership fees are for the operations of PRAMA, not for the benefit of PLRA.
One of the seeds of discord between PRAMA and PLRA was PLRA's demand for a 5%
charge on the total collection of membership dues. As aptly pointed out, there is no
reason why PRAMA could not collect the membership dues itself. While it is true that the
collection of PRAMA annual membership dues and ID fees by PLRA was convenient
both for PRAMA and the principal retirees, this reciprocal benefit was merely an
accommodation, not a right in esse of PRAMA.

Second, the Orders of February 14, 2002 and June 13, 2002, clarifying the assailed April
30, 2001 Order, manifestly showed the trial court abused its discretion when it ordered:
(1) the reinstatement of Atty. Collado as consultant to PLRA; (2) the payment to
PRAMA of 0.5% commissions allegedly received by PLRA from its short-listed banks;
and (3) instructions to said banks to remit the said 0.5% commission to PRAMA.

While only the April 30, 2001 Order granting the preliminary mandatory injunction is the
principal subject of this petition, we cannot ignore the Orders of February 14, 2002 and
June 13, 2002 which are mere clarificatory orders of the assailed April 30, 2001 Order.
Indeed, the two orders expanded the preliminary mandatory injunction granted to
PRAMA.

The reinstatement of Atty. Collado is not the subject of the MOA. Atty. Collado has been
appointed PLRA pro bono consultant since 1994. He held that position on the confidence
of PLRA Officers and Board of Trustees. Thus, the officers and board have the
management prerogative to terminate him for whatever business reasons they may have.
In this instance, the Court cannot interfere with a management decision of the board to
terminate him. It cannot be the subject of an injunctive writ.

Further, PRAMA cannot order PLRA to remit the 0.5% commissions it allegedly
received from short-listed banks. The 0.5% of the total outstanding balance of the
principal retirees' deposits with the PLRA's short-listed banks is paid to PRAMA as
marketing fee which is the subject of a separate MOA between PRAMA and the banks
concerned. PLRA is not privy to this MOA. If the banks refuse to pay PRAMA the
marketing fees starting 2001, PLRA cannot be forced to do so. The MOA between
PRAMA and the banks has nothing to do with the MOA between PLRA and PRAMA.
Similarly, the trial court cannot order PLRA to give instructions to its short-listed banks
to continue remitting to PRAMA the 0.5% commission. It has no legal foundation.
PLRA, not privy to the MOA between PRAMA and the banks, cannot interfere with the
contractual relation and obligations of PRAMA and the banks. In short, the MOA
between PRAMA and the banks does not concern PLRA.

Third, the banks are not impleaded in Civil Case No. 01-112. We note the carefully
worded directives in the Orders of February 14, 2002 and June 13, 2002, commanding
PLRA to remit the 0.5% commission and to give instructions to the short-listed banks.
The trial court cannot order the banks directly, as the latter have not been impleaded in
the civil case.

Fourth, the April 30, 2001 Order of the trial court to remit the monies due to PRAMA
was not only vague, but also resolved one of the main issues of the case precluded in a
preliminary injunctive writ. While this was clarified by the trial court in its later Orders of
February 14, 2002 and June 13, 2002, still the assailed April 30, 2001 Order was the one
affirmed by the CA. The CA erred on this because the order to remit all the monies due to
PRAMA was a subject of the main case. What precipitated the case before the trial court
was the issue of the alleged non-remittance by PLRA of the membership dues it allegedly
collected for PRAMA. The merits of this issue still have to be heard and resolved. It
cannot be the subject of a preliminary mandatory injunction which is only an ancillary
remedy.

The purpose of the ancillary relief is to keep things as they peaceably are while the court
passes upon the merits. Where a preliminary prohibitory or mandatory injunction will
result in a premature resolution of the case, or will grant the principal objective of the
parties before merits can be passed upon, the prayer for the relief should be properly
denied. 36 Allowing PRAMA to receive all monies remitted to it through a preliminary
mandatory injunction would result in PRAMA obtaining what it prayed for without trial
on its merits. The premature resolution of a major issue of the main case before the merits
can be passed upon compels us to reject such grant and strike down the assailed April 30,
2001 Order.

Given the foregoing review, we so hold that the CA committed reversible error in
upholding the assailed April 30, 2001 Order of the trial court, which gravely abused its
discretion in granting said preliminary mandatory injunction.

WHEREFORE, the petition is GRANTED, and the January 31, 2002 Decision and
November 17, 2002 Resolution of the CA in CA-G.R. SP No. 65479 are hereby
REVERSED and SET ASIDE. Likewise, the April 30, 2001 Order of the Makati City
RTC, Branch 57, and the clarificatory Orders of February 14, 2002 and June 13, 2002,
are REVERSED and SET ASIDE. Let the trial court resolve with dispatch Civil Case No.
01-112. No pronouncement as to costs.
SO ORDERED.

Sandoval-Gutierrez,* Carpio, Carpio-Morales, Tinga and Velasco, Jr., JJ., concur.

(Philippine Leisure and Retirement Authority v. Court of Appeals, G.R. No. 156303,
|||

[December 19, 2007], 565 PHIL 388-406)

 FIRST DIVISION

[G.R. No. 168522. December 19, 2007.]

UNIWIDE HOLDINGS, INC., petitioner, vs. JANDECS

TRANSPORTATION CO., INC., respondent.

RESOLUTION

CORONA, J : p

Petitioner Uniwide Holdings Inc. filed a petition for review for certiorari under Rule 45 of
the Rules of Court assailing the decision 1 of the Court of Appeals (CA) dated February
16, 2005 in CA-G.R. CV No. 78931 entitled Jandecs Transportation Co., Inc. v. Uniwide
Holdings, Incorporated. In a resolution dated August 17, 2005, 2 we denied the petition for
failure to show that the CA committed reversible error. Thereafter, petitioner filed a
"Motion to Suspend Proceedings with Motion for Reconsideration" calling this Court's
attention to the order of suspension of payments and approval of its rehabilitation plan by
the Securities and Exchange Commission (SEC). 3

The antecedent facts follow.

In January 1997, petitioner and respondent Jandecs Transportation Co., Inc. entered into a
contract of "Assignment of Leasehold Rights" under which the latter was to operate food
and snack stalls at petitioner's Uniwide Coastal Mall in Paraaque City. The contract was
for a period of 18 years, commencing October 1, 1997 up to September 30, 2015, for a
consideration of P2,460,630.15. The parties also agreed that respondent's stalls would be
located near the movie houses and would be the only stalls to sell food and beverages in
that area.

On February 7, 1997, respondent paid the contract price in full. Petitioner, however, failed
to turn over the stall units on October 1, 1997 as agreed upon. Respondent sought the
rescission of the contract and the refund of its payment. Petitioner refused both.

On July 23, 1999, respondent filed a complaint in the Regional Trial Court (RTC), Branch
257 of Paraaque City, for breach of contract, rescission of contract, damages and issuance
of a writ of preliminary attachment. In the complaint, 4 respondent claimed that, despite
full payment, petitioner (1) failed to deliver the stall units on the stipulated date; (2) opened
its own food and snack stalls near the cinema area and (3) refused to accommodate its
request for the rescission of the contract and the refund of payment.
In its answer, 5 petitioner admitted respondent's full payment of the contract price but
denied that it was bound to deliver the stalls on October 1, 1997. According to petitioner,
the contract was clear that it was to turn over the units only upon completion of the mall.
It likewise claimed that, under the contract, it had the option to offer substitute stalls to
respondent which the latter, however, rejected.

After trial, the RTC ruled in favor of respondent. It held:

It is not disputed that [petitioner] had failed to [turn over] the units leased to
[respondent]. Since the term of the contract is for 18 years to commence on
October 1, 1997 to September 30, 2015, it is understood that [petitioner] was
obliged to deliver to [respondent] the leased units on October 1, 1997.
[Petitioner's] failure to deliver the leased units as provided in the contract
obviously constitutes breach thereof.

[Respondent] had paid [petitioner] the full consideration of P2,460,680.15 for the
leasehold rights. While [respondent] had fully complied with [its] obligation,
[petitioner] has not performed its part of the obligation to deliver to [respondent]
the 2 units leased. Hence, [respondent] has the right to rescind the contract. The
power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him (Art. 1191, Civil
Code). 6

xxx xxx xxx

WHEREFORE, finding the act of [respondent] in rescinding the Assignment of

Leasehold Rights proper, the same is declared valid and lawful. Accordingly,
[petitioner] is ordered to return to [respondent] the amount of P2,460,630.15 plus
interest at the legal rate and to pay [respondent] the amount of P30,000.00 for
attorney's fees.

SO ORDERED. 7

Aggrieved, petitioner appealed the decision to the CA. Except for the award of attorney's
fees which it found to be bereft of any basis, the CA upheld the RTC decision saying:

UPON THE VIEW WE TAKE OF THIS CASE, THUS, the Decision of the
Regional Trial Court, Paraaque City, Branch 257 in Civil Case No. 99-0268
dated March 12, 2003 is hereby AFFIRMED, with the sole modification that the
award of attorney's fees to [respondent] be DELETED. Costs shall also be taxed
against [petitioner].

SO ORDERED. 8
Petitioner filed a partial motion for reconsideration (MR) of the CA decision but it was
denied as well. 9 Hence, it filed the petition for review on certiorari which we denied on
August 17, 2005. 10 Thereafter, petitioner filed the "Motion to Suspend Proceedings with
Motion for Reconsideration."

In its motion to suspend the proceedings, petitioner prays that the action in this Court be
held in abeyance in view of the SEC's order of suspension of payments and approval of its
rehabilitation plan. 11 In its MR, on the other hand, it insists that we should find (1) the
rescission decreed by the lower courts erroneous and (2) the order for refund of the
P2,460,630.15 (with legal interest) to respondent unwarranted.

SUSPENSION OF PROCEEDINGS
WHEN WARRANTED

The relevant law dealing with the suspension of payments for money claims against
corporations under rehabilitation is Presidential Decree (PD) No. 902-A, 12 as amended.
The term "claim" under said law refers to debts or demands of pecuniary nature. 13 It is the
assertion of rights for the payment of money. 14 The raison d' tre behind the suspension
of claims pending rehabilitation was explained in the case of BF Homes, Inc. v. CA: 15

. . .the reason for suspending actions for claims against the corporation should not
be difficult to discover. It is not really to enable the management committee or
the rehabilitation receiver to substitute the [corporation] in any pending action
against it before any court, tribunal, board or body. Obviously, the real
justification is to enable the management committee or the rehabilitation receiver
to effectively exercise its/his powers free from any judicial or extra-judicial
interference that might unduly hinder or prevent the "rescue" of the debtor
[corporation]. To allow such other action to continue would only add to the
burden of the management committee or rehabilitation receiver, whose time,
effort and resources would be wasted in defending claims against the corporation
instead of being directed toward its restructuring and rehabilitation.

In Philippine Air Lines [(PAL)], Incorporated v. Zamora, 16 we said that "all actions for
claims against a corporation pending before any court, tribunal or board shall ipso jure be
suspended in whatever stage such actions may be found upon the appointment by the SEC
of a management committee or a rehabilitation receiver."

However, we would still find no cogent reason to reverse our August 17, 2005 resolution
denying petitioner's appeal even if the proceedings here were to be suspended in the
meantime. And such suspension would not at all affect our position that the MR should be
denied as well.

RIGHT OF RESCISSION
WHEN AVAILABLE
Article 1191 of the Civil Code provides:

The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he had chosen fulfillment, if the latter should become
impossible.

xxx xxx xxx

From the foregoing, the right of rescission is implied in every reciprocal obligation where
one party fails to perform what is incumbent upon him while the other is willing and ready
to comply. Certainly, petitioner's failure to deliver the units on the commencement date of
the lease on October 1, 1997 gave respondent the right to rescind the contract after the latter
had already paid the contract price in full.

Furthermore, respondent's right to rescind the contract cannot be prevented by the fact that
petitioner had the option to substitute the stalls. Even if petitioner had that option, it did
not, however, mean that it could insist on the continuance of the contract by forcing
respondent to accept the substitution. Neither did it mean that its previous default had been
obliterated completely by the exercise of that option.

However, so as not to run counter to or depart from the well-established doctrines in BF

Homes, Inc. and PAL, and considering further the SEC's appointment of a receivership
committee, 17 we will defer the entry of judgment in this case even after this resolution
attains finality. In effect, the execution of the RTC decision (which the CA and this Court
have affirmed) is suspended until further advice from us.

One final note. Petitioner's extreme bad faith in dealing with respondent was too glaring
for the Court to ignore. Petitioner's lack of good and honest intentions, as well as the
evasive manner by which it was able to frustrate respondent's claim for a decade, should
not go unsanctioned. Parties in a contract cannot be allowed to engage in double-dealing
schemes to dupe those who transact with them in good faith.

WHEREFORE, premises considered, the motion for reconsideration of our August 17,
2005 resolution is DENIED with finality. However, the motion for suspension of
proceedings is GRANTED and the entry of judgment held in abeyance until further orders
of this Court. Accordingly, petitioner Uniwide Holdings, Inc. is hereby DIRECTED to
make a quarterly report to this Court on the status of its ongoing rehabilitation.

Treble costs against petitioner.

SO ORDERED.

Puno, C.J., Sandoval-Gutierrez, Azcuna and Leonardo-de Castro, JJ., concur.

(Uniwide Holdings, Inc. v. Jandecs Transportation Co., Inc., G.R. No. 168522,
|||

[December 19, 2007], 565 PHIL 459-466)

 SECOND DIVISION

[G.R. No. 172346. July 24, 2013.]

SPOUSES NAMEAL and LOURDES BONROSTRO, petitioners, vs.

SPOUSES JUAN and CONSTANCIA LUNA, respondents.

DECISION

DEL CASTILLO, J : p

Questioned in this case is the Court of Appeals' (CA) disquisition on the matter of
interest.

Petitioners spouses Nameal and Lourdes Bonrostro (spouses Bonrostro) assail through this
Petition for Review on Certiorari 1 the April 15, 2005 Decision 2 of the CA in CA-G.R.
CV No. 56414 which affirmed with modifications the April 4, 1997 Decision 3 of the
Regional Trial Court (RTC) of Quezon City, Branch 104 in Civil Case No. Q-94-18895.
They likewise question the CA's April 17, 2006 Resolution 4 denying their motion for
partial reconsideration.

Factual Antecedents

In 1992, respondent Constancia Luna (Constancia), as buyer, entered into a Contract to

Sell 5 with Bliss Development Corporation (Bliss) involving a house and lot identified as
Lot 19, Block 26 of New Capitol Estates in Diliman, Quezon City. Barely a year after,
Constancia, this time as the seller, entered into another Contract to Sell 6 with petitioner
Lourdes Bonrostro (Lourdes) concerning the same property under the following terms and
conditions:DIESaC

1. The stipulated price of P1,250,000.00 shall be paid by the VENDEE to the

VENDOR in the following manner:

(a) P200,000.00 upon signing . . . [the] Contract to Sell,

(b) P300,000.00 payable on or before April 30, 1993,

(c) P330,000.00 payable on or before July 31, 1993,

(d) P417,000.00 payable to the New Capitol Estate, for 15 years at

[P6,867.12] a month,
 2. . . . [I]n the event the VENDEE fails to pay the second installment on time,
[t]he VENDEE will pay starting May 1, 1993 a 2% interest on the
P300,000.00 monthly. Likewise, in the event the VENDEE fails to pay
the amount of P630,000.00 on the stipulated time, this CONTRACT TO
SELL shall likewise be deemed cancelled and rescinded and . . . 5% of
the total contract price [of] P1,250,000.00 shall be deemed forfeited in
favor of the VENDOR. Unpaid monthly amortization shall likewise be
deducted from the initial down payment in favor of the VENDOR. 7

Immediately after the execution of the said second contract, the spouses Bonrostro took
possession of the property. However, except for the P200,000.00 down payment, Lourdes
failed to pay any of the stipulated subsequent amortization payments.

Ruling of the Regional Trial Court

On January 11, 1994, Constancia and her husband, respondent Juan Luna (spouses Luna),
filed before the RTC a Complaint 8 for Rescission of Contract and Damages against the
spouses Bonrostro praying for the rescission of the contract, delivery of possession of the
subject property, payment by the latter of their unpaid obligation, and awards of actual,
moral and exemplary damages, litigation expenses and attorney's fees. HaSEcA

In their Answer with Compulsory Counterclaim, 9 the spouses Bonrostro averred that they
were willing to pay their total balance of P630,000.00 to the spouses Luna after they sought
from them a 60-day extension to pay the same. 10 However, during the time that they were
ready to pay the said amount in the last week of October 1993, Constancia and her lawyer,
Atty. Arlene Carbon (Atty. Carbon), did not show up at their rendezvous. On November
24, 1993, Lourdes sent Atty. Carbon a letter 11 expressing her desire to pay the balance,
but received no response from the latter. Claiming that they are still willing to settle their
obligation, the spouses Bonrostro prayed that the court fix the period within which they
can pay the spouses Luna.

The spouses Bonrostro likewise belied that they were not paying the monthly amortization
to New Capitol Estates and asserted that on November 18, 1993, they paid Bliss, the
developer of New Capitol Estates, the amount of P46,303.44. Later during trial, Lourdes
testified that Constancia instructed Bliss not to accept amortization payments from anyone
as evidenced by her March 4, 1993 letter 12 to Bliss.

On April 4, 1997, the RTC rendered its Decision 13 focusing on the sole issue of whether
the spouses Bonrostro's delay in their payment of the installments constitutes a substantial
breach of their obligation under the contract warranting rescission. The RTC ruled that the
delay could not be considered a substantial breach considering that Lourdes (1) requested
for an extension within which to pay; (2) was willing and ready to pay as early as the last
week of October 1993 and even wrote Atty. Carbon about this on November 24, 1993; (3)
gave Constancia a down payment of P200,000.00; and, (4) made payment to Bliss.
The dispositive portion of the said Decision reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered as

follows:

1.) Declaring [t]he Contract to Sell executed by the plaintiff [Constancia] and
defendant [Lourdes] with respect to the house and lot located at Blk. 26, [L]ot
19, New Capitol Estate[s], Diliman[,] Quezon City to be in force and effect.
And that Lourdes Bonrostro must remain in the possession of the premises. DCTHaS

2.) Ordering the defendant[s] to pay plaintiff[s] within 60 days from receipt of
this decision the sum of P300,000.00 plus an interest of 2% per month from
April 1993 to November 1993.

3.) Ordering the defendant[s] to pay plaintiff[s] within sixty (60) days from
receipt of this decision the sum of P330,000.00 plus an interest of 2% [per
month] from July 1993 to November 1993.

4.) Ordering the defendant[s] to reimburse plaintiff[s] the sum of P214,492.62

which plaintiff[s] paid to Bliss Development Corporation.

No pronouncement as to Cost.

SO ORDERED. 14

As their Motion for Reconsideration 15 was likewise denied in an Order 16 dated July 15,
1997, the spouses Luna appealed to the CA. 17

Ruling of the Court of Appeals

In its Decision 18 of April 15, 2005, the CA concluded that since the contract entered into
by and between the parties is a Contract to Sell, rescission is not the proper remedy.
Moreover, the subject contract being specifically a contract to sell a real property on
installment basis, it is governed by Republic Act No. 6552 19 or the Maceda Law, Section
4 of which states:

Sec. 4. In case where less than two years of installment were paid, the seller shall
give the buyer a grace period of not less than sixty days from the date the
installment became due. ScAIaT

If the buyer fails to pay the installments due at the expiration of the grace period,
the seller may cancel the contract after thirty days from receipt by the buyer
of the notice of cancellation or the demand for rescission of the contract by a
notarial act. (Emphases supplied)
The CA held that while the spouses Luna sent the spouses Bonrostro letters 20 rescinding
the contract for non-payment of the sum of P630,000.00, the same could not be considered
as valid and effective cancellation under the Maceda Law since they were made within the
60-day grace period and were not notarized. The CA concluded that there being no
cancellation effected in accordance with the procedure prescribed by law, the contract
therefore remains valid and subsisting.

The CA also affirmed the RTC's finding that Lourdes was ready to pay her obligation on
November 24, 1993.

However, the CA modified the RTC Decision with respect to interest, viz.:

Nevertheless, there is a need to modify the appealed decision insofar as (i) the
interest imposed on the sum of P300,000.00 is only for the period April 1993 to
November 1993; (ii) the interest imposed on the sum of P330,000.00 is 2% per
month and is only for the period July 1993 to November 1993; (iii) it does not
impose interest on the amount of P214,492.62 which was paid by Constancia to
BLISS in behalf of Lourdes . . .

The rule is that 'no interest shall be due unless it has been expressly stipulated in
writing' (Art. 1956, Civil Code). However, the contract does not provide for
interest in case of default in payment of the sum of P330,000.00 to Constancia
and the monthly amortizations to BLISS. CacTIE

Considering that Lourdes had incurred . . . delay in the performance of her

obligations, she should pay (i) interest at the rate of 2% per month on the sum of
P300,000.00 from May 1, 1993 until fully paid and (ii) interest at the legal rate
on the amounts of P330,000.00 and P214,492.62 from the date of default (August
1, 1993 and April 4, 1997 [date of the appealed decision], respectively) until the
same are fully paid . . . 21

Hence, the dispositive portion of the said Decision:

WHEREFORE, the appealed decision is AFFIRMED with the

MODIFICATIONS that paragraphs 2, 3, and 4 of its dispositive portion shall now
read:

2.) Ordering the defendants to pay plaintiffs the sum of P300,000.00 plus interest
thereon at the rate of 2% per month from May 1, 1993 until fully paid;

3.) Ordering the defendants to pay plaintiffs the sum of P330,000.00 plus interest
thereon at the legal rate from August 1, 1993 until fully paid; and
 4.) Ordering the defendants to reimburse plaintiffs the sum of P214,492.62, which
plaintiffs paid to Bliss Development Corporation, plus interest thereon at the
legal rate from filing of the complaint until fully reimbursed.

SO ORDERED. 22

The spouses Luna no longer assailed the ruling. On the other hand, the spouses Bonrostro
filed a Partial Motion for Reconsideration 23 questioning the above-mentioned
modifications. The CA, however, denied for lack of merit the said motion in a Resolution
24 dated April 17, 2006.

Hence, this Petition for Review on Certiorari.

Issue

The basic issue in this case is whether the CA correctly modified the RTC Decision with
respect to interests.
AEcIaH

The Parties' Arguments

As may be recalled, the RTC under paragraphs 2 and 3 of the dispositive portion of its
Decision ordered the spouses Bonrostro to pay the spouses Luna the sums of P300,000.00
plus interest of 2% per month from April 1993 to November 1993 and P330,000.00 plus
interest of 2% per month from July 1993 to November 1993, respectively. The CA modified
these by reckoning the payment of the 2% interest on the P300,000.00 from May 1, 1993
until fully paid and by imposing interest at the legal rate on the P330,000.00 reckoned from
August 1, 1993 until fully paid.

The spouses Bonrostro harp on the factual finding of the RTC, as affirmed by the CA, that
Lourdes was willing and ready to pay her obligation as evidenced by her November 24,
1993 letter to Atty. Carbon. They also assert that the sending of the said letter constitutes
a valid tender of payment on their part. Hence, they argue that they should not be assessed
any interest subsequent to the date of the said letter. Neither should they be ordered to pay
interest on the amount of P214,492.62 which covers the amortizations paid by the spouses
Luna to Bliss. They point out that it was Constancia who prevented them from fulfilling
their obligation to pay the amortizations when she instructed Bliss not to accept payment
from them. 25

The spouses Luna, on the other hand, aver that the November 24, 1993 letter of Lourdes is
not equivalent to tender of payment since the mere sending of a letter expressing the
intention to pay, without the accompanying payment, cannot be considered a valid tender
of payment. Also, if the spouses Bonrostro were really willing and ready to pay at that time
and assuming that the spouses Luna indeed refused to accept payment, the former should
have resorted to consignation. Anent the payment of amortization, the spouses Luna
explain that under the parties' Contract to Sell, Lourdes was to assume Constancia's balance
to Bliss by paying the monthly amortization in order to avoid the cancellation of the earlier
Contract to Sell entered into by Constancia with Bliss. 26 However, since Lourdes was
remiss in paying the same, the spouses Luna were constrained to pay the amortization.
They thus assert that reimbursement to them of the said amount with interest is proper
considering that by reason of such payment, the spouses Bonrostro were spared from the
interests and penalties which would have been imposed by Bliss if the amortization
remained unpaid. TAIEcS

Our Ruling

The Petition lacks merit.

The spouses Bonrostro's reliance on the

RTC's factual finding that Lourdes was
willing and ready to pay on November
24, 1993 is misplaced.

As mentioned, the RTC in resolving the Complaint focused on the sole issue of whether
the failure of spouses Bonrostro to pay the installments of P300,000.00 on April 30, 1993
and P330,000.00 on July 31, 1993 is a substantial breach of their obligation under the
contract as to warrant the rescission of the same. 27 The said court ratiocinated, viz.:

After careful evaluation of the evidence testimonial and documentary, the Court
believes that the defendants['] delay in the payment of the two installment[s] is
not so substantial [as to] warrant [rescission] of contract. Although, the defendant
failed to pay the two installments [i]n due time, she was able to communicate
with the plaintiffs through letters requesting for an extension of two months
within which to pay the installment[s]. In fact, on November 24, 1993 defendant
informed Atty. Arlene Carbon that she was ready to pay the installments and the
money is ready for pick-up. However, plaintiff did not bother to get or pick-up
the money without any valid reason. It would be very prejudicial on the part of
the defendant if the contract to sell be rescinded considering that she made a
downpayment of P200,000.00 and made partial amortization to the Bliss
Development Corporation. In fact, the defendant testified that she is willing and
ready to pay the balance including the interest on November 24, 1993.

The Court is of the opinion that the delay in the payment of the balance of the
purchase price of the house and lot is not [so] substantial [as to] warrant the
rescission of the contract to sell. The question of whether a breach of contract is
substantial depends upon the attendant circumstance. . . . 28 CDHAcI

Clearly, the RTC arrived at the above-quoted conclusion based on its mistaken premise
that rescission is applicable to the case. Hence, its determination of whether there was
substantial breach. As may be recalled, however, the CA, in its assailed Decision, found
 the contract between the parties as a contract to sell, specifically of a real property on
installment basis, and as such categorically declared rescission to be not the proper
remedy. This is considering that in a contract to sell, payment of the price is a positive
suspensive condition, failure of which is not a breach of contract warranting rescission
under Article 1191 29 of the Civil Code but rather just an event that prevents the
supposed seller from being bound to convey title to the supposed buyer. 30 Also, and
as correctly ruled by the CA, Article 1191 cannot be applied to sales of real property
on installment since they are governed by the Maceda Law. 31

There being no breach to speak of in case of non-payment of the purchase price in a contract
to sell, as in this case, the RTC's factual finding that Lourdes was willing and able to pay
her obligation a conclusion arrived at in connection with the said court's determination
of whether the non-payment of the purchase price in accordance with the terms of the
contract was a substantial breach warranting rescission therefore loses significance. The
spouses Bonrostro's reliance on the said factual finding is thus misplaced. They cannot
invoke their readiness and willingness to pay their obligation on November 24, 1993 as an
excuse from being made liable for interest beyond the said date. HDICSa

The spouses Bonrostro are liable for

interest on the installments due from the
date of default until fully paid.

The spouses Bonrostro assert that Lourdes' letter of November 24, 1993 amounts to tender
of payment of the remaining balance amounting to P630,000.00. Accordingly, thenceforth,
accrual of interest should be suspended.

Tender of payment "is the manifestation by the debtor of a desire to comply with or pay an
obligation. If refused without just cause, the tender of payment will discharge the debtor of
the obligation to pay but only after a valid consignation of the sum due shall have been
made with the proper court." 32 "Consignation is the deposit of the [proper amount with a
judicial authority] in accordance with rules prescribed by law, after the tender of payment
has been refused or because of circumstances which render direct payment to the creditor
impossible or inadvisable." 33

"Tender of payment, without more, produces no effect." 34 "[T]o have the effect of
payment and the consequent extinguishment of the obligation to pay, the law requires the
companion acts of tender of payment and consignation." 35

As to the effect of tender of payment on interest, noted civilist Arturo M. Tolentino

explained as follows:

When a tender of payment is made in such a form that the creditor could have
immediately realized payment if he had accepted the tender, followed by a prompt
attempt of the debtor to deposit the means of payment in court by way of
 consignation, the accrual of interest on the obligation will be suspended from the
date of such tender. But when the tender of payment is not accompanied by
the means of payment, and the debtor did not take any immediate step to
make a consignation, then interest is not suspended from the time of such
tender. . . . 36 (Emphasis supplied) HSTCcD

Here, the subject letter merely states Lourdes' willingness and readiness to pay but it was
not accompanied by payment. She claimed that she made numerous telephone calls to Atty.
Carbon reminding the latter to collect her payment, but, neither said lawyer nor Constancia
came to collect the payment. After that, the spouses Bonrostro took no further steps to
effect payment. They did not resort to consignation of the payment with the proper court
despite knowledge that under the contract, non-payment of the installments on the agreed
date would make them liable for interest thereon. The spouses Bonrostro erroneously
assumed that their notice to pay would excuse them from paying interest. Their claimed
tender of payment did not produce any effect whatsoever because it was not accompanied
by actual payment or followed by consignation. Hence, it did not suspend the running of
interest. The spouses Bonrostro are therefore liable for interest on the subject installments
from the date of default until full payment of the sums of P300,000.00 and P330,000.00.

The spouses Bonrostro are likewise

liable for interest on the amount paid by
the spouses Luna to Bliss as
amortization.

The spouses Bonrostro want to be relieved from paying interest on the amount of
P214,492.62 which the spouses Luna paid to Bliss as amortizations by asserting that they
were prevented by the latter from fulfilling such obligation. They invoke Art. 1186 of the
Civil Code which provides that "the condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment."

However, the Court finds Art. 1186 inapplicable to this case. The said provision explicitly
speaks of a situation where it is the obligor who voluntarily prevents fulfillment of the
condition. Here, Constancia is not the obligor but the obligee. Moreover, even if this
significant detail is to be ignored, the mere intention to prevent the happening of the
condition or the mere placing of ineffective obstacles to its compliance, without actually
preventing fulfillment is not sufficient for the application of Art. 1186. 37 Two requisites
must concur for its application, to wit: (1) intent to prevent fulfillment of the condition;
and, (2) actual prevention of compliance. 38 IaEHSD

In this case, while it is undisputed that Constancia indeed instructed Bliss on March 4, 1994
not to accept payment from anyone but her, there is nothing on record to show that Bliss
heeded the instruction of Constancia as to actually prevent the spouses Bonrostro from
making payments to Bliss. There is no showing that subsequent to the said letter, the
spouses Bonrostro attempted to make payment to and was refused by Bliss. Neither was
there a witness presented to prove that Bliss indeed gave effect to the instruction contained
in Constancia's letter. While Bliss' Project Development Officer, Mr. Ariel Cordero,
testified during trial, nothing could be gathered from his testimony regarding this except
for the fact that Bliss received the said letter. 39 In view of these, the spouses Luna could
not be said to have placed an effective obstacle as to actually prevent the spouses Bonrostro
from making amortization payments to Bliss.

On the other hand, there are telling circumstances which militate against the spouses
Bonrostro's claimed keenness to comply with their obligation to pay the monthly
amortization. After the execution of the contract in January 1993, they immediately took
possession of the property but failed to make amortization payments. It was only after
seven months or on November 18, 1993 that they made payments to Bliss in the amount of
P46,303.44. 40 Whether the same covers previous unpaid amortizations is also not clear as
the receipt does not indicate the same 41 and per Statement of Account 42 as of March 8,
1994 issued by Bliss, the unpaid monthly amortization for February to November 1993 in
the total amount of P78,271.69 remained outstanding. There was also no payment made of
the amortization due on December 4, 1993 and January 4, 1994 43 before the filing of the
Complaint on January 11, 1994. TcIHDa

On the part of the spouses Luna, it is understandable that they paid the amortization due.
The assumption of payment of the monthly amortization to Bliss was made part of the
obligations of the spouses Bonrostro under their contract with the spouses Luna precisely
to avoid the cancellation of the earlier contract entered into by Constancia with Bliss. But
as the spouses Bonrostro failed in this obligation, the spouses Luna were constrained to
pay Bliss to avoid the adverse effect of such failure. This act of the spouses Luna proved
to be even more beneficial to the spouses Bonrostro as the cancellation of the Contract to
Sell between Constancia and Bliss would result in the cancellation of the subsequent
Contract to Sell between Constancia and Lourdes. Also, the spouses Bonrostro were
relieved from paying the penalties that would have been imposed by Bliss if the monthly
amortization covered by the said payment remained unpaid. The Statements of Account 44
issued by Bliss clearly state that each monthly amortization is due on or before the fourth
day of every month and a penalty equivalent to 1/10th of 1% per day of delay shall be
imposed for all payments made after due date. That translates to 3% monthly or 36% per
annum rate of interest, three times higher than the 12% per annum rate of interest correctly
imposed by the CA.

Hence, the resulting situation is that the spouses Luna are constrained to part with their
money while the spouses Bonrostro, despite being remiss in their obligation to pay the
monthly amortization, are relieved from paying higher penalties at the expense of the
former. This is aside from the fact that the spouses Bonrostro are in continued possession
of the subject property and are enjoying the beneficial use thereof. Under the circumstances
and considering that the spouses Bonrostro are obviously in delay in complying with their
obligation to pay the amortization due from February 1993 to January 1995 for which the
spouses Luna paid P214,492.62, 45 the CA correctly ordered the reimbursement to the
latter of the said amount with interest. "Delay in the performance of an obligation is looked
upon with disfavor because, when a party to a contract incurs delay, the other party who
performs his part of the contract suffers damages thereby." 46 As discussed, the spouses
Luna obviously suffered damages brought about by the failure of the spouses Bonrostro to
comply with their obligation on time. "And, sans elaboration of the matter at hand, damages
take the form of interest . . . ." 47 Under Article 2209 of the Civil Code,"[i]f the obligation
consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest . . . ." There being no
stipulation on interest in case of delay in the payment of amortization, the CA thus correctly
imposed interest at the legal rate which is now 12% per annum. SaETCI

WHEREFORE, the Petition for Review on Certiorari is DENIED and the assailed
Decision dated April 15, 2005 and the Resolution dated April 17, 2006 of the Court of
Appeals in CA-G.R. CV No. 56414 are AFFIRMED.

SO ORDERED.

Carpio, Brion, Perez and Perlas-Bernabe, JJ., concur.

||| (Spouses Bonrostro v. Spouses Luna, G.R. No. 172346, [July 24, 2013], 715 PHIL 1-18)
 THIRD DIVISION

[G.R. No. 174986. July 7, 2009.]

ARMAND O. RAQUEL-SANTOS and ANNALISSA MALLARI,

petitioners, vs. COURT OF APPEALS and FINVEST SECURITIES
CO., INC., respondents.

[G.R. No. 175071. July 7, 2009.]

PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs. FINVEST

SECURITIES CO., INC., respondent.

[G.R. No. 181415. July 7, 2009.]

FINVEST SECURITIES CO., INC., petitioner, vs. TRANS-PHIL

MARINE ENT., INC. and ROLAND H. GARCIA, respondents.

DECISION

NACHURA, J : p

Three petitions, arising from related events, were consolidated by this Court:
G.R. Nos. 174986 and 175071 are petitions for review assailing the Court of Appeals
(CA) Decision 1 in CA-G.R. CV No. 85176 dated August 9, 2006, and Resolution dated
October 11, 2006; and G.R. No. 181415 is a petition for review assailing the CA
Decision 2 in CA-G.R. CV No. 85430 dated September 3, 2007, and Resolution dated
January 24, 2008. These cases cropped up from the failure of Finvest Securities Co.,
Inc. (Finvest) to meet its obligations to its clients and the Philippine Stock Exchange
(PSE), allegedly caused by mishandling of Finvest's funds and property by its officers.
G.R. Nos. 174986 and 175071
Finvest is a stock brokerage corporation duly organized under Philippine laws
and is a member of the PSE with one membership seat pledged to the latter. Armand
O. Raquel-Santos (Raquel-Santos) was Finvest's President and nominee to the PSE
from February 20, 1990 to July 16, 1998. 3 Annalissa Mallari (Mallari) was Finvest's
Administrative Officer until December 31, 1998. 4
In the course of its trading operations, Finvest incurred liabilities to PSE
representing fines and penalties for non-payment of its clearing house obligations. PSE
also received reports that Finvest was not meeting its obligations to its clients. 5
Consequently, PSE indefinitely suspended Finvest from trading. The Securities and
Exchange Commission (SEC) also suspended its license as broker. 6
On June 17, 1998, PSE demanded from Finvest the payment of its obligations to
the PSE in the amount of P4,267,339.99 and to its (Finvest's) clients within 15 days. 7
PSE also ordered Finvest to replace its nominee, Raquel-Santos. 8
Upon failure of Finvest to settle its obligations, PSE sought authority from the
SEC to take over the operations of Finvest in accordance with PSE's undertaking
pursuant to Section 22 (a) (5) 9 of the Revised Securities Act. On July 22, 1998, SEC
acted favorably on PSE's request and authorized it to take over the operations of Finvest
in order to continue preserving the latter's assets. Finvest was duly informed of the
SEC's decision and was advised to refrain from making any payment, delivery of
securities, or selling or otherwise encumbering any of its assets without PSE's approval.
10 cSaATC

As of August 11, 1998, Finvest's total obligation to PSE, representing penalties,

charges and fines for violations of pertinent rules, was pegged at P5,990,839.99. 11
Finvest promised to settle all obligations to its clients and to PSE subject to verification
of the amount due, but Finvest requested a deadline of July 31, 1999. 12 PSE granted
Finvest's request, with the warning that, should Finvest fail to meet the deadline, PSE
might exercise its right to sell Finvest's membership seat and use the proceeds thereof
to settle its obligations to the PSE, its member-brokers and its clients. 13 On the same
day, Finvest requested an appointment with PSE's concerned officer to reconcile,
confirm and update the amount of the penalties, charges and fines due PSE. Finvest
also advised PSE that it would be represented by Mr. Ernesto Lee, its consultant, during
the said meeting. 14 After consultation with Mr. Lee, PSE revised its computation of
the penalties, charges and fines and reduced the amount due to P3,540,421.17. 15
In a Letter dated September 8, 1998, Finvest appealed to PSE for the approval
of the following: (1) that it be given a period of up to March 30, 1999 to settle claims
of clients, subject to proper documents and verification of balance; and (2) that it be
allowed to settle its liabilities to PSE at an amount lower than P4,212,921.13
(representing penalties, charges and fines at P3,540,421.17 plus sanctions for violation
of rules at P675,500.00), considering that it had never unduly exposed PSE to any legal
and financial risks in connection with its clearing accounts. 16
In reply, PSE required Finvest to acknowledge within 30 days, in whole or in
part, clients' claims that had been filed with the PSE and to settle all duly acknowledged
claims by December 31, 1998. PSE resolved to consider the request for a reduction of
its liabilities to PSE only after it had settled all duly acknowledged claims of its clients.
17
On February 3, 1999, PSE inquired from Finvest if it had already settled all duly
acknowledged claims of its clients and its liabilities to PSE. 18 PSE also demanded that
Finvest settle its liabilities to it not later than March 31, 1999. Finvest responded by
proposing that the amount of assessed penalties, charges and fines be reduced to 10%,
that is, P354,042.17; and that full payment of the clients' claims be deferred to June 30,
1999. 19 Previously, Finvest had also requested a written clearance from PSE for
renewal of the registration of its brokers and dealers with the SEC. 20
In its Letter of February 23, 1999, PSE informed Finvest that it would only issue
a written clearance after Finvest had settled its obligations to PSE and paid all
acknowledged liabilities to various clients. 21 In response, Finvest repeated its appeal
to be allowed to fully operate again and to pay a reduced amount on the ground that it
had no adequate funds because it had been the victim of fraud committed by its
employees. 22 aHECST

On April 21, 1999, PSE again sent a demand letter to Finvest, reminding the
latter of the March 31, 1999 deadline. 23
On April 26, 1999, Finvest requested a hearing to determine the amount of its
liability and to exhaust the possibility of arriving at a reasonable solution, and reiterated
its appeal for the resumption of its operations. 24 PSE brushed aside Finvest's request,
urging it instead to settle all of its obligations by May 31, 1999; otherwise, PSE would
be forced to recommend to the SEC the liquidation of its assets and sell its seat at public
auction, 25 pursuant to its Pledge Agreement with Finvest. Finvest protested the
imposition of the deadline for being arbitrary on the ground that the claims against it
had not yet been established. 26
At this juncture, Finvest filed a Complaint with the SEC for accounting and
damages with prayer for a temporary restraining order and/or preliminary injunction
and mandamus against Raquel-Santos, Mallari and PSE. The complaint alleged that
Raquel-Santos and Mallari took undue advantage of their positions by diverting to their
personal use and benefit the unaccounted stock certificates and sales proceeds referred
to in Annex "X" of the complaint, which was a list of the claims of Finvest's clients as
of December 31, 1998. Finvest prayed that Raquel-Santos and Mallari be ordered to
account for the missing stock certificates and sales proceeds and to pay the profits that
would have accrued to Finvest. As against PSE, the complaint alleged that PSE violated
Finvest's right to due process by illegally and arbitrarily suspending Finvest's
operations, thus compounding its inability to meet the demands of its clients; and by
unilaterally and arbitrarily imposing upon Finvest fines and penalties, without a
hearing. The complaint prayed that an injunction be issued to prevent PSE from
initiating the liquidation of Finvest and selling Finvest's seat at public auction. aDSAEI

Alleging that Raquel-Santos and Mallari failed to file their Answer within the
reglementary period, Finvest moved for a partial judgment against them. 27 On
February 4, 2000, SEC, through a Hearing Panel, rendered a Partial Judgment 28
against Raquel-Santos and Mallari, ordering them to account for the missing stock
certificates and pay the damages that Finvest may sustain.
 Raquel-Santos and Mallari filed separate motions to set aside the partial
judgment, alleging non-receipt of summons. In an Order dated April 10, 2000, SEC
denied due course to the two motions. 29 Thereafter, the SEC Hearing Panel issued a
writ of execution. 30
Consequently, notices of garnishment and sale were issued against Raquel-
Santos' Manila Golf Shares and Sta. Elena Golf Shares. 31 Raquel-Santos moved for
the cancellation of the notice of sale, arguing that there was no basis for the sale of his
shares as there was no money judgment involved, only an accounting of the allegedly
missing stock certificates. According to him, only after it is established that there were
missing certificates should he be held accountable. In the same motion, Raquel-Santos
also endeavored to make an accounting of the stock certificates through the following
documents: (a) a 35-page Stock Ledger of an inventory of securities/stock certificates
as of July 31, 1998; (b) a 24-page inventory as of July 31, 1998 of stocks in the vault
of Finvest; and (c) a 5-page inventory of the securities on deposit with the Philippine
Central Depository, Inc. 32
On June 29, 2000, the parties entered into an Agreement, 33 approved by the
SEC en banc in its Order 34 of July 11, 2000, to remand the case to the Securities
Investigation and Clearing Division for service of summonses to Raquel-Santos and
Mallari. In turn, Raquel-Santos and Mallari agreed not to dispose of or transfer the
garnished properties in the meantime, but the writs of garnishment would remain in
force during the pendency of the case.
Meanwhile, on June 5, 2000, the SEC Hearing Panel granted Finvest's motion
for the issuance of a preliminary injunction to enjoin PSE from initiating the liquidation
of Finvest and from selling its membership seat. The SEC Hearing Panel ratiocinated
that PSE's plan to sell Finvest's membership seat at public auction, despite the fact that
its claims against Finvest were yet to be determined in these proceedings, was reason
enough for the issuance of a preliminary injunction. 35 Upon posting of the required
bond, the SEC Hearing Panel issued a writ of preliminary injunction on June 21, 2000.
36
With the enactment of the Securities Regulation Code, the case was transferred
to the Regional Trial Court (RTC), Makati City, and docketed as Civil Case No. 00-
1589. HDAaIS

On October 2, 2001, the RTC issued an Order lifting the garnishment of Raquel-
Santos' Manila Golf Club share on the ground that there must be a proper accounting
to determine the amount for which Raquel-Santos and Mallari were to be held jointly
and severally liable to Finvest before a writ of garnishment may be validly issued. 37
As a result, Finvest filed a motion for reconsideration and a motion to respect the SEC
en banc Order dated July 11, 2000. The motions were denied by the RTC in its May
30, 2002 Order. 38 Through a petition for certiorari, the October 2, 2001 Order of the
RTC was subsequently modified by the CA on December 9, 2002. The CA held that
the sale of Raquel-Santos' share in Manila Golf Club was valid, subject to the outcome
of the main case (Civil Case No. 00-1589). The parties were further enjoined to comply
with their obligations under the July 11, 2000 Order of the SEC en banc. 39
In the meantime, PSE filed a Motion to Dissolve the Writ of Preliminary
Injunction and/or Motion for Reconsideration 40 on the ground that it had the legal
obligation to make the appropriate recommendations to the SEC on whether or not it
would be to the best interest of all concerned for Finvest to be liquidated at the soonest
possible time.
On April 28, 2003, the RTC issued a judgment in Civil Case No. 00-1589 in
favor of Finvest:

WHEREFORE, judgment is rendered directing that the writ of preliminary

injunction issued on June 21, 2000 be declared permanent. Respondents Raquel-
Santos and Mallari are ordered to render an accounting of the stock certificates
listed in Annex A of the Complaint.

SO ORDERED. 41

The trial court noted that Finvest had not been remiss in addressing its dispute
with the PSE. When PSE manifested its intent to liquidate Finvest and sell its seat at
public auction, the amount of Finvest's liability was still unsettled, which thus makes it
doubtful whether Section 22 (a) (5) would apply. On the issue between Finvest and its
officers (Raquel-Santos and Mallari), the trial court held that Finvest could rightfully
demand an accounting from them and hold them liable for unaccounted securities since
Raquel-Santos exercised control and supervision over the trading operations of Finvest
and he and Mallari had custody of all securities traded.
On September 12, 2003, Finvest sought a partial reconsideration of the RTC
Judgment praying that: (a) Finvest's indefinite suspension by PSE be lifted; (b) Raquel-
Santos and Mallari be ordered to render an accounting of the stock certificates within
60 days from receipt of the judgment, and upon failure to do so, to jointly and severally
pay Finvest P18,184,855.89, the value of the stocks as of December 31, 1998; and (c)
Raquel-Santos be ordered to liquidate his cash advances amounting to P3,143,823.63
within 60 days from receipt of the judgment or, in case of failure to do so, to consider
the same as unliquidated cash advances. 42
On the prayer to lift the indefinite suspension of Finvest by PSE, the trial court
found that there was, in fact, a need to allow Finvest's operation to continue to enable
it to negotiate the terms and modes of payments with its claimants, settle its obligations
and fully ascertain its financial condition. On the prayer to set a period within which to
render the accounting, the trial court held that there was no need to set a period as
Section 4, Rule 39 of the Rules on Civil Procedure already directs when such kind of
judgment is enforceable. Accordingly, the RTC modified its earlier decision in its Order
dated February 1, 2005, thus: ICHcTD
 WHEREFORE, plaintiff's Motion for Partial Reconsideration is partially granted
as follows

a) The indefinite suspension of operation of plaintiff Finvest Corporation by the

defendant Philippine Stock Exchange is lifted; and

b) The "Annex A" in the dispositive portion of the Judgment dated April 28, 2003
is modified to read as "Annex X".

All other reliefs are denied. 43

PSE appealed to the CA. Finvest likewise filed a partial appeal. Raquel-Santos
and Mallari also filed an appeal with the CA but the same was deemed abandoned when
they failed to file their appellants' brief. 44 The appeals of Finvest and PSE were
docketed as CA-G.R. CV No. 85176.
On August 9, 2006, the CA rendered a Decision granting Finvest's petition, thus:

WHEREFORE, plaintiff-appellant Finvest's partial appeal of the April 28, 2003

Judgment of the Regional Trial Court of Makati City, Branch 138 is hereby
GRANTED to the effect that defendants-appellants Armand O. Raquel-Santos
and Annalissa Mallari are hereby given a period of sixty (60) days from the
finality of this decision to render an accounting and in the event that they will fail
to do so, they are hereby ordered to jointly and severally pay Finvest the amount
of eighteen million one hundred eighty-four thousand eight hundred fifty-five
pesos and eighty-nine centavos (P18,184,855.89), and for defendant-appellant
Raquel-Santos to pay three million one hundred forty-three thousand eight
hundred twenty-three pesos and sixty-three centavos (P3,143,823.63). As for the
appeal of defendant-appellant Philippine Stock Exchange, the same is hereby
DENIED for lack of merit.

SO ORDERED. 45

For expediency and in the interest of speedy disposition of justice, the CA set a
60-day period within which Raquel-Santos and Mallari would render an accounting.
The appellate court agreed that Raquel-Santos and Mallari were guilty of gross
negligence or bad faith for the wrongful disposition of the proceeds of the sale of the
shares of stock that were in their custody. According to the CA, this circumstance
justified the order for them to pay P18,184,855.89, representing the various claims of
clients, and for Raquel-Santos to pay P3,143,823.63, representing unliquidated cash
advances, in the event they failed to render the necessary accounting within the given
period. Significantly, the CA also noted that Raquel-Santos and Mallari did not even
dispute the affidavit of Mr. Ernesto Lee regarding the schedule of claims.
The CA opined that paragraph 5 (a) of the Pledge Agreement, giving PSE the
right to sell Finvest's seat in case of default, pertained to default in the payment of
obligations already determined and established. The validity of the fines and penalties
imposed by the PSE was yet to be substantiated. PSE could not insist on selling
Finvest's seat unless its claims had been resolved with finality. It was, thus, proper to
enjoin PSE from exercising whatever rights it had under the Pledge Agreement.
In their motion for reconsideration, 46 Raquel-Santos and Mallari protested the
CA's order to hold them jointly and severally liable for the claims of Finvest's clients
on the ground that this relief was not even prayed for in Finvest's complaint. They
insisted that the proper procedure to render an accounting was to specify the beginning
balance, tack the values therefor, render an accounting, and adjudge them liable for the
deficiency, if any. They averred that the beginning balance must be set out by the parties
or, in case of dispute, by the courts. PSE likewise filed a motion for reconsideration 47
reiterating its arguments.CcTIAH

On October 11, 2006, the CA denied the respective motions for reconsideration
of the PSE and Raquel-Santos and Mallari. 48 The CA dismissed PSE's motion for
reconsideration for being a mere rehash of its arguments. As for the issues raised by
Raquel-Santos and Mallari, the CA pronounced that its order to hold Raquel-Santos and
Mallari liable for the claims in case they failed to account for them was well within the
reliefs prayed for by Finvest in its Complaint. The CA added that Raquel-Santos and
Mallari could follow the proposed accounting procedure when they rendered an
accounting pursuant to the court's order.
Raquel-Santos and Mallari and the PSE filed separate petitions for review on
certiorari with this Court, docketed as G.R. Nos. 174986 and 175071, respectively,
assailing the August 9, 2006 CA Decision and October 11, 2006 Resolution. This Court
directed the consolidation of the two petitions.
G.R. No. 181415
The Court likewise directed the consolidation of G.R. No. 181415, which stems
from a case between Finvest and two of its clients, Trans-Phil. Marine Enterprises, Inc.
(TMEI) and Roland Garcia. The facts of the case are as follows: cSCTEH

TMEI and Roland Garcia filed a complaint against Finvest with the SEC praying
for the delivery of stock certificates and payment of dividends on the stocks they
purchased. The Complaint alleged that, from February 4, 1997 to July 31, 1997, TMEI
and Roland Garcia purchased shares of stock of Piltel Corporation through Finvest. In
particular, TMEI purchased 63,720 shares for P1,122,863.13 while Garcia purchased
40,000 shares for P500,071.25. Finvest failed to deliver to them the stock certificates
despite several demands. TMEI and Roland Garcia also claimed that they were entitled
to the dividends declared by Piltel from the time they purchased the shares of stock.
In its Answer, Finvest asserted that it could not have complied with
complainants' demand for the delivery of the stock certificates because it was under
indefinite suspension since October 1997 and it had no means to verify or validate their
claims.
 During the pre-trial stage, TMEI amended its complaint by modifying its prayer
for a refund of the value of the undelivered shares of stock, instead of the delivery of
the stock certificates plus payment of dividends. 49 In the hearing conducted by the
trial court for the purpose of determining the propriety of admitting the amended
complaint, Finvest manifested that it had no objection to the admission of the amended
complaint, and that it would no longer file an amended answer. Both parties manifested
that they were no longer presenting any additional evidence; hence, the case was
submitted for decision. 50 AEIHCS

On April 29, 2003, the RTC rendered a Decision in Civil Case No. 00-1579, the
dispositive portion of which reads:

WHEREFORE, judgment is rendered ordering the respondent to return to

complainant Trans-[Phil] Marine Enterprises[,] Inc.[,] the value of the
undelivered shares of stock of Piltel equivalent to P1,122,863.13 and to
complainant Roland H. Garcia the value of the undelivered shares of stock of
Piltel equivalent to P500,071.25, both with interest thereon at the legal rate from
the date of the filing of the Complaint.

SO ORDERED. 51

On June 6, 2005, the RTC modified its earlier decision. The amount of
P1,122,863.13 in the dispositive portion was reduced to P1,078,313.13 based on
evidence showing that 2,025 Piltel shares, equivalent to P44,550.00, had been delivered
to TMEI, which fact was not denied by the latter. 52
Finvest appealed to the CA. On September 3, 2007, the CA rendered a Decision
53 affirming the RTC Decision. Applying Article 1191 of the Civil Code, the CA
declared that since Finvest failed to comply with its obligation to deliver to TMEI and
Garcia the shares of stock, Finvest was bound to return the amounts paid by them.
On January 24, 2008, the CA denied Finvest's motion for reconsideration; 54
hence, the petition for review on certiorari, docketed as G.R. No. 181415.
The Petition in G.R. No. 174986
Petitioners Raquel-Santos and Mallari raise the following issues:

A. THE HONORABLE COURT OF APPEALS ERRED IN NOT FIXING A

BEGINNING BALANCE FOR THE ACCOUNTING ORDERED.

B. THE HONORABLE COURT OF APPEALS HAD NO JURISDICTION TO

ORDAIN THE PAYMENT OF THE SUPPOSED UNLIQUIDATED
ADVANCES OF PETITIONER RAQUEL-SANTOS. 55
 While conceding that they have to render an accounting of the claims stated in
Annex "X", petitioners bewail the lack of statement of the beginning balance therefor.
They aver that a sweeping order for them to answer all these claims does not meet the
standards of fair play. They insist that, as pointed out in their motion for reconsideration
filed with the CA, the proper procedure is to specify the beginning balance first. 56
Petitioners, therefore, pray that judgment be rendered fixing the beginning balance for
the accounting ordered. AaHDSI

Petitioners further aver that the CA exceeded its jurisdiction when it ordered
them to pay unliquidated cash advances. Petitioners point out that said unliquidated
cash advances were not alleged, and payment thereof was not prayed for, in the
complaint. 57 The alleged cash advances were only mentioned in the Supplemental
Affidavit submitted by Mr. Ernesto Lee to the trial court. 58 They, therefore, pray that
the order for Raquel-Santos to liquidate or pay his cash advances be deleted.
The Petition in G.R. No. 175071
PSE assigns the following errors:

I.

THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER THE

EVIDENCE CLEARLY SHOWING THAT THE AMOUNT OF LIABILITY
OF RESPONDENT HAD ALREADY BEEN DETERMINED,
SUBSTANTIATED AND ESTABLISHED NOT ONLY BY PETITIONER
BUT ALSO WITH THE FULL KNOWLEDGE AND PARTICIPATION OF
RESPONDENT. aIcTCS

II.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN

ENJOINING PETITIONER PSE FROM ENFORCING AND EXERCISING
ITS RIGHT UNDER THE PLEDGE AGREEMENT.

III.

APPEAL BY CERTIORARI UNDER RULE 45 IS PROPER CONSIDERING

THAT THE HONORABLE COURT OF APPEALS MISAPPREHENDED THE
FACTS OF THE CASE. 59

PSE contends that appeal by certiorari is proper considering that the CA

misapprehended the facts of the case. For one, the CA failed to consider the fact that
PSE's claim against Finvest had been duly ascertained, computed and substantiated.
PSE points out that it has made several demands on Finvest for the payment of its
obligations and the amount due has been computed after consultation with Finvest's
representative, Mr. Ernesto Lee. In fact, in his Letter dated September 8, 1998, Finvest's
Chairman, Mr. Abelardo Licaros, already acknowledged the amount of Finvest's
liabilities and obligations to PSE in the amount of P4,212,921.13. Finvest even
proposed that its outstanding obligations to PSE be reduced to 10% of the total amount
due and the deadline for its payment be extended. Considering, therefore, that Finvest
already acknowledged and ascertained its obligations with PSE and yet it defaulted in
the payment thereof, PSE had the right to sell at public auction Finvest's pledged seat
pursuant to the Pledge Agreement and in accordance with Article 2112 of the Civil
Code.
The Petition in G.R. No. 181415
In this petition, Finvest raises the following grounds:

I.

WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS

GRAVELY ERRED IN AFFIRMING THE DECISION OF THE TRIAL
COURT WHICH ORDERED THE RETURN OF THE VALUE OF THE
UNDELIVERED SHARES OF STOCK AT THE TIME OF THE PURCHASE,
WHICH AWARD OF DAMAGES HAVE NOT BEEN ESTABLISHED BY
EVIDENCE.

II.

WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS

GRAVELY ERRED IN RENDERING THE DECISION WHICH TENDS TO
BE IN CONFLICT WITH ANOTHER DECISION OF THE HONORABLE
COURT OF APPEALS (SPECIAL FOURTEENTH DIVISION) IN CA-G.R.
CV NO. 85176 (NOW PENDING BEFORE THE HONORABLE SUPREME
COURT AS G.R. NO. 174986) INSOFAR AS THE AWARD OF DAMAGES
TO RESPONDENTS IS CONCERNED, WHICH CONFLICTING FINDING
WAS THE SAME SITUATION HEREIN PETITIONER SOUGHT TO AVOID
WHEN IT MOVED FOR THE CONSOLIDATION OF BOTH CASES
BEFORE THE TRIAL COURT. 60 TEcAHI

Finvest insists that the trial court and the CA had no basis in awarding in favor
of respondents damages equivalent to the value of the undelivered shares of stock
purchased by TMEI and Garcia. Finvest posits that there was no evidence to show that
respondents were entitled thereto.
Finvest further contends that the order for them to pay the said shares of stock is
in conflict with the CA Decision in CA-G.R. CV No. 85176, ordering Finvest's officers
to render an accounting or to pay the value of stock certificates that included those
covering the shares of stock purchased by TMEI and Garcia. According to Finvest, the
two judgments caused an apparent confusion as to who would ultimately be held liable
for the subject shares.
 Respondents counter that they have sufficiently proven the value of the shares
of stock through the buy confirmation slips, vouchers and official receipts, which they
presented in evidence. They submit that liability for these undelivered shares of stock
of its officers is a corporate liability that Finvest may not pass on to its erring officers.
The Court's Ruling
G.R. No. 174986
The petition of Raquel-Santos and Mallari has no merit.
The CA properly shunned petitioners' prayer to further modify the assailed
judgment to include a beginning balance for the accounting ordered. It is well to note
that petitioners' appeal from the decision of the lower court was deemed abandoned
when they failed to file their appellants' brief. Not having filed an appeal, petitioners
could not have obtained any affirmative relief from the appellate court other than what
they obtained, if any, from the lower court. After all, a party who does not appeal from
a judgment can no longer seek modification or reversal of the same. He may oppose the
appeal of the other party only on grounds consistent with the judgment. 61 The appealed
decision becomes final as to the party who does not appeal.
Moreover, we find no reason, at this point, to amend or modify the judgment of
the CA just to include a statement of the beginning balance for the accounting ordered.
This pertains to the manner in which petitioners would comply with the order to render
an accounting upon its execution, which matter should not concern this Court at the
moment. DHIaTS

In any case, the Court is not in a position to grant the relief prayed for since the
proper beginning balance, if indeed necessary, is not determinable from the records. In
fact, petitioners, being in possession of the records relative to the missing stock
certificates, have the means to determine the beginning balance. In their motion for
reconsideration of the CA Decision, petitioners themselves acknowledge that the parties
must set the beginning balance and only in case of dispute will the courts be called upon
to intervene. 62
Although petitioners may no longer seek affirmative relief from the trial court's
decision, they may, however, oppose any modification of, or advance such arguments
as may be necessary to uphold or maintain, the said decision. Considering that the order
directing the payment of unliquidated cash advances is a modification of the trial court's
decision, petitioners have every right to oppose the same.
To recall, respondent Finvest's cause of action against petitioners was for
accounting and damages, arising from the allegedly missing stock certificates. In
relation to such cause of action, Finvest alleged in the Complaint that petitioners had
sole authority and custody of the stock certificates and that they took undue advantage
of their positions in diverting to their personal benefit the proceeds from the sale of the
shares of stock. Finvest, therefore, prayed that Raquel-Santos and Mallari be held
"jointly and severally liable to account for and/or to pay for all missing stock certificates
and payables listed in Annex X [of the Complaint] and for any other subsequent claims
and the corresponding profits that could have accrued to the corporation"; and "damages
that the corporation may sustain by reason of and/or in relation to such missing or
unaccounted stock certificates, payables, and any other subsequent claims". SCIacA

In refuting petitioners' stance that the CA erred in granting a relief not prayed
for in the Complaint, respondent argues that the order for Raquel-Santos to liquidate or
pay his cash advances was well within its prayer for the payment of damages that
Finvest will sustain in relation to the missing stock certificates.
It is true that lack of prayer for a specific relief will not deter the court from
granting that specific relief. Even without the prayer for a particular remedy, proper
relief may be granted by the court if the facts alleged in the complaint and the evidence
adduced so warrant. The prayer in the complaint for other reliefs equitable and just in
the premises justifies the grant of a relief not otherwise specifically prayed for. 63
Admittedly, even if an issue has not been raised in the complaint but evidence
has been presented thereon, the trial court may grant relief on the basis of such evidence.
A court may rule and render judgment on the basis of the evidence before it, even
though the relevant pleading has not been previously amended, provided that no
surprise or prejudice to the adverse party is thereby caused. 64 So long as the basic
requirements of fair play have been met, as where litigants were given full opportunity
to support their respective contentions and to object to or refute each other's evidence,
the court may validly treat the pleadings as if they have been amended to conform to
the evidence and proceed to adjudicate on the basis of all the evidence before it. 65
Notably, the Complaint did not allege that petitioner Raquel-Santos obtained
from Finvest cash advances that he failed to liquidate. The alleged cash advances were
disclosed to the court in the Supplemental Affidavit 66 that Mr. Ernesto Lee submitted
to the court. Attached to the Supplemental Affidavit were copies of disbursement
vouchers and checks representing the cash advances made by petitioner Raquel-Santos.
We note that petitioner Raquel-Santos did not protest the order for him to pay
the cash advances in his Motion for Reconsideration of the CA Decision. He raises the
issue for the first time in this petition, which should not be allowed. A question that was
never raised in courts below cannot be allowed to be raised for the first time on appeal
without offending basic rules of fair play, justice and due process. 67 In any case,
petitioner Raquel-Santos had every opportunity to refute the Supplemental Affidavit,
together with the vouchers and checks, but he did not submit any counter evidence.
Petitioner is clearly estopped from questioning the order for him to pay the cash
advances.
G.R. No. 175071
PSE's petition is without merit. EDIHSC

Article 1159 of the Civil Code provides that contracts have the force of law
between the contracting parties and should be complied with in good faith. Being the
primary law between the parties, the contract governs the adjudication of their rights
and obligations. A court has no alternative but to enforce the contractual stipulations in
the manner they have been agreed upon and written. 68
The Pledge Agreement between PSE and Finvest was entered into pursuant to
PSE's by-laws which requires a member to pledge its membership seat to secure the
payment of all debts or obligations due PSE and its other members arising out of, or in
connection with, the present or future contracts of such member with PSE and its
members. In case of default in the payment of obligations, the Pledge Agreement
explicitly grants PSE the right to sell Finvest's pledged seat, viz.:

5. Default. In the event of a default by the PLEDGOR in respect to the Obligations

or upon the failure of the PLEDGOR to comply with any of the provisions of this
Agreement, the PLEDGEE may: TSEAaD

(a) cause the public sale at any time as the PLEDGEE may elect at its
place of business or elsewhere and the PLEDGEE may, in all allowable
cases, acquire or purchase the Pledged Seat and hold the same thereafter
in its own right free from any claim of the PLEDGOR;

(b) apply, at its option, the proceeds of any said sale, as well as all sums
received or collected by the PLEDGEE from or on account of such
Pledged Seat to (i) the payment of expenses incurred or paid by the
PLEDGEE in connection with any sale, transfer or delivery of the Pledged
Seat, and (ii) payment of the Obligations and all unpaid interests,
penalties, damages, expenses, and charges accruing on the Obligations or
pursuant to the By-laws and this Agreement. The balance shall be returned
to the PLEDGOR. 69

Article 2112 of the Civil Code also gives the pledgee the same right to sell the
thing pledged in case the pledgor's obligation is not satisfied in due time.
Under the law on contracts, mora solvendi or debtor's default is defined as a
delay in the fulfillment of an obligation, by reason of a cause imputable to the debtor.
There are three requisites necessary for a finding of default. First, the obligation is
demandable and liquidated; second, the debtor delays performance; and third, the
creditor judicially or extrajudicially requires the debtor's performance. 70 TaISDA

In the present petition, PSE insists that Finvest's liability for fines, penalties and
charges has been established, determined and substantiated, hence, liquidated.
We note however that both trial court and CA have ruled otherwise. Factual
findings of the trial court, particularly when affirmed by the CA, are generally binding
on the Court. 71 This is because the trial court's findings of fact are deemed conclusive
and we are not duty-bound to analyze and weigh all over again the evidence already
considered in the proceedings below. 72 The Court is not a trier of facts and does not
normally undertake a re-examination of the evidence presented by the contending
parties during the trial of the case. 73 The Court's jurisdiction over a petition for review
on certiorari is limited to reviewing only errors of law, not of fact, unless the factual
findings complained of are devoid of support from the evidence on record or the
assailed judgment is based on a misapprehension of facts. 74
The findings of fact of both the trial court and the CA are fully supported by the
records. They plainly show that the parties were negotiating to determine the exact
amount of Finvest's obligations to PSE, during which period PSE repeatedly moved the
deadlines it imposed for Finvest to pay the fines, penalties and charges, apparently to
allow for more time to thresh out the details of the computation of said penalties. In the
middle of those talks, PSE unceremoniously took steps to sell the pledged seat at public
auction, without allowing the negotiations to come to a conclusion. This sudden
decision of PSE deprived Finvest a sporting chance to settle its accountabilities before
forfeiting its seat in the stock exchange. Without that seat, Finvest will lose its standing
to trade and do business in the stock exchange. SDIaHE

A debt is liquidated when the amount is known or is determinable by inspection

of the terms and conditions of relevant documents. 75 Under the attendant
circumstances, it cannot be said that Finvest's debt is liquidated. At the time PSE left
the negotiating table, the exact amount of Finvest's fines, penalties and charges was still
in dispute and as yet undetermined. Consequently, Finvest cannot be deemed to have
incurred in delay in the payment of its obligations to PSE. It cannot be made to pay an
obligation the amount of which was not fully explained to it. The public sale of the
pledged seat would, thus, be premature.
G.R. No. 181415
Finvest's petition is denied.
The CA was correct in applying Article 1191 of the Civil Code, which indicates
the remedies of the injured party in case there is a breach of contract:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in

case one of the obligors should not comply with what is incumbent upon him. EDcICT

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.

Initially, respondents sought the fulfillment of Finvest's obligation to deliver the

stock certificates, instead of a rescission. They changed their minds later and amended
the prayer in their complaint and opted for a refund of the purchase price plus damages.
The trial court allowed the amendment, there being no objection from Finvest.
The right of a party to rescission under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party who violates the reciprocity between
them. 76 In a contract of sale, the seller obligates itself to transfer the ownership of and
deliver a determinate thing, and the buyer to pay therefor a price certain in money or its
equivalent. In some contracts of sale, such as the sale of real property, prior physical
delivery of the thing sold or its representation is not legally required, as the execution
of the Deed of Sale effectively transfers ownership of the property to the buyer through
constructive delivery. Hence, delivery of the certificate of title covering the real
property is not necessary to transfer ownership. DSIaAE

In the sale of shares of stock, physical delivery of a stock certificate is one of the
essential requisites for the transfer of ownership of the stocks purchased. Section 63 of
the Corporation Code provides thus:

SEC. 63. Certificate of stock and transfer of shares. The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice-president, countersigned by the secretary or assistant secretary,
and sealed with the seal of the corporation shall be issued in accordance with the
by-laws. Shares of stock so issued are personal property and may be transferred
by delivery of the certificate or certificates indorsed by the owner or his attorney-
in-fact or other person legally authorized to make the transfer. No transfer,
however, shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation so as to show the names of the parties to
the transaction, the date of the transfer, the number of the certificate or certificates
and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation. 77 SECcAI

For a valid transfer of stocks, the requirements are as follows: (a) there must be
delivery of the stock certificate; (b) the certificate must be endorsed by the owner or his
attorney-in-fact or other persons legally authorized to make the transfer; and (c) to be
valid against third parties, the transfer must be recorded in the books of the corporation.
78
Clearly, Finvest's failure to deliver the stock certificates representing the shares
of stock purchased by TMEI and Garcia amounted to a substantial breach of their
contract which gave rise to a right to rescind the sale.
Rescission creates the obligation to return the object of the contract. This is
evident from Article 1385 of the Civil Code which provides:

ART. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can
return whatever he may be obliged to restore.
 Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing
the loss.

To rescind is to declare a contract void at its inception and to put an end to it as

though it never was. Rescission does not merely terminate the contract and release the
parties from further obligations to each other, but abrogates it from the beginning and
restores the parties to their relative positions as if no contract has been made. 79
Mutual restitution entails the return of the benefits that each party may have
received as a result of the contract. In this case, it is the purchase price that Finvest must
return. The amount paid was sufficiently proven by the buy confirmation receipts,
vouchers, and official/provisional receipts that respondents presented in evidence. In
addition, the law awards damages to the injured party, which could be in the form of
interest on the price paid, 80 as the trial court did in this case.
Lastly, we address respondents' concern over Finvest's attempt to pass its
liability for the undelivered stock certificates to its officers. We find that, contrary to
Finvest's stance, the CA Decision in CA-G.R. CV No. 85176, which is the subject of
the two other petitions for review before this Court, is not in conflict with our present
resolution. While the decision in the other case adjudges Finvest's officers liable to
Finvest for the missing stock certificates, the assailed decision in this petition makes
Finvest directly responsible to its clients for undelivered stock certificates. Moreover,
even if Finvest's officers are blameworthy, we cannot hold them solidarily liable, as
they were not impleaded as parties to this case. Consolidation of cases does not make
the parties to one case parties to the other.
WHEREFORE, the petitions in G.R. No. 174986 and G.R. No. 175071 are
DENIED. The CA Decision in CA-G.R. CV No. 85176 dated August 9, 2006 and
Resolution dated October 11, 2006 are AFFIRMED.
The petition in G.R. No. 181415 is likewise DENIED. The CA Decision in CA-
G.R. CV No. 85430 dated September 3, 2007 and Resolution dated January 24, 2008
are AFFIRMED.
SO ORDERED.
Ynares-Santiago, Chico-Nazario, Velasco, Jr. and Peralta, JJ., concur.
(Raquel-Santos v. Court of Appeals, G.R. No. 174986, 175071, 181415, [July 7, 2009],
|||

609 PHIL 630-659)

 SECOND DIVISION

[G.R. No. 173441. December 3, 2009.]

HEIRS OF SOFIA QUIRONG, Represented by ROMEO P.

QUIRONG, petitioners, vs. DEVELOPMENT BANK OF THE
PHILIPPINES, respondent.

DECISION

ABAD, J :p

This case is about the prescriptive period of an action for rescission of a contract
of sale where the buyer is evicted from the thing sold by a subsequent judicial order in
favor of a third party.
The Facts and the Case
The facts are not disputed. When the late Emilio Dalope died, he left a 589-
square meter untitled lot 1 in Sta. Barbara, Pangasinan, to his wife, Felisa Dalope
(Felisa) and their nine children, one of whom was Rosa Dalope-Funcion. 2 To enable
Rosa and her husband Antonio Funcion (the Funcions) get a loan from respondent
Development Bank of the Philippines (DBP), Felisa sold the whole lot to the Funcions.
With the deed of sale in their favor and the tax declaration transferred in their names,
the Funcions mortgaged the lot with the DBP.
On February 12, 1979, after the Funcions failed to pay their loan, the DBP
foreclosed the mortgage on the lot and consolidated ownership in its name on June 17,
1981. 3
Four years later or on September 20, 1983 the DBP conditionally sold the lot to
Sofia Quirong 4 for the price of P78,000.00. In their contract of sale, Sofia Quirong
waived any warranty against eviction. The contract provided that the DBP did not
guarantee possession of the property and that it would not be liable for any lien or
encumbrance on the same. Quirong gave a down payment of P14,000.00.
Two months after that sale or on November 28, 1983 Felisa and her eight
children (collectively, the Dalopes) 5 filed an action for partition and declaration of
nullity of documents with damages against the DBP and the Funcions before the
Regional Trial Court (RTC) of Dagupan City, Branch 42, in Civil Case D-7159. 2005cdasia

On December 27, 1984, notwithstanding the suit, the DBP executed a deed of
absolute sale of the subject lot in Sofia Quirong's favor. The deed of sale carried
substantially the same waiver of warranty against eviction and of any adverse lien or
encumbrance.
On May 11, 1985, Sofia Quirong having since died, her heirs (petitioner Quirong
heirs) filed an answer in intervention 6 in Civil Case D-7159 in which they asked the
RTC to award the lot to them and, should it instead be given to the Dalopes, to allow
the Quirong heirs to recover the lot's value from the DBP. But, because the heirs failed
to file a formal offer of evidence, the trial court did not rule on the merits of their claim
to the lot and, alternatively, to relief from the DBP. 7
On December 16, 1992 the RTC rendered a decision, declaring the DBP's sale
to Sofia Quirong valid only with respect to the shares of Felisa and Rosa Funcion in the
property. It declared Felisa's sale to the Funcions, the latter's mortgage to the DBP, and
the latter's sale to Sofia Quirong void insofar as they prejudiced the shares of the eight
other children of Emilio and Felisa who were each entitled to a tenth share in the subject
lot.
The DBP received a copy of the decision on January 13, 1993 and, therefore, it
had until January 28, 1993 within which to file a motion for its reconsideration or a
notice of appeal from it. But the DBP failed to appeal supposedly because of excusable
negligence and the withdrawal of its previous counsel of record. 8
When the RTC judgment became final and the court issued a writ of execution,
the DBP resisted the writ by motion to quash, claiming that the decision could not be
enforced because it failed to state by metes and bounds the particular portions of the lot
that would be assigned to the different parties in the case. The RTC denied the DBP's
motion, prompting the latter to seek recourse by special civil action of certiorari
directly with this Court in G.R. 116575, Development Bank of the Philippines v.
Fontanilla. On September 7, 1994 the Court issued a resolution, denying the petition
for failure of the DBP to pay the prescribed fees. This resolution became final and
executory on January 17, 1995. 9
On June 10, 1998 the Quirong heirs filed the present action 10 against the DBP
before the RTC of Dagupan City, Branch 44, in Civil Case CV-98-02399-D for
rescission of the contract of sale between Sofia Quirong, their predecessor, and the DBP
and praying for the reimbursement of the price of P78,000.00 that she paid the bank
plus damages. The heirs alleged that they were entitled to the rescission of the sale
because the decision in Civil Case D-7159 stripped them of nearly the whole of the lot
that Sofia Quirong, their predecessor, bought from the DBP. The DBP filed a motion
to dismiss the action on ground of prescription and res judicata but the RTC denied
their motion.
On June 14, 2004, after hearing the case, the RTC rendered a decision, 11
rescinding the sale between Sofia Quirong and the DBP and ordering the latter to return
to the Quirong heirs the P78,000.00 Sofia Quirong paid the bank. 12 On appeal by the
DBP, the Court of Appeals (CA) reversed the RTC decision and dismissed the heirs'
action on the ground of prescription. The CA concluded that, reckoned from the finality
of the December 16, 1992 decision in Civil Case D-7159, the complaint filed on June
10, 1998 was already barred by the four-year prescriptive period under Article 1389 of
the Civil Code.13 The Quirong heirs filed a motion for reconsideration of the decision
but the appellate court denied it, 14 thus, this petition.
The Issues Presented
The issues presented in this case are:

1. Whether or not the Quirong heirs' action for rescission of respondent DBP's
sale of the subject property to Sofia Quirong was already barred by prescription;
and ATHCDa

2. In the negative, whether or not the heirs of Quirong were entitled to the
rescission of the DBP's sale of the subject lot to the late Sofia Quirong as a
consequence of her heirs having been evicted from it.

The Court's Rulings

The CA held that the Quirong heirs' action for rescission of the sale between
DBP and their predecessor, Sofia Quirong, is barred by prescription reckoned from the
date of finality of the December 16, 1992 RTC decision in Civil Case D-7159 and
applying the prescriptive period of four years set by Article 1389 of the Civil Code.
Unfortunately, the CA did not state in its decision the date when the RTC
decision in Civil Case D-7159 became final and executory, which decision resulted in
the Quirong heirs' loss of 80% of the lot that the DBP sold to Sofia Quirong. Petitioner
heirs claim that the prescriptive period should be reckoned from January 17, 1995, the
date this Court's resolution in G.R. 116575 became final and executory. 15
But the incident before this Court in G.R. 116575 did not deal with the merit of
the RTC decision in Civil Case D-7159. That decision became final and executory on
January 28, 1993 when the DBP failed to appeal from it within the time set for such
appeal. The incident before this Court in G.R. 116575 involved the issuance of the writ
of execution in that case. The DBP contested such issuance supposedly because the
dispositive portion of the decision failed to specify details that were needed for its
implementation. Since this incident did not affect the finality of the decision in Civil
Case D-7159, the prescriptive period remained to be reckoned from January 28, 1993,
the date of such finality.
The next question that needs to be resolved is the applicable period of
prescription. The DBP claims that it should be four years as provided under Article
1389 of the Civil Code.16 Article 1389 provides that "the action to claim rescission
must be commenced within four years". The Quirong heirs, on the other hand, claim
that it should be 10 years as provided under Article 1144 which states that actions "upon
a written contract" must be brought "within 10 years from the date the right of action
accrues".
Now, was the action of the Quirong heirs "for rescission" or "upon a written
contract"? There is no question that their action was for rescission, since their complaint
in Civil Case CV-98-02399-D asked for the rescission of the contract of sale between
Sofia Quirong, their predecessor, and the DBP and the reimbursement of the price of
P78,000.00 that Sofia Quirong paid the bank plus damages. The prescriptive period for
rescission is four years.
But it is not that simple. The remedy of "rescission" is not confined to the
rescissible contracts enumerated under Article 1381. 17 Article 1191 of the Civil Code
gives the injured party in reciprocal obligations, such as what contracts are about, the
option to choose between fulfillment and "rescission". Arturo M. Tolentino, a well-
known authority in civil law, is quick to note, however, that the equivalent of Article
1191 in the old code actually uses the term "resolution" rather than the present
"rescission". 18 The calibrated meanings of these terms are distinct.
"Rescission" is a subsidiary action based on injury to the plaintiff's economic
interests as described in Articles 1380 and 1381. "Resolution", the action referred to in
Article 1191, on the other hand, is based on the defendant's breach of faith, a violation
of the reciprocity between the parties. As an action based on the binding force of a
written contract, therefore, rescission (resolution) under Article 1191 prescribes in 10
years. Ten years is the period of prescription of actions based on a written contract
under Article 1144. HSaIET

The distinction makes sense. Article 1191 gives the injured party an option to
choose between, first, fulfillment of the contract and, second, its rescission. An action
to enforce a written contract (fulfillment) is definitely an "action upon a written
contract", which prescribes in 10 years (Article 1144). It will not be logical to make the
remedy of fulfillment prescribe in 10 years while the alternative remedy of rescission
(or resolution) is made to prescribe after only four years as provided in Article 1389
when the injury from which the two kinds of actions derive is the same.
Here, the Quirong heirs alleged in their complaint that they were entitled to the
rescission of the contract of sale of the lot between the DBP and Sofia Quirong because
the decision in Civil Case D-7159 deprived her heirs of nearly the whole of that lot. But
what was the status of that contract at the time of the filing of the action for rescission?
Apparently, that contract of sale had already been fully performed when Sofia Quirong
paid the full price for the lot and when, in exchange, the DBP executed the deed of
absolute sale in her favor. There was a turnover of control of the property from DBP to
Sofia Quirong since she assumed under their contract, "the ejectment of squatters and/or
occupants" on the lot, at her own expense. 19
Actually, the cause of action of the Quirong heirs stems from their having been
ousted by final judgment from the ownership of the lot that the DBP sold to Sofia
Quirong, their predecessor, in violation of the warranty against eviction that comes with
every sale of property or thing. Article 1548 of the Civil Code provides:

Article 1548. Eviction shall take place whenever by a final judgment based
on a right prior to the sale or an act imputable to the vendor, the vendee is
deprived of the whole or of a part of thing purchased.

xxx xxx xxx

With the loss of 80% of the subject lot to the Dalopes by reason of the judgment
of the RTC in Civil Case D-7159, the Quirong heirs had the right to file an action for
rescission against the DBP pursuant to the provision of Article 1556 of the Civil Code
which provides:

Article 1556. Should the vendee lose, by reason of the eviction, a part of the
thing sold of such importance, in relation to the whole, that he would not
have bought it without said part, he may demand the rescission of the
contract; but with the obligation to return the thing without other
encumbrances than those which it had when he acquired it. . . .

And that action for rescission, which is based on a subsequent economic loss
suffered by the buyer, was precisely the action that the Quirong heirs took against the
DBP. Consequently, it prescribed as Article 1389 provides in four years from the time
the action accrued. Since it accrued on January 28, 1993 when the decision in Civil
Case D-7159 became final and executory and ousted the heirs from a substantial portion
of the lot, the latter had only until January 28, 1997 within which to file their action for
rescission. Given that they filed their action on June 10, 1998, they did so beyond the
four-year period.
With the conclusion that the Court has reached respecting the first issue
presented in this case, it would serve no useful purpose for it to further consider the
issue of whether or not the heirs of Quirong would have been entitled to the rescission
of the DBP's sale of the subject lot to Sofia Quirong as a consequence of her heirs
having been evicted from it. As the Court has ruled above, their action was barred by
prescription. The CA acted correctly in reversing the RTC decision and dismissing their
action.HaIATC

Parenthetically, the Quirong heirs were allowed by the RTC to intervene in the
original action for annulment of sale in Civil Case D-7159 that the Dalopes filed against
the DBP and the Funcions. Not only did the heirs intervene in defense of the sale, they
likewise filed a cross claim against the DBP. And they were apparently heard on their
defense and cross claim but the RTC did not adjudicate their claim for the reason that
they failed to make a formal offer of their documentary exhibits. Yet, they did not
appeal from this omission or from the judgment of the RTC, annulling the DBP's sale
of the subject lot to Sofia Quirong. This point is of course entirely academic but it shows
 that the Quirong heirs have themselves to blame for the loss of whatever right they may
have in the case.
WHEREFORE, the Court DENIES the petition and AFFIRMS the November
30, 2005 decision of the Court of Appeals in CA-G.R. CV 83897.
SO ORDERED.
Carpio, Leonardo-de Castro, Brion and Peralta, * JJ., concur.
(Heirs of Quirong v. Development Bank of the Phils., G.R. No. 173441, [December 3,
|||

2009], 621 PHIL 487-497)

 THIRD DIVISION

[G.R. No. 160236. October 16, 2009.]

"G" HOLDINGS, INC., petitioner, vs. NATIONAL MINES AND

ALLIED WORKERS UNION Local 103 (NAMAWU); SHERIFFS
RICHARD H. APROSTA and ALBERTO MUNOZ, all acting
Sheriffs; DEPARTMENT OF LABOR AND EMPLOYMENT,
Region VI, Bacolod District Office, Bacolod City, respondents.

DECISION

NACHURA, J : p

Before this Court is a petition for review on certiorari under Rule 45 of the Rules
of Court assailing the October 14, 2003 Decision 1 of the Court of Appeals (CA) in
CA-G.R. SP No. 75322.
The Facts
The petitioner, "G" Holdings, Inc. (GHI), is a domestic corporation primarily
engaged in the business of owning and holding shares of stock of different companies.
2 It was registered with the Securities and Exchange Commission on August 3, 1992.
Private respondent, National Mines and Allied Workers Union Local 103
(NAMAWU), was the exclusive bargaining agent of the rank and file employees of
Maricalum Mining Corporation (MMC), 3 an entity operating a copper mine and mill
complex at Sipalay, Negros Occidental. 4

MMC was incorporated by the Development Bank of the Philippines (DBP) and the
Philippine National Bank (PNB) on October 19, 1984, on account of their foreclosure of
Marinduque Mining and Industrial Corporation's assets. MMC started its commercial
operations in August 1985. Later, DBP and PNB transferred it to the National
Government for disposition or privatization because it had become a non-performing
asset. 5

On October 2, 1992, pursuant to a Purchase and Sale Agreement 6 executed between GHI
and Asset Privatization Trust (APT), the former bought ninety percent (90%) of MMC's
shares and financial claims. 7 These financial claims were converted into three
Promissory Notes 8 issued by MMC in favor of GHI totaling P500M and secured by
mortgages over MMC's properties. The notes, which were similarly worded except for
their amounts, read as follows:
 PROMISSORY NOTE

AMOUNT - Php114,715,360.00 [Php186,550,560.00 in the second note,

and Php248,734,080.00 in the third note.

MAKATI, METRO MANILA, PHILIPPINES, October 2, 1992 IcSADC

For Value Received, MARICALUM MINING CORPORATION (MMC) with

postal address at 4th Floor, Manila Memorial Park Bldg., 2283 Pasong Tamo
Extension, Makati, Metro Manila, Philippines, hereby promises to pay "G"
HOLDINGS, INC., at its office at Phimco Compound, F. Manalo Street, Punta,
Sta. Ana, Manila, the amount of PESOS ONE HUNDRED FOURTEEN
MILLION, SEVEN HUNDRED FIFTEEN THOUSAND AND THREE
HUNDRED SIXTY (Php114,715,360.00) ["PESOS ONE HUNDRED EIGHTY
SIX MILLION FIVE HUNDRED FIFTY THOUSAND FIFE HUNDRED AND
SIXTY (Php186,550,560.00)" in the second note, and "PESOS TWO
HUNDRED FORTY EIGHT MILLION, SEVEN HUNDRED THIRTY FOUR
THOUSAND AND EIGHTY (Php248,734,080.00)" in the third note],
PHILIPPINE CURRENCY, on or before October 2, 2002. Interest shall accrue
on the amount of this Note at a rate per annum equal to the interest of 90-day
Treasury Bills prevailing on the Friday preceding the maturity date of every
calendar quarter.

As collateral security, MMC hereby establishes and constitutes in favor of "G"

HOLDINGS, INC., its successors and/or assigns:

1. A mortgage over certain parcels of land, more particularly listed and described
in the Sheriff's Certificate of Sale dated September 7, 1984 issued by the
Ex-Officio Provincial Sheriff of Negros Occidental, Rolando V. Ramirez,
with office at Bacolod City following the auction sale conducted pursuant
to the provisions of Act 3135, a copy of which certificate of sale is hereto
attached as Annex "A" and made an integral part hereof;

2. A chattel mortgage over assets and personal properties more particularly listed
and described in the Sheriff's Certificate of Sale dated September 7, 1984
issued by the Ex-Officio Provincial Sheriff of Negros Occidental,
Rolando V. Ramirez, with office at Bacolod City following the auction
conducted pursuant to the provisions of Act 1508, a copy of which
Certificate of Sale is hereto attached as Annex "B" and made an integral
part hereof.

3. Mortgages over assets listed in APT Specific Catalogue GC-031 for MMC, a
copy of which Catalogue is hereby made an integral part hereof by way
of reference, as well as assets presently in use by MMC but which are not
listed or included in paragraphs 1 and 2 above and shall include all assets
that may hereinafter be acquired by MMC.
 MARICALUM MINING CORPORATION

(Maker)

xxx xxx xxx 9

Upon the signing of the Purchase and Sale Agreement and upon the full
satisfaction of the stipulated down payment, GHI immediately took physical possession
of the mine site and its facilities, and took full control of the management and operation
of MMC. 10
Almost four years thereafter, or on August 23, 1996, a labor dispute (refusal to
bargain collectively and unfair labor practice) arose between MMC and NAMAWU,
with the latter eventually filing with the National Conciliation and Mediation Board of
Bacolod City a notice of strike. 11 Then Labor Secretary, now Associate Justice of this
Court, Leonardo A. Quisumbing, later assumed jurisdiction over the dispute and ruled
in favor of NAMAWU. In his July 30, 1997 Order in OS-AJ-10-96-014 (Quisumbing
Order), Secretary Quisumbing declared that the lay-off (of workers) implemented on
May 7, 1996 and October 7, 1996 was illegal and that MMC committed unfair labor
practice. He then ordered the reinstatement of the laid-off workers, with payment of full
backwages and benefits, and directed the execution of a new collective bargaining
agreement (CBA) incorporating the terms and conditions of the previous CBA
providing for an annual increase in the workers' daily wage. 12 In two separate cases
G.R. Nos. 133519 and 138996 filed with this Court, we sustained the validity of
the Quisumbing Order, which became final and executory on January 26, 2000. 13 TIDcEH

On May 11, 2001, then Acting Department of Labor and Employment (DOLE)
Secretary, now also an Associate Justice of this Court, Arturo D. Brion, on motion of
NAMAWU, directed the issuance of a partial writ of execution (Brion Writ), and
ordered the DOLE sheriffs to proceed to the MMC premises for the execution of the
same. 14 Much later, in 2006, this Court, in G.R. Nos. 157696-97, entitled Maricalum
Mining Corporation v. Brion and NAMAWU, 15 affirmed the propriety of the issuance
of the Brion Writ.
The Brion Writ was not fully satisfied because MMC's resident manager resisted
its enforcement. 16 On motion of NAMAWU, then DOLE Secretary Patricia A. Sto.
Tomas ordered the issuance of the July 18, 2002 Alias Writ of Execution and Break-
Open Order (Sto. Tomas Writ). 17 On October 11, 2002, the respondent acting sheriffs,
the members of the union, and several armed men implemented the Sto. Tomas Writ,
and levied on the properties of MMC located at its compound in Sipalay, Negros
Occidental. 18
On October 14, 2002, GHI filed with the Regional Trial Court (RTC) of
Kabankalan City, Negros Occidental, Special Civil Action (SCA) No. 1127 for
Contempt with Prayer for the Issuance of a Temporary Restraining Order (TRO) and
Writ of Preliminary Injunction and to Nullify the Sheriff's Levy on Properties. 19 GHI
contended that the levied properties were the subject of a Deed of Real Estate and
Chattel Mortgage, dated September 5, 1996 20 executed by MMC in favor of GHI to
secure the aforesaid P550M promissory notes; that this deed was registered on February
24, 2000; 21 and that the mortgaged properties were already extrajudicially foreclosed
in July 2001 and sold to GHI as the highest bidder on December 3, 2001, as evidenced
by the Certificate of Sale dated December 4, 2001. 22
The trial court issued ex parte a TRO effective for 72 hours, and set the hearing
on the application for a writ of injunction. 23 On October 17, 2002, the trial court
ordered the issuance of a Writ of Injunction (issued on October 18, 2002) 24 enjoining
the DOLE sheriffs from further enforcing the Sto. Tomas Writ and from conducting
any public sale of the levied-on properties, subject to GHI's posting of a P5M bond. 25
Resolving, among others, NAMAWU's separate motions for the reconsideration
of the injunction order and for the dismissal of the case, the RTC issued its December
4, 2002 Omnibus Order, 26 the dispositive portion of which reads:

WHEREFORE, premises considered, respondent NAMAWU Local 103's Motion

for Reconsideration dated October 23, 2002 for the reconsideration of the Order
of this Court directing the issuance of Writ of Injunction prayed for by petitioner
and the Order dated October 18, 2002 approving petitioner's Injunction Bond in
the amount of P5,000,000.00 is hereby DENIED.

Respondent's Motion to Dismiss as embodied in its Opposition to Extension of

Temporary Restraining Order and Issuance of Writ of Preliminary Injunction
with Motion to Dismiss and Suspend Period to File Answer dated October 15,
2002 is likewise DENIED.

Petitioner's Urgent Motion for the return of the levied firearms is GRANTED.
Pursuant thereto, respondent sheriffs are ordered to return the levied firearms and
handguns to the petitioner provided the latter puts [up] a bond in the amount of
P332,200.00. DASEac

Respondent's lawyer, Atty. Jose Lapak, is strictly warned not to resort again to
disrespectful and contemptuous language in his pleadings, otherwise, the same
shall be dealt with accordingly.

SO ORDERED. 27

Aggrieved, NAMAWU filed with the CA a petition for certiorari under Rule
65, assailing the October 17, 18 and December 4, 2002 orders of the RTC. 28
After due proceedings, on October 14, 2003, the appellate court rendered a
Decision setting aside the RTC issuances and directing the immediate execution of the
Sto. Tomas Writ. The CA ruled, among others, that the circumstances surrounding the
execution of the September 5, 1996 Deed of Real Estate and Chattel Mortgage yielded
 the conclusion that the deed was sham, fictitious and fraudulent; that it was executed
two weeks after the labor dispute arose in 1996, but surprisingly, it was registered only
on February 24, 2000, immediately after the Court affirmed with finality the
Quisumbing Order. The CA also found that the certificates of title to MMC's real
properties did not contain any annotation of a mortgage lien, and, suspiciously, GHI
did not intervene in the long drawn-out labor proceedings to protect its right as a
mortgagee of virtually all the properties of MMC. 29
The CA further ruled that the subsequent foreclosure of the mortgage was
irregular, effected precisely to prevent the satisfaction of the judgment against MMC.
It noted that the foreclosure proceedings were initiated in July 2001, shortly after the
issuance of the Brion Writ; and, more importantly, the basis for the extrajudicial
foreclosure was not the failure of MMC to pay the mortgage debt, but its failure "to
satisfy any money judgment against it rendered by a court or tribunal of competent
jurisdiction, in favor of any person, firm or entity, without any legal ground or reason".
30 Further, the CA pierced the veil of corporate fiction of the two corporations. 31 The
dispositive portion of the appellate court's decision reads: ATcaHS

WHEREFORE, in view of the foregoing considerations, the petition is

GRANTED. The October 17, 2002 and the December 4, 2002 Order of the RTC,
Branch 61 of Kabankalan City, Negros Occidental are hereby ANNULLED and
SET ASIDE for having been issued in excess or without authority. The Writ of
Preliminary Injunction issued by the said court is lifted, and the DOLE Sheriff is
directed to immediately enforce the Writ of Execution issued by the Department
of Labor and Employment in the case "In re: Labor Dispute in Maricalum Mining
Corporation" docketed as OS-AJ-10-96-01 (NCMB-RB6-08-96). 32

The Issues

Dissatisfied, GHI elevated the case to this Court via the instant petition for review on
certiorari, raising the following issues:

WHETHER OR NOT GHI IS A PARTY TO THE LABOR DISPUTE

BETWEEN NAMAWU AND MMC.

II

WHETHER OR NOT, ASSUMING ARGUENDO THAT THE PERTINENT

DECISION OR ORDER IN THE SAID LABOR DISPUTE BETWEEN MMC
AND NAMAWU MAY BE ENFORCED AGAINST GHI, THERE IS
ALREADY A FINAL DEETERMINATION BY THE SUPREME COURT OF
THE RIGHTS OF THE PARTIES IN SAID LABOR DISPUTE
CONSIDERING THE PENDENCY OF G.R. NOS. 157696-97.
 III

WHETHER OR NOT GHI IS THE ABSOLUTE OWNER OF THE

PROPERTIES UNLAWFULLY GARNISHED BY RESPONDENTS
SHERIFFS.

IV

WHETHER OR NOT THE HONORABLE HENRY D. ARLES CORRECTLY

ISSUED A WRIT OF INJUNCTION AGAINST THE UNLAWFUL
EXECUTIOIN ON GHI'S PROPERTIES.

WHETHER OR NOT THE VALIDITY OF THE DEED OF REAL AND

CHATTEL MORTGAGE OVER THE SUBJECT PROPERTIES BETWEEN
MMC AND GHI MAY BE COLLATERALLY ATTACKED.

VI

WHETHER OR NOT, ASSUMING ARGUENDO THAT THE VALIDITY OF

THE SAID REAL AND CHATTEL MORTGAGE MAY BE
COLLATERALLY ATTACKED, THE SAID MORTGAGE IS SHAM,
FICTITIOUS AND FRAUDULENT.

VII

WHETHER OR NOT GHI IS A DISTINCT AND SEPARATE CORPORATE

ENTITY FROM MMC. ESDHCa

VIII

WHETHER OR NOT GHI CAN BE PREVENTED THROUGH THE

ISSUANCE OF A RESTRAINING ORDER OR INJUNCTION FROM
TAKING POSSESSION OR BE DISPOSSESSED OF ASSETS PURCHASED
BY IT FROM APT. 33

Stripped of non-essentials, the core issue is whether, given the factual

circumstances obtaining, the RTC properly issued the writ of injunction to prevent the
enforcement of the Sto. Tomas Writ. The resolution of this principal issue, however,
will necessitate a ruling on the following key and interrelated questions:

1. Whether the mortgage of the MMC's properties to GHI was a sham;

2. Whether there was an effective levy by the DOLE upon the MMC's real
and personal properties; and
 3. Whether it was proper for the CA to pierce the veil of corporate fiction
between MMC and GHI.

Our Ruling
Before we delve into an extended discussion of the foregoing issues, it is
essential to take judicial cognizance of cases intimately linked to the present
controversy which had earlier been elevated to and decided by this Court.
Judicial Notice.
Judicial notice must be taken by this Court of its Decision in Maricalum Mining
Corporation v. Hon. Arturo D. Brion and NAMAWU, 34 in which we upheld the right
of herein private respondent, NAMAWU, to its labor claims. Upon the same principle
of judicial notice, we acknowledge our Decision in Republic of the Philippines, through
its trustee, the Asset Privatization Trust v. "G" Holdings, Inc., 35 in which GHI was
recognized as the rightful purchaser of the shares of stocks of MMC, and thus, entitled
to the delivery of the company notes accompanying the said purchase. These company
notes, consisting of three (3) Promissory Notes, were part of the documents executed
in 1992 in the privatization sale of MMC by the Asset Privatization Trust (APT) to
GHI. Each of these notes uniformly contains stipulations "establishing and constituting
in favor of GHI" mortgages over MMC's real and personal properties. The stipulations
were subsequently formalized in a separate document denominated Deed of Real Estate
and Chattel Mortgage on September 5, 1996. Thereafter, the Deed was registered on
February 4, 2000. 36
We find both decisions critically relevant to the instant dispute. In fact, they
should have guided the courts below in the disposition of the controversy at their
respective levels. To repeat, these decisions respectively confirm the right of
NAMAWU to its labor claims 37 and affirm the right of GHI to its financial and
mortgage claims over the real and personal properties of MMC, as will be explained
below. The assailed CA decision apparently failed to consider the impact of these two
decisions on the case at bar. Thus, we find it timely to reiterate that: "courts have also
taken judicial notice of previous cases to determine whether or not the case pending is
a moot one or whether or not a previous ruling is applicable to the case under
consideration". 38 HIEASa

However, the CA correctly assessed that the authority of the lower court to issue
the challenged writ of injunction depends on the validity of the third party's (GHI's)
claim of ownership over the property subject of the writ of execution issued by the labor
department. Accordingly, the main inquiry addressed by the CA decision was whether
GHI could be treated as a third party or a stranger to the labor dispute, whose properties
were beyond the reach of the Writ of Execution dated December 18, 2001. 39
In this light, all the more does it become imperative to take judicial notice of the
two cases aforesaid, as they provide the necessary perspective to determine whether
GHI is such a party with a valid ownership claim over the properties subject of the writ
of execution. In Juaban v. Espina, 40 we held that "in some instances, courts have also
taken judicial notice of proceedings in other cases that are closely connected to the
matter in controversy. These cases may be so closely interwoven, or so clearly
interdependent, as to invoke a rule of judicial notice". The two cases that we have taken
judicial notice of are of such character, and our review of the instant case cannot stray
from the findings and conclusions therein.
Having recognized these crucial Court rulings, situating the facts in proper
perspective, we now proceed to resolve the questions identified above.
The mortgage
was not a sham.
Republic etc., v. "G" Holdings, Inc. acknowledged the existence of the Purchase
and Sale Agreement between the APT and the GHI, and recounts the facts attendant to
that transaction, as follows:

The series of negotiations between the petitioner Republic of the Philippines,

through the APT as its trustee, and "G" Holdings culminated in the execution of
a purchase and sale agreement on October 2, 1992. Under the agreement, the
Republic undertook to sell and deliver 90% of the entire issued and outstanding
shares of MMC, as well as its company notes, to "G" Holdings in consideration
of the purchase price of P673,161,280. It also provided for a down payment of
P98,704,000 with the balance divided into four tranches payable in installment
over a period of ten years. 41

The "company notes" mentioned therein were actually the very same three (3)
Promissory Notes amounting to P550M, issued by MMC in favor of GHI. As already
adverted to above, these notes uniformly contained stipulations "establishing and
constituting" mortgages over MMC's real and personal properties.
It may be remembered that APT acquired the MMC from the PNB and the DBP.
Then, in compliance with its mandate to privatize government assets, APT sold the
aforesaid MMC shares and notes to GHI. To repeat, this Court has recognized this
Purchase and Sale Agreement in Republic, etc., v. "G" Holdings, Inc.
The participation of the Government, through APT, in this transaction is
significant. Because the Government had actively negotiated and, eventually, executed
the agreement, then the transaction is imbued with an aura of official authority, giving
rise to the presumption of regularity in its execution. This presumption would cover all
related transactional acts and documents needed to consummate the privatization sale,
inclusive of the Promissory Notes. It is obvious, then, that the Government, through
APT, consented to the "establishment and constitution" of the mortgages on the assets
of MMC in favor of GHI, as provided in the notes. Accordingly, the notes (and the
stipulations therein) enjoy the benefit of the same presumption of regularity accorded
to government actions. Given the Government consent thereto, and clothed with the
presumption of regularity, the mortgages cannot be characterized as sham, fictitious or
fraudulent. IHaSED

Indeed, as mentioned above, the three (3) Promissory Notes, executed on

October 2, 1992, "established and constituted" in favor of GHI the following mortgages:

1. A mortgage over certain parcels of land, more particularly listed and described
in the Sheriff's Certificate of Sale dated September 7, 1984 issued by the
Ex-Officio Provincial Sheriff of Negros Occidental, Rolando V. Ramirez,
with office at Bacolod City following the auction sale conducted pursuant
to the provisions of Act 3135, a copy of which certificate of sale is hereto
attached as Annex "A" and made an integral part hereof;

2. A chattel mortgage over assets and personal properties more particularly listed
and described in the Sheriff's Certificate of Sale dated September 7, 1984
issued by the Ex-Officio Provincial Sheriff of Negros Occidental,
Rolando V. Ramirez, with office at Bacolod City following the auction
conducted pursuant to the provision of Act 1508, a copy of which
Certificate of Sale is hereto attached as Annex "B" and made an integral
part hereof.

3. Mortgages over assets listed in APT Specific catalogue GC-031 for MMC, a
copy of which Catalogue is hereby made an integral part hereof by way
of reference, as well as assets presently in use by MMC but which are not
listed or included in paragraphs 1 and 2 above and shall include all assets
that may hereinafter be acquired by MMC. 42

It is difficult to conceive that these mortgages, already existing in 1992, almost four (4)
years before NAMAWU filed its notice of strike, were a "fictitious" arrangement
intended to defraud NAMAWU. After all, they were agreed upon long before the seeds
of the labor dispute germinated.
While it is true that the Deed of Real Estate and Chattel Mortgage was executed
only on September 5, 1996, it is beyond cavil that this formal document of mortgage
was merely a derivative of the original mortgage stipulations contained in the
Promissory Notes of October 2, 1992. The execution of this Deed in 1996 does not
detract from, but instead reinforces, the manifest intention of the parties to "establish
and constitute" the mortgages on MMC's real and personal properties.
Apparently, the move to execute a formal document denominated as the Deed
of Real Estate and Chattel Mortgage came about after the decision of the RTC of Manila
in Civil Case No. 95-76132 became final in mid-1996. This conclusion surfaces when
we consider the genesis of Civil Case No. 95-76132 and subsequent incidents thereto,
as narrated in Republic, etc. v. "G" Holdings, Inc., viz.:
 Subsequently, a disagreement on the matter of when installment payments should
commence arose between the parties. The Republic claimed that it should be on
the seventh month from the signing of the agreement while "G" Holdings insisted
that it should begin seven months after the fulfillment of the closing conditions.
AHSaTI

Unable to settle the issue, "G" Holdings filed a complaint for specific
performance and damages with the Regional Trial Court of Manila, Branch 49,
against the Republic to compel it to close the sale in accordance with the purchase
and sale agreement. The complaint was docketed as Civil Case No. 95-76132.

During the pre-trial, the respective counsels of the parties manifested that the
issue involved in the case was one of law and submitted the case for decision. On
June 11, 1996, the trial court rendered its decision. It ruled in favor of "G"
Holdings and held:

"In line with the foregoing, this Court having been convinced that the
Purchase and Sale Agreement is indeed subject to the final closing
conditions prescribed by Stipulation No. 5.02 and conformably to Rule
39, Section 10 of the Rules of Court, accordingly orders that the Asset
Privatization Trust execute the corresponding Document of Transfer
of the subject shares and financial notes and cause the actual delivery
of subject shares and notes to "G" Holdings, Inc., within a period of
thirty (30) days from receipt of this Decision, and after "G" Holdings
Inc., shall have paid in full the entire balance, at its present value of
P241,702,122.86, computed pursuant to the prepayment provisions of the
Agreement. Plaintiff shall pay the balance simultaneously with the
delivery of the Deed of Transfer and actual delivery of the shares and
notes.

SO ORDERED."

The Solicitor General filed a notice of appeal on behalf of the Republic on June
28, 1996. Contrary to the rules of procedure, however, the notice of appeal was
filed with the Court of Appeals (CA), not with the trial court which rendered the
judgment appealed from.

No other judicial remedy was resorted to until July 2, 1999 when the Republic,
through the APT, filed a petition for annulment of judgment with the CA. It
claimed that the decision should be annulled on the ground of abuse of discretion
amounting to lack of jurisdiction on the part of the trial court. . . .

Finding that the grounds necessary for the annulment of judgment were
inexistent, the appellate court dismissed the petition. . . . 43

With the RTC decision having become final owing to the failure of the Republic to
perfect an appeal, it may have become necessary to execute the Deed of Real Estate and
Chattel Mortgage on September 5, 1996, in order to enforce the trial court's decision of
June 11, 1996. This appears to be the most plausible explanation for the execution of
the Deed of Real Estate and Chattel Mortgage only in September 1996. Even as the
parties had already validly constituted the mortgages in 1992, as explicitly provided in
the Promissory Notes, a specific deed of mortgage in a separate document may have
been deemed necessary for registration purposes. Obviously, this explanation is more
logical and more sensible than the strained conjecture that the mortgage was executed
on September 5, 1996 only for the purpose of defrauding NAMAWU. HICSaD

It is undeniable that the Deed of Real Estate and Chattel Mortgage was formally
documented two weeks after NAMAWU filed its notice of strike against MMC on
August 23, 1996. However, this fact alone cannot give rise to an adverse inference for
two reasons. First, as discussed above, the mortgages had already been "established and
constituted" as early as October 2, 1992 in the Promissory Notes, showing the clear
intent of the parties to impose a lien upon MMC's properties. Second, the mere filing of
a notice of strike by NAMAWU did not, as yet, vest in NAMAWU any definitive right
that could be prejudiced by the execution of the mortgage deed.
The fact that MMC's obligation to GHI is not reflected in the former's financial
statements a circumstance made capital of by NAMAWU in order to cast doubt on
the validity of the mortgage deed is of no moment. By itself, it does not provide a
sufficient basis to invalidate this public document. To say otherwise, and to invalidate
the mortgage deed on this pretext, would furnish MMC a convenient excuse to absolve
itself of its mortgage obligations by adopting the simple strategy of not including the
obligations in its financial statements. It would ignore our ruling in Republic, etc. v.
"G" Holdings, Inc., which obliged APT to deliver the MMC shares and financial notes
to GHI. Besides, the failure of the mortgagor to record in its financial statements its
loan obligations is surely not an essential element for the validity of mortgage
agreements, nor will it independently affect the right of the mortgagee to foreclose.
Contrary to the CA decision, Tanongon v. Samson 44 is not "on all fours" with
the instant case. There are material differences between the two cases. At issue in
Tanongon was a third-party claim arising from a Deed of Absolute Sale executed
between Olizon and Tanongon on July 29, 1997, after the NLRC decision became final
and executory on April 29, 1997. In the case at bar, what is involved is a loan with
mortgage agreement executed on October 2, 1992, well ahead of the union's notice of
strike on August 23, 1996. No presumption of regularity inheres in the deed of sale in
Tanongon, while the participation of APT in this case clothes the transaction in 1992
with such a presumption that has not been successfully rebutted. In Tanongon, the
conduct of a full-blown trial led to the finding duly supported by evidence that
the voluntary sale of the assets of the judgment debtor was made in bad faith. Here, no
trial was held, owing to the motion to dismiss filed by NAMAWU, and the CA failed
to consider the factual findings made by this Court in Republic, etc. v. "G" Holdings,
Inc. Furthermore, in Tanongon, the claimant did not exercise his option to file a separate
action in court, thus allowing the NLRC Sheriff to levy on execution and to determine
the rights of third-party claimants. 45 In this case, a separate action was filed in the
regular courts by GHI, the third-party claimant. Finally, the questioned transaction in
Tanongon was a plain, voluntary transfer in the form of a sale executed by the judgment
debtor in favor of a dubious third-party, resulting in the inability of the judgment
creditor to satisfy the judgment. On the other hand, this case involves an involuntary
transfer (foreclosure of mortgage) arising from a loan obligation that well-existed long
before the commencement of the labor claims of the private respondent.
Three other circumstances have been put forward by the CA to support its
conclusion that the mortgage contract is a sham. First, the CA considered it highly
suspect that the Deed of Real Estate and Chattel Mortgage was registered only on
February 4, 2000, "three years after its execution, and almost one month after the
Supreme Court rendered its decision in the labor dispute". 46 Equally suspicious, as far
as the CA is concerned, is the fact that the mortgages were foreclosed on July 31, 2001,
after the DOLE had already issued a Partial Writ of Execution on May 9, 2001. 47 To
the appellate court, the timing of the registration of the mortgage deed was too
coincidental, while the date of the foreclosure signified that it was "effected precisely
to prevent the satisfaction of the judgment awards". 48 Furthermore, the CA found that
the mortgage deed itself was executed without any consideration, because at the time
of its execution, all the assets of MMC had already been transferred to GHI. 49
These circumstances provided the CA with sufficient justification to apply
Article 1387 of the Civil Code on presumed fraudulent transactions, and to declare that
the mortgage deed was void for being simulated and fictitious. 50
We do not agree. We find this Court's ruling in MR Holdings, Ltd. v. Sheriff
Bajar 51 pertinent and instructive:

Article 1387 of the Civil Code of the Philippines provides:

"Art. 1387. All contracts by virtue of which the debtor alienates property
by gratuitous title are presumed to have been entered into in fraud of
creditors, when the donor did not reserve sufficient property to pay all
debts contracted before the donation. cdrep

Alienations by onerous title are also presumed fraudulent when made by

persons against whom some judgment has been rendered in any instance
or some writ of attachment has been issued. The decision or attachment
need not refer to the property alienated, and need not have been obtained
by the party seeking rescission.

In addition to these presumptions, the design to defraud creditors may be

proved in any other manner recognized by law and of evidence."
 This article presumes the existence of fraud made by a debtor. Thus, in
the absence of satisfactory evidence to the contrary, an alienation of a
property will be held fraudulent if it is made after a judgment has been
rendered against the debtor making the alienation. This presumption of
fraud is not conclusive and may be rebutted by satisfactory and
convincing evidence. All that is necessary is to establish affirmatively
that the conveyance is made in good faith and for a sufficient and
valuable consideration.

The "Assignment Agreement" and the "Deed of Assignment" were executed for
valuable considerations. Patent from the "Assignment Agreement" is the fact that
petitioner assumed the payment of US$18,453,450.12 to ADB in satisfaction of
Marcopper's remaining debt as of March 20, 1997. Solidbank cannot deny this
fact considering that a substantial portion of the said payment, in the sum of
US$13,886,791.06, was remitted in favor of the Bank of Nova Scotia, its major
stockholder.

The facts of the case so far show that the assignment contracts were executed in
good faith. The execution of the "Assignment Agreement" on March 20, 1997
and the "Deed of Assignment" on December 8, 1997 is not the alpha of this case.
While the execution of these assignment contracts almost coincided with the
rendition on May 7, 1997 of the Partial Judgment in Civil Case No. 96-80083
by the Manila RTC, however, there was no intention on the part of petitioner to
defeat Solidbank's claim. It bears reiterating that as early as November 4, 1992,
Placer Dome had already bound itself under a "Support and Standby Credit
Agreement" to provide Marcopper with cash flow support for the payment to
ADB of its obligations. When Marcopper ceased operations on account of
disastrous mine tailings spill into the Boac River and ADB pressed for payment
of the loan, Placer Dome agreed to have its subsidiary, herein petitioner, pay ADB
the amount of US$18,453,450.12.

Thereupon, ADB and Marcopper executed, respectively, in favor of petitioner an

"Assignment Agreement" and a "Deed of Assignment". Obviously, the
assignment contracts were connected with transactions that happened long
before the rendition in 1997 of the Partial Judgment in Civil Case No. 96-
80083 by the Manila RTC. Those contracts cannot be viewed in isolation. If
we may add, it is highly inconceivable that ADB, a reputable international
financial organization, will connive with Marcopper to feign or simulate a
contract in 1992 just to defraud Solidbank for its claim four years thereafter. And
it is equally incredible for petitioner to be paying the huge sum of
US$18,453,450.12 to ADB only for the purpose of defrauding Solidbank of the
sum of P52,970,756.89. ADECcI

It is said that the test as to whether or not a conveyance is fraudulent is does it

prejudice the rights of creditors? We cannot see how Solidbank's right was
prejudiced by the assignment contracts considering that substantially all of
 Marcopper's properties were already covered by the registered "Deed of
Real Estate and Chattel Mortgage" executed by Marcopper in favor of ADB
as early as November 11, 1992. As such, Solidbank cannot assert a better
right than ADB, the latter being a preferred creditor. It is basic that
mortgaged properties answer primarily for the mortgaged credit, not for the
judgment credit of the mortgagor's unsecured creditor. Considering that
petitioner assumed Marcopper's debt to ADB, it follows that Solidbank's right as
judgment creditor over the subject properties must give way to that of the former.
52

From this ruling in MR Holdings, we can draw parallel conclusions. The

execution of the subsequent Deed of Real Estate and Chattel Mortgage on September
5, 1996 was simply the formal documentation of what had already been agreed in the
seminal transaction (the Purchase and Sale Agreement) between APT and GHI. It
should not be viewed in isolation, apart from the original agreement of October 2, 1992.
And it cannot be denied that this original agreement was supported by an adequate
consideration. The APT was even ordered by the court to deliver the shares and
financial notes of MMC in exchange for the payments that GHI had made.
It was also about this time, in 1996, that NAMAWU filed a notice of strike to
protest non-payment of its rightful labor claims. 53 But, as already mentioned, the
outcome of that labor dispute was yet unascertainable at that time, and NAMAWU
could only have hoped for, or speculated about, a favorable ruling. To paraphrase MR
Holdings, we cannot see how NAMAWU's right was prejudiced by the Deed of Real
Estate and Chattel Mortgage, or by its delayed registration, when substantially all of the
properties of MMC were already mortgaged to GHI as early as October 2, 1992. Given
this reality, the Court of Appeals had no basis to conclude that this Deed of Real Estate
and Chattel Mortgage, by reason of its late registration, was a simulated or fictitious
contract.
The importance of registration and its binding effect is stated in Section 51 of
the Property Registration Decree or Presidential Decree (P.D.) No. 1529, 54 which
reads:

SECTION 51. Conveyance and other dealings by registered owner. An owner

of registered land may convey, mortgage, lease, charge or otherwise deal with the
same in accordance with existing laws. He may use such forms, deeds, mortgages,
leases or other voluntary instrument as are sufficient in law. But no deed,
mortgage, lease or other voluntary instrument, except a will purporting to convey
or effect registered land, shall take effect as a conveyance or bind the land, but
shall operate only as a contract between the parties and as evidence of authority
to the Registry of Deeds to make registration.

The act of registration shall be the operative act to convey or affect the land
insofar as third persons are concerned, and in all cases under this Decree, the
 registration shall be made in the Office of the Register of Deeds for the province
or the city where the land lies. 55

Under the Torrens system, registration is the operative act which gives validity to the
transfer or creates a lien upon the land. Further, entrenched in our jurisdiction is the
doctrine that registration in a public registry creates constructive notice to the whole
world. 56 Thus, Section 51 of Act No. 496, as amended by Section 52 of P.D. No. 1529,
provides:

SECTION 52. Constructive notice upon registration. Every conveyance,

mortgage, lease, lien, attachment, order, judgment, instrument or entry affecting
registered land shall, if registered, filed or entered in the Office of the Register of
Deeds for the province or city where the land to which it relates lies, be
constructive notice to all persons from the time of such registering, filing or
entering. EScHDA

But, there is nothing in Act No. 496, as amended by P.D. No. 1529, that imposes
a period within which to register annotations of "conveyance, mortgage, lease, lien,
attachment, order, judgment, instrument or entry affecting registered land". If liens
were not so registered, then it "shall operate only as a contract between the parties and
as evidence of authority to the Registry of Deeds to make registration". If registered, it
"shall be the operative act to convey or affect the land insofar as third persons are
concerned". The mere lapse of time from the execution of the mortgage document to
the moment of its registration does not affect the rights of a mortgagee.
Neither will the circumstance of GHI's foreclosure of MMC's properties on July
31, 2001, or after the DOLE had already issued a Partial Writ of Execution on May 9,
2001 against MMC, support the conclusion of the CA that GHI's act of foreclosing on
MMC's properties was "effected to prevent satisfaction of the judgment award". GHI's
mortgage rights, constituted in 1992, antedated the Partial Writ of Execution by nearly
ten (10) years. GHI's resort to foreclosure was a legitimate enforcement of a right to
liquidate a bona fide debt. It was a reasonable option open to a mortgagee which, not
being a party to the labor dispute between NAMAWU and MMC, stood to suffer a loss
if it did not avail itself of the remedy of foreclosure.
The well-settled rule is that a mortgage lien is inseparable from the property
mortgaged. 57 While it is true that GHI's foreclosure of MMC's mortgaged properties
may have had the "effect to prevent satisfaction of the judgment award against the
specific mortgaged property that first answers for a mortgage obligation ahead of any
subsequent creditors", that same foreclosure does not necessarily translate to having
been "effected to prevent satisfaction of the judgment award" against MMC.
Likewise, we note the narration of subsequent facts contained in the Comment
of the Office of the Solicitor General. Therein, it is alleged that after the Partial Writ of
Execution was issued on May 9, 2001, a motion for reconsideration was filed by MMC;
that the denial of the motion was appealed to the CA; that when the appeal was
dismissed by the CA on January 24, 2002, it eventually became the subject of a review
petition before this Court, docketed as G.R. No. 157696; and that G.R. No. 157696 was
decided by this Court only on February 9, 2006.
This chronology of subsequent events shows that February 9, 2006 would have
been the earliest date for the unimpeded enforcement of the Partial Writ of Execution,
as it was only then that this Court resolved the issue. This happened four and a half
years after July 31, 2001, the date when GHI foreclosed on the mortgaged properties.
Thus, it is not accurate to say that the foreclosure made on July 31, 2001 was "effected
[only] to prevent satisfaction of the judgment award".
We also observe the error in the CA's finding that the 1996 Deed of Real Estate
and Chattel Mortgage was not supported by any consideration since at the time the deed
was executed, "all the real and personal property of MMC had already been transferred
in the hands of G Holdings". 58 It should be remembered that the Purchase and Sale
Agreement between GHI and APT involved large amounts (P550M) and even spawned
a subsequent court action (Civil Case No. 95-76132, RTC of Manila). Yet, nowhere in
the Agreement or in the RTC decision is there any mention of real and personal
properties of MMC being included in the sale to GHI in 1992. These properties simply
served as mortgaged collateral for the 1992 Promissory Notes. 59 The Purchase and
Sale Agreement and the Promissory Notes themselves are the best evidence that there
was ample consideration for the mortgage. THDIaC

Thus, we must reject the conclusion of the CA that the Deed of Real Estate and
Chattel Mortgage executed in 1996 was a simulated transaction.
On the issue of whether there
had been an effective levy upon
the properties of GHI.
The well-settled principle is that the rights of a mortgage creditor over the
mortgaged properties are superior to those of a subsequent attaching creditor. In Cabral
v. Evangelista, 60 this Court declared that:

Defendants-appellants purchase of the mortgaged chattels at the public sheriff's

sale and the delivery of the chattels to them with a certificate of sale did not give
them a superior right to the chattels as against plaintiffs-mortgagees. Rule 39,
Section 22 of the old Rules of Court (now Rule 39, Section 25 of the Revised
Rules), cited by appellants precisely provides that "the sale conveys to the
purchaser all the right which the debtor had in such property on the day the
execution or attachment was levied". It has long been settled by this Court that
"The right of those who so acquire said properties should not and can not be
superior to that of the creditor who has in his favor an instrument of mortgage
executed with the formalities of the law, in good faith, and without the least
indication of fraud. This is all the more true in the present case, because, when
the plaintiff purchased the automobile in question on August 22, 1933, he knew,
 or at least, it is presumed that he knew, by the mere fact that the instrument of
mortgage, Exhibit 2, was registered in the office of the register of deeds of
Manila, that said automobile was subject to a mortgage lien. In purchasing it, with
full knowledge that such circumstances existed, it should be presumed that he did
so, very much willing to respect the lien existing thereon, since he should not
have expected that with the purchase, he would acquire a better right than that
which the vendor then had". In another case between two mortgagees, we held
that "As between the first and second mortgagees, therefore, the second
mortgagee has at most only the right to redeem, and even when the second
mortgagee goes through the formality of an extrajudicial foreclosure, the
purchaser acquires no more than the right of redemption from the first
mortgagee". The superiority of the mortgagee's lien over that of a subsequent
judgment creditor is now expressly provided in Rule 39, Section 16 of the Revised
Rules of Court, which states with regard to the effect of levy on execution as to
third persons that "The levy on execution shall create a lien in favor of the
judgment creditor over the right, title and interest of the judgment debtor in such
property at the time of the levy, subject to liens or encumbrances then existing".

Even in the matter of possession, mortgagees over chattel have superior,

preferential and paramount rights thereto, and the mortgagor has mere rights of
redemption. 61
Similar rules apply to cases of mortgaged real properties that are registered.
Since the properties were already mortgaged to GHI, the only interest remaining in the
mortgagor was its right to redeem said properties from the mortgage. The right of
redemption was the only leviable or attachable property right of the mortgagor in the
mortgaged real properties. We have held that

The main issue in this case is the nature of the lien of a judgment creditor, like
the petitioner, who has levied an attachment on the judgment debtor's (CMI) real
properties which had been mortgaged to a consortium of banks and were
subsequently sold to a third party, Top Rate.

xxx xxx xxx

The sheriff's levy on CMI's properties, under the writ of attachment obtained by
the petitioner, was actually a levy on the interest only of the judgment debtor CMI
on those properties. Since the properties were already mortgaged to the
consortium of banks, the only interest remaining in the mortgagor CMI was its
right to redeem said properties from the mortgage. The right of redemption was
the only leviable or attachable property right of CMI in the mortgaged real
properties. The sheriff could not have attached the properties themselves, for they
had already been conveyed to the consortium of banks by mortgage (defined as a
"conditional sale"), so his levy must be understood to have attached only the
mortgagor's remaining interest in the mortgaged property the right to redeem
it from the mortgage. 62 CHDTEA
 xxx xxx xxx

There appears in the record a factual contradiction relating to whether the

foreclosure by GHI on July 13, 2001 63 over some of the contested properties came
ahead of the levy thereon, or the reverse. NAMAWU claims that the levy on two trucks
was effected on June 22, 2001, 64 which GHI disputes as a misstatement because the
levy was attempted on July 18, 2002, and not 2001. 65 What is undisputed though is
that the mortgage of GHI was registered on February 4, 2000, 66 well ahead of any levy
by NAMAWU. Prior registration of a lien creates a preference, as the act of registration
is the operative act that conveys and affects the land, 67 even against subsequent
judgment creditors, such as respondent herein. Its registration of the mortgage was not
intended to defraud NAMAWU of its judgment claims, since even the courts were
already judicially aware of its existence since 1992. Thus, at that moment in time, with
the registration of the mortgage, either NAMAWU had no properties of MMC to attach
because the same had been previously foreclosed by GHI as mortgagee thereof; or by
virtue of the DOLE's levy to enforce NAMAWU's claims, the latter's rights are subject
to the notice of the foreclosure on the subject properties by a prior mortgagee's right.
GHI's mortgage right had already been registered by then, and "it is basic that
mortgaged properties answer primarily for the mortgaged credit, not for the judgment
credit of the mortgagor's unsecured creditor". 68
On the issue of piercing the
veil of corporate fiction.
The CA found that:

"Ordinarily, the interlocking of directors and officers in two different

corporations is not a conclusive indication that the corporations are one and the
same for purposes of applying the doctrine of piercing the veil of corporate
fiction. However, when the legal fiction of the separate corporate personality is
abused, such as when the same is used for fraudulent or wrongful ends, the courts
have not hesitated to pierce the corporate veil (Francisco vs. Mejia, 362 SCRA
738). In the case at bar, the Deed of Real Estate and Chattel Mortgage was entered
into between MMC and G Holdings for the purpose of evading the satisfaction of
the legitimate claims of the petitioner against MMC. The notion of separate
personality is clearly being utilized by the two corporations to perpetuate the
violation of a positive legal duty arising from a final judgment to the prejudice of
the petitioner's right." 69

Settled jurisprudence 70 has it that

"(A) corporation, upon coming into existence, is invested by law with a

personality separate and distinct from those persons composing it as well as from
any other legal entity to which it may be related. By this attribute, a stockholder
may not, generally, be made to answer for acts or liabilities of the said
corporation, and vice versa. This separate and distinct personality is, however,
 merely a fiction created by law for convenience and to promote the ends of
justice. For this reason, it may not be used or invoked for ends subversive to the
policy and purpose behind its creation or which could not have been intended by
law to which it owes its being. This is particularly true when the fiction is used
to defeat public convenience, justify wrong, protect fraud, defend crime,
confuse legitimate legal or judicial issues, perpetrate deception or otherwise
circumvent the law. This is likewise true where the corporate entity is being
used as an alter ego, adjunct, or business conduit for the sole benefit of the
stockholders or of another corporate entity. In all these cases, the notion of
corporate entity will be pierced or disregarded with reference to the particular
transaction involved.EHcaDT

Given this jurisprudential principle and the factual circumstances obtaining in this case,
we now ask: Was the CA correct in piercing the veil of corporate identity of GHI and
MMC?
In our disquisition above, we have shown that the CA's finding that there was a
"simulated mortgage" between GHI and MMC to justify a wrong or protect a fraud has
struggled vainly to find a foothold when confronted with the ruling of this Court in
Republic v. "G" Holdings, Inc.
The negotiations between the GHI and the Government through APT, dating
back to 1992 culminating in the Purchase and Sale Agreement, cannot be depicted
as a contrived transaction. In fact, in the said Republic, etc. v. "G" Holdings, Inc., this
Court adjudged that GHI was entitled to its rightful claims not just to the shares of
MMC itself, or just to the financial notes that already contained the mortgage clauses
over MMCs disputed assets, but also to the delivery of those instruments. Certainly, we
cannot impute to this Court's findings on the case any badge of fraud. Thus, we reject
the CA's conclusion that it was right to pierce the veil of corporate fiction, because the
foregoing circumstances belie such an inference. Furthermore, we cannot ascribe to the
Government, or the APT in particular, any undue motive to participate in a transaction
designed to perpetrate fraud. Accordingly, we consider the CA interpretation
unwarranted.
We also cannot agree that the presumption of fraud in Article 1387 of the Civil
Code relative to property conveyances, when there was already a judgment rendered or
a writ of attachment issued, authorizes piercing the veil of corporate identity in this
case. We find that Article 1387 finds less application to an involuntary alienation such
as the foreclosure of mortgage made before any final judgment of a court. We thus hold
that when the alienation is involuntary, and the foreclosure is not fraudulent because
the mortgage deed has been previously executed in accordance with formalities of law,
and the foreclosure is resorted to in order to liquidate a bona fide debt, it is not the
alienation by onerous title contemplated in Article 1387 of the Civil Code wherein fraud
is presumed.
 Since the factual antecedents of this case do not warrant a finding that the
mortgage and loan agreements between MMC and GHI were simulated, then their
separate personalities must be recognized. To pierce the veil of corporate fiction would
require that their personalities as creditor and debtor be conjoined, resulting in a merger
of the personalities of the creditor (GHI) and the debtor (MMC) in one person, such
that the debt of one to the other is thereby extinguished. But the debt embodied in the
1992 Financial Notes has been established, and even made subject of court litigation
(Civil Case No. 95-76132, RTC Manila). This can only mean that GHI and MMC have
separate corporate personalities.
Neither was MMC used merely as an alter ego, adjunct, or business conduit for
the sole benefit of GHI, to justify piercing the former's veil of corporate fiction so that
the latter could be held liable to claims of third-party judgment creditors, like
NAMAWU. In this regard, we find American jurisprudence persuasive. In a decision
by the Supreme Court of New York 71 bearing upon similar facts, the Court denied
piercing the veil of corporate fiction to favor a judgment creditor who sued the parent
corporation of the debtor, alleging fraudulent corporate asset-shifting effected after a
prior final judgment. Under a factual background largely resembling this case at bar,
viz.:

In this action, plaintiffs seek to recover the balance due under judgments they
obtained against Lake George Ventures Inc. (hereinafter LGV), a subsidiary of
defendant that was formed to develop the Top O' the World resort community
overlooking Lake George, by piercing the corporate veil or upon the theory that
LGV's transfer of certain assets constituted fraudulent transfers under the Debtor
and Creditor Law. We previously upheld Supreme Court's denial of defendant's
motion for summary judgment dismissing the complaint (252 A.D.2d 609, 675
N.Y.S.2d 234) and the matter proceeded to a nonjury trial. Supreme Court
thereafter rendered judgment in favor of defendant upon its findings that,
although defendant dominated LGV, it did not use that domination to commit a
fraud or wrong on plaintiffs. Plaintiffs appealed.EcDSTI

The trial evidence showed that LGV was incorporated in November 1985.
Defendant's principal, Francesco Galesi, initially held 90% of the stock and all of
the stock was ultimately transferred to defendant. Initial project funding was
provided through a $2.5 million loan from Chemical Bank, secured by defendant's
guarantee of repayment of the loan and completion of the project. The loan
proceeds were utilized to purchase the real property upon which the project was
to be established. Chemical Bank thereafter loaned an additional $3.5 million to
LGV, again guaranteed by defendant, and the two loans were consolidated into a
first mortgage loan of $6 million. In 1989, the loan was modified by splitting the
loan into a $1.9 term note on which defendant was primary obligor and a $4.1
million project note on which LGV was the obligor and defendant was a
guarantor.
 Due to LGV's lack of success in marketing the project's townhouses and in order
to protect itself from the exercise of Chemical Bank's enforcement remedies,
defendant was forced to make monthly installments of principal and interest on
LGV's behalf. Ultimately, defendant purchased the project note from Chemical
Bank for $3.1 million, paid the $1.5 million balance on the term note and took an
assignment of the first mortgage on the project's realty. After LGV failed to make
payments on the indebtedness over the course of the succeeding two years,
defendant brought an action to foreclose its mortgage. Ultimately, defendant
obtained a judgment of foreclosure and sale in the amount of $6,070,246.50.
Defendant bid in the property at the foreclosure sale and thereafter obtained a
deficiency judgment in the amount of $3,070,246.50.

Following the foreclosure sale, LGV transferred to defendant all of the shares of
Top of the World Water Company, a separate entity that had been organized to
construct and operate the water supply and delivery system for the project, in
exchange for a $950,000 reduction in the deficiency judgment.

the U.S. Supreme Court of New York held

Based on the foregoing, and accepting that defendant exercised complete

domination and control over LGV, we are at a loss as to how plaintiffs perceive
themselves to have been inequitably affected by defendant's foreclosure action
against LGV, by LGV's divestiture of the water company stock or the sports
complex property, or by defendant's transfer to LGV of a third party's
uncollectible note, accomplished solely for tax purposes. It is undisputed that
LGV was, and for some period of time had been, unable to meet its
obligations and, at the time of the foreclosure sale, liens against its property
exceeded the value of its assets by several million dollars, even including the
water company and sports complex at the values plaintiffs would assign to
them. In fact, even if plaintiffs' analysis were utilized to eliminate the entire $3
million deficiency judgment, the fact remains that subordinate mortgages
totaling nearly an additional $2 million have priority over plaintiffs'
judgments.

As properly concluded by Supreme Court, absent a finding of any inequitable

consequence to plaintiffs, both causes of action pleaded in the amended
complaint must fail. Fundamentally, a party seeking to pierce the corporate
veil must show complete domination and control of the subsidiary by the
parent and also that such domination was used to commit a fraud or wrong
against the plaintiff that resulted in the plaintiff's injury (252 A.D.2d 609,
610, 675 N.Y.S.2d 234, supra; see, Matter of Morris v. New York State Dept. of
Taxation & Fin., 82 N.Y.2d 135, 141, 603 N.Y.S.2d 807, 623 N.E.2d 1157).
Notably, "[e]vidence of domination alone does not suffice without an
additional showing that it led to inequity, fraud or malfeasance" (TNS
Holdings v. MKI Sec. Corp., 92 N.Y.2d 335, 339, 680 N.Y.S.2d 891, 703 N.E.2d
749). ASHEca
 xxx xxx xxx

In reaching that conclusion, we specifically reject a number of plaintiffs'

assertions, including the entirely erroneous claims that our determination on the
prior appeal (252 A.D.2d 609, 675 N.Y.S.2d 234, supra) set forth a "roadmap"
for the proof required at trial and mandated a verdict in favor of plaintiffs upon
their production of evidence that supported the decision's "listed facts". To the
contrary, our decision was predicated upon the existence of such evidence, absent
which we would have granted summary judgment in favor of defendant. We are
equally unpersuaded by plaintiffs' continued reliance upon defendant's December
1991 unilateral conversion of its intercompany loans with LGV from debt to
equity, which constituted nothing more than a "bookkeeping transaction" and had
no apparent effect on LGV's obligations to defendant or defendant's right to
foreclose on its mortgage. 72

This doctrine is good law under Philippine jurisdiction.

In Concept Builders, Inc. v. National Labor Relations Commission, 73 we laid
down the test in determining the applicability of the doctrine of piercing the veil of
corporate fiction, to wit:

1. Control, not mere majority or complete control, but complete domination, not
only of finances but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to this transaction had
at the time no separate mind, will or existence of its own.

2. Such control must have been used by the defendant to commit fraud or wrong,
to perpetuate the violation of a statutory or other positive legal duty, or
dishonest and, unjust act in contravention of plaintiffs legal rights; and,

3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.

xxx xxx xxx

Time and again, we have reiterated that mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock of a corporation is not,
by itself, a sufficient ground for disregarding a separate corporate personality. 74 It is
basic that a corporation has a personality separate and distinct from that composing it
as well as from that of any other legal entity to which it may be related. Clear and
convincing evidence is needed to pierce the veil of corporate fiction. 75
In this case, the mere interlocking of directors and officers does not warrant
piercing the separate corporate personalities of MMC and GHI. Not only must there be
a showing that there was majority or complete control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked, so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own. The mortgage deed transaction attacked as a basis
for piercing the corporate veil was a transaction that was an offshoot, a derivative, of
the mortgages earlier constituted in the Promissory Notes dated October 2, 1992. But
these Promissory Notes with mortgage were executed by GHI with APT in the name of
MMC, in a full privatization process. It appears that if there was any control or
domination exercised over MMC, it was APT, not GHI, that wielded it. Neither can we
conclude that the constitution of the loan nearly four (4) years prior to NAMAWU's
notice of strike could have been the proximate cause of the injury of NAMAWU for
having been deprived of MMC's corporate assets. IDcHCS

On the propriety of injunction

to prevent execution by the
NLRC on the properties
of third-party claimants
It is settled that a Regional Trial Court can validly issue a Temporary Restraining
Order (TRO) and, later, a writ of preliminary injunction to prevent enforcement of a
writ of execution issued by a labor tribunal on the basis of a third-party's claim of
ownership over the properties levied upon. 76 While, as a rule, no temporary or
permanent injunction or restraining order in any case involving or growing out of a
labor dispute shall be issued by any court where the writ of execution issued by a
labor tribunal is sought to be enforced upon the property of a stranger to the labor
dispute, even upon a mere prima facie showing of ownership of such claimant a
separate action for injunctive relief against such levy may be maintained in court, since
said action neither involves nor grows out of a labor dispute insofar as the third party
is concerned. 77 Instructively, National Mines and Allied Workers' Union v. Vera: 78

Petitioners' reliance on the provision of Art. 254 of the New Labor Code (herein
earlier quoted) which prohibits injunctions or restraining orders in any case
involving or growing out of a 'labor dispute' is not well-taken. This has no
application to the case at bar. Civil Case No. 2749 is one which neither "involves"
nor "grows out" of a labor dispute. What 'involves' or 'grows out' of a labor dispute
is the NLRC case between petitioners and the judgment debtor, Philippine Iron
Mines. The private respondents are not parties to the said NLRC case. Civil Case
No. 2749 does not put in issue either the fact or validity of the proceeding in the
NLRC case nor the decision therein rendered, much less the writ of execution
issued thereunder. It does not seek to enjoin the execution of the decision against
the properties of the judgment debtor. What is sought to be tried in Civil Case
No. 2749 is whether the NLRC's decision and writ of execution, above
mentioned, shall be permitted to be satisfied against properties of private
respondents, and not of the judgment debtor named in the NLRC decision and
writ of execution. Such a recourse is allowed under the provisions of Section 17,
Rule 39 of the Rules of Court.
 To sustain petitioners' theory will inevitably lead to disastrous consequences and
lend judicial imprimatur to deprivation of property without due process of law.
Simply because a writ of execution was issued by the NLRC does not authorize
the sheriff implementing the same to levy on anybody's property. To deny the
victim of the wrongful levy, the recourse such as that availed of by the herein
private respondents, under the pretext that no court of general jurisdiction can
interfere with the writ of execution issued in a labor dispute, will be sanctioning
a greater evil than that sought to be avoided by the Labor Code provision in
question. Certainly, that could not have been the intendment of the law creating
the NLRC. For well-settled is the rule that the power of a court to execute its
judgment extends only over properties unquestionably belonging to the judgment
debtor."

Likewise, since the third-party claimant is not one of the parties to the action, he
cannot, strictly speaking, appeal from the order denying his claim, but he should file a
separate reivindicatory action against the execution creditor or the purchaser of the
property after the sale at public auction, or a complaint for damages against the bond
filed by the judgment creditor in favor of the sheriff. 79
A separate civil action for recovery of ownership of the property would not
constitute interference with the powers or processes of the labor tribunal which
rendered the judgment to execute upon the levied properties. The property levied upon
being that of a stranger is not subject to levy. Thus, a separate action for recovery, upon
a claim and prima facie showing of ownership by the petitioner, cannot be considered
as interference. 80
Upon the findings and conclusions we have reached above, petitioner is situated
squarely as such third-party claimant. The questioned restraining order of the lower
court, as well as the order granting preliminary injunction, does not constitute
interference with the powers or processes of the labor department. The registration of
the mortgage document operated as notice to all on the matter of the mortgagee's prior
claims. Official proceedings relative to the foreclosure of the subject properties
constituted a prima facie showing of ownership of such claimant to support the issuance
of injunctive reliefs.ESCTIA

As correctly held by the lower court:

The subject incidents for TRO and/or Writ of Injunction were summarily heard
and in resolving the same, the Court believes, that the petitioner has a clear and
unmistakable right over the levied properties. The existence of the subject Deed
of Real Estate and Chattel Mortgage, the fact that petitioner initiated a foreclosure
of said properties before the Clerk of Court and Ex-Officio Sheriff, RTC Branch
61, Kabankalan City on July 13, 2001, the fact that said Ex-Officio Sheriff and
the Clerk of Court issue a Notice of Foreclosure, Possession and Control over
said mortgaged properties on July 19, 2001 and the fact that a Sheriff's Certificate
of Sale was issued on December 3, 2001 are the basis of its conclusion. Unless
 said mortgage contract is annulled or declared null and void, the presumption of
regularity of transaction must be considered and said document must be looked
[upon] as valid.

Notably, the Office of the Solicitor General also aptly observed that when the
respondent maintained that the Deed of Real Estate and Chattel mortgage was entered
into in fraud of creditors, it thereby admitted that the mortgage was not void, but merely
rescissible under Article 1381 (3) of the Civil Code; and, therefore, an independent
action is needed to rescind the contract of mortgage. 81 We, however, hold that such
an independent action cannot now be maintained, because the mortgage has been
previously recognized to exist, with a valid consideration, in Republic, etc., v. "G"
Holdings, Inc.
A final word
The Court notes that the case filed with the lower court involves a principal
action for injunction to prohibit execution over properties belonging to a third party not
impleaded in the legal dispute between NAMAWU and MMC. We have observed,
however, that the lower court and the CA failed to take judicial notice of, or to consider,
our Decisions in Republic, etc., v. "G" Holdings, Inc., and Maricalum Mining
Corporation v. Brion and NAMAWU, in which we respectively recognized the
entitlement of GHI to the shares and the company notes of MMC (under the Purchase
and Sale Agreement), and the rights of NAMAWU to its labor claims. At this stage,
therefore, neither the lower court nor the CA, nor even this Court, can depart from our
findings in those two cases because of the doctrine of stare decisis.
From our discussion above, we now rule that the trial court, in issuing the
questioned orders, did not commit grave abuse of discretion, because its issuance was
amply supported by factual and legal bases.
We are not unmindful, however, of the fact that the labor claims of NAMAWU,
acknowledged by this Court in Maricalum, still awaits final execution. As success fades
from NAMAWU's efforts to execute on the properties of MMC, which were validly
foreclosed by GHI, we see that NAMAWU always had, and may still have, ample
supplemental remedies found in Rule 39 of the Rules of Court in order to protect its
rights against MMC. These include the examination of the judgment obligor when
judgment is unsatisfied, 82 the examination of the obligors of judgment obligors, 83 or
even the resort to receivership. 84
While, theoretically, this case is not ended by this decision, since the lower court
is still to try the case filed with it and decide it on the merits, the matter of whether the
mortgage and foreclosure of the assets that are the subject of said foreclosure is ended
herein, for the third and final time. So also is the consequential issue of the separate and
distinct personalities of GHI and MMC. Having resolved these principal issues with
certainty, we find no more need to remand the case to the lower court, only for the
 purpose of resolving again the matter of whether GHI owns the properties that were the
subject of the latter's foreclosure.
WHEREFORE, the Petition is GRANTED. The Decision of the Court of
Appeals dated October 14, 2003 is SET ASIDE. The Omnibus Order dated December
4, 2002 of the Regional Trial Court, Branch 61 of Kabankalan City, Negros Occidental
is AFFIRMED. No costs. STEacI

SO ORDERED.

Carpio Morales, * Chico-Nazario, ** Peralta and Abad, *** JJ., concur.

(G Holdings, Inc. v. National Mines and Allied Workers Union Local 103, G.R. No.
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160236, [October 16, 2009], 619 PHIL 69-114)