1. 116 Phil.

1235

MAKALINTAL, J.:
The judgment appealed from, rendered on March 10, 1959 by the Court of First Instance of Rizal after
a joint trial of both cases mentioned in the caption, orders "the spouses Basilio Bautista and Sofia de
Rosas to execute a deed of sale covering the property in question in favor of Ruperto Soriano and
Olimpia de Jesus upon payment by the latter of P1,650.00 which is the balance of the price agreed upon,
that is P3,900.00, and the amount previously received by way of loan by the said spouses from the said
Ruperto Soriano and Olimpia de Jesus, to pay the sum of P500.00 by way of attorney's fees, and to pay
the costs."
Appellants Basilio Bautista and Sofia de Rosas have adopted in their appeal brief the following factual
findings of the trial court:
"Spouses Basilio Bautista and Sofia de Rosas are the absolute and registered owners of a parcel of land,
situated in the municipality of Teresa, province of Rizal, covered by Original Certificate of Title No.
3905, of the Register of Deeds of Rizal and particularly described as follows:
"A parcel of land (Lot No. 4980 of the Cadastral Survey of Teresa; situated in the municipality of Teresa;
bounded on the NE. by Lot No. 5004; on the SE. by Lots Nos. 5003 and 4958; on the SW. by Lot 4949;
and on the W. and NW. by a creek . . . Containing the area of Thirty Thousand Two Hundred Twenty-
Two (30,222) square meters, more or less. Date of Survey, December 1913-June, 1914. (Full technical
description appears on Original Certificate of Title No. 3905).
"That, on May 30, 1956, the said spouses for and in consideration on the sum of P1,800, signed a
document entitled "Kasulatan Ng Sanglaan" in favor of Ruperto Soriano and Olimpia de Jesus, under
the following terms and conditions:
"1. Na ang Sanglaang ito ay magpapatuloy lamang hanggang dalawang (2) taon pasimula sa araw na
lagdaan ang kasunduang ito, at magpapalampas ng dalawang panahon ani o ani agricola.
"2. Na, ang aanihin ng bukid na isinangla ay mapupunta sa pinagsanglaan bilang pakinabang ng
nabanggit na halagang inutang.
"3. Na, ang buwis sa pamahalaan ng lupang ito ay ang magbabayad ay ang nagsangla o mayari.
"4. Na, ang lupang nasanglang ito ay hindi na maaaring isangla pang muli sa ibang tao ng walang
pahintulot ang Unang Pinagsanglaan.
"5. Na, pinagkasunduan din naman na sakaling magkaroon ng kakayahan ang Pinagsanglaan ay
maaaring bilhin ng patuluyan ang lupang nasanglang ito kahit anong araw sa loob ng taning na
dalawang taon ng sanglaan sa halagang Tatlong Libo at Siyam na Raan Piso (P3,900.00), salaping
Pilipino na pinagkaisahan.
"6. Na, sakaling ang pagkakataon na ipinagkaloob ng Nagsangla sa sinundang talata ay hindi
maisagawa ng Pinagsanglaan sa Kawalan ng maibayad at gayon din naman ang Nagsangla na hindi
maibalik ang halagang inutang sa taning na panahon, ang sanglaan ito ay lulutasin alinsunod sa
itinatagubilin ng batas sabagay-bagay ng sanglaan, na ito ay ang tinatawag na (FORECLOSURE OF
MORTGAGES, JUDICIAL OR EXTRA JUDICIAL). Maaring makapili ng hakbang ang Pinagsanglaan,
alinsunod sa batas o kaya naman ay pagusapan ng dalawang parte ang mabuting paraan ng paglutas ng
bagay na ito."
"That simultaneously with the signing of the aforementioned deed, the spouses Basilio Bautista and
Sofia de Rosas transferred the possession of the said land to Ruperto Soriano and Olimpia de Jesus who
have been and are still in possession of the said property and have since that date been and are
cultivating the said land and have enjoyed and are still enjoying the produce thereof to the exclusion of
all other persons. Sometimes after May 30, 1956, the spouses Basilio Bautista and Sofia de Rosas
received from Ruperto Soriano and Olimpia de Jesus, the sum of P450.00 pursuant to the conditions
agreed upon in the aforementioned document for which no receipt was issued and which was returned
by the spouses sometime on May 31, 1958. On May 13, 1958, a certain Atty. Angel O. Ver wrote a letter
to the spouses Bautista whose letter has been marked Annex "B" of the stipulation of facts informing
the said spouses that his clients Ruperto Soriano and Olimpia de Jesus have decided to buy the parcel
of land in question pursuant to paragraph 5 of the document in question, Annex "A".
"The spouses inspite of the receipt of the letter refused to comply with the demand contained therein.
On May 31, 1958, Ruperto Soriano and Olimpia de Jesus filed before this Court Civil Case No. 5023,
praying that plaintiffs be allowed to consign or deposit with the Clerk of Court the sum of P1,650.00 as
the balance of the purchase price of the parcel of land in question and that after due hearing, judgment
be rendered ordering the defendants to execute an absolute deed of sale of the said property in their
favor, plus damages.
"On June 9, 1958, spouses Basilio Bautista and Sofia de Rosas filed a complaint against Ruperto Soriano
and Olimpia de Jesus marked as Annex "B" of the Stipulation of Facts, which case after hearing was
dismissed for lack of jurisdiction. On August 5, 1959, the spouses Bautista and de Rosas again filed a
case in the Court of First Instance against Soriano and de Jesus asking this Court to order the
defendants to accept the payment of the principal obligation and release the mortgage and to make an
accounting of the harvest for the two harvest seasons (1956-1957). The two cases, were by agreement of
the parties assigned to one branch so that they can be tried jointly."
The principal issue in this case is whether, having seasonably advised appellants that they had decided
to buy the land in question pursuant to paragraph 5 of the instrument of mortgage, appellees are
entitled to specific performance consisting of the execution by appellants of the corresponding deed of
sale. As translated, paragraph 5 states: "That it has likewise been agreed that if the financial condition
of the mortgagees will permit, they may purchase said land absolutely on any date within the two-year
term of this mortgage at the agreed price of P3,900.00."
Appellants contend that, being mortgagors, they cannot be deprived of the right to redeem the
mortgaged property, because such right is inherent in and inseparable from this kind of contract. The
premise of the contention is not entirely accurate. While the transaction is undoubtedly a mortgage and
contains the customary stipulation concerning redemption, it carries the added special provision
aforequoted, which renders the mortgagors' right to redeem defeasible at the election of the
mortgagees. There is nothing illegal or immoral in this. It is simply an option to buy, sanctioned by
Article 1479 of the Civil Code, which states: "A promise to buy and sell a determinate thing for a price
certain is reciprocally demandable. An accepted unilateral promise to buy or to sell a determinate thing
for a price certain is bindings upon the promisor if the promise is supported by a consideration distinct
from the price."
In this case the mortgagors' promise to sell is supported by the same consideration as that of the
mortgage itself, which is distinct from that which would support the sale, an additional amount having
been agreed upon, to make up the entire price of P3,900.00, should the option be exercised. The
mortgagors' promise was in the nature of a continuing offer, non-withdrawable during a period of two
years, which upon acceptance by the mortgagees gave rise to a perfected contract of purchase and sale.
Appellants cite the case of Iñigo vs. Court of Appeals, 96 Phil., 37; 50 Off. Gaz. [11] 5281, where we held
that a stipulation In a contract of mortgage to sell the property to the mortgagee does not bind the same
but creates only a personal obligation on the part of the mortgagor. The citation, instead of sustaining
appellants' position, confirms that of appellees, who are not here enforcing any real right to the disputed
land but are rather seeking to obtain specific performance of a personal obligation, namely, the
execution of a deed of sale for the price agreed upon, the corresponding amount to cover which was
duly deposited in court upon the filing of the complaint.
Reference is made in appellants' brief to the fact that they tendered the sum of P1,800.00 to redeem
the mortgage before they filed their complaint in civil case No. 99 in the Justice of the Peace court of
Morong, Rizal. That tender was ineffective for other purpose intended. In the first place it must have
been made after the option to purchase had been exercised by appellees (Civil Case No. 99 was filed on
June 9, 1958, only to be dismissed for lack of jurisdiction); and secondly, appellants' offer to redeem
could be defeated by appellees' preemptive right to purchase within the period of two years from May
30, 1956. As already noted, such right was availed of and appellants were accordingly notified by letter
dated May 13, 1958, which was received by them on the following May 22. Offer and acceptance
converged and gave rise to a perfected and binding contract of purchase and sale.
The judgment appealed from is afiirmed, with costs.
Bengzon, C. J., Padilla, Bautista Angelo, Concepcion, Reyes, J. B. L., Barrera, Paredes,
Dizon, and Regala, JJ., concur.

------------------------------------------------------------------------------------------------------------------------

2. 92 Phil. 495

REYES, J.:
This is an appeal from a decision of the Court of First Instance of Bulacan, decreeing the registration of
a parcel of land situated in Obando of said province in the name of Apolonia Santiago. The appeal has
been indorsed to this Court by the Court of Appeals on the ground that the questions raised are purely
legal.

The application for registration was filed on January 9, 1936, and it was opposed by various persons,
among them the appellant Angela Dionisio, who claimed title to the land as purchaser in a foreclosure
sale. But the claim of the other oppositors need not be discussed since they have not appealed.

The evidence shows that the land in question was bought by the applicant in 1935 from its former owner,
Roman San,Diego, and the sale was recorded in the office of the register of deeds of Bulacan in
accordance with section 194 of the Revised Administrative Code, as amended. It turned out, however,
that prior to the sale Roman San Diego had already mortgaged the land to one Eulalia Resurreccion,
and as the mortgage was also registered in accordance with the Administrative Code, it had precedence
over the sale. As the mortgage debt was not paid, Eulalia Resurreccion had the mortgage foreclosed
(civil case No. 5769, Court of First Instance of Bulacan) and the land was sold at public auction to satisfy
the judgment and adjudicated to Angela Dionisio, as the highest bidder.

On learning of the sale, Apolonia Santiago, who had not been made a party to the foreclosure
proceedings, brought an action to annul the judgment rendered therein, including the sale made in
favor of Angela Dionisio, and she also intervened in the proceeding for the confirmance of the sale and
filed her opposition thereto. Taking the view that the oppositor's claim might well be determined in the
action for annulment which she had already filed, the court (Judge Pastor Endencia, presiding)
confirmed the sale but without prejudice to whatever rights the oppositor might have. No appeal was
taken from this resolution.

Thereafter the action for annulment was tried and decided by another judge of the same court, the Hon.
Arsenic C. Roldan. The decision concludes:

"In view of these considerations, the Court finds that the judicial proceedings held in Civil Case No.
5769 cannot affect the rights of Apolonia Santiago who was not a party therein and, therefore, any sale
of her property or the property in question over which she has rights, in which she has not been a party
litigant is null and void and therefore the sale of this property in question made by the sheriff is null
and void in civil case No. 5769 with regards to the right of Apolonia Santiago over the same; the
ownership acquired by Apolonia .Santiago over the land in question in Exhibit A is subject to the
mortgage in favor of Eulalia Resurreccion (Exhibit 2). The defendants are sentenced to pay the
costs. So Ordered."
No appeal appears to have been taken from this and the decision must have attained finality because
counsel for the present appellant admitted in open court that a bill of cost had already been filed by the
winning party.

Concurring in the opinion expressed in that decision Judge Potenciano Pecson, who subsequently heard
the present case for registration, declared that the foreclosure sale did not affect the rights of the
applicant Apolonia Santiago, who had not been made a party to the proceedings, and decreed the
registration of the land in her favor. It is this decision that is now before.us on appeal.

In the decision Judge Pecson makes the finding of fact that Apolonia Santiago was not impleaded in the
foreclosure suit. And while it is true that her interest in the land in question was subordinate to that of
the mortgagee, Eulalia Resurreccion, the rule of procedure in force at the time the foreclosure suit was
instituted,which was section 255 of Act 190, required that in an action for foreclosure "all persons
having or claiming an interest in the premises subordinate in right to that of the holder of the mortgage
* * * be made defendants in the action." This rule applied not only to a subordinate lienholder (Sun
Life Assurance Co. of Canada vs. Gonzales Diez, 52 Phil., 271), but also to a purchaser of real property
already mortgaged to another (De la Paz et al. vs. McCondray & Co., Inc., 66 Phil., 402), and the effect
of the failure to implead a subordinate lienholder or subsequent purchaser or both is to render the
foreclosure ineffective as against them, with the result that there remains in their favor the
"unforeclosed equity of redemption." But the foreclosure is valid as between the parties to the
suit. (Ibid.; 2 Moran's Rules of Court, 3rd ed., p. 239.)

It is argued that Apolonia Santiago did in fact intervene in the foreclosure suit and was therefore bound
by its results. But it appears that her intervention consisted merely in opposing the confirmation of the
sale upon learning that such a sale had been made. This is not the same as being a party to the suit to
the extent of being bound by the judgment. That judgment had already been rendered and was already
in the process of execution when the intervention took place. In any event, though the sale was
confirmed, the court took pains to specify that the confirmance was to be without prejudice to the rights
of Apolonia Santiago.

There is much discussion in the briefs as to whether Judge Roldan's decision in the annulment case has
been duly proved with the presentation of what purports to be a carbon copy thereof stamped as
follows:

"ES COPIA:

M. DE LOS SANTOS
Escribano del Juzgado

Por:

(FDO.) JOSE A. SANTOS

Clerk"
It appears that the original of the decision is no longer in the record, a. great portion of this having been
lost as a result of the last war. There is also dispute as to whether the decision, if there was one, has
already become final, although it was admitted at the trial that the bill of costs had already been filed
in court by the winning party. The appellee's apparent object in urging consideration of said decision
is to give it the effect res judicata on the question of whether the foreclosure sale should be regarded as
void or not. But we see no useful purpose in pursuing inquiry in that direction. As we understand it,
Judge Roldan did not declare the foreclosure sale entirely void. He did say that it was null and void
"with regards to the rights of Apolonia Santiago," but this is only one way of saying that the foreclosure
was ineffective as against her although it may be valid as between the parties to the suit. Given this
interpretation, the decision accords with the pronouncements of this Court in the cases above cited and
does not have the effect of completely nullifying the foreclosure sale in favor of Angela Dionisio. That
sale is valid with respect to the parties to the foreclosure suit, though subject to Apolonia Santiago's
unforeclosed equity of redemption.

This unforeclosed equity, which Judge Endencia saw fit to protect in his order confirming the
foreclosure sale by means of a proviso that the said sale was to be without prejudice to the rights of
Apolonia Santiago, still exists and must be recognized.

It has been suggested that one way of giving it recognition is to allow the land to be registered in the
name of Apolonia Santiago but subject to the mortgage in favor of Eulalia P. Resurreccion. Another
way is to register the land in the name of the oppositor Angela Dionisio subject to redemption by
Apolonia Santiago. To keep to the beaten path, our preference is for the second method, which has
already received the sanction of this Court in the case of De la Paz et al. vs. McCondray & Co.,
Inc., supra. In that case the purchaser of land sold at public auction to satisfy the judgment in a
foreclosure suit applied for the registration of said land. The application for registration having been
opposed by a married couple who had previously purchased the land from its owner but had not been
impleaded in the foreclosure suit, a situation was presented similar to the one confronting us
here. Deciding the case, this Court granted the registration applied for but subject to the prior
purchasers' equitable right of redemption, for the exercise of which right they were given a period of
three months from the date the decision should become final.

The only difference between that case and the present one is that therechore the applicant for
registration was the purchaser at the foreclosure sale, whereas here the applicant is the previous
purchaser. But in principle the two cases are identical and applies to both. It is not an obstacle to this
solution that it is the previous purchaser, Apolonia Santiago, that has applied for the registration of the
land. Both by statute and by jurisprudence, registration may be decreed in favor of an oppositor whose
ownership has been established (Section 37, Act 496, as amended by Section 2, Act 3621;
Balme vs. Sales, 43 Off. Gaz., 3191, 3194; Garchitorena vs. Sotto,[*] 44 Off. Gaz. 3783), and the more so
in the present case where the record shows that the opposition of Angela Dionisio in effect prays for the
registration of the land in her favor by asking that she be substituted in place of Apolonia Santiago in
the application for registration. Registration of the land in question in the name of Angela Dionisio,
the herein oppositor, is thus legally feasible, subject, of course, to Apolonia Santiago's equitable right
of redemption.

This, in fact, is the proper solution in the present case. For registration of the land in the name of
Apolonia Santiago, who does not become its owner until she has exercised her right to redeem, vculd
be subject to the objection that it is premature, if not altogether anomalous. Her equity of redemption
is, of course, registerable, but only as an incumbrance on a registered title of ownership.

Wherefore, it is our decision that the judgment appealed from be revoked and another one entered
decreeing the registration of the land in the name of Angela Dionisio, but subject to Apolonia Santiago's
equitable right of redemption, which right should be exercised by her within three months from the
date this decision becomes final, without special pronouncement as to costs. So ordered.
Paras, C. J., Pablo, Bengzon, Tuason, Bautista Angelo and Labrador, JJ., concur.

------------------------------------------------------------------------------------------------------------------------
3. SECOND DIVISION

[G.R. Nos. 128833. April 20, 1998]

RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D.

LAO, petitioners, vs. COURT OF APPEALS and GOYU & SONS, INC.,respondents.

[G.R. No. 128834. April 20, 1998]

RIZAL COMMERCIAL BANKING CORPORATION, petitioners, vs. COURT OF APPEALS,

ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP, SPOUSES GO
TENG KOK and BETTY CHIU SUK YING alias BETTY GO, respondents.

[G.R. No. 128866. April 20, 1998]

MALAYAN INSURANCE INC., petitioner, vs. GOYU & SONS, INC. respondent.

D EC I S I O N
MELO, J.:

The issues relevant to the herein three consolidated petitions revolve around the fire loss claims of
respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc. (MICO) in
connection with the mortgage contracts entered into by and between Rizal Commercial Banking
Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of P74,040,518.58,
plus 37% interest per annum commencing July 27, 1992. RCBC was ordered to pay actual and
compensatory damages in the amount of P5,000,000.00. MICO and RCBC were held solidarily liable
to pay GOYU P1,500,000.00 as exemplary damages and P1,500,000.00 for attorneys fees. GOYUs
obligation to RCBC was fixed at P68,785,069.04 as of April 1992, without any interest, surcharges, and
penalties. RCBC and MICO appealed separately but, in view of the common facts and issues involved,
their individual petitions were consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After
due evaluation, RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D.
Lao, recommended GOYUs application for approval by RCBCs executive committee. A credit facility in
the amount of P30 million was initially granted. Upon GOYUs application and Uys and Laos
recommendation, RCBCs executive committee increased GOYUs credit facility to P50 million, then to
P90 million, and finally to P117 million.
As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two
chattel mortgages in favor of RCBC, which were registered with the Registry of Deeds at Valenzuela,
Metro Manila. Under each of these four mortgage contracts, GOYU committed itself to insure the
mortgaged property with an insurance company approved by RCBC, and subsequently, to endorse and
deliver the insurance policies to RCBC.
GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992,
Alchester Insurance Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance
policies, issued nine endorsements in favor of RCBC seemingly upon instructions of GOYU (Exhibits 1-
Malayan to 9-Malayan).
On April 27, 1992, one of GOYUs factory buildings in Valenzuela was gutted by fire. Consequently,
GOYU submitted its claim for indemnity on account of the loss insured against. MICO denied the claim
on the ground that the insurance policies were either attached pursuant to writs of
attachments/garnishments issued by various courts or that the insurance proceeds were also claimed
by other creditors of GOYU alleging better rights to the proceeds than the insured. GOYU filed a
complaint for specific performance and damages which was docketed at the Regional Trial Court of the
National Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-65442, now subject of the
present G.R. No. 128833 and 128866.
RCBC, one of GOYUs creditors, also filed with MICO its formal claim over the proceeds of the
insurance policies, but said claims were also denied for the same reasons that MICO denied GOYUs
claims.
In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of
Manila (Branch 3), confirmed that GOYUs other creditors, namely, Urban Bank, Alfredo Sebastian, and
Philippine Trust Company obtained their respective writs of attachments from various courts, covering
an aggregate amount of P14,938,080.23, and ordered that the proceeds of the ten insurance policies be
deposited with the said court minus the aforementioned P14,938,080.23. Accordingly, on January 7,
1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of the Manila RTC.
In the meantime, another notice of garnishment was handed down by another Manila RTC sala
(Branch 28) for the amount of P8,696,838.75 (Exhibit 22-Malayan).
After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant,
Malayan Insurance Company, Inc. and Rizal Commercial Banking Corporation, ordering the latter as
follows:

1. For defendant Malayan Insurance Co., Inc.:

a. To pay the plaintiff its fire loss claims in the total amount of P74,040,518.58 less the amount
of P50,000,000.00 which is deposited with this Court;

b. To pay the plaintiff damages by way of interest for the duration of the delay since July 27,
1992 (ninety days after defendant insurers receipt of the required proof of loss and notice
of loss) at the rate of twice the ceiling prescribed by the Monetary Board, on the following
amounts:
 1) P50,000,000.00 from July 27, 1992 up to the time said amount was deposited with this
Court on January 7, 1994;

2) P24,040,518.58 from July 27, 1992 up to the time when the writs of attachments were
received by defendant Malayan;

2. For defendant Rizal Commercial Banking Corporation:

a. To pay the plaintiff actual and compensatory damages in the amount of P2,000,000.00;

3. For both defendants Malayan and RCBC:

a. To pay the plaintiff, jointly and severally, the following amounts:

1) P1,000,000.00 as exemplary damages;

2) P1,000,000.00 as, and for, attorneys fees;

3) Costs of suit.

and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan obligations
with defendant RCBC in the amount of P68,785,069.04, as of April 27, 1992, with interest
thereon at the rate stipulated in the respective promissory notes (without surcharges and
penalties) per computation, pp. 14-A, 14-B & 14-C.

FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to release
immediately to the plaintiff the amount of P50,000,000.00 deposited with the Court by defendant
Malayan, together with all the interests earned thereon.

(Record, pp. 478-479.)

From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with the
amounts awarded in its favor. MICO and RCBC disputed the trial courts findings of liability on their
part. The Court of Appeals partly granted GOYUs appeal, but sustained the findings of the trial court
with respect to MICO and RCBCs liabilities, thusly:

WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as follows:

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58 less the amount of
P50,505,594.60 (per O.R. No. 3649285) plus deposited in court and damages by way of interest
commencing July 27, 1992 until the time Goyu receives the said amount at the rate of thirty-seven (37%)
percent per annum which is twice the ceiling prescribed by the Monetary Board.

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION:

a) To pay the plaintiff actual and compensatory damages in the amount of P5,000,000.00.

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL BANKING

CORPORATION, UY CHUN BING AND ELI D. LAO:
a) To pay the plaintiff jointly and severally the following amounts:

1. P1,500,000.00 as exemplary damages;

2. P1,500,000.00 as and for attorneys fees.

4. And on RCBCs Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its loan obligation with
RCBC in the amount of P68,785,069.04 as of April 27, 1992 without any interest, surcharges and
penalties.

The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to immediately release
to Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R. No. 3649285) deposited with it by
Malayan Insurance Co., Inc., together with all the interests thereon.

(Rollo, p. 200.)
RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review
and consequent reversal of the above dispositions of the Court of Appeals.
In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which
case, by virtue of the Court of Appeals resolution dated August 7, 1996, was consolidated with C.A. G.R.
No. CV-46162 (subject of herein G.R. No. 128833). At issue in said petition is RCBCs right to intervene
in the action between Alfredo C. Sebastian (the creditor) and GOYU (the debtor), where the subject
insurance policies were attached in favor of Sebastian.
After a careful review of the material facts as found by the two courts below in relation to the
pertinent and applicable laws, we find merit in the submissions of RCBC and MICO.
The several causes of action pursued below by GOYU gave rise to several related issues which are
now submitted in the petitions before us. This Court, however, discerns one primary and central issue,
and this is, whether or not RCBC, as mortgagee, has any right over the insurance policies taken by
GOYU, the mortgagor, in case of the occurrence of loss.
As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter
executed several mortgage contracts in favor of RCBC. It was expressly stipulated in these mortgage
contracts that GOYU shall insure the mortgaged property with any of the insurance companies
acceptable to RCBC. GOYU indeed insured the mortgaged property with MICO, an insurance company
acceptable to RCBC. Based on their stipulations in the mortgage contracts, GOYU was supposed to
endorse these insurance policies in favor of, and deliver them, to RCBC. Alchester Insurance Agency,
Inc., MICOs underwriter from whom GOYU obtained the subject insurance policies, prepared the nine
endorsements (see Exh. 1-Malayan to 9-Malayan; also Exh. 51-RCBC to 59-RCBC), copies of which were
delivered to GOYU, RCBC, and MICO. However, because these endorsements do not bear the signature
of any officer of GOYU, the trial court, as well as the Court of Appeals, concluded that the endorsements
are defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee have separate and distinct insurable interests in the
same mortgaged property, such that each one of them may insure the same property for his own sole
benefit. There is no question that GOYU could insure the mortgaged property for its own exclusive
benefit. In the present case, although it appears that GOYU obtained the subject insurance policies
naming itself as the sole payee, the intentions of the parties as shown by their contemporaneous acts,
must be given due consideration in order to better serve the interest of justice and equity.
It is to be noted that nine endorsement documents were prepared by Alchester in favor of
RCBC. The Court is in a quandary how Alchester could arrive at the idea of endorsing any specific
insurance policy in favor of any particular beneficiary or payee other than the insured had not such
named payee or beneficiary been specifically disclosed by the insured itself. It is also significant that
GOYU voluntarily and purposely took the insurance policies from MICO, a sister company of RCBC,
and not just from any other insurance company. Alchester would not have found out that the subject
pieces of property were mortgaged to RCBC had not such information been voluntarily disclosed by
GOYU itself. Had it not been for GOYU, Alchester would not have known of GOYUs intention of
obtaining insurance coverage in compliance with its undertaking in the mortgage contracts with RCBC,
and verily, Alchester would not have endorsed the policies to RCBC had it not been so directed by
GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in
favor of mortgagor RCBC. The basis and purpose of the doctrine was explained in Philippine National
Bank vs. Court of Appeals (94 SCRA 357 [1979]), to wit:

The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and justice,
and its purpose is to forbid one to speak against his own act, representations, or commitments to the
injury of one to whom they were directed and who reasonably relied thereon. The doctrine of estoppel
springs from equitable principles and the equities in the case. It is designed to aid the law in the
administration of justice where without its aid injustice might result. It has been applied by this Court
wherever and whenever special circumstances of a case so demand.

(p. 368.)

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam,
she prepared in quadruplicate on February 11, 1992 the nine endorsement documents for GOYUs nine
insurance policies in favor of RCBC. The original copies of each of these nine endorsement documents
were sent to GOYU, and the others were sent to RCBC and MICO, while the fourth copies were retained
for Alchesters file (tsn, February 23, pp. 7-8). GOYU has not denied having received from Alchester the
originals of these endorsements.
RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant
to the stipulation in the mortgage contracts. We find such reliance to be justified under the
circumstances of the case. GOYU failed to seasonably repudiate the authority of the person or persons
who prepared such endorsements. Over and above this, GOYU continued, in the meantime, to enjoy
the benefits of the credit facilities extended to it by RCBC. After the occurrence of the loss insured
against, it was too late for GOYU to disown the endorsements for any imagined or contrived lack of
authority of Alchester to prepare and issue said endorsements. If there had not been actually an implied
ratification of said endorsements by virtue of GOYUs inaction in this case, GOYU is at the very least
estopped from assailing their operative effects. To permit GOYU to capitalize on its non-confirmation
of these endorsements while it continued to enjoy the benefits of the credit facilities of RCBC which
believed in good faith that there was due endorsement pursuant to their mortgage contracts, is to
countenance grave contravention of public policy, fair dealing, good faith, and justice. Such an unjust
situation, the Court cannot sanction. Under the peculiar circumstances obtaining in this case, the Court
is bound to recognize RCBCs right to the proceeds of the insurance policies if not for the actual
endorsement of the policies, at least on the basis of the equitable principle of estoppel.
GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds
of insurance shall exclusively apply to the interest of the person in whose name or for whose benefit it
is made. The peculiarity of the circumstances obtaining in the instant case presents a justification to
take exception to the strict application of said provision, it having been sufficiently established that it
was the intention of the parties to designate RCBC as the party for whose benefit the insurance policies
were taken out. Consider thus the following:
1. It is undisputed that the insured pieces of property were the subject of mortgage contracts entered
into between RCBC and GOYU in consideration of and for securing GOYUs credit facilities from
RCBC. The mortgage contracts contained common provisions whereby GOYU, as mortgagor,
undertook to have the mortgaged property properly covered against any loss by an insurance company
acceptable to RCBC.

2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO, no less
than a sister company of RCBC and definitely an acceptable insurance company to RCBC.

3. Endorsement documents were prepared by MICOs underwriter, Alchester Insurance Agency, Inc.,
and copies thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail, until of late, the validity
of said endorsements.

4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit facilities extended
by RCBC which was conditioned upon the endorsement of the insurance policies to be taken by GOYU
to cover the mortgaged properties.

This Court can not over stress the fact that upon receiving its copies of the endorsement documents
prepared by Alchester, GOYU, despite the absence of its written conformity thereto, obviously
considered said endorsement to be sufficient compliance with its obligation under the mortgage
contracts since RCBC accordingly continued to extend the benefits of its credit facilities and GOYU
continued to benefit therefrom. Just as plain too is the intention of the parties to constitute RCBC as
the beneficiary of the various insurance policies obtained by GOYU.The intention of the parties will
have to be given full force and effect in this particular case. The insurance proceeds may, therefore, be
exclusively applied to RCBC, which under the factual circumstances of the case, is truly the person or
entity for whose benefit the policies were clearly intended.
Moreover, the laws evident intention to protect the interests of the mortgagee upon the mortgaged
property is expressed in Article 2127 of the Civil Code which states:

ART. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and
the rents or income not yet received when the obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue
of expropriation for public use, with the declarations, amplifications and limitations established by law,
whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third
person.

Significantly, the Court notes that out of the 10 insurance policies subject of this case, only 8 of
them appear to have been subject of the endorsements prepared and delivered by Alchester for and
upon instructions of GOYU as shown below:

INSURANCE POLICY PARTICULARS ENDORSEMENT

a. Policy Number : F-114-07795 None b. Policy Number : ACIA/F-174-

07660 Exhibit 1-Malayan
Issue Date : March 18, 1992
Issue Date : January 18, 1992
Expiry Date : April 5, 1993
Expiry Date : February 9, 1993
Amount : P9,646,224.92
Amount : P4,307,217.54
c. Policy Number : ACIA/F-114- g. Policy Number : ACIA/F-174-
07661 Exhibit 2-Malayan 07223 Exhibit 6-Malayan

Issue Date : January 18, 1992 Issue Date : May 29, 1991

Expiry Date : February 15, 1993 Expiry Date : June 27, 1992

Amount : P6,603,586.43 Amount : P6,000,000.00

d. Policy Number : ACIA/F-114- h. Policy Number : CI/F-128-03341 None

07662 Exhibit 3-Malayan
Issue Date : May 3, 1991
Issue Date : January 18, 1992
Expiry Date : May 3, 1992
Expiry Date : (not legible)
Amount : P10,000,000.00
Amount : P6,603,586.43

e. Policy Number : ACIA/F-114-

07663 Exhibit 4-Malayan i. Policy Number : F-114-07402 Exhibit 8-
Malayan
Issue Date : January 18, 1992
Issue Date : September 16, 1991
Expiry Date : February 9, 1993
Expiry Date : October 19, 1992
Amount : P9,457,972.76
Amount : P32,252,125.20

f. Policy Number : ACIA/F-114-

07623 Exhibit 7-Malayan j. Policy Number : F-114-07525 Exhibit 9-
Malayan
Issue Date : January 13, 1992
Issue Date : November 20, 1991
Expiry Date : January 13, 1993
Expiry Date : December 5, 1992
Amount : P24,750,000.00
Amount : P6,603,586.43

(pp. 456-457, Record; Folder of Exhibits for MICO.)

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by MICOs
witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise, the record shows no endorsement for
Policy Number CI/F-128-03341 [(h) above]. Also, one of the endorsement documents, Exhibit 5-
Malayan, refers to a certain insurance policy number ACIA-F-07066, which is not among the insurance
policies involved in the complaint.
 The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being
exclusively payable to RCBC by reason of the endorsement by Alchester to RCBC, which we already
ruled to have the force and effect of an endorsement by GOYU itself, these 8 policies can not be attached
by GOYUs other creditors up to the extent of the GOYUs outstanding obligation in RCBCs favor. Section
53 of the Insurance Code ordains that the insurance proceeds of the endorsed policies shall be applied
exclusively to the proper interest of the person for whose benefit it was made. In this case, to the extent
of GOYUs obligation with RCBC, the interest of GOYU in the subject policies had been transferred to
RCBC effective as of the time of the endorsement. These policies may no longer be attached by the other
creditors of GOYU, like Alfredo Sebastian in the present G.R. No. 128834, which may nonetheless
forthwith be dismissed for being moot and academic in view of the results reached herein. Only the two
other policies amounting to P19,646,224.92 may be validly attached, garnished, and levied upon by
GOYUs other creditors. To the extent of GOYUs outstanding obligation with RCBC, all the rest of the
other insurance policies above-listed which were endorsed to RCBC, are, therefore, to be released from
attachment, garnishment, and levy by the other creditors of GOYU.
This brings us to the next relevant issue to be resolved, which is, the extent of GOYUs outstanding
obligation with RCBC which the proceeds of the 8 insurance policies will discharge and liquidate, or
put differently, the actual amount of GOYUs liability to RCBC.
The Court of Appeals simply echoed the declaration of the trial court finding that GOYUS total
obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial courts
exclusion of Promissory Note No. 421-92 (renewal of Promissory Note No. 908-91) and Promissory
Note No. 420-92 (renewal of Promissory Note No. 952-91) on the ground that their execution is highly
questionable for not only are these dated after the fire, but also because the signatures of either GOYU
or any its representative are conspicuously absent.Accordingly, the Court of Appeals speculated thusly:

Hence, this Court is inclined to conclude that said promissory notes were pre-signed by plaintiff in
blank terms, as averred by plaintiff, in contemplation of the speedy grant of future loans, for the same
practice of procedure has always been adopted in its previous dealings with the bank.

(Rollo, pp. 181-182.)

The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that
the documents are spurious, for it is presumed that the ordinary course of business had been followed
(Metropolitan Bank and Trust Company vs. Quilts and All, Inc., 222 SCRA 486 [1993]). The obligor
and not the holder of the negotiable instrument has the burden of proof of showing that he no longer
owes the obligee any amount (Travel-On, Inc. vs. Court of Appeals, 210 SCRA 351 [1992]).
Even casting aside the presumption of regularity of private transactions, receipt of the loan
amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the
testimony of Go Song Hiap when he answered the queries of the trial court:
ATTY. NATIVIDAD
Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the amounts stated
therein?
A: Yes, sir, I received the amount.
COURT
He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?
WITNESS:
Yes, Your Honor, I received all the amounts.
 COURT
Indicated in the Promissory Notes?
WITNESS
A. The promissory Notes they did not give to me but the amount I asked which is correct, Your
Honor.
COURT
Q: You mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?
A: Yes, Your Honor.
(tsn, Jan. 14, 1994, p. 26.)
Furthermore, aside from its judicial admission of having received all the proceeds of the 29
promissory notes as hereinabove quoted, GOYU also offered and admitted to RCBC that its obligation
be fixed at P116,301,992.60 as shown in its letter dated March 9, 1993, which pertinently reads:

We wish to inform you, therefore that we are ready and willing to pay the current past due account of
this company in the amount of P116,301,992.60 as of 21 January 1993, specified in pars. 15, p. 10, and
18, p. 13 of your affidavits of Third Party Claims in the Urban case at Makati, Metro Manila and in the
Zamboanga case at Zamboanga city, respectively, less the total of P8,851,519.71 paid from the Seaboard
and Equitable insurance companies and other legitimate deductions. We accept and confirm this
amount of P116,301,992.60 as stated as true and correct.

(Exhibit BB.)

The Court of Appeals erred in placing much significance on the fact that the excluded promissory
notes are dated after the fire. It failed to consider that said notes had for their origin transactions
consummated prior to the fire. Thus, careful attention must be paid to the fact that Promissory Notes
No. 420-92 and 421-92 are mere renewals of Promissory Notes No. 908-91 and 952-91, loans already
availed of by GOYU.
The two courts below erred in failing to see that the promissory notes which they ruled should be
excluded for bearing dates which are after that of the fire, are mere renewals of previous ones. The
proceeds of the loan represented by these promissory notes were admittedly received by GOYU. There
is ample factual and legal basis for giving GOYUs judicial admission of liability in the amount of
P116,301,992.60 full force and effect
It should, however, be quickly added that whatever amount RCBC may have recovered from the
other insurers of the mortgaged property will, nonetheless, have to be applied as payment against
GOYUs obligation. But, contrary to the lower courts findings, payments effected by GOYU prior to
January 21, 1993 should no longer be deducted. Such payments had obviously been duly considered by
GOYU, in its aforequoted letter dated March 9, 1993, wherein it admitted that its past due account
totaled P116,301,992.60 as of January 21, 1993.
The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January 21,
1993, to wit:
Total Obligation as admitted by GOYU as of Regular 80,535,946.32
January 21, 1993: P116,301,992.60
FDU 7,548,025.17
Broken down as follows
____________ _____________
Principal[1] Interest
Total: 108,083,971.49 8,218,021.11[2] Company: 2,756,373.00

LESS: 3) Payment from

1) Proceeds from foreign department

Seaboard Eastern negotiation: 203,584.89

Insurance Company: 6,095,145.81 9,055,104.70[3]

2) Proceeds from NET AMOUNT as of January 21, 1993: P

107,246,887.90
Equitable Insurance

The need for the payment of interest due upon the principal amount of the obligation, which is the
cost of money to RCBC, the primary end and the ultimate reason for RCBCs existence and being, was
duly recognized by the trial court when it ruled favorably on RCBCs counterclaim, ordering GOYU to
pay its loan obligation with RCBC in the amount of P68,785,069.04, as of April 27,1992, with interest
thereon at the rate stipulated in the respective promissory notes (without surcharges and penalties) per
computation, pp. 14-A, 14-B, 14-C (Record, p. 479).Inexplicably, the Court of Appeals, without even
laying down the factual or legal justification for its ruling, modified the trial courts ruling and ordered
GOYU to pay the principal amount of P68,785,069.04 without any interest, surcharges and penalties
(Rollo, p. 200).
It is to be noted in this regard that even the trial court hedgingly and with much uncertainty deleted
the payment of additional interest, penalties, and charges, in this manner:

Regarding defendant RCBCs commitment not to charge additional interest, penalties and surcharges,
the same does not require that it be embodied in a document or some form of writing to be binding and
enforceable. The principle is well known that generally a verbal agreement or contract is no less binding
and effective than a written one. And the existence of such a verbal agreement has been amply
established by the evidence in this case. In any event, regardless of the existence of such verbal
agreement, it would still be unjust and inequitable for defendant RCBC to charge the plaintiff with
surcharges and penalties considering the latters pitiful situation. (Emphasis supplied.)

(Record, p. 476)

The essence or rationale for the payment of interest or cost of money is separate and distinct from
that of surcharges and penalties. What may justify a court in not allowing the creditor to charge
surcharges and penalties despite express stipulation therefor in a valid agreement, may not equally
justify non-payment of interest. The charging of interest for loans forms a very essential and
fundamental element of the banking business, which may truly be considered to be at the very core of
its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any
interest at all. We fail to find justification for the Court of Appeals outright deletion of the payment of
interest as agreed upon in the respective promissory notes.This constitutes gross error.
For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down
by this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]), shall apply,
to wit:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII
on Damages of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date of the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to
a forbearance of credit.

(pp. 95-97.)

There being written stipulations as to the rate of interest owing on each specific promissory note as
summarized and tabulated by the trial court in its decision (pp.470 and 471, Record) such agreed
interest rates must be followed. This is very clear from paragraph II, sub-paragraph 1 quoted above.
On the issue of payment of surcharges and penalties, we partly agree that GOYUs pitiful situation
must be taken into account. We do not agree, however, that payment of any amount as surcharges and
penalties should altogether be deleted. Even assuming that RCBC, through its responsible officers,
herein petitioners Eli Lao and Uy Chun Bing, may have relayed its assurance for assistance to GOYU
immediately after the occurrence of the fire, we cannot accept the lower courts finding that RCBC had
thereby ipso facto effectively waived collection of any additional interests, surcharges, and penalties
from GOYU. Assurances of assistance are one thing, but waiver of additional interests, surcharges, and
penalties is another.
Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of
liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code.Article 2227 thereof
provides:

ART. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably
reduced if they are iniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable, the Court must
consider the circumstances of each case. It should be stressed that the Court will not make any sweeping
ruling that surcharges and penalties imposed by banks for non-payment of the loans extended by them
are generally iniquitous and unconscionable. What may be iniquitous and unconscionable in one case,
may be totally just and equitable in another. This provision of law will have to be applied to the
established facts of any given case. Given the circumstances under which GOYU found itself after the
occurrence of the fire, the Court rules the surcharges rates ranging anywhere from 9% to 27%, plus the
penalty charges of 36%, to be definitely iniquitous and unconscionable. The Court tempers these rates
to 2% and 3%, respectively. Furthermore, in the light of GOYUs offer to pay the amount of
P116,301,992.60 to RCBC as March 1993 (See: Exhibit BB), which RCBC refused, we find it more in
keeping with justice and equity for RCBC not to charge additional interest, surcharges, and penalties
from that time onward.
Given the factual milieu spread hereover, we rule that it was error to hold MICO liable in damages
for denying or withholding the proceeds of the insurance claim to GOYU.
Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance policies,
RCBC has the right to claim the insurance proceeds, in substitution of the property lost in the
fire. Having assigned its rights, GOYU lost its standing as the beneficiary of the said insurance policies.
Secondly, for an insurance company to be held liable for unreasonably delaying and withholding
payment of insurance proceeds, the delay must be wanton, oppressive, or malevolent (Zenith Insurance
Corporation vs. CA, 185 SCRA 403 [1990]). It is generally agreed, however, that an insurer may in good
faith and honesty entertain a difference of opinion as to its liability.Accordingly, the statutory penalty
for vexatious refusal of an insurer to pay a claim should not be inflicted unless the evidence and
circumstances show that such refusal was willful and without reasonable cause as the facts appear to a
reasonable and prudent man (Buffalo Ins. Co. vs. Bommarito [CCA 8th] 42 F [2d] 53, 70 ALR
1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St Rep 307; Kusnetsky vs. Security Ins.
Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not show that MICO wantonly and in
bad faith delayed the release of the proceeds. The problem in the determination of who is the actual
beneficiary of the insurance policies, aggravated by the claim of various creditors who wanted to partake
of the insurance proceeds, not to mention the importance of the endorsement to RCBC, to our mind,
and as now borne out by the outcome herein, justified MICO in withholding payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail
itself of two simultaneous remedies in enforcing the claim of an unpaid creditor, one for specific
performance and the other for foreclosure. In doing so, said the appellate court, the second action is
deemed barred, RCBC having split a single cause of action (Rollo, pp. 195-199). The Court of Appeals
was too accommodating in giving due consideration to this argument of GOYU, for the foreclosure suit
is still pending appeal before the same Court of Appeals in CA G.R CV No. 46247, the case having been
elevated by RCBC.
In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of Appeals
pre-empted the resolution of said foreclosure case which is not before it. This is plain reversible error
if not grave abuse of discretion.
As held in Pea vs. Court of Appeals (245 SCRA 691[1995]):

It should have been enough, nonetheless, for the appellate court to merely set aside the questioned
orders of the trial court for having been issued by the latter with grave abuse of discretion. In likewise
enjoining permanently herein petitioner from entering in and interfering with the use or occupation
and enjoyment of petitioners (now private respondent) residential house and compound, the appellate
court in effect, precipitately resolved with finality the case for injunction that was yet to be heard on the
merits by the lower court. Elevated to the appellate court, it might be stressed, were mere incidents of
the principal case still pending with the trial court. In Municipality of Bian, Laguna vs. Court of
Appeals, 219 SCRA 69, we ruled that the Court of Appeals would have no jurisdiction in
a certiorari proceeding involving an incident in a case to rule on the merits of the main case itself which
was not on appeal before it.

(pp. 701-702.)
 Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga Regional Trial
Court, since it has been determined that RCBC has the right to the insurance proceeds, the subject
matter of intervention is rendered moot and academic. Respondent Sebastian must, however, yield to
the preferential right of RCBC over the MICO insurance policies.It is basic and fundamental that the
first mortgagee has superior rights over junior mortgagees or attaching creditors (Alpha Insurance &
Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of Canada vs. Gonzales Diaz, 52
Phil. 271 [1928]).
WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of December
16, 1996 and April 3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED and SET ASIDE, and a new
one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442 before Branch 3
of the Manila Regional Trial Court for lack of merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking Corporation the
proceeds of the insurance policies in the amount of P51,862,390.94 (per report of adjuster Toplis &
Harding (Far East), Inc., Exhibits 2 and 2-1), less the amount of P50,505,594.60 (per O.R. No.
3649285);

3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the interests earned
to Rizal Commercial Banking Corporation;

4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking Corporation in
the principal amount of P107,246,887.90, with interest at the respective rates stipulated in each
promissory note from January 21, 1993 until finality of this judgment, and surcharges at 2% and
penalties at 3% from January 21, 1993 to March 9, 1993, minus payments made by Malayan Insurance
Company, Inc. and the proceeds of the amount deposited with the trial court and its earned
interest. The total amount due RCBC at the time of the finality of this judgment shall earn interest at
the legal rate of 12% in lieu of all other stipulated interests and charges until fully paid.

The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR CV
48376 is DISMISSED for being moot and academic in view of the results herein arrived at. Respondent
Sebastians right as attaching creditor must yield to the preferential rights of Rizal Commercial Banking
Corporation over the Malayan insurance policies as first mortgagee.
SO ORDERED.
Regalado, (Chairman), Puno, Mendoza, and Martinez, JJ., concur.
4. SECOND DIVISION

[ G.R. No. 181672, September 20, 2010 ]

SPS. ANTONIO & LETICIA VEGA, PETITIONER, VS. SOCIAL SECURITY SYSTEM (SSS) & PILAR
DEVELOPMENT CORPORATION, RESPONDENTS.

DECISION

ABAD, J.:
This case is about the lack of authority of a sheriff to execute upon a property that the judgment obligor
had long sold to another although the registered title to the property remained in the name of the
former.

The Facts and the Case

Magdalena V. Reyes (Reyes) owned a piece of titled land[1] in Pilar Village, Las Piñas City. On August
17, 1979 she got a housing loan from respondent Social Security System (SSS) for which she mortgaged
her land.[2] In late 1979, however, she asked the petitioner spouses Antonio and Leticia Vega (the
Vegas) to assume the loan and buy her house and lot since she wanted to emigrate. [3]

Upon inquiry with the SSS, an employee there told the Vegas that the SSS did not approve of members
transferring their mortgaged homes. The Vegas could, however, simply make a private arrangement
with Reyes provided they paid the monthly amortizations on time. This practice, said the SSS
employee, was commonplace.[4] Armed with this information, the Vegas agreed for Reyes to execute in
their favor a deed of assignment of real property with assumption of mortgage and paid Reyes
P20,000.00 after she undertook to update the amortizations before leaving the country. The Vegas then
took possession of the house in January 1981.[5]

But Reyes did not readily execute the deed of assignment. She left the country and gave her sister,
Julieta Reyes Ofilada (Ofilada), a special power of attorney to convey ownership of the property.
Sometime between 1983 and 1984, Ofilada finally executed the deed promised by her sister to the Vegas.
Ofilada kept the original and gave the Vegas two copies. The latter gave one copy to the Home
Development Mortgage Fund and kept the other.[6] Unfortunately, a storm in 1984 resulted in a flood
that destroyed the copy left with them.[7]

In 1992, the Vegas learned that Reyes did not update the amortizations for they received a notice to
Reyes from the SSS concerning it.[8] They told the SSS that they already gave the payment to Reyes but,
since it appeared indifferent, on January 6, 1992 the Vegas updated the amortization themselves and
paid P115,738.48 to the SSS, through Antonio Vega's personal check.[9] They negotiated seven
additional remittances and the SSS accepted P8,681.00 more from the Vegas. [10]

Meanwhile, on April 16, 1993 respondent Pilar Development Corporation (PDC) filed an action for sum
of money against Reyes before the Regional Trial Court (RTC) of Manila in Civil Case 93-6551. PDC
claimed that Reyes borrowed from Apex Mortgage and Loans Corporation (Apex) P46,500.00 to buy
the lot and construct a house on it.[11] Apex then assigned Reyes' credit to the PDC on December 29,
1992,[12] hence, the suit by PDC for the recovery of the unpaid debt. On August 26, 1993 the RTC
rendered judgment, ordering Reyes to pay the PDC the loan of P46,398.00 plus interest and penalties
beginning April 11, 1979 as well as attorney's fees and the costs.[13] Unable to do so, on January 5, 1994
the RTC issued a writ of execution against Reyes and its Sheriff levied on the property in Pilar Village. [14]
On February 16, 1994 the Vegas requested the SSS to acknowledge their status as subrogees and to give
them an update of the account so they could settle it in full. The SSS did not reply. Meantime, the RTC
sheriff published a notice for the auction sale of the property on February 24, March 3 and 10,
1994.[15] He also served on the Vegas notice of that sale on or about March 20, 1994.[16] On April 5,
1994, the Vegas filed an affidavit of third party claimant and a motion for leave to admit a motion in
intervention to quash the levy on the property.[17]

Still, stating that Vegas' remedy lay elsewhere, the RTC directed the sheriff to proceed with the
execution.[18] Meantime, the Vegas got a telegram dated August 29, 1994, informing them that the SSS
intended to foreclose on the property to satisfy the unpaid housing debt of P38,789.58. [19] On October
19, 1994 the Vegas requested the SSS in writing for the exact computation of the indebtedness and for
assurance that they would be entitled to the discharge of the mortgage and delivery of the proper
subrogation documents upon payment. They also sent a P37,521.95 manager's check that the SSS
refused to accept.[20]

On November 8, 1994 the Vegas filed an action for consignation, damages, and injunction with
application for preliminary injunction and temporary restraining order against the SSS, the PDC, the
sheriff of RTC Branch 19, and the Register of Deeds before the RTC of Las Piñas in Civil Case 94-
2943. Still, while the case was pending, on December 27, 1994 the SSS released the mortgage to the
PDC.[21] And on August 22, 1996 the Register of Deeds issued TCT T-56657 to the PDC.[22] A writ of
possession subsequently evicted the Vegas from the property.

On May 8, 2002 the RTC decided Civil Case 94-2943 in favor of the Vegas. It ruled that the SSS was
barred from rejecting the Vegas' final payment of P37,521.95 and denying their assumption of Reyes'
debt, given the SSS' previous acceptance of payments directly from them. The Vegas were subrogated
to the rights of Reyes and substituted her in the SSS housing loan and mortgage contract. That the
Vegas had the receipts show that they were the ones who made those payments. The RTC ordered the
PDC to deliver to the Vegas the certificate of title covering the property. It also held the SSS and PDC
solidarily liable to the Vegas for P300,000.00 in moral damages, P30,000.00 in exemplary damages,
and P50,000.00 in attorney's fees and for costs of the suit. [23]

The SSS appealed to the Court of Appeals (CA) in CA G.R. CV 77582. On August 30, 2007 the latter
court reversed the RTC decision[24]for the reasons that the Vegas were unable to produce the deed of
assignment of the property in their favor and that such assignment was not valid as to PDC. Their
motion for reconsideration having been denied, the Vegas filed this petition for review
on certiorari under Rule 45.[25]

The Issues Presented

The issues in this case are:

1. Whether or not the Vegas presented adequate proof of Reyes' sale of the subject property to
them;

2. In the affirmative, whether or not Reyes validly sold her SSS-mortgaged property to the Vegas;
and

3. In the affirmative, whether or not the sheriff validly sold the same at public auction to satisfy
Reyes' debt to PDC.
The Rulings of the Court

One. The CA ruled that the Vegas were unable to prove that Reyes assigned the subject property to
them, given that they failed to present the deed of assignment in their favor upon a claim that they lost
it.[26] But the rule requiring the presentation of the original of that deed of assignment is not
absolute. Secondary evidence of the contents of the original can be adduced, as in this case, when the
original has been lost without bad faith on the part of the party offering it. [27]

Here, not only did the Vegas prove the loss of the deed of assignment in their favor and what the same
contained, they offered strong corroboration of the fact of Reyes' sale of the property to them. They
took possession of the house and lot after they bought it. Indeed, they lived on it and held it in the
concept of an owner for 13 years before PDC came into the picture. They also paid all the amortizations
to the SSS with Antonio Vega's personal check, even those that Reyes promised to settle but did
not. And when the SSS wanted to foreclose the property, the Vegas sent a manager's check to it for the
balance of the loan. Neither Reyes nor any of her relatives came forward to claim the property. The
Vegas amply proved the sale to them.

Two. Reyes acquired the property in this case through a loan from the SSS in whose favor she executed
a mortgage as collateral for the loan. Although the loan was still unpaid, she assigned the property to
the Vegas without notice to or the consent of the SSS. The Vegas continued to pay the amortizations
apparently in Reyes' name. Meantime, Reyes apparently got a cash loan from Apex, which assigned the
credit to PDC. This loan was not secured by a mortgage on the property but PDC succeeded in getting
a money judgment against Reyes and had it executed on the property. Such property was still in Reyes'
name but, as pointed out above, the latter had disposed of it in favor of the Vegas more than 10 years
before PDC executed on it.

The question is: was Reyes' disposal of the property in favor of the Vegas valid given a provision in the
mortgage agreement that she could not do so without the written consent of the SSS?

The CA ruled that, under Article 1237[28] of the Civil Code, the Vegas who paid the SSS amortizations
except the last on behalf of Reyes, without the latter's knowledge or against her consent, cannot compel
the SSS to subrogate them in her rights arising from the mortgage. Further, said the CA, the Vegas'
claim of subrogation was invalid because it was done without the knowledge and consent of the SSS as
required under the mortgage agreement.[29]

But Article 1237 cannot apply in this case since Reyes consented to the transfer of ownership of the
mortgaged property to the Vegas. Reyes also agreed for the Vegas to assume the mortgage and pay the
balance of her obligation to SSS. Of course, paragraph 4 of the mortgage contract covering the property
required Reyes to secure SSS' consent before selling the property. But, although such a stipulation is
valid and binding, in the sense that the SSS cannot be compelled while the loan was unpaid to recognize
the sale, it cannot be interpreted as absolutely forbidding her, as owner of the mortgaged property, from
selling the same while her loan remained unpaid. Such stipulation contravenes public policy, being an
undue impediment or interference on the transmission of property.[30]

Besides, when a mortgagor sells the mortgaged property to a third person, the creditor may demand
from such third person the payment of the principal obligation. The reason for this is that the mortgage
credit is a real right, which follows the property wherever it goes, even if its ownership changes. Article
2129[31] of the Civil Code gives the mortgagee, here the SSS, the option of collecting from the third
person in possession of the mortgaged property in the concept of owner.[32] More, the mortgagor-
owner's sale of the property does not affect the right of the registered mortgagee to foreclose on the
same even if its ownership had been transferred to another person. The latter is bound by the registered
mortgage on the title he acquired.
After the mortgage debt to SSS had been paid, however, the latter had no further justification for
withholding the release of the collateral and the registered title to the party to whom Reyes had
transferred her right as owner. Under the circumstance, the Vegas had the right to sue for the
conveyance to them of that title, having been validly subrogated to Reyes' rights.

Three. The next question is: was Reyes' sale of the property to the Vegas binding on PDC which tried
to enforce the judgment credit in its favor on the property that was then still mortgaged to the SSS?

The CA ruled that Reyes' assignment of the property to the Vegas did not bind PDC, which had a
judgment credit against Reyes, since such assignment neither appeared in a public document nor was
registered with the register of deeds as Article 1625 of the Civil Code required. Article 1625 reads:

Art. 1625. An assignment of a credit, right or action shall produce no effect as against
third persons, unless it appears in a public instrument, or the instrument is recorded in
the Registry of Property in case the assignment involves real property. (1526)

But Article 1625 referred to assignment of credits and other incorporeal rights. Reyes did not assign
any credit or incorporeal right to the Vegas. She sold the Vegas her house and lot. They became owner
of the property from the time she executed the deed of assignment covering the same in their
favor. PDC had a judgment for money against Reyes only. A court's power to enforce its judgment
applies only to the properties that are indisputably owned by the judgment obligor. [33] Here, the
property had long ceased to belong to Reyes when she sold it to the Vegas in 1981.

The PDC cannot take comfort in the fact that the property remained in Reyes' name when it bought the
same at the sheriff sale. The PDC cannot assert that it was a buyer in good faith since it had notice of
the Vegas' claim on the property prior to such sale.

Under the circumstances, the PDC must reconvey the subject property to the Vegas or, if this is no
longer possible, pay them its current market value as the trial court may determine with interest of 12
percent per annum from the date of the determination of such value until it is fully paid. Further,
considering the distress to which the Vegas were subjected after the unlawful levy on their property,
aggravated by their subsequent ouster from it through a writ of possession secured by PDC, the RTC
was correct in awarding the Vegas moral damages of P300,000.00, exemplary damages of P30,000.00
and attorney's fees of P50,000.00 plus costs of the suit. But these are to be borne solely by PDC
considering that the SSS had nothing to do with the sheriff's levy on the property. It released the title
to the PDC simply because it had a sheriff's sale in its favor.

The PDC is, however, entitled to reimbursement from the Vegas of the sum of P37,820.15 that it paid
to the SSS for the release of the mortgaged title.

WHEREFORE, the Court GRANTS the petition, REVERSES the assailed decision of the Court of
Appeals in CA-G.R. CV 77582 dated August 30, 2007, and in its place DIRECTS respondent Pilar
Development Corporation:

1. To convey to petitioner spouses Antonio and Leticia Vega the title to and possession of the property
subject of this case, covered by Transfer Certificate of Title 56657 of the Register of Deeds of Las Piñas
City, for the issuance of a new title in their names; and
2. To pay the same petitioner spouses moral damages of P300,000.00, exemplary damages of
P30,000.00, and attorney's fees of P50,000.00.

On the other hand, the Court DIRECTS petitioner spouses to reimburse respondent Pilar
Development Corp. the sum of P37,820.15, representing what it paid the respondent SSS for the release
of the mortgaged certificate of title.

SO ORDERED.

Carpio, Peralta, Bersamin,* and Perez,** JJ., concur.

------------------------------------------------------------------------------------------------------------------------

5. 160 Phil. 833

FIRST DIVISION

[ G.R. No. L-29130, August 08, 1975 ]

DEVELOPMENT BANK OF THE PHILIPPINES, PLAINTIFF AND APPELLEE, VS. DIONISIO

MIRANG, DEFENDANT AND APPELLANT.

DECISION

MAKALINTAL, J.:
This appeal was originally taken to the Court of Appeals, which certified it here because it involves
purely legal questions.

The appealed decision was rendered by the Court of First Instance of Davao on May 14, 1963 in its Civil
Case No. 3762, and modified by its Order of July 1, 1963. It directed the defendant, now appellant, to
pay the plaintiff Development Bank of the Philippines, now appellee, the sum of P16,013.13 plus 6%
interest per annum from July 30, 1957[1] up to the date of payment, but deducting there from the sum
of P360.00 representing the value of an engine, referred to in paragraph 11 of the stipulation of
facts. The defendant was likewise ordered to pay P500.00 as attorney's fees, plus the cots of the suit.

From the stipulation submitted to the trial court it appears that on September 7, 1950 the appellant
obtained approval of a loan of P14,000.00 from the Rehabilitation Finance Corporation,[2] secured by
a first mortgage on defendant's homestead, for the following purposes:

P1,000 for purchase of work animals and farm implements;

P1,500 for construction of farmhouse and laborer's quarters; and
P11,500for development and maintenance of 18.5 hectares of abaca land.

The loan was released gradually to the appellant up to a total of P13,000.00. Thereafter the appellee
refused to make any further releases because the plantation which was being financed was attacked by
mosaic disease, which destroyed the abaca plants. The appellant on his part, failed to pay the yearly
amortizations; so in accordance with the terms of the promissory notes he had signed and the mortgage
contract itself, the provincial sheriff of Davao, upon request of the appellee; foreclosed the mortgage
extrajudicially under the provisions of Act 3135, as amended, and sold the mortgaged property at public
auction on July 30, 1957. By that time the appellant's indebtedness, including interest, had reached
P19,714.35, besides the expenses of the auction sale and registration fees, which amounted to
P101.00. The appellee, as the highest bidder for P2,010.00, acquired ownership of the mortgaged
property. The appellant was duly advised of the sale, with the information that the same was subject to
his right of redemption within one year from July 30, 1957. This right he had not exercised when the
complaint was filed by the appellee on May 29, 1962.

In his brief the appellant assigns five (5) errors, which may be condensed into the following issues:

(1) Whether or not the creditor Development Bank of the Philippines has a right to recover the balance
of the indebtedness after the mortgaged property was sold for less than the amount thereof under
extrajudicial foreclosure pursuant to Act 3135, as amended;

(2) Whether or not the debtor, appellant Mirang, may be exempted from paying the loan on the ground
that it had been granted to him for the purpose of developing his homestead by planting it to abaca, and
that said abaca was destroyed by mosaic disease; or, failing that, whether or not his obligation may be
reduced by this Court; and

(3) Whether or not the mortgage debtor who wishes to repurchase his homestead should pay therefor
only the price paid by the purchaser at the auction sale, or the total obligation incurred by him and still
outstanding.

On the first issue, the appellant contends that because the mortgage was extrajudically foreclosed and
sold at less than the mortgage debt under Act 3135 the appellee is not entitled to recover the deficiency
because neither this Act, as amended, nor the mortgage contract itself, contains any provision giving
such right to the mortgagee.

The same question has been settled by this Court in the case of Philippine Bank of Commerce vs. Tomas
de Vera,[3] where We held:

"The sole issue to be resolved in this case is whether the trial Court acted correctly in holding appellee
Bank entitled to recover from appellant the sum of P99,033.20 as deficiency arising after the
extrajudicial foreclosure, under Act No. 3135, as amended, of the mortgaged properties in question. It
is urged, on appellant's part, that since Act No. 3135, as amended, is silent as to the mortgagee's right
to recover deficiency arising after an extrajudicial foreclosure sale of mortgage, he (Mortgagee) may not
recover the same.

"A reading of the provisions of Act No. 3135, as amended, (re extrajudicial foreclosure) discloses
nothing, it is true, as to mortgagee's right to recover such deficiency. But neither do we find any
provision there under which expressly or impliedly prohibits such recovery.

"Article 2131 of the new Civil Code, on the contrary, expressly provides that 'The form, extent and
consequences of a mortgage, both as to its constitution, modification and extinguishment, and as to
other matters not included in this Chapter, shall be governed by the provisions of the Mortgage Law
and of the Land Registration Law,' Under the Mortgage Law, which is still in force, the mortgagee has
the right to claim for the deficiency resulting from the price obtained in the outstanding obligation at
the time of the foreclosure proceedings. (See Soriano vs. Enriquez, 24 Phil. 806; Banco Nacional vs.
Barreto, 53 Phil. 995) Under the Rules of Court (Section 6, Rule 70*), 'Upon the sale of property, under
an order for a sale to satisfy a mortgage or other incumbrance thereon, if there be a balance due to the
plaintiff after applying the proceeds of the sale, the Court, upon motion, should render a judgment
against the defendant for any such balance for which, by the record of the case, he may be personally
liable to the plaintiff, x x x' It is true that this refers to a judicial foreclosure, but the underlying principle
is the same, that the mortgage is but a security and not a satisfaction of indebtedness."

Appellant invites the attention of this Court to the new provisions of the Civil Code on pledge,
particularly Article 2115, which provides:

"The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of
the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. x x
x .If the price of the sale is less, neither shall the creditor be entitled to the deficiency, notwithstanding
any stipulation to the contrary."

as well as to the fact that in chattel mortgage under Art. 1484, paragraph 3, the creditor shall have no
further action to recover any unpaid balance if he has chosen to foreclose the chattel mortgage. These
provisions, far from supporting the appellant's stand, militate against it, because they show that when
the Legislature intends to bar or occlude a creditor from suing for any deficiency after foreclosing and
selling the security given for the obligation, it makes express provision to that effect. In the same case
of Philippine Bank of Commerce vs. De vera, supra, this Court said apropos:

"It is then clear that in the absence of a similar provision in Act 3135, as amended, it cannot be
concluded that the creditor loses his right given him under the Mortgage Law and recognized in the
Rules of Court, to take action for the recovery of any unpaid balance on the principal obligation, simply
because he has chosen to foreclose his mortgage extrajudicially, pursuant to a special power of attorney
given him by the mortgagor in the mortgage contract. As stated by this Court in Medina vs. Philippine
National Bank (56 Phil. 651), a case analogous to the one at bar, the step taken by the mortgagee-bank
in resorting to extra-judicial foreclosure under Act No. 3135, was 'merely to find a proceeding for the
sale, and its action cannot be taken to mean a waiver of its right to demand the payment of the whole
debt." '

On the second issue the appellant asks that if he cannot be completely absolved he should at least be
given a reduction of his indebtedness because of his inability to realize any income from the abaca he
planted. His predicament may evoke sympathy, but it does not justify a disregard of the terms of the
contract he entered into. His obligation thereunder is neither conditional nor aleatory; its terms are
clear and subject to no exception.

The third issue has likewise been resolved by this Court in a similar case. [4] The issue posed there
involved the price at which the mortgagor should redeem his property after the same had been sold at
public auction whether the amount for which the property was sold, as contended by the mortgagor, or
the balance of the loan obtained from the banking institution, as contended by the mortgagee
RFC. Cited in that case was Section 31 of Com. Act No. 459, which was the special law applicable
exclusively to properties mortgaged with the RFC, as follows:

"The mortgagor or debtor to the Agricultural and Industrial Bank*, whose real property has been sold
at public auction, judicially or extra-judicially, for the full or partial payment of an obligation to said
Bank, shall within one year from the date of the auction sale, have the right to redeem the real property
by paying to the Bank all the amount he owed the latter on the date of the sale, with interest on the total
indebtedness at the rate agreed upon in the obligation from said date, unless the bidder has taken
material possession of the property or unless this has been delivered to him, in which case the proceeds
of the property shall compensate interest. x x x"

The same provision applies in the instant case. The unavoidable conclusion is that the appellant, in
redeeming the foreclosed property, should pay the entire amount he owned to the Bank on the date of
the sale, with interest thereon at the rate agreed upon.

WHEREFORE, the decision appealed from is affirmed, with costs.

Teehankee, Esguerra, and Muñoz Palma, JJ., concur.

Castro, J., concurs in a separate opinion.

Makasiar, J., dissents in a separate opinion.

------------------------------------------------------------------------------------------------------------------------
6. 191 Phil. 479

DE CASTRO,* J.:
This is a petition for review by way of certiorari of the decision[1] of the Court of Appeals in CA-G.R.
No. 39760-R entitled "Maxima Castro, plaintiff-appellee, versus Severino Valencia, et al., defendants;
Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes, defendants-appellants," which
affirmed in toto the decision of the Court of First Instance of Manila in favor of plaintiff-appellee, the
herein private respondent Maxima Castro.
On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia, went to the
Rural Bank of Caloocan to apply for an industrial loan. It was Severino Valencia who arranged
everything about the loan with the bank and who supplied to the latter the personal data required for
Castro's loan application. On December 11, 1959, after the bank approved the loan for the amount of
P3,000.00, Castro, accompanied by the Valencia spouses, signed a promissory note corresponding to
her loan in favor of the bank.
On the same day, December 11, 1959, the Valencia spouses obtained from the bank an equal amount of
loan for P3,000.00. They signed a promissory note (Exhibit "2") corresponding to their loan in favor
of the bank and had Castro affixed thereon her signature as co-maker.
The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house and lot of 150
square meters, covered by Transfer Certificate of Title No. 7419 of the Office of the Register of Deeds of
Manila.
On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff Basilio Magsambol, sent
a notice of sheriff's sale addressed to Castro, announcing that her property covered by T.C.T. No. 7419
would be sold at public auction on March 10, 1961 to satisfy the obligation covering the two promissory
notes plus interest and attorney's fees.
Upon request by Castro and the Valencias and with conformity of the bank, the auction sale that was
scheduled for March 10, 1961 was postponed for April 10, 1961. But when April 10, 1961 was
subsequently declared a special holiday, the sheriff of Manila sold the property covered by T.C.T. No.
7419 at a public auction sale that was held on April 11, 1961, which was the next succeeding business
day following the special holiday.
Castro alleged that it was only when she received the letter from the Acting Deputy Sheriff on February
13, 1961, when she learned for the first time that the mortgage contract (Exhibit "6") which was an
encumbrance on her property was for P6,000.00 and not for P3,000.00 and that she was made to sign
as co-maker of the promissory note (Exhibit "2") without her being informed of this.
On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against petitioners Bank
and Desiderio, the Spouses Valencia, Basilio Magsambol and Arsenio Reyes as defendants in Civil Case
No. 46698 before the Court of First Instance of Manila upon the charge, amongst others, that thru
mistake on her part or fraud on the part of Valencias she was induced to sign as co-maker of a
promissory note (Exhibit "2") and to constitute a mortgage on her house and lot to secure the
questioned note. At the time of filing her complaint, respondent Castro deposited the amount of
P3,383.00 with the court a quo in full payment of her personal loan plus interest.
In her amended complaint, Castro prayed, amongst other, for the annulment as far as she is concerned
of the promissory note (Exhibit "2") and mortgage contract (Exhibit "6") insofar as it exceeds
P3,000.00; for the discharge of her personal obligation with the bank by reason of a deposit of
P3,383.00 with the court a quo upon the filing of her complaint; for the annulment of the foreclosure
sale of her property covered by T.C.T. No. 7419 in favor of Arsenio Reyes; and for the award in her favor
of attorney's fees, damages and cost.
In their answers, petitioners interposed counterclaims and prayed for the dismissal of said complaint,
with damages, attorney's fees and costs.[2]
The pertinent facts arrived from the stipulation of facts entered into by the parties as stated by
respondent Court of Appeals are as follows:
"Spawning the present litigation are the facts contained in the following stipulation of facts submitted
by the parties themselves:
"1. That the capacity and addresses of all the parties in this case are admitted;
"2. That the plaintiff was the registered owner of a residential house and lot located at Nos. 1268-
1270 Carola Street, Sampaloc, Manila, containing an area of one hundred fifty (150) square meters,
more or less, covered by T.C.T. No. 7419 of the Office of the Register of Deeds of Manila;
"3. That the signatures of the plaintiff appearing on the following documents are genuine:
'a) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 7, 1959 in the
amount of P3,000.00 attached as Annex A of this partial stipulation of facts;
'b) Promissory Note dated December 11, 1959 signed by the plaintiff in favor of the Rural Bank
of Caloocan for the amount of P3,000.00as per Annex B of this partial stipulation of facts;
'c) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 11, 1959, signed
only by the defendants, SeverinoValencia and Catalina Valencia, attached as Annex C, of this partial
stipulation of facts;
'd) Promissory note in favor of the Rural Bank of Caloocan, dated December 11, 1959 for the amount
of P3,000.00, signed by the spouses Severino Valencia and Catalina Valencia as borrowers, and
plaintiff Maxima Castro, as a co-maker, attached as Annex D of this partial stipulation of facts;
'e) Real estate mortgage dated December 11, 1959 executed by plaintiff Maxima Castro, in favor of the
Rural Bank of Caloocan, to secure the obligation of P6,000.00 attached herein as Annex E of this partial
stipulation of facts;
"All the parties herein expressly reserved their right to present any evidence they may desire on the
circumstances regarding the execution of the above-mentioned documents.
"4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff, Basilio Magsambol, sent a notice of
sheriff's sale, addressed to the plaintiff, dated February 13, 1961, announcing that plaintiff's property
covered by T.C.T. No. 7419 of the Register of Deeds of the City of Manila, would be sold at public auction
on March 10, 1961 to satisfy the total obligation of P5,728.50, plus interest, attorney's fees, etc., as
evidenced by the Notice of Sheriff's Sale and Notice of Extrajudicial Auction Sale of the Mortgaged
property, attached herewith as Annexes F and F-1, respectively, of this stipulation of facts;
"5. That upon the request of the plaintiff and defendants-spouses Severino Valencia and Catalina
Valencia, and with the conformity of the Rural Bank of Caloocan, the Sheriff of Manila postponed the
auction sale scheduled for March 10, 1961 for thirty (30) days and the sheriff re-set the auction sale for
April 10, 1961;
"6. That April 10, 1961 was declared a special public holiday;
"(Note: No. 7 is omitted upon agreement of the parties.)
"8. That on April 11, 1961, the Sheriff of Manila, sold at public auction plaintiff's property covered by
T.C.T. No. 7419 and defendant, Arsenio Reyes, was the highest bidder and the corresponding certificate
of sale was issued to him as per Annex G of this partial stipulation of facts;
"9. That on April 16, 1962, the defendant Arsenio Reyes, executed an Affidavit of Consolidation of
Ownership, a copy of which is hereto attached as Annex H of this partial stipulation of facts;
"10. That on May 9, 1962, the Rural Bank of Caloocan Incorporated executed the final deed of sale in
favor of the defendant, ArsenioReyes, in the amount of P7,000.00, a copy of which is attached as Annex
I of this partial stipulation of facts;
"11. That the Register of Deeds of the City of Manila issued the Transfer Certificate of Title No. 67297
in favor of the defendant, Arsenio Reyes, in lieu of Transfer Certificate of Title No. 7419 which was in
the name of plaintiff, Maxima Castro, which was cancelled;
"12. That after defendant, Arsenio Reyes, had consolidated his title to the property as per T.C.T. No.
67299, plaintiff filed a notice of lis pendens with the Register of Deeds of Manila and the same was
annotated in the back of T.C.T. No. 67299 as per Annex J of this partial stipulation of facts; and
"13. That the parties hereby reserved their rights to present additional evidence on matters not covered
by this partial stipulation of facts.
"WHEREFORE, it is respectfully prayed that the foregoing partial stipulation of facts be approved and
admitted by this Honorable Court."
As for the evidence presented during the trial, We quote from the decision of the Court of Appeals the
statement thereof, as follows:
"In addition to the foregoing stipulation of facts, plaintiff claims she is a 70-year old widow who cannot
read and write the English language; that she can speak the Pampango dialect only; that she has only
finished second grade (t.s.n., p. 4, December 11, 1964); that in December 1959, she needed money in
the amount of P3,000.00 to invest in the business of the defendant spouses Valencia, who accompanied
her to the defendant bank for the purpose of securing a loan of P3,000.00; that while at the defendant
bank, an employee handed to her several forms already prepared which she was asked to sign on the
places indicated, with no one explaining to her the nature and contents of the documents; that she did
not even receive a copy thereof; that she was given a check in the amount of P2,882.85 which she
delivered to defendant spouses; that sometime in February 1961, she received a letter from the Acting
Deputy Sheriff of Manila, regarding the extrajudicial foreclosure sale of her property; that it was then
when she learned for the first time that the mortgage indebtedness secured by the mortgage on her
property was P6,000.00 and not P3,000.00; that upon investigation of her lawyer, it was found that
the papers she was made to sign were:
'(a) Application for a loan of P3,000.00 dated December 7, 1959 (Exh. B-1 and Exh. I);
'(b) Promissory note dated December 11, 1959 for the said loan of P3,000.00 (Exh. B-2);
'(c) Promissory note dated December 11, 1959 for P3,000.00 with the defendants Valencia spouses
as borrowers and appellee as co-maker (Exh. B-4 or Exh. 2).
"The auction sale set for March 10, 1961 was postponed to April 10, 1961 upon the request of defendant
spouses Valencia who needed more time within which to pay their loan of P3,000.00 to the defendant
bank; plaintiff claims that when she filed the complaint she deposited with the Clerk of Court the sum
of P3,383.00 in full payment of her loan of P3,000.00 with the defendant bank, plus interest at the rate
of 12% per annum up to April 3, 1961 (Exh. D).
"As additional evidence for the defendant bank, its manager declared that sometime in December, 1959,
plaintiff was brought to the Office of the Bank by an employee (t.s.n., p. 4, January 27, 1966). She went
there to inquire if she could get a loan from the bank. He claims he asked the amount and the purpose
of the loan and the security to be given and plaintiff said she would need P3,000.00 to be invested in a
drugstore in which she was a partner (t.s.n., p. 8). She offered as security for the loan her lot and house
at Carola St., Sampaloc, Manila, which was promptly investigated by the defendant bank's
inspector. Then a few days later, plaintiff came back to the bank with the wife of defendant Valencia. A
date was allegedly set for plaintiff and the defendant spouses for the processing of their application, but
on the day fixed, plaintiff came without the defendant spouses. She signed the application and the other
papers pertinent to the loan after she was interviewed by the manager of the defendant. After the
application of plaintiff was made, defendant spouses had their application for a loan also prepared and
signed (see Exh. 13). In his interview of plaintiff and defendant spouses, the manager of the bank was
able to gather that plaintiff was in joint venture with the defendant spouses wherein she agreed to invest
P3,000.00 as additional capital in the laboratory owned by said spouses (t.s.n., pp. 16-17)."[3]
The Court of Appeals, upon evaluation of the evidence, affirmed in toto the decision of the Court of First
Instance of Manila, the dispositive portion of which reads:
"FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment and:
"(1) Declares that the promissory note, Exhibit '2', is invalid as against plaintiff herein;
"(2) Declares that the contract of mortgage, Exhibit '6', is null and void, in so far as the amount thereof
exceeds the sum of P3,000.00 representing the principal obligation of plaintiff, plus the
interest thereon at 12% per annum;
"(3) Annuls the extrajudicial foreclosure sale at public auction of the mortgaged property held on
April 11, 1961, as well as all the process and actuations made in pursuance of or in implementation
thereto;
"(4) Holds that the total unpaid obligation of plaintiff to defendant Rural Bank of Caloocan, Inc., is
only the amount of P3,000.00, plus the interest thereon at 12% per annum, as of April 3, 1961, and
orders that plaintiff's deposit of P3,383.00 in the Office of the Clerk of Court be applied to the payment
thereof;
"(5) Orders defendant Rural Bank of Caloocan, Inc. to return to defendant Arsenio Reyes the
purchase price the latter paid for the mortgaged property at the public auction, as well as reimburse
him of all the expenses he has incurred relative to the sale thereof;
"(6) Orders defendants spouses Severino D. Valencia and Catalina Valencia to pay defendant Rural
Bank of Caloocan, Inc. the amount of P3,000.00 plus the corresponding 12% interest thereon per
annum from December 11, 1960 until fully paid; and
"Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and
spouses Severino D. Valencia and Catalina Valencia to pay plaintiff, jointly and severally, the sum of
P600.00 by way of attorney's fees, as well as costs.
"In view of the conclusion that the court has thus reached, the counterclaims of defendant Rural Bank
of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes are hereby dismissed, as a corollary.
"The Court further denies the motion of defendant Arsenio Reyes for an Order requiring Maxima Castro
to deposit rentals filed on November 16, 1963, resolution of which was held in abeyance pending final
determination of the case on the merits, also as a consequence of the conclusion aforesaid."[4]
Petitioners Bank and Jose Desiderio moved for the reconsideration[5] of respondent court's
decision. The motion having been denied,[6]they now come before this Court in the instant petition,
with the following Assignment of Errors, to wit:
I
"THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL ANNULMENT OF THE
PROMISSORY NOTE, EXHIBIT 2, AND THE MORTGAGE, EXHIBIT 6, INSOFAR AS THEY AFFECT
RESPONDENT MAXIMA CASTRO VIS-A-VIS PETITIONER BANK DESPITE THE TOTAL ABSENCE
OF EITHER ALLEGATION IN THE COMPLAINT OR COMPETENT PROOF IN THE EVIDENCE OF
ANY FRAUD OR OTHER UNLAWFUL CONDUCT COMMITTED OR PARTICIPATED IN BY
PETITIONERS IN PROCURING THE EXECUTION OF SAID CONTRACTS FROM RESPONDENT
CASTRO.
II
"THE COURT OF APPEALS ERRED IN IMPUTING UPON AND CONSIDERING PREJUDICIALLY
AGAINST PETITIONERS, AS BASIS FOR THE PARTIAL ANNULMENT OF THE CONTRACTS
AFORESAID ITS FINDING OF FRAUD PERPETRATED BY THE VALENCIA SPOUSES UPON
RESPONDENT CASTRO IN UTTER VIOLATION OF THE RES INTER ALIOS ACTA RULE.
III
"THE COURT OF APPEALS ERRED IN NOT HOLDING THAT, UNDER THE FACTS FOUND BY IT,
RESPONDENT CASTRO IS UNDER ESTOPPEL TO IMPUGN THE REGULARITY AND VALIDITY OF
HER QUESTIONED TRANSACTION WITH PETITIONER BANK.
IV
"THE COURT OF APPEALS ERRED IN NOT FINDING THAT, BETWEEN PETITIONERS AND
RESPONDENT CASTRO, THE LATTER SHOULD SUFFER THE CONSEQUENCES OF THE FRAUD
PERPETRATED BY THE VALENCIA SPOUSES, INASMUCH AS IT WAS THRU RESPONDENT
CASTRO'S NEGLIGENCE OR ACQUIESCENSE, IF NOT ACTUAL CONNIVANCE, THAT THE
PERPETRATION OF SAID FRAUD WAS MADE POSSIBLE.
V
"THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF THE DEPOSIT BY
RESPONDENT CASTRO OF P3,383.00 WITH THE COURT BELOW AS A TENDER AND
CONSIGNATION OF PAYMENT SUFFICIENT TO DISCHARGE SAID RESPONDENT FROM HER
OBLIGATION WITH PETITIONER BANK.
VI
"THE COURT OF APPEALS ERRED IN NOT DECLARING AS VALID AND BINDING UPON
RESPONDENT CASTRO THE HOLDING OF THE SALE ON FORECLOSURE ON THE BUSINESS
DAY NEXT FOLLOWING THE ORIGINALLY SCHEDULED DATE THEREFOR WHICH WAS
DECLARED A HOLIDAY WITHOUT NECESSITY OF FURTHER NOTICE THEREOF."
The issue raised in the first three (3) assignment of errors is whether or not respondent court correctly
affirmed the lower court in declaring the promissory note (Exhibit 2) invalid insofar as they affect
respondent Castro vis-a-vis petitioner bank, and the mortgage contract (Exhibit 6) valid up to the
amount of P3,000.00 only.
Respondent court declared that the consent of Castro to the promissory note (Exhibit 2) where she
signed as co-maker with the Valenciasas principal borrowers and her acquiescence to the mortgage
contract (Exhibit 6) where she encumbered her property to secure the amount of P6,000.00 was
obtained by fraud perpetrated on her by the Valencias who had abused her confidence, taking
advantage of her old age and ignorance of her financial need. Respondent court added that "the
mandate of fair play decrees that she should be relieved of her obligation under the contract" pursuant
to Articles 24[7] and 1332[8] of the Civil Code.
The decision in effect relieved Castro of any liability to the promissory note (Exhibit 2) and the mortgage
contract (Exhibit 6) was deemed valid up to the amount of P3,000.00 only which was equivalent to her
personal loan to the bank.
Petitioners argued that since the Valencias were solely declared in the decision to be responsible for the
fraud against Castro, in the light of the res inter alios acta rule, a finding of fraud perpetrated by the
spouses against Castro cannot be taken to operate prejudicially against the bank. Petitioners concluded
that respondent court erred in not giving effect to the promissory note (Exhibit 2) insofar as they affect
Castro and the bank and in declaring that the mortgage contract (Exhibit 6) was valid only to the extent
of Castro's personal loan of P3,000.00.
The records of the case reveal that respondent court's findings of fraud against the Valencias is well
supported by evidence. Moreover, the findings of fact by respondent court in the matter is deemed
final.[9] The decision declared the Valencias solely responsible for the defraudation of
Castro. Petitioners' contention that the decision was silent regarding the participation of the bank in
the fraud is, therefore, correct.
We cannot agree with the contention of petitioners that the bank was defrauded by the Valencias. For
one, no claim was made on this in the lower court. For another, petitioners did not submit proof to
support its contention.
At any rate, We observe that while the Valencias defrauded Castro by making her sign the promissory
note (Exhibit 2) and the mortgage contract (Exhibit 6), they also misrepresented to the bank Castro's
personal qualifications in order to secure its consent to the loan. This must be the reason which
prompted the bank to contend that it was defrauded by the Valencias. But to reiterate, We cannot agree
with the contention for reasons above-mentioned. However, if the contention deserves any
consideration at all, it is in indicating the admission of petitioners that the bank committed mistake in
giving its consent to the contracts.
Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by
the Valencias, both Castro and the bank committed mistake in giving their consents to the contracts. In
other words, substantial mistake vitiated their consents given. For if Castro had been aware of what
she signed and the bank of the true qualifications of the loan applicants, it is evident that they would
not have given their consents to the contracts.
Pursuant to Article 1342 of the Civil Code which provides:
"Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual."
We cannot declare the promissory note (Exhibit 2) valid between the bank and Castro and the mortgage
contract (Exhibit 6) binding on Castro beyond the amount of P3,000.00, for while the contracts may
not be invalidated insofar as they affect the bank and Castro on the ground of fraud because the bank
was not a participant thereto, such may however be invalidated on the ground of substantial mistake
mutually committed by them as a consequence of the fraud and misrepresentation inflicted by
the Valencias. Thus, in the case of Hill vs. Veloso,[10] this Court declared that a contract may be
annulled on the ground of vitiated consent if deceit by a third person, even without connivance or
complicity with one of the contracting parties, resulted in mutual error on the part of the parties to the
contract.
Petitioners argued that the amended complaint fails to contain even a general averment of
fraud or mistake, and its mention in the prayer is definitely not a substantial compliance with the
requirement of Section 5, Rule 8 of the Rules of Court. The records of the case, however, will show that
the amended complaint contained a particular averment of fraud against the Valencias in full
compliance with the provision of the Rules of Court. Although, the amended complaint made no
mention of mistake being incurred in by the bank and Castro, such mention is not essential in order
that the promissory note (Exhibit 2) may be declared of no binding effect between them and the
mortgage (Exhibit 6) valid up to the amount of P3,000.00 only. The reason is that the mistake they
mutually suffered was a mere consequence of the fraud perpetrated by the Valencias against
them. Thus, the fraud particularly averred in the complaint, having been proven, is deemed sufficient
basis for the declaration of the promissory note (Exhibit 2) invalid insofar as it affects Castro vis-a-
vis the bank, and the mortgage contract (Exhibit 6) valid only up to the amount of P3,000.00.
The second issue raised in the fourth assignment of errors is who between Castro and the bank should
suffer the consequences of the fraud perpetrated by the Valencias.
In attributing to Castro all consequences of the loss, petitioners argue that it was her negligence or
acquiescence if not her actual connivance that made the fraud possible.
Petitioners' argument utterly disregards the findings of respondent Court of Appeals wherein
petitioners' negligence in the contracts has been aptly demonstrated, to wit:
"A witness for the defendant bank, Rodolfo Desiderio claims he had subjected the plaintiff-appellee to
several interviews. If this were true why is it that her age was placed at 61 instead of 70; why was she
described in the application (Exh. B-1-9) as drug manufacturer when in fact she was not; why was it
placed in the application that she has an income of P20,000.00 when according to plaintiff-appellee,
she has not even given such kind of information - the true fact being that she was being paid P1.20
per picul of the sugarcane production in her hacienda and 500 cavans on the palay production."[11]
From the foregoing, it is evident that the bank was as much guilty, as Castro was, of negligence in giving
its consent to the contracts. It apparently relied on representations made by the Valencia spouses when
it should have directly obtained the needed data from Castro who was the acknowledged owner of
the property offered as collateral. Moreover, considering Castro's personal circumstances - her lack of
education, ignorance and old age - she cannot be considered utterly neglectful for having been
defrauded. On the contrary, it is demanded of petitioners to exercise the highest order of care and
prudence in its business dealings with the Valencias considering that it is engaged in a banking business
- a business affected with public interest. It should have ascertained Castro's awareness of what she
was signing or made her understand what obligations she was assuming, considering that she was
giving accommodation to, without any consideration from, the Valencia spouses.
Petitioners further argue that Castro's act of holding the Valencias as her agent led the bank to believe
that they were authorized to speak and bind her. She cannot now be permitted to deny the authority of
the Valencias to act as her agent for one who clothes another with apparent authority as her agent is
not permitted to deny such authority.
The authority of the Valencias was only to follow-up Castro's loan application with the bank. They were
not authorized to borrow for her. This is apparent from the fact that Castro went to the Bank to sign the
promissory note for her loan of P3,000.00. If her act had been understood by the Bank to be a grant of
an authority to the Valencias to borrow in her behalf, it should have required a special power of attorney
executed by Castro in their favor. Since the bank did not, We can rightly assume that it did not
entertain the notion, that the Valencia spouses were in any manner acting as an agent of Castro.
When the Valencias borrowed from the Bank a personal loan of P3,000.00 evidenced by a promissory
note (Exhibit 2) and mortgaged (Exhibit 6) Castro's property to secure said loan, the Valencias acted
for their own behalf. Considering however that for the loan in which the Valencias appeared as
principal borrowers, it was the property of Castro that was being mortgaged to secure said loan,
the Bank should have exercised due care and prudence by making proper inquiry if Castro's consent to
the mortgage was without any taint or defect. The possibility of her not knowing that she signed the
promissory note (Exhibit 2) as co-maker with the Valencias, and that her property was mortgaged to
secure the two loans instead of her own personal loan only, in view of her personal circumstances -
ignorance, lack of education and old age - should have placed the Bank on prudent inquiry to protect
its interest and that of the public it serves. With the recent occurrence of events that have supposedly
affected adversely our banking system, attributable to laxity in the conduct of bank business by its
officials, the need of extreme caution and prudence by said officials and employees in the discharge of
their functions cannot be over-emphasized.
Question is, likewise, raised as to the propriety of respondent court's decision which declared that
Castro's consignation in court of the amount of P3,383.00 was validly made. It is contended that the
consignation was made without prior offer or tender of payment to the Bank, and is therefore, not
valid. In holding that there is a substantial compliance with the provision of Article 1256 of the Civil
Code, respondent court considered the fact that the Bank was holding Castro liable for the sum of
P6,000.00 plus 12% interest per annum, while the amount consigned was only P3,000.00 plus 12%
interest; that at the time of consignation, the Bank had long foreclosed the mortgage extrajudicially and
the sale of the mortgage property had already been scheduled for April 10, 1961 for non-payment of the
obligation, and that despite the fact that the Bank already knew of the deposit made by Castro because
the receipt of the deposit was attached to the record of the case, said Bank had not made any claim of
such deposit, and that therefore, Castro was right in thinking that it was futile and useless for her to
make previous offer and tender of payment directly to the Bank only in the aforesaid amount of
P3,000.00 plus 12% interest. Under the foregoing circumstances, the consignation made by Castro was
valid, if not under the strict provision of the law, under the more liberal considerations of equity.
The final issue raised is the validity or invalidity of the extrajudicial foreclosure sale at public auction
of the mortgaged property that was held on April 11, 1961.
Petitioners contended that the public auction sale that was held on April 11, 1961 which was the next
business day after the scheduled date of the sale on April 10, 1961, a special public holiday, was
permissible and valid pursuant to the provisions of Section 31 of the Revised Administrative Code which
ordains:
"Pretermission of holiday. - Where the day, or the last day, for doing any act required or permitted by
law falls on a holiday, the act may be done on the next succeeding business day."
Respondent court ruled that the aforesaid sale is null and void, it not having been carried out in
accordance with Section 9 of Act No. 3135, which provides:
"Section 9. - Notice shall be given by posting notices of the sale for not less than twenty days in at least
three public places of the municipality or city where the property is situated, and if such property is
worth more than four hundred pesos, such notice shall also be published once a week for at least three
consecutive weeks in a newspaper of general circulation in the municipality or city."
We agree with respondent court. The pretermission of a holiday applies only "where the day, or the last
day for doing any act required or permitted by law falls on a holiday," or when the last day of a given
period for doing an act falls on a holiday. It does not apply to a day fixed by an office or officer of the
government for an act to be done, as distinguished from a period of time within which an act should be
done, which may be on any day within that specified period. For example, if a party is required by law
to file his answer to a complaint within fifteen (15) days from receipt of the summons and the last day
falls on a holiday, the last day is deemed moved to the next succeeding business day. But, if the court
fixes the trial of a case on a certain day but the said date is subsequently declared a public holiday, the
trial thereof is not automatically transferred to the next succeeding business day. Since April 10, 1961
was not the day or the last day set by law for the extrajudicial foreclosure sale, nor the last day of a
given period, but a date fixed by the deputy sheriff, the aforesaid sale cannot legally be made on the
next succeeding business day without the notices of the sale on that day being posted as prescribed in
Section 9, Act No. 3135.
WHEREFORE, finding no reversible error in the judgment under review, We affirm the
same in toto. No pronouncement as to cost.
SO ORDERED.
Teehankee, Acting C.J., Makasiar, Fernandez, Guerrero,and Melencio-Herrera, JJ., concur.

------------------------------------------------------------------------------------------------------------------------

7. EN BANC

G.R. No. L-8219 April 28, 1956

BENITO TAN CHAT, Plaintiff-Appellee, vs. C. N. HODGES, ET AL.,defendants;

C. N. HODGES, Defendant-Appellant.

Jose Ma. Lopez Vito, Jr. for appellee.

Gellado and Galingan for appellant.

PARAS, C. J.:

The defendant-appellant, C. N. Hodges, was the owner of three lots which he sold on July 6, 1941 to
the plaintiff-appellee, Benito Tan Chat, for P15,105. The latter paid P3,105 in cash mortgaged the lots
in favor of the appellant to secure the payment of the balance of P12,000. The appellant handed over to
the appelle a printed form of mortgage contract which the appellee more or less followed in drafting the
deed of mortgage actually executed and signed by him. In view of appellee's failure to comply with its
conditions, the appellant filed a petition with the sheriff of Iloilo City for the sale of the mortgaged lots
in accordance with the provisions of Act No. 3135 as amended. The corresponding notice was made and
the sale at public auction was set for November 23, 1953. Whereupon the appellee filed in the Court of
First Instance of Iloilo a petition for prohibition with injunction. After trial the court rendered a decision
granting the petition and ordering the defendants C. N. Hodges and the sheriff of Iloilo City to desist
from carrying out the scheduled sale. The defendant C. N. Hodges has appealed.

The main issue to be decided is whether or not the deed of mortgage contains a special power to
foreclose extra-judicially. The model printed form, Exhibit E, contains in paragraph 7 of the condition
that "this mortgage shall, after notice to the mortgagor, be considered automatically foreclosed, without
the necessity of any judicial proceedings upon the failure of the mortgagor (to comply with the
conditions therein specified)"; and, in paragraph 8, the condition that "when this mortgage is
automatically foreclosed for any of the causes or reasons enumerated in the next proceeding paragraph,
the mortgagee is hereby authorized by the mortgagor to take possession of the property herein mortgage
without the necessity of resorting to any court proceedings, or any other judicial action." These
provisions were omitted in the deed of mortgage, Exhibit D, actually executed by the appellee in favor
of the appellant, although this contains the following conditions:
3. It is also stipulated that the MORTGAGEE, in selling the property at public auction, shall follow the
procedure provided for in Act No. 3135, the MORTGAGOR in any case to be notified by the
MORTGAGEE in writing by registered mail of the sale.

4. It is further agreed and stipulated that the conditions and stipulations set forth in the preceding
paragraphs shall not be construed as depriving the MORTGAGEE of his right to institute the
corresponding judicial proceedings to foreclose this mortgage if, in the opinion of the MORTGAGEE,
his interests require such an action.

It is contended for the appellee that the elimination from Exhibit D of the conditions contained in
paragraphs 7 and 8 of Exhibit E shows a clear intention on his part to disauthorized extra-judicial
foreclosure; and that, in any event, the special power to foreclose extra-judicially referred to in Act No.
3135 should be specific and unequivocal.

Upon the other hand, it is the theory of the appellant that while the provisions contained in paragraphs
3 and 4 of the deed of mortgage, Exhibit D, do not contain direct phraseology, they nevertheless amount
to an express authority to foreclose extra-judicially.

We are inclined to rule in favor of appellant's contention. Section 1 of Act No. 3135, as amended by Act
no. 4118, provides that "when a sale is made under a special power inserted in or attached to any real
estate mortgage hereafter made as security for the payment of money or the fulfillment of any other
obligations, the provisions of the following sections shall govern as to the manner in which the sale and
redemption shall be effected, whether or not provisions for the same is made in the power." The sale
spoken of is extra-judicial. Paragraphs 3 and 4 of the deed of mortgage, Exhibit D, taken together, is
plainly an express authority for the mortgagee to foreclose extra-judicially. It is noteworthy that
paragraph 3 is to the effect that the mortgagee, in selling the property at public auction, shall follow the
procedure prescribed in Act No. 3135, the mortgagor to be notified by the mortgagee in writing by
registered mail of the date of the sale; and paragraph 4 reserves to the mortgagee the right to foreclose
judicially. If these were not intended to allow extra-judicial foreclosure, the procedure prescribed in Act
No. 3135 would not have been mentioned and the mortgagee would not have been required to notify
the mortgagor in writing by registered mail of the sale; and the right would not be reserved to the
mortgagee to institute judicial foreclosure proceedings. This reservation implies the existence of
another right, namely, the only remaining remedy of extra-judicial foreclosure. The omission in Exhibit
D of paragraphs 7 and 8 contained in the printed form, Exhibit E is of no moment since paragraphs 3
and 4 of the deed of mortgage are already sufficient.

While it has been held that a power of sale will not be recognized as contained in mortgage unless it is
given by express grant and in clear and explicit terms, and that there can be no implied power of sale
where a mortgage holds by a deed absolute in form, it is generally held that no particular formality is
required in the creation of the power of sale. Any words are sufficient which evince an intention that
the sale may be made upon default or other contingency. (41 Corpus Juris, p. 926.).

We are not inclined, however, to render judgment in favor of the appellant with reference to his claim
for expenses, attorney's fees, and damages.

Wherefore, the appealed decision is reversed and the petition for prohibition with injunction filed in
the court below dismissed. So ordered, with costs of both instances against the plaintiff-appellee.

Reyes, A., Jugo, Bautista Angelo, Concepcion, and Reyes, J. B. L., JJ.,concur.
8. 222 Phil. 288

MELENCIO-HERRERA, J.:
In this Petition for Review on Certiorari, petitioners assail the Decision of respondent Appellate Court
in its Case No. CA-G.R. No. 35006-R. We have decided to reverse on the basis of the facts of the
controversy and of considerations hereunder to be expounded:

1. According to respondent Court: "Mauricio Manasil was the original occupant and claimant of a 100-
hectare forest land (t.s.n., Oct. 24, 1963, pp. 11, 13 and 14) situated in barrio Luna, municipality of
Claveria, province of Misamis Oriental."[1] The land was occupied for "agricultural" purposes. It became
alienable on March 28, 1950, the area being declared alienable and disposable and released as
agricultural land under Forestry Administrative Order No. 4-51 (Exhibits "B-1" and "B-2").

2. After the death of Manuel Manasil, his son Mauricio "inherited" the land, declared the same for tax
purposes in his name under Tax Declaration No. 4744 issued in 1930, paid realty taxes on the land from
1927, and inheritance tax on September 29, 1953 (Exhibit "5-Intervenor"). He had introduced
improvements on the land.

3. It appears that, in 1948, Mauricio sold two parcels within the land, one of 11 hectares and the other
of 10 hectares, to Catalino ALEMAN. Those two parcels constitute the Disputed Property in this case.

4. After the sale to him, ALEMAN declared the Disputed Property for tax purposes in his name under
Tax Declarations No. 4979 and 4980. On May 31, 1956, he applied for a Free Patent over the Disputed
Property (FPA No. 16-1840).

5. On February 1, 1957, ALEMAN mortgaged the Disputed Property (or his "rights") to petitioner
Amparo LIM to secure the payment of a loan of P1,300.00 (Exhibit "C"). Due to ALEMAN's failure to
pay the loan on due date, upon LIM's complaint in Civil Case No. 1435 of the Court of First Instance of
Misamis Oriental, the mortgage was foreclosed. Said respondent Court: "The mortgage was foreclosed
on January 17, 1957 (should be January 19, 1959) …. after which she took possession of the two
parcels of land".[2]

6. On March 3, 1960, for the sum of P3,000.00, ALEMAN further sold the Disputed Property to LIM
(Exhibit "D") who, on the same day, filed a free patent application in her name (FPA No. 16-6769),
ALEMAN's previous application being cancelled. The sale was evidently made to strengthen LIM's
rights to the Disputed Property. LIM declared the Disputed Property for taxation purposes in her name
on May 6, 1960, and was issued Tax Declarations 8438 and 8439, which cancelled the Tax Declarations
in ALEMAN's name.

7. In the meanwhile, on February 29, 1959, the Deputy Sheriff of Misamis Oriental had levied upon
and sold the Disputed Property at public auction to satisfy a judgment for P1,471.96, with interest,
rendered on June 18, 1956 by the Municipal Court of Cagayan de Oro against ALEMAN in Civil Case
No. 302, entitled "Soc Chao vs. Catalino Aleman". The highest bidder was Eugenio LAMBERANG, and
the corresponding certificate of sale was executed in his favor.

8. On February 27, 1960, within one year after the auction sale, LIM offered to redeem the Disputed
Property, and she deposited the amount of P2,400.00 with the Sheriff, but LAMBERANG refused to
accept the same. Later, LIM withdrew the deposit on March 11, 1960, after ALEMAN had "sold" the
Disputed Property to her. It may be mentioned that after LIM had foreclosed the Disputed Property on
January 19, 1959, she acquired the right to redeem[3], and LAMBERANG was in duty bound to allow
her redemption of the Disputed Property.
9. On March 14, 1960, the Sheriff issued a deed of conveyance to LAMBERANG, which was recorded
in the Office of the Register of Deeds of Misamis Oriental on March 16, 1960. LAMBERANG obtained
a Writ of Possession on April 11, 1960 by virtue of which he entered and occupied the Disputed Property.

10. On October 31, 1960, LIM and her husband filed a case against the Provincial Sheriff for the
annulment of the execution sale (Civil Case No. 1856) on the ground that the Disputed Property was
still public land at the time of said sale and, therefore, could not be the subject of levy and execution.
LAMBERANG was allowed to intervene in the case.

11. Ultimately, the trial Court ruled in favor of LIM on the ground that the Disputed Property was
public land and could not be subjected to levy and sale at public auction. LAMBERANG, as Intervenor,
brought the case on appeal to respondent Court, which reversed the judgment of the lower Court.

12. Two important dates were not given full appreciation neither by the trial Court, nor by respondent
Court. The latter had expressly found: (a) "The mortgage was foreclosed on January 17, 1957 (should
be January 19, 1959) …. after which she (LIM) took possession of the two parcels of land". (b) "On
February 28, 1959, the Deputy Sheriff of Misamis Oriental, Jose Velez Yasay, levied and sold at public
auction the two parcels of land in question."[4] It should appear clear that when the Disputed Property
was sold at public auction on February 28, 1959, ALEMAN, as judgment debtor, was no longer the
owner of the Disputed Property, ownership having been acquired by LIM on January 19, 1959. The sale
to LAMBERANG could not have been valid.

13. At the very least, LIM should have been allowed to redeem the Disputed Property within the one
year period from February 28, 1959, which she offered to do on February 27, 1960. The mortgage in her
favor was executed on February 1, 1957, while the judgment against ALEMAN was rendered on June
18, 1956. The mortgage was subsequent to the judgment.[5]

14. It is not necessary to rule on whether or not the Disputed Property had already become private
property on the date of the public auction. The transactions herein mentioned were in regards to
"rights" to the Disputed Property, irrespective of whether the physical property was or was not private
property.

WHEREFORE, the Decision of respondent Court in its case CA-G.R. No. 35006-R is SET ASIDE and
the judgment of the Court of First Instance of Misamis Oriental, annulling the auction sale of February
28, 1959, is reinstated.

Without costs.

SO ORDERED.

Teehankee, (Chairman), Plana, Relova, Gutierrez, Jr., De La Fuente, and Alampay, JJ., concur.
9. 409 Phil. 493

MENDOZA, J.:
This is a petition for review of the decision,[1] dated April 17, 2000, of the Court of Appeals in CA-G.R.
SP No. 53856, affirming an order, dated September 29, 1998, of the Regional Trial Court, Branch 56,
Lucena City, the dispositive portion of which reads:

WHEREFORE, FROM THE FOREGOING, defendant Republic Planters Bank is hereby ordered to
execute within twenty (20) days from receipt hereof, the necessary deed of reconveyance called for in
the order of the Court dated 17 May 1993 in favor of the plaintiffs.

SO ORDERED.[2]

The background of the case is as follows:

Demetrio Llego, one of the defendants in the original complaint filed in the Regional Trial Court of
Lucena City, inherited from his father a portion of a parcel of land situated in Barangay Silangang
Mayao, Lucena City. This portion was part of a bigger parcel of land, the other portions of which, in
turn, were inherited by Llego's mother and siblings. The heirs undertook the apportionment of the
inherited parcel of land informally, without executing a written extrajudicial partition thereof. As a
result, title to the property remained in the name of Llego's father.[3]

On March 25, 1976, Llego sold to his uncle, herein private respondent Agustin Lagrama, and his aunt
Paz Abastillas his share in the inherited parcel of land. The lot was to be paid in installments. Llego
did not, however, execute a deed of sale of the lot as title to the lot was still in his father's name. Llego
promised that as soon as the title was transferred in his name, he would immediately execute a deed of
absolute sale in favor of the buyers, to which they agreed.[4]

Notwithstanding the absence of a deed of sale, on March 26, 1976, private respondent Lagrama and
Abastillas entered into and took possession of the portion of land sold to them by Llego. On December
23, 1977, private respondent Lagrama and Abastillas paid the balance of the purchase price of the lot
sold to them.[5]

On March 6, 1979, Llego and his co-heirs extrajudicially partitioned the property[6]left by their father. A
new title was issued to Llego for his share, i.e., the portion of the land he had previously sold to private
respondent Lagrama. On November 12, 1982, Llego, through his attorney-in-fact, Ceferino Tan,
mortgaged the land to the Republic Planters Bank for P45,000.00. As Llego failed to pay his
indebtedness to petitioner bank, the mortgage was foreclosed and the property was sold to the bank as
the highest bidder. It appears that Llego likewise failed to redeem the property.[7]

In 1983, private respondents filed with the trial court a complaint for specific performance to compel
Llego to execute the necessary deed of absolute sale in their favor. Impleaded as co-defendants were
Ceferino Tan and petitioner bank. Llego did not answer the complaint and was, for that reason,
declared in default. Petitioner bank, in its answer, pleaded that it was a mortgagee in good faith. On
the other hand, Tan alleged that he acted as Llego's attorney-in-fact only as an accommodation.[8]

On May 17, 1993, the lower court rendered its decision, the dispositive portion of which stated:
WHEREFORE, by reason of the overwhelming evidence presented, the Court finds the case of the
plaintiffs and conformably declares that plaintiffs [herein private respondents] herein are the absolute
owners of the land in question and defendant Demetrio Llego is heretofore directed to execute the
necessary conveyance for him and defendant Ceferino Tan to redeem the said property from the
defendant bank.

Consequently, the Register of Deeds of Quezon is directed to cancel Transfer Certificate of Title No. T-
31753 and upon the execution and registration of the corresponding deed of sale the title be registered
in the names of plaintiffs Agustin Lagrama, Edgardo Lagrama, Danilo Lagrama, Artemio Lagrama and
Corazon Lagrama.

Plaintiffs not being able to prove damages, the Court denies the same.

SO ORDERED.[9]

Republic Planters Bank appealed, but the appeal was dismissed for its failure to file the brief on time. As
a consequence, the decision of the lower court became final.

Thereafter, a writ of execution was issued, but it was returned unsatisfied because it turned out that
petitioner bank had consolidated its title over the land in dispute for failure of Demetrio Llego to redeem
it.[10] Private respondents then filed a motion to require the petitioner bank to execute the necessary
deed of reconveyance, which was opposed by the latter. [11]

On September 29, 1998, the trial court granted private respondents' motion and ordered Republic
Planters Bank to execute the "necessary deed of reconveyance called for in the order of the Court dated
May 17, 1995 in favor of the plaintiffs."[12] Petitioner bank moved for reconsideration, but its motion
was denied.

On appeal, the Court of Appeals rendered its questioned decision affirming the trial court's decision
and dismissing the petition. The Court of Appeals held:

It is well to remember that Republic Planters Bank was impleaded in the action below precisely because
plaintiffs therein, now private respondents Agustin Lagrama, et al., questioned the act of Demetrio
Llego in mortgaging the property to the bank despite the fact that he had previously sold the same to
Agustin Lagrama. In its decision, the court found that, by his acts, Llego engaged in a scheme "designed
to defraud plaintiffs." The court noted that Llego did not even bother to answer the complaint and
allowed himself to be declared in default. Neither did Ceferino Tan offer any evidence to counteract the
imputation of fraud against him, in conspiracy with Llego. Significantly, during the proceedings, title
to the land was still in the name of Demetrio Llego. This therefore explains why the court in its
judgment ordered Llego himself, and not the mortgagee bank, to effect the conveyance to the plaintiffs.
The court in fact ordered the Register of Deeds to cancel the title (TCT No. T-31753) of Llego and issue
a new title to the Lagramas "upon the execution and registration of the corresponding deed of sale."

Now, when execution of the final judgment was made, the sheriff reported "that defendant (Demeterio)
Llego refused to sign the document of reconveyance while defendant Ceferino Tan cannot be located."
Consequently, private respondents, as prevailing parties, invoked the remedy provided for in section
10(a) of the 1997 Revised Rules of Civil Procedure which provides that in lieu of directing a conveyance
of the property, the court "may by an order divest the title of any party and vest it in others, which shall
have the same form of a conveyance executed in due form of law."

Republic Planters Bank cannot blunt the impact of the court's order of September 29, 1998 on the
allegation that it is a mortgagee in good faith. It was, to repeat, impleaded as a defendant in the action
for specific performance. It was aware of the charge of fraud imputed to Demeterio Llego in mortgaging
the property to the bank despite the previous sale thereof to Agustin Lagrama. The court indeed found
the existence of fraud in the transaction. The bank appealed the decision of the court but its appeal was
thrown out. Meantime, the bank consolidated its title over the property. How then can the bank insist
on its protestation that it has a good title thereto?[13]

Petitioner bank's motion for reconsideration was likewise denied. Hence this petition.

The main question in this case is whether or not petitioner bank may be compelled to execute a deed of
reconveyance transferring the parcel of land mortgaged to petitioner in favor of private respondents.

The Court of Appeals rejected the contention that petitioner cannot be compelled to execute the deed
of reconveyance since it was Demetrio Llego himself who was ordered by the court to do so. It stressed
that title to the property had been consolidated in the name of the bank by virtue of the failure of Llego
to redeem the mortgage. Hence, it could not be insisted that Llego should effect the reconveyance. The
Court of Appeals agreed with the trial court that the bank took title to the property pendente lite and,
therefore, it was bound by the court's decision.[14]

On the other hand, petitioner contends that it is a mortgagee in good faith and for value of the property
as of March 12, 1982 when the same was mortgaged to it by Demetrio Llego. It points out that the
complaint for specific performance was filed by private respondents only on May 3, 1984, more than
one year after the mortgage was validly constituted on November 12, 1982. As it was an innocent
purchaser for value long before the case against it was filed, it could not be considered a
transferee pendente lite.

Petitioner likewise cites St. Dominic Corp. v. Intermediate Appellate Court,[15] in which it was held that
the foreclosure sale retroacts to the date of the registration of the mortgage and that a person who takes
a mortgage in good faith and for valuable consideration, the record showing clear title to the mortgagor,
will be protected against equitable claims on the title in favor of third persons of which he had no actual
or constructive notice. Prescinding from this, petitioner contends that the foreclosure sale in the case
at bar must be treated to have taken place not on the actual date of the sale or during the pendency of
the case but on the date the mortgage was executed and registered, or on November 12, 1982, more
than one year before the case in the lower court was filed. Consequently, petitioner cannot be
considered a transferee pendente lite and it could not be accused of being aware of the flaw on said title
when it transferred the property.[16]

Petitioner's contentions are without merit.

Several circumstances militate against petitioner's argument that the mortgage in its favor and the
subsequent foreclosure and consolidation of title of the property under its name must be protected and
respected.

First. In the complaint for specific performance filed by private respondents, petitioner bank was
impleaded as co-defendant along with Demetrio Llego and Ceferino Tan. The trial court's decision,
dated May 17, 1993, has already attained finality as petitioner's appeal to the Court of Appeals was
dismissed for being filed out of time. As correctly pointed out by private respondents in their comment,
the instant petition is improper considering that it attempts to reverse the trial court's decision which
is already final and executory.[17] This being the case, whatever judgment was rendered by the court in
that case is necessarily binding on all defendants therein, i.e., Llego, Tan and petitioner bank. As to
which defendant would actually execute the reconveyance is not important, for this merely involves the
implementation of the court's order.
The trial court ordered Llego to execute the necessary deed of reconveyance and, together with Ceferino
Tan, to redeem the property from petitioner bank believing that title to the land was still in the name
of Llego. As the writ of execution directed at Llego could not be carried out, because in the meantime
petitioner bank had obtained title to the land, the trial court directed its order to petitioner bank. It
cannot be argued that, in so doing, the court modified its earlier judgment. It is noteworthy that
petitioner bank tried to appeal from the decision of the trial court which ordered the Register of Deeds
of Quezon to cancel TCT No. T-31753 and issue a new title to private respondents, but the bank's appeal
was dismissed for its failure to file its brief. As a result, the trial court's decision became final, and
petitioner bank cannot now claim that it is not bound by the trial court's order to reconvey the land to
private respondents.

Second. Both the trial court and the Court of Appeals correctly held that petitioner bank was a
transferee pendente lite whose title was subject to the incidents and results of the pending litigation.
Petitioner bank contends that it constituted the mortgage more than a year before the private
respondents' action for specific performance was filed and the fact that the foreclosure and public
auction sale took place after the institution of the case is immaterial since the foreclosure sale retroacts
to the date of the constitution of the mortgage. Petitioner bank argues that it was a purchaser for value
long before the filing of the case and, therefore, it cannot be considered a transferee pendente lite.

This argument is specious. Petitioner acquired the property only after the filing of private respondents'
case for specific performance. When the mortgage was constituted, petitioner was not yet, properly
speaking, a transferee, being a mere mortgagee of the property. Only when petitioner acquired the
property in the foreclosure sale and subsequently consolidated its title did it become the transferee of
the property.

Thus, petitioner bank is a transferee pendente lite of the property in litigation within the contemplation
of Rule 39, §47(b). As such, it is bound by the decision against Demetrio Llego. As this Court held in
one case:[18]

. . . A transferee pendente lite stands exactly in the shoes of the transferor and is bound by any judgment
or decree which may be rendered for or against the transferor; his title is subject to the incidents and
results of the pending litigation, and his transfer certificate of title will, in that respect, afford him no
special protection.[19]

Petitioner bank may thus be properly ordered to execute the necessary deed of reconveyance in favor
of private respondents. The remedy left to petitioner is to pursue its claim against Llego and his
attorney-in-fact Ceferino Tan by filing the appropriate action to recover the unpaid indebtedness.

Third. Petitioner insists that it is not a transferee pendente lite because it was a purchaser for value
long before the case for specific performance was filed. The contention is without merit. Even if it is
not a transferee pendente lite, petitioner nevertheless cannot claim a right superior to that of private
respondents because petitioner acted in bad faith when it foreclosed and acquired the property. As the
Court of Appeals pointed out, petitioner was aware of the charge of fraud against Demetrio Llego in
mortgaging the property to it despite the previous sale thereof to private respondent Agustin
Lagrama. The trial court found the existence of fraud in the transaction and declared private
respondents to be the absolute owners of the property. As already stated, this decision of the trial court
is now final and is binding on petitioner bank. In the meantime, the bank consolidated its title over the
property. Since the bank acquired the land in question with knowledge of the fraud committed by
Llego, it cannot claim to be a purchaser in good faith and, therefore, to have a better right than its
predecessor-in-interest.[20]
Petitioner's reliance on the case of St. Dominic Corp. v. Intermediate Appellate Court[21] is
misplaced. The facts of that case are different from those of the case at bar. In the Dominic case, the
facts were as follows: In 1961, the People's Homesite and Housing Corporation (PHHC) awarded a
parcel of land covered by TCT No. 83783 to Cristobal Santiago, who sold the same to the spouses Carlos
Robes and Adelia Francisco. The spouses Robes mortgaged the lot to Manufacturer's Bank and Trust
Company, and this fact was duly annotated on the back of TCT 84387. Thereafter, Civil Case No. Q-
11895, entitled Ricardo Castulo and Juan V. Ebreo v. Carlos Robes, Adelia Francisco, and People's
Homesite and Housing Corporation, was filed seeking the cancellation of TCT No. 83783. Claiming
legal interest in the property, the Bustamante spouses were allowed to intervene in the case. A notice
of lis pendens was annotated on the title at the instance of the Bustamante spouses. For failure of the
Robes spouses to pay the mortgage obligation, Manufacturer's Bank foreclosed the lot which was then
bought at public auction by Aurora Francisco, who was subsequently issued a certificate of sale. As no
redemption of the property was effected, TCT No. 84387 issued in the name of the Robes spouses was
cancelled and TCT No. 217192 was issued to the buyer Aurora Francisco. The notice of lis pendens was
not carried over to TCT No. 217192.

Aurora Francisco applied for, and was issued, a writ of possession for the property. The Bustamante
spouses filed a motion to quash the writ, which motion was denied by the lower court. The spouses
then filed a petition for certiorari with the Supreme Court. Thereafter, Aurora Francisco sold the
property to petitioner St. Dominic Corp, which was issued TCT No. 22337. Again, no notice of any lien
or encumbrance appeared on the title.

Meanwhile, Civil Case No. Q-11895 was decided. The trial court ruled that the sale by PHHC to
Cristobal Santiago was void and cancelled TCT No. 83783. The sale of the same lot to the spouses Robes
was likewise declared void and TCT No. 84387 was cancelled. PHHC was ordered to process
Bustamante's application to purchase the lot and execute documents awarding the lot to her. A writ of
execution was issued to the Bustamante spouses, with the qualification, however, that the writ could
not be enforced against St. Dominic Corp. The spouses questioned the order via certiorari with the
Intermediate Appellate Court, which granted the writ of certiorari and ordered the trial court to issue
the writ of execution against St. Dominic Corp.

On appeal, this Court reversed the ruling of the Intermediate Appellate Court and held that St. Dominic
Corp. was not bound by the decision in that case because it was never impleaded in Civil Case No. Q-
11895. Anent the effect of the trial court's judgment on Manufacturer's Bank's (mortgagee bank) rights
and on the foreclosure of the property in question, it was held that the invalidation of the title issued as
a result of regular land registration proceedings in the name of the mortgagor when given as a security
for a loan would not nullify the rights of a mortgagee who acted in good faith. The mortgagee is under
no obligation to look beyond the certificate of title and has the right to rely on what appears on its
face. The title to the property given as security to Manufacturer's Bank by the spouses was valid,
regular, and free from any lien or encumbrance. The title of Aurora Francisco, as a purchaser at the
public auction sale of the property in question, could not be affected by any adverse claim as the
plaintiffs in the civil case. This is even more true with petitioner St. Dominic Corp. which had acquired
title from Francisco without any notice or flaw.

In the case of St. Dominic, when the property in question was mortgaged to Manufacturer's Bank, the
title showed that it was valid, regular, and free from any lien or encumbrance. When it was later
foreclosed and sold at public auction and a new transfer certificate of title was issued to the buyer, the
notice of lis pendens was not carried over to the new title. And, when the property was sold to petitioner
St. Dominic Corp., which was again issued TCT No. 22337, no notice of any lien or encumbrance
appeared on the title. These factual circumstances led the Court to conclude that the mortgagee bank
and its subsequent transferrees had acted in good faith. It is obvious that the case of St. Dominic Corp.
v. Intermediate Appellate Court cannot be invoked in this case where both the trial court [22] and the
Court of Appeals[23] found that petitioner bank did not act in good faith in acquiring title to the property.

WHEREFORE, the decision of the Court of Appeals appealed from is AFFIRMED.

SO ORDERED.

Bellosillo, (Chairman), and Buena, JJ., concur.

Quisumbing and De Leon, Jr., JJ., on leave.

------------------------------------------------------------------------------------------------------------------------

10. 173 Phil. 102

GUERRERO, J.:
Petition for review on certiorari of the decision of the Court of Appeals[1] in CA-G.R. No. 46976-R
entitled "Jose P. Dizon, Plaintiff-Appellant, versus Alfredo G. Gaborro (substituted by Pacita de
Guzman Gaborro as Judicial Administratrix of the Estate of Alfredo G. Gaborro) and the Development
Bank of the Philippines, Defendants-Appellees," affirming with modification the decision of the Court
of First Instance of Pampanga, Branch II in Civil Case No, 2184.
The dispositive portion of the decision sought to be reviewed reads:

"IN VIEW OF THE FOREGOING, the judgment: appealed therefrom Is hereby affirmed with
modification that the plaintiff-appellant has the right to refund or reimburse the defendant appellees
the sum of P131,831.91) with interest at 8% per annum from October 6, 1959 until full payment, said
right to be exercised within one year from the date this judgment becomes final, with the understanding
that, if he fails to do so within the said period, then he is deemed to have lost his right over the lands
forever. With costs against the appellant."[2]

MODIFIED.
The basic issue to be resolved in this case is whether the "Deed of Sale with Assumption of Mortgage"
and the "Option to Purchase Real Estate," two instruments executed by and between petitioner Jose P.
Dizon and Alfredo G. Gaborro (defendant below) on the same day, October 6, 1969 constitute in truth
and in fact an absolute sale of the three parcels of land therein described or merely an equitable
mortgage or conveyance thereof by way of security for reimbursement, refund or repayment by
petitioner Jose P. Dizon of any and all sums which may have been paid to the Development Bank of the
Philippines and the Philippine National Bank by Alfredo G. Gaborro (later substituted herein by his
wife Pacita de Guzman Gaborro as administratrix of the estate of Alfredo G, Gaborro) who had died
during the pendency of the case.
A supplementary issue raised is whether or not Gaborro or ;the respondent administratrix of the estate
should account for all the fruits produced and income received by them from the lands mentioned and
described in the aforesaid "Deed of Sale with Assumption of Mortgage,"
The antecedent facts established in the record arc not disputed, petitioner Jose P, Dizon was the owner
of the three (3) parcels of land, subject matter of this litigation, situated in Mabalacat, Pampanga with
an aggregate area of 130.58 hectares, as evidenced by Transfer Certificate of Title No. 15679. He
constituted a first mortgage lien in favor of the Development Bank of the Philippines in order to secure
a loan in the sum of P38,000.00 and a second mortgage lien in favor of the Philippine National Bank
to secure his indebtedness to said bank in the amount of P93,831.91.
Petitioner Dizon having defaulted in the payment of his debt, the Development Bank of the Philippines
foreclosed the mortgage extrajudicially pursuant to the provisions of Act No. 3135. On May 26, 1959.
the lands were sold to the DBP for P31,459.21, which amount covered the loan, interest and expenses,
and the corresponding "Certificate of Sale, "(Exhibit A-2, Exhibit I-b) was executed in favor of the said
bank. On November 12. 1959. Dizon himself executed the deed of sale (Exhibit A-l-a) over the properties
in favor of the DBP which deed was recorded in the Office of the Register of Deeds on October 6. 1960.
Sometime prior to October 6. 1959 Alfredo G. Gaborro and Jose P. Dizon met. Gaborro became
interested in the lands of Dizon. Dizon originally intended to lease to Gaborro the property which had
been lying idle for some time. But as the mortgage was already foreclosed by the DBP and the bank in
fact purchased the lands at the foreclosure sale on May 26. 1959, they abandoned the projected lease.
They then entered into the following contract on October 6. 1959 captioned and quoted. to wit:

DEED OF SALE WITH ASSUMPTION OF MORTGAGE

KNOW ALL MEN BY THESE PRESENTS:

This DEED OF SALE WITH ASSUMPTION OF MORTGAGE, made and executed at the City of Manila.
Philippines, on this 6th day of October. 1959 by and between -

JOSE P. DIZON, of legal age, Filipino, married to Norberta Torres, with residence and postal address
at Mabalacat, Pampanga, hereinafter referred to as the VENDOR,

ALFREDO G. GABORRO. likewise of legal age, Filipino, married to Pacita de Guzman, with residence
and postal address at 46. 7th St., Gilmore Avenue, Quezon City, hereinafter referred to as the VENDEE,

W I T N E S S E T H: That

WHEREAS, the VENDOR is the registered owner of three (3) parcels of land covered by Transfer
Certificate of Title No. 15679 of the land records of Pampanga, situated in the Municipality of
Mabaiacat, Province of Pampanga, and more particularly described and bounded as follows:

1. A parcel of land (Lot No. 188 of the Cadastral Survey of Mabalacat), with the improvements
thereon, situated in the Municipality of Mabalacat. Bounded on theNE., by Lot No. 187; on the
SE., by Lots Nos. 183. 189, 191 and 192; ontheSW. by Lot No. 192 and on the NW., by the
unimproved provincial road to Magalang Containing an area of TWO HUNDRED AND TWENTY
ONE THOUSAND ONE HUNDRED SEVENTY TWO SQUARE METERS (221,172), more or less.
2.
3. A parcel of land (Lot No. 193 of the Cadastral Survey of Mabalacat), with the improvements
thereon, situated in the Municipality of Mabalacat. Bounded on the NE. by a road and Lots Nos.
569, 570 and 571; on the SB., by Lot No. 571 and the unimproved road to Magalang; on the SW.,
by a road and on the NE., by a road and the Sapang Pritil. Containing an area of NINE
HUNDRED SEVENTY EIGHT THOUSAND SEVEN HUNDRED AND SEVENTEEN SQUARE
METERS (978,717), more or less.
 4.
5. A parcel of land (Lot No. 568 of the Cadastral Survey of Mabalacat), with the improvements
thereon, situated in the Municipality of Mabalacat. Bounded on the NE., by Lot No. 570, on the
SE., SW and NW by roads. Containing an area of ONE HUNDRED FIVE THOUSANDNINE
HUNDRED AND TWENTY ONE SQUARE METERS (105,921), more or less.

WHEREAS, the above-described properties are presently mortgaged (first mortgage) to the
Development Bank of the Philippines (formerly Rehabilitation Finance Corporation) to secure the
payment of a loan, plus interest, of THIRTY EIGHT THOUSAND PESOS ONLY (38,000.00),
Philippine currency, as evidenced by a deed of mortgage for P……, dated which deed was ratified and
acknowledged before Notary Public of Manila, Mr……as Doc. No....; Page No……; Reg, No. Series of
196….;

WHEREAS, the aforesaid properties are likewise mortgage (second mortgage) to the Philippine
National Bank to secure the payment of a loan of NINETY THREE THOUSAND EIGHT HUNDRED
THIRTY ONE PESOS & 91/100 (93,831.91), Philippine Currency, plus interest up to August 13, 1957,
as evidenced by deed of Mortgage for P……dated………which deed was ratified and acknowledged before
Notary Public of Manila, Mr…….., as Doc. No……., Page No……, Reg. No. ... Series of 196……;

WHEREAS, the VENDOR, has offered to sell and the VENDEE is willing to purchase the above-
described properties for ONE HUNDRED THIRTY ONE THOUSAND EIGHT HUNDRED THIRTY
ONE PESOS & 91/100 (131,831.91), Philippine Currency, under the terms and conditions herein below
set forth;

NOW, THEREFORE, for and in consideration of the above premises and the- amount of ONE
HUNDRED THIRTY ONE THOUSAND EIGHT HUNDRED THIRTY ONE PESOS & 91/100
(P131,831.91), Philippine Currency, in hand paid in cash by the VENDEE unto the VENDOR, receipt
whereof is hereby acknowledged by the VENDOR to his entire and full satisfaction, and the assumption
by the VENDEE of the entire mortgage indebtedness, both with the Development Bank of the
Philippines and the Philippine National Bank above mentioned, the VENDOR does by these presents,
sell, transfer and convey, as he had sold, transferred, and conveyed, by way of absolute sale, perpetually
and forever, unto the VENDEE, his heirs, successors and assigns, above described properties, with all
the improvements thereon, free from all liens and encumbrances of whatever nature, except the pre-
existing mortgage obligations with the Development Bank of the Philippines and the Philippine
National Bank aforementioned. The VENDOR does hereby warrant title, ownership and possession
over the properties herein sold and conveyed, and binds himself to defend the same from any and all
claimants.

That the VENDEE, does by these presents, assume as he has assumed, under the same terms and
conditions of the mortgage contracts dated………..of ………the mortgage indebtedness of the VENDOR
in favor of the Development Bank of the Philippines and the Philippine National Bank, respectively, as
if the aforesaid documents were personally executed by the VENDEE and states and reiterates all the
terms and conditions stipulated in said both documents, making them to all intents and purposes, parts
hereof by reference.

IN WITNESS WHEREOF, the VENDOR and the VENDEE, together with their instrumental witnesses,
have signed this deed of the place, date, month and year first above written.
(Sgd.)JOSEP. DIZON
Vendor

(Sgd.) ALFREDO G. GABORRO

Vendee

Signed in the Presence of:

(Sgd.) (Illegible) (Sgd.) (Illegible)

(Acknowledgment Omitted)

The second contract executed the same day, October 6, 1959 is called option to Purchase Real Estate,
and is in the following wise and manner:

OPTION TO PURCHASE REAL ESTATE

KNOW ALL MEN BY THESE PRESENTS:

That I. ALFREDO O. GABORRO, of legal age, Filipino, married to Pacita de Guzman, with residence
and postal address at 46, 7th St., Gilmore Ave., Quezon City, for valuable consideration, do hereby give
to JOSE P. DIZON, of legal age, Filipino, married to Norberta Torres, resident of Mabalacat, Pampanga,
his heirs, successors and assigns, the option of repurchasing the following described properties:.

TRANSFER CERTIFICATE OF TITLE

NO. 15679, PROVINCE OF PAMPANGA

1. A parcel of land (Lot No. 188 of Cadastral Survey of Mabalacat, Pamp.), containing an area of
(211,172) more or less.
2.
3. A parcel of land (Lot No. 193 of the Cadastral Survey of Mabalacat, Pampanga), containing an
area of (978,1 72) more or less.
4.
5. A parcel of land (Lot No. 568 of the Cadastral Survey of Mabalacat, Pamp.), containing an area
of (105, 921), more or less.

which I acquired from the said Jose P. Dizon by purchase by virtue of that document entitled Deed of
Sale with Assumption of Mortgage dated October 6, 1959, acknowledged by both of us before Notary
Public of Manila GREGORIO SUMBIUO as Doc. No. 342. Page No. 70, Reg. No. VII Scries of 1959.
Said option shall be valid and effective within the period comprised from January, 1965 to December 3
J, J 970, inclusive, upon payment of the amount of ONE HUNDRED THIRTY ONE THOUSAND
EIGHT HUNDRED THIRTY ONE PESOS & 91/100 (P131,83 1.91). Philippine Currency, plus an
interest of eight per centum (8%) thereof, per annum. This is without prejudice at any time to the
payment by Mr. Dizon ofany partial amount to be applietl to the principal obligation, without any way
disturbing the possession and/or ownership of the above properties since only full payment can effect
the necessary change.

In the event that Mr. Jose P. Dizon may be able to find a purchaser for the foregoing properties on or
the fifth year from the date the execution of this document, the GRANTEE. Mr. JOSE P. DIZON, may
do so provided that the aggregate amount which was paid to Development Bank of the Philippines and
to the Philippine National Bank together with the interests thereon at the rate of 8% shall be refunded
to the undersigned.

Furthermore, in case Mr. Jose P. Dizon shall be able to find a purchaser for the said properties, it shall
be his duty to first notify the undersigned of the contemplated sale, naming the price and the purchaser
therefor, and awarding the first preference in the sale hereof to the undersigned.

IN WITNESS WHEREOF, I have hereunto signed these presents at the City of Manila, on this 6th day
of October, 1959.

(Sgd.) ALFREDO G. GABORRO

CONFORME:

(Sgd.) JOSE P. DIZON

SIGNED IN THE PRESENCE OF:

(Acknowledgment Omitted)

The sum of P131,813.91 which purports to be the consideration of the sale was not actually paid by
Alfredo G. Gaborro to the Petitioner. The said amount represents the aggregate debts of the petitioner
with the Development Bank of the Philippines and the Philippine National Bank.
After the execution of said contracts, Alfredo G. Gaborro took possession of the three parcels of land in
question.
On October 7, 1959, Gaborro wrote the Development Bank of the Philippines a letter (Exh. J), as follows:

"Sir:

This is with reference to your mortgage lien of P38,000.00 more or less over the properties more
particularly described in TCT No. 15679 of the land records of Pampanga in the name of Jose P. Dizon.
In this connection, we have the honor to inform you that pursuant to a Deed of Sale with Assumption
of Mortgage executed on October 6, 1959 by Jose P. Dizon in my favor, copy of which is hereto attached,
the ownership of ihc same has been transferred to me subject of course to your conformity to the
assumption of mortgage. As a consequence of the foregoing document, the obligation therefore of
paying your goodselves the total amount of indebtedness has shifted to me.

Considering that these agricultural properties have not been under cultivation for quite a long time, 1
would therefore request that, on the premise that the assumption of mortgage would be agreeable to
you, that I be allowed to pay the outstanding obligation, under the same terms and conditions as
embodied in the original contract of mortgage within ten (10) years to be divided in 10 equal annual
amortizations. I am enclosing herewith a check in the amount of £3,609.95 representing 10% of the
indebtedness of Jose P. Dizon to show my honest intention in assuming the mdrtgage obligation to you.
x x x"
The Board of Governors of the DBP, in its Resolution No. 7066 dated October 21, 1959 approved the
offer of Gaborro but said Board required him to pay 20% of the purchase price as initial payment. (Exh.
D) Accordingly, on July 1 1. i960, the DBP and Gaborro executed a conditional sale of the properties in
consideration of the sum of P36,090.95 (Exh. C) payable 20% down and the balance in 10 years in the
yearly amortization plan at 8 % per annum.
On January 7, 1960, Dizon assigned his right of redemption to Gaborro in an instrument (Exh, 9)
entitled:

ASSIGNMENT OF RIGHT OF REDEMPTION AND ASSUMPTION OF OBLIGATION

KNOW ALL MEN BY THESE PRESENTS:

This instrument, made and executed by and between JOSE P. DIZON, married to Norhgr-fa. P. Torres,
Filipino, of legal age, with residence and postal address at Mabalacat. Pampanga, hereinafter referred
to as the ASSIGNOR and ALFREDO G. GABORRO, married to Pacita de Guzman, likewise of legal age,
Filipino, with residence and postal address at 46, 7th Street, Gilmore Ave., Quezon City, hereinafter
referred to as the ASSIGNEE,

W I T N E S S E T H:

WHEREAS, the Assignor is the owner and mortgagor of three (3) parcels agricultural land together
with all the improvements existing thereon and more particularly described and bounded as follows:.

TRANSFER CERTIFICATE OF TITLE NO. 1567 PROVINCE OF PAMPANGA

1. A parcel of land (Lot No. 188 of the Cadastral Survey of Mabalacat), with the improvements thereon
situated in the Municipality of Mabalacat. Bounded on the NE, by Lot No. 187; on the SE. by Lots Nos.
183, 189. 191 and 192; on the SW. by Lot No. 192; and on the NW, by the unimproved provincial road
to Magalang. Containing an area of two hundred twenty-one thousand one hundred and seventy two
square meters (221.172). more or less.

2. A parcel of land (Lot No. 193 of the Cadastral Survey of Mabalacat). with the improvements thereon,
situated in the Municipality of Mabalacat. Bounded on the NE. by a road and Lots Nos. 569, 670 and
571; on the SE. by Lot No. 571 and the unimproved road to Magalan; on the SW. by a road; and on the
NW. by a road and the Sapang Pritil. Containing an area of nine hundred seventy eight thousand seven
hundred and seventeen square meters (978.717). more or less.

3. A parcel of land (Lot No. 568 of the Cadastral Survey of Mabalacat). with the improvements thereon,
situated in the Municipality of Mabalacat. Bounded on the NE. by Lot No. 570; and on the SE., SW. and
MW. by roads. Containing an area of one hundred five thousand nine hundred and twenty-one square
meters (105,921). more or less.

WHEREAS, the above described properties were mortgaged with the Rehabilitation Finance
Corporation, now Development Bank of the Philippines, which mortgage has been foreclosed on May
26, 1959;

AND WHEREAS, the herein Assignor has still the right to redeem the said properties from the said
Development Bank of the Philippines within a period of one (1) year counted from the date of
foreclosure of the said mortgage.

NOW, THEREFORE, for ……………………………………………………………………………………and other valuable

considerations, receipt whereof is hereby acknowledged by the Assignor from the Assignee, the herein
Assignor does hereby transfer and assign to the herein Assignee, his heirs, successors and assigns the
aforesaid right to redeem the aforementioned properties above described.

That with this document the herein Assignor relinquishes any and all rights to the said properties
including the improvements existing thereon.

That the Assignee, by these presents, hereby assumes the obligation in favor of the said Development
Bank of the Philippines, as paying whatever legal indebtedness the Assignor has with the said Bank in
connection with the transaction regarding the above mentioned properties subject to the terms and
conditions that the said Bank may require and further recognizes the second mortgage in favor of the
Philippine National Bank.

IN WITNESS WHEREOF, the parties have hereunto set their hands in the City of Manila, Philippines
this _______day ______of 1959.

(Sgd.) JOSE P. DIZON

(Assignor)

(Sgd.) ALFREDO G. GABORRO

(Assignee)

(Acknowledgment Omitted)
After the execution of the conditional sale to him, Gaborro made several payments to the DBP and PNB.
He introduced improvements, cultivated the lands, raised sugarcane and other crops and appropriated
the produce to himself. He also paid the land taxes thereon.
On July 5, 1961, Jose P. Dizon through his lawyer, Atty. Leonardo Abola, wrote a letter to Gaborro
informing him that he is formally offering to reimburse Gaborro ofwhat he paid to the banks but
without, however, tendering any cash, and demanding an accounting of the income and of the property,
contending that the transaction they entered into was one of antichresis. Gaborro did not accede to the
demands of the petitioner, whereupon, on July 30, 1962, Jose P. Dizon instituted a complaint in the
Court of First Instance of Pampanga, against Gaborro, alleging that the documents Deed of Sale With
Assumption of Mortgage and the Option to Purchase Real Estate did not express the true intention and
agreement between the parties. Petitioner Dizon, as plaintiff below, contended that the two deeds
constitute in fact a single transaction; that their real agreement was not an absolute sale of the said
parcels of land but merely an equitable mortgage or conveyance by way of security for the
reimbursement or refund by Dizon to Gaborro of any and all sun.s which the latter may have paid on
account of the mortgage debts in favor of theDBP andthe PNB. Plaintiff prayed that defendant Gaborro
be ordered to accept plaintiffs offer to reimburse him ofwhat hepaid to the banks; to surrender the
possession of the lands to plaintiff; to make an accounting of all the fruits, produce, harvest and other
income which he had received from the three (3) parcels of iand; and to pay the plaintiff for the loss of
two barns and for damages.
In its answer, the DBP specifically denied the material averments of the complaint and stated that on
October 6, 1959, the plaintiff Dizon was no longer the owner of the land in question because the DBP
acquired them at the extrajudicial foreclosure safe held on May 26, 1959, and that the only right which
plaintiff possessed was a mere right to redeem the lands under Act 3135 as amended.
Defendant Alfredo G. Gaborro also answer, denying the material averments of the complaint, stating
that the "Deed of Sale with Assumption of Mortgage" expresses the true agreement of the parties "fully,
truthfully and religiously" but the "Option to Purchase Real Estate" does not express the true intention
of the parties because it was made only to protect the reputation of the plaintiff among his townmates,
and even in the supposition that said option is valid, the action is premature; He also filed a
counterclaim for damages, which plaintiff denied.
The issues having been joined, a pre-trial was held and the following stipulation of facts admitted by
the parties was approved by the Court in the following order dated February 22, 1963:
ORDER
At today's initial trial, the following were present: Mr. Leonardo Abola, for the plaintiff: Mr. Carlos
Antiporda, for the defendant Alfredo Gaborro; and Mr. Virgilio Fugoso, for the Development Bank of
the Philippines:
The parties have stipulated on the following facts:

1. That Annex A attached to the complaint is marked Exhibit A-Stipulation. The parties have
admitted the due execution, authenticity and genuineness of said Exhibit A-Stipulation. This fact
has been admitted by all the three parties.
2.
3. That the defendant Gaborro executed Annex B, which is marked Exhibit B-Slipulation. This fact
has been admitted only between plaintiff and defendant Gaborro.
4.
5. That the three parcels of land referred to in paragraph 3 of the complaint, on or before October
6, I 959. were subject to a first mortgage lien in favor of the Development Bank of the Philippines,
formerly Rehabilitation Finance Corporation, to secure payment of a loan obtained by the
plaintiff Jose P. Dizon in the original sum of P-38.000.00 plus interest, which has been assumed
by defendant Gaborro by virtue of a document. Exhibit A-Stipulation, and also subject to a
second mortgage lien in favor of the Philippine National Bank to secure the payment of a loan in
the sum of P93,83 1.91 plus interest up to August 30. 1951. which mortgage liens were duly
annotated on TCT 15679. This fact has been admitted by the plaintiff and defendant Gaborro.
 6.
7. In respect to the foreclosure of the first mortgage referred to above, it was admitted that the same
was foreclosed on May 26, 1959. the second mortgage lias not been admitted nor foreclosed.
8.
9. That the Development Bank of the Philippines admits that the first mortgage referred to above
was foreclosed on May 26, 1959 under the provisions of Public Act No. 3135, as amended.
10.
11. That subsequently the Development Bank and the defendant Gaborro executed a document
entitled Conditional Sale over the same parcels of land referred to in paragraph 3 of (he
complaint, and copy thereof will be furnished by the Development Bank of the Philippines and
marked Exhibit C-Stipulation.
12.
13. That on or before October 6, 1960, TCT No. 15679 of the Register of Deeds of Pampanga in the
name of Jose P. Dizon covering the three parcels of land referred to in the complaint was
cancelled and in lieu thereof TCT NO. 24292 of the Register of Deeds of Pampanga was issued
in the name of the Development Bank of the Philippines. This fact has been admitted by all the
parties.
14.
15. That after the execution of the deed of conditional sale, certain payments were made by the
defendant Gaborro to the Development Bank, the exact amount to be determined later and
receipts of payments to be also exhibited later. This fact has been admitted by all the three
parties.
16.
17. That since October 6, 1959, the defendant Gaborro has made several payments to the PNB in the
amounts appearing on the receipts which will be shown later, such payments being made on
account of the sum of £38.83 1.91. The payment was assumed by said defendant Gaborro. This
fact has been admitted by plaintiff and defendant Gaborro only.
18.
19. That since the execution of Exhibits A and B-Stipulation, the defendant Gaborro has been and
still is in the actual possession of the three parcels of land in question and he is actually
cultivating the same and that the land taxes thereon have been paid by said defendant Gaborro.
the amounts of said taxes appearing on the official receipts to be shown later. This fact has been
admitted by plaintiff and defendant Gaborro only.
20.
21. That since defendant Gaborro took possession of the lands in question, he has been
appropriating all the fruits produced and other income of said lands without giving to the
plaintiff any share thereof. This fact has been admitted by plaintiff and defendant Gaborro only.

Let a copy of this order be served upon the plaintiff, defendant Gaborro and the Development Bank of
the Philippines with the understanding that, if, within fifteen (15) days, none of the parties questions
the correctness of the facts set forth above, this stipulation of facts shall be conclusive upon the parties
interested in this case.
Set the trial on the controversial facts on April 18, 1963, at 9:00 o'clock in the morning.
Paragraphs 3 and 10 of the above quoted order were deleted in an order dated July 26, 1963.
The records disclose that during the pendency of the case in the trial court, motions were filed by the
plaintiff for the appointment of a receiver of the properties but all were denied, Plaintiff also reiterated
the same motion before the appellate court which, however, dismissed the same, reserving to him the
right to file in the trial court. Plaintiff did file but with the same result, Certiorari proceedings were
resorted to in the Court of Appeals in CA-G.R. No. SP-01403 entitled "Jose P. Dizon vs. Hon. Felipe
Buencamino, et al."" which the respondent court denied.
After trial the court held that the true agreement between Jose P. Dizon, the plaintiff therein, and the
defendant Alfredo G. Gaborro is that the defendant would assume and pay the indebtedness of the
plaintiff to the Development Bank of the Philippines and the Philippine National Bank, and in
consideration therefor, the defendant was given the possession and enjoyment of the properties in
question until the plaintiff shall have reimbursed to defendant fully the amount of PI 3 1,831.91 plus
6% interest per annum.
Accordingly, on March 14, 1970, the lower court rendered judgment, the dispositive part of which reads:

"IN VIEW OF THE FOREGOING, the documents entitled 'Deed of Sale with Assumption of Mortgage'
(Exhibit A-Stipulation) and 'Option to Purchase Real Estate1 (Exhibit B-Stipulation) are hereby
reformed to (he extent indicated above. However, since this action was filed before the period allowed
the plaintiff to redeem his properly, the prematurity of this action aside from not being principally
alleged in the complaint, deters this Court from ordering further reliefs and remedies. The counterclaim
of the defendant is dismissed.
The plaintiffs motion for new trial and for reconsideration, and motion for admission of supplemental
complaint having been denied for lack of merit, on June 6, 1970, plaintiff appealed to the Court of
Appeals, which, however, affirmed the decision with the modification that the plaintiff-appellant has
the right to refund or reimburse the defendant-appellee the sum of P131,831.91 with interest at 8% per
annum from October 6, 1959 until full payment, said right to be exercised within one (1) year from the
date the judgment becomes final, with the understanding that, if he fails to do so within the said period,
then he is deemed to have lost his right over the lands forever.
Petitioner's motion for reconsideration and/or rehearing having been denied by the Court of Appeals,
hence the present petition for review on certiorari. The petitioner assigns the following errors, to wit:

"I. The Court of Appeals, like the lower court, erred in not holding that upon established facts and
undisputed documentary evidence, the deed of sale with assumption of mortgage (Exhibit A-
Stipulation) constitutes an equitable mortgage or conveyance to secure petitioner's obligation to
reimburse or refund to defendant Alfredo Gaborro any and all sums to the extent of P131,831.91, paid
by said defendant in total or partial satisfaction of petitioner's mortgage debts to the DBP and the PNB.
In this connection, the Court of Appeals erred:

(A) In not finding that the petitioner was the lawful owner of the lands in question:

(B) In not finding that the deed of sale in question is not a real and unconditional sale; and

(C) In not holding that the option to purchase real estate (Exhibit B-Stipulation) is conclusive evidence
that the transaction in question is in fact an equitable mortgage.

"II. The Court of Appeals also erred in funding that the instrument entitled 'Assignment of Right of
Redemption and Assumption of Obligation' is conclusive evidence that the real transaction evidenced
by the 'Deed of Sale with Assumption of Mortgage' is not an equitable mortgage. In this connection the
said court also erred or at least committed a grave abuse of discretion:
(A) In not finding that the said deed of assignment is in fact a mere reiteration of the terms and
condition of the deed of sale;

(B) In finding that the price or consideration of the aforesaid assignment of right of redemption
consisted of 300 cavans of palay delivered by Mrs. Gaborro to the petitioner; and

(C) In finding that defendant Gaborro purchased the lands in question by virtue of the aforementioned
deed of assignment.

"III. The Court of Appeals, like the trial court, also erred in not finding that the estate of Alfredo G.
Gaborro is under obligation to render an accounting of all the produce, fruits and other income of the
lands in question from October 6, 1959, and to reconvey the said lands to the herein petitioner. In this
connection, the said court also erred:

(A) In not holding that as a mortgagee in possession, the Gaborro estate has the obligation to either
render an accounting of the produce or fruits of the lands, or to pay rentals for the occupation of said
lands;

(B) In not finding that the Gaborro estate has the obligations to reconvey the lands in controversy to
the herein petitioner, upon payment of the balance due from him after deducting either the net value
of the produce or fruits of the said lands or the rentals thereof;

(C) In not finding that further reliefs or remedies may be granted the herein petitioner; and

(D) In not ordering the admission of herein petitioner's 'Supplemental Complaint" dated April 30, 1970.

"IV. The Court of Appeals finally erred in not reversing the decision of the trial court, and in not
rendering judgment declaring that the deed of sale with assumption of mortgage (Exhibit A-
Stipulation) is in fact an equitable mortgage; and in not ordering the Gaborro estate either to render an
accounting of all the produce or fruits of the lands in question or to pay rentals for the occupation
thereof, from October 6, 1959: and in not ordering the estate of Alfredo G. Gaborro to reconvey, transfer
and assign unto the petitioner the aforementioned lands."
The two instruments sought to be reformed in this case appear to stipulate rights and obligations
between the parties thereto pertaining to and involving parcels of land that had already been foreclosed
and sold extrajudicially, and purchased by the mortgage creditor, a third party. It becomes, therefore,
necessary to determine the legality of said rights and obligations arising from the foreclosure and sale
proceedings not only between the two contracting parties to the instruments executed between them
but also in so far as the agreement affects the rights of the third party, the purchaser Bank.
Act 3135. Section 6 as amended by Act 4118. under which the properties were extrajudicially foreclosed
and sold, provides that:

"Sec. 6. In all cases in which an extrajudicial saie is made under the special power herein before referred
to. the debtor, his successors in interest or any judicial creditor or judgment creditor of sale debtor, or
any person having a lien on the property subsequent to the mortgage or deed of trust under which the
property is sold, may redeem the same at any time within the term or one year from and after the date
of the sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-
four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not
consistent with the provisions of this Act.
Under the Revised Rules of Court. Rule 39, Section 33, the judgment debtor remains in possession of
the property foreclosed and sold, during the period of redemption. If the judgment debtor is in
possession of the property sold, he is entitled to retain it and receive the fruits, the purchaser not being
entitled to such possession. (Riosa v. Verzosa, 26 Phil. 86: Velasco v. Rosenberg's Inc. 32 Phil.
72; Pabico v. Pauco, 43 Phil. 572; Power v. PNB. 54 Phil. 54; Gorospe v. Gochangco, I.-12735. Oct. 30,
1959).
A judgment debtor, whose property is levied on execution, may transfer his right of redemption to any
one whom he may desire. The right to redeem land sold under execution within 12 months is a property
right and may be sold voluntarily by its owner and may also be attached and sold under execution.
(Magno v. Viola and Sotto, 61 Phil. 80).
Upon foreclosure and sale, the purchaser is entitled to a certificate of sale executed by the sheriff.
(Section 27, Revised Rules of Court) After the termination of the period of redemption and no
redemption having been made, the purchaser is entitled to a deed of conveyance and to the possession
of the properties. (Section 35, Revised Rules of Court). The weight of authority is to the effect that the
purchaser of land sold at public auction under a writ of execution only has an inchoate right in the
property, subject to be defeated and terminated within the period of 12 months from the date of sale,
by a redemption on the part of the owner. Therefore, the judgment debtor in possession of the property
is entitled to remain therein during the period allowed for redemption. (Riosa v. Verzosa, 26 Phil. 86;
89;GonzaJes v. Calimbas, 51 Phil, 355.)
In the case before Us, after the extrajudicial foreclosure and sale of his properties, petitioner Dizon
retained the right to redeem the lands, the possession, use and enjoyment of the same during the period
of redemption. And these are the only rights that Dizon could legally transfer, cede and convey unto
respondent Gaborro under the instrument caplioned Deed of Sale with Assumption of Mortgage (Exh
A-Stipulation), likewise the same rights that said respondent could acquire in consideration of the
latter's promise to pay and assume the loan of petitioner Dizon with DBP and PNB.
Such an instrument cannot be legally considered a real and unconditional sale of the parcels of land,
firstly, because there was absolutely no money consideration therefor, as admittedly stipulated, the sum
of P131,831.91 mentioned in the document as the consideration ''receipt of which was acknowledged'1
was not actually paid; and secondly, because the properties had already been previously sold by the
sheriff at the foreclosure sale, thereby divesting the petitioner of his full right as owner thereof to
dispose and sell the lands.
In legal consequence thereby, respondent Gaborro as transferee of these certain limited rights or
interests under Exh. A-Stipulation, cannot grant to petitioner Dizon more than said rights, such as the
option to purchase the lands as stipulated in the document called Option to Purchase Real Estate
(Exhibit B-Stipulation). This is necessarily so for the reason that respondent Gaborro did not purchase
or acquire the full title and ownership of the properties by virtue of the Deed of Sale With Assumption
of Mortgage (Exh. A-Stipuiation), earlier executed between them which We have ruled out as an
absolute sale. The only legal effect of this Option Deed is the grant to petitioner the right to recover the
properties upon reimbursing respondent Gaborro of the total sums of money that the latter may have
paid to DBP and PNB on account of the mortgage debts, the said right to be exercised within the
stipulated 5 years period.
In the light of the foreclosure proceedings and sale of the properties, a legal point of primary importance
here, as well as other relevant facts and circumstances, We agree with the findings of the trial and
appellate courts that the true intention of the parties is that respondent Gaborro would assume and pay
the indebtedness of petitioner Dizon to DBP and PNB, and in consideration therefor, respondent
Gaborro was given the possession, the enjoyment and use of the lands until petitioner can reimburse
fully the respondent the amounts paid by the latter to DBP and PNB, to accomplish the following ends:
(a) payment of the bank obligations; (b) make the lands productive for the benefit of the possessor,
respondent Gaborro; (c) assure the return of the land to the original owner, petitioner Dizon, thus
rendering equity and fairness to all parties concerned.
In view of all these considerations, the law and jurisprudence, and the facts established, We find that
the agreement between petitioner Dizon and respondent Gaborro is one of those innominate contracts
under Art. 1307 of the New Civil Code whereby petitioner and respondent agreed "to give and to do"
certain rights and obligations respecting the lands and the mortgage debts of petitioner which would
be acceptable to the bank, but partaking of the nature of the antichresis insofar as the principal parties,
petitioner Dizon and respondent Gaborro, are concerned.
Mistake is a ground for the reformation of an instrument when, there having been a meeting of the
minds of the parties to a contract, their true intention is not expressed in the instrument purporting to
embody the agreement, and one of the parties may ask for such reformation to the end that such true
intention may be expressed. (Art, 1359, New Civil code). When a mutual mistake of the parties causes
the failure of the instrument to disclose their real agreement, said instrument may be reformed. (Art.
1361, New Civil Code.) It was a mistake for the parties to execute the Deed of Sale With Assumption of
Mortgage and the Option to Purchase Real Estate and stand on the literal meaning of the terms and
stipulations used therein.
The instruments must, therefore be reformed in accordance with the intention and legal rights and
obligations of the parties the petitioner, the respondent and the Banks. We agree with the reformation
decreed by the trial and appellate courts, but in the sense that petitioner Jose P. Dizon has the right to
reacquire the three parcels of land within the one-year period indicated below by refunding or
reimbursing to respondent Alfredo G. Gaborro or the Judicial Administratrix of his Estate whatever
amount the latter has actually paid on account of the principal only, of the loans of Dizon with the DBP
and PNB, excluding the interests and land taxes that may have been paid or may have accrued, on duly
certified financial statements issued by the said banks.
On the issue of the accounting of the fruits, harvests and other income received from the three parcels
of land from October 6. 1959 up to the present, prayed and demanded by Dizon of Gaborro or the
Judicial Administratrix of the Jailer's estate, We hold that in fairness and equity and in the interests of
justice that since We have ruled out the obligation of petitioner Dizon to reimburse respondent Gaborro
of any interests and land taxes that have accrued or been paid by the latter on the loans of Dizon w ith
DBP and PNB. petitioner Dizon in turn is not entitled to an accounting of the fruits, harvests and other
income received by respondent Gaborro from the lands, for certainly, petitioner cannot have both
benefits and the two may be said to offset each other.
By virtue of the Option to Purchase Real Estate (Exh. B-Stipulation) which on its face granted Dizon
the option to purchase the properties which must be exercised within the period from January, 1960 to
December 31,1 965 but which We held to be simply the grant of the right to petitioner Di/on to recover
his properties within the said period, although already expired by reasons and circumstances beyond
his control, petitioner is entitled to a reconveyance of the properties within a reasonable period. The
period of one year from the date of the finality of this judgment as laid down by the Court of Appeals
for the exercise of such right by petitioner Dizon appears fair and reasonable and We approve the same.
Since We are not informed of the status of Dizon's loan of £93,831.91 with the Philippine National Bank
which appears to be on a subsisting basis, it is proper to indicate here how petitioner Dizon may exercise
the right to a reconveyance of the properties as herein affirmed, as follows:
(a) Dizon is granted the right to a reconveyance of the properties by reimbursing Gaborro (or his estate)
whatever amount(s) the latter has actually paid on account of the principal only, of Dizon's loans of
P38,000.00 and P93,83 1.91 which the DBP and PNB. respectively, exclusive of the interests that may
have accrued thereon or may have been paid by Gaborro, on the basis of duly certified statements issued
by said banks;

(b) Any outstanding balance due on Dizon's original principal loan of P38,000.00 with the
Development Bank of the Philippines assumed by Gaborro and on Dizon's original principal loan of
P93,831.91 with the PNB shall be deducted from the above-fixed reconveyance price payable to
Gaborro, in order to enable Dizon to pay off the said mortgage loans directly to the said banks, in
accordance with terms mutually agreed upon with them b) Dizon;

(c) In other words, the maximum reconveyance price that Dizon is obligated to pay is the total sum of
P131,831.91 (the sum total of the principals of his two original loans with the DBP and PNB), and should
the amounts due to the said banks exceed this total of PI 31,831.91 (because of delinquent interests and
other charges), nothing shall be due Gaborro by way of reimbursement and Dizon will thereupon step
into the shoes of Gaborro as owner-mortgagor of the properties and directly arrange with the bar's for
the settlement of the amounts still due and payable to them, subject to the right of Dizon to recover
such amounts in excess of-P131,831.91 from Gaborro by writ of execution in this case; and

(d) As already stated, Dizon is not entitled to an accounting of the fruits, harvests and other income
received by Gaborro from the land while Gaborro in turn is not entitled to the payment of any interests
on any amounts paid by him on account of the principal loans to the banks nor reimbursement of any
interests paid by him to the banks.
WHEREFORE, the judgment appealed from is hereby affirmed with the modification that petitioner
Dizon is granted the right within one year from finality of this decision to a reconveyance of the
properties in litigation upon payment and reimbursement to respondent estate of Alfredo G. Gaborro
of the amounts actually paid by Gaborro or his estate on account of the principal only of Dizon's original
loans with the Development Bank of the Philippines and Philippine National Bank in and up to the total
amount of P131,831.91. under the terms and conditions set forth in the preceding paragraph with
subparagraphs (a) to (d), which are hereby incorporated by reference as an integral part of this
judgment, and upon the exercise of such right respondent estate shall forthwith execute the
corresponding deed of reconveyance in favor of petitioner Dizon and deliver possession of the
properties to him. Without pronouncement as to costs.
Teehankee, (Chairman), Makasiar, Muñoz-Palma, and Fernandez, JJ., concur.

------------------------------------------------------------------------------------------------------------------------

11. 49 Phil. 647

VILLA-REAL, J.:
This is an appeal taken by Jose Maria Memije from a judgment of the Court of First Instance of
Manila the dispositive part of which is as follows:

"For all the foregoing, the court is of the opinion that the plaintiff has a right to the relief prayed for in
its complaint. Wherefore, judgment is rendered declaring that Exhibits C and D, that is, the mortgage
deeds in question in this proceeding, in so far as they prejudice the rights of the plaintiff, are null
and void; that the preliminary injunction issued in this case against the defendant Jose Ma. Memije
is final and absolute; and that the plaintiff recover the amount of the fire insurance policies of the
defendant 'Magallanes Press,.Inc.,' which, or the representatives of which, is hereby ordered to endorse
said insurance policies to the plaintiff, with the costs of the proceeding against the defendants,
with the exception of J. P. Heilbronn Co., Inc. It is so ordered."

In support of his appeal, the appellant assigns the following supposed errors as committed by the
lower court in its judgment, to wit: (1) The court erred in overruling the demurrer filed by
this defendant to the complaint in this action; (2) the trial court erred in giving the plaintiff
corporation possession of the property mortgaged to this appellant without following the necessary
proceedings or complying with the provisions of the law; (3) the trial court erred in issuing
the writ of preliminary injunction against the appellant and E. E. Elser, restraining the former from
receiving from the latter, or the latter from delivering to the former, the amount of the insurance
policies covering the property mortgaged to the appellant, which was damaged by the fire that
occurred in the establishment of the Magallanes Press, Inc.; (4) the trial court erred in giving to the
unnecessary intervention of the Magallanes Press, Inc., in the execution, of the deed Exhibit C an
interpretation which is neither based upon law nor upon the contract; (5) the trial court erred in
ordering the suspension of the foreclosure of the appellant's mortgage on the property of the Magallanes
Press, Inc.; (6) the trial court erred, under the facts proven in this case, in applying article 1297 of the
Civil Code; (7) the trial court erred in finding in its decision that the defendant Jose Ma. Memije
should not have executed the documents Exhibits C and D without taking into account the rights of the
plaintiff corporation, The Belgian Catholic Missionaries, Inc.; (8) the trial court erred in declaring
Exhibits C and D null and void in so far as they prejudice the rights of the plaintiff, over whose credit
that of the herein appellant is preferential; in declaring the writ of preliminary injunction issued
against the defendant Jose Ma. Memije final and absolute; in giving judgment for the plaintiff to
recover the amount of the fire insurance policies of the defendant the Magallanes Press, Inc.; and (9)
the trial court erred in not making any pronouncement as to the counter-claim and cross-complaint
of the defendant Jose Ma. Memije in this action, nor taking the same into consideration and rendering
judgment thereon in favor of said defendant.

The oral evidence has not been forwarded to this court so that we are compelled to base our
opinion exclusively upon the documentary evidence and the facts found and stated by the trial court
in its judgment.

It appears that on December 1, 1921, the Magallanes Press, through its manager H. Cameña, executed
a promissory note in favor of J. P. Heilbronn & Co., Inc., for the sum of P3,472.92, with interest at 10
per cent per annum, payable at the rate of P250 a month, plus the interest earned on the
unpaid balance, until the whole amount of the indebtedness shall have been paid, the first payment to
be made on January 1, 1922, with the condition that upon the failure to pay any monthly installment or
the interest earned on the unpaid balance, the whole amount of the indebtedness shall become due,
and the maker shall pay the payee an additional sum equivalent to 15 per cent of the total balance, for
attorney's fee and expenses of collection, forfeiting all right of exemption.

On the same date, December 1, 1921, the said Magallanes Press, through its manager H. Camena, also
executed a promissory note in favor of J. P. Heilbronn & Co., Inc., for the sum of P0,715.77, with interest
at 12 per cent per annum, payable at the rate of P500 a month, together with the interest earned on
the unpaid balance, until the whole amount of the indebtedness shall have been paid, the first payment
to be made on January 1, 1922, with the condition that upon the failure to pay any monthly installment
or the interest earned on the unpaid balance, the whole amount of the indebtedness shall become
due, and the maker shall pay the payee an additional sum equal to 15 per cent of the
total balance for attorney's fee and expenses of collection, forfeiting all right of exemption.
To secure the payment of said promissory notes which amounted to a total of P14,188.69, H. Cameña,
as general manager of the Magallanes Press, executed a chattel mortgage on all the printing machinery
and its accessories, belonging to the said Magallanes Press, in favor of J. P. Heilbronn & Co., Inc.

On June 19, 1922, the Magallanes Press Co., Inc., successor to the Magallanes Press, with all the
latter's rights and obligations, through its duly authorized president, E. F. Clemente, executed a chattel
mortgage on the same printing machinery and its accessories in favor of the Belgian Catholic
Missionaries Co., Inc., which the Magallanes Press had mortgaged to J. P. Heilbronn & Co., Inc.,
to secure the payment of a loan of P30,500, with interest at 12 per cent per annum, which the
said Magallanes Press & Co., Inc., had obtained from the Belgian Catholic Missionaries Co., Inc., the
duration of the mortgage loan being one year from the execution of the mortgage deed.

In December, 1922 the appellant Jose Ma. Memije made a loan in the sum of P2,000 to E. F. Clemente
which was paid on account of the indebtedness of the Magallanes Press to J. P. Heilbronn & Co., Inc.,
together with the sum of P1,641 which A. F. Mendoza owed said E. F. Clemente.

On the occasion of the issuance of the writ of attachment in civil cause No. 23818 of the Court of First
Instance of Manila, entitled Jose Ma. Cavanna vs. The Magallanes Press Co., Inc., the defendant Jose
Ma. Memije, on February 21, 1923, filed an intervention in said case.

All the promissory notes executed by the Magallanes Press in favor of J. P. Heilbronn & Co., Inc.,
having been overdue for non-payment of the installments, as well as the respective chattel mortgage,
the said J. P. Heilbronn & Co., Inc., transferred all its mortgage credit against the Magallanes Press
to Jose Ma. Memije in consideration of the sum of P8,280.90, the balance of said mortgage credit.

On March 14, 1923, Enrique Clemente, as manager of the Magallanes Press Co., Inc., executed a deed
in favor of Jose Ma. Memije by virtue of which the chattel mortgage which was given by the Magallanes
Press in favor of J. P. Heilbronn & Co., Inc., an£ transferred by the latter to Jose Ma. Memije, was
made to cover an additional loan of P5,895.79, which included the sum of P2,000 which said Jose Ma.
Memije had advanced said Enrique Clemente in December, 1922.

On April 21, 1923, a fire occurred in the building where the printing machinery, its accessories and
other personal property of the Magallanes Press Co., Inc., were located and which were covered by
said chattel mortgages. Said property was insured, and the insurance policies covering it were
endorsed to J. P. Heilbronn & Co., Inc., upon the execution of the chattel mortgage thereon in favor of
the latter. When J. P. Heilbronn & Co., Inc., transferred its mortgage credit to Jose Ma. Memije it, in
turn, endorsed said insurance policies to him. The insurance companies were disposed to pay the
respective insurance policies, which amounted to P7,686.45, but due to the issuance of the above-
mentioned writ of preliminary injunction, payment could not be made.

Due to the filing of the complaint in the present case on May 9, 1923, and the issuance of the writ of
preliminary injunction on May 10th of the same year, Jose Ma. Memije was unable to collect the amount
of the insurance policies, and when he was summoned under the complaint on May 14,1923, he made
demand on the Magallanes Press Co., Inc., for the payment of his mortgage credit and on the same date
the manager of said corporation, E. F. Clemente, permitted the secretary of the said corporation to
place the property covered by the mortgage into the hands of the said Jose Ma. Memije in order that
the same might be sold, but the sale could not be consummated due to the issuance of the said writ of
preliminary injunction.

The first question raised by the defendant and appellant has reference to the overruling of the
demurrer filed by him to the complaint.
One of the grounds of said demurrer was that the complaint in this case did not allege facts sufficient
to constitute a cause of action against the said defendant, in that, notwithstanding the fact that the said
complaint was instituted to annul the document of transfer of the mortgage credit Exhibit C, it was not
alleged in the said complaint that the defendant Jose Ma. Memije had any intention to defraud the
interests of the plaintiff corporation, which was absolutely impossible due to the nature of the
transaction and the preferential character of the mortgage credit of J. P. Heilbronn & Co., Inc.

As to this paragraph of the complaint, the plaintiff company having known of the existence of a chattel
mortgage in favor of J. P. Heilbronn & Co., Inc., the latter, either as the first or as the second mortgagee,
had a perfect right to transfer its mortgage credit, without the knowledge or consent of any other
mortgagee, inasmuch as whoever acquired it, would have exactly the same status as the transferor with
the same rights and obligations. The fact, therefore, that the MagaUanes Press Co., Inc.,
had consented to the transfer of the mortgage credit of J. P. Heilbronn & Co., Inc., to Jose Ma. Memije,
does not constitute a fraud that can vitiate the said transfer, inasmuch as the order of preference of
the existing mortgages has not been altered, and its allegation does not constitute a cause of action to
annul the said transfer.

In regard to the allegation contained in the ninth paragraph of the complaint, it is very clear that the
increase made by Jose Ma. Memije in the mortgage credit acquired by him from J. P. Heilbronn & Co.,
Inc., and the extension made by the Magallanes Press, Inc., of the mortgage to said additional credit
without the knowledge or consent of the plaintiff company, as second mortgagee, prejudices the credit
of the latter, inasmuch as the security for the payment of said credit was reduced as to it, and, therefore,
constitutes a fraud that vitiates the contract of extension of the mortgage evidenced by the deed Exhibit
D, rendering it void.

The facts alleged in paragraph 9 of the complaint are sufficient to constitute a cause of action of
nullity, and the lower court did not err in overruling the demurrer filed by the defendant Jose Ma.
Memije.

In regard to the second assignment of error, it appears that the defendant Jose Ma. Memije having
attempted to foreclose the mortgage, by which the mortgage credit acquired by him from J.
P. Heilbronn & Co., Inc., was secured, in order to recover not only the original credit but also the
increase, the Belgian Catholic Missionaries Co., Inc., filed a complaint, with a petition for a writ of
preliminary injunction against the sheriff, in whose hands the foreclosure of the mortgage was
placed. The writ of preliminary injunction having been issued, upon the filing of a bond in the sum of
P15,000, and there being no person more interested in the conservation and custody of the property
covered by the mortgage than said plaintiff company, being the largest creditor, it applied and obtained
from the court the possession of the same.

Contrary to the contention of the appellant, this case is not one of replevin but simply a proceeding
instituted by the plaintiff for the deposit of the property in-litigation, upon the filing of a bond, said
plaintiff acting as a receiver by authority of the court, being the person most interested in the
conservation and care of the same (sec. 174, Act No. 190; 11 C. J., 726).

The lower court, therefore, did not err in authorizing the plaintiff company to take possession of the
personal property in litigation upon the filing of a bond sufficient to secure the conservation or value
thereof.

The third assignment of error raises the question as to the preference of right between the plaintiff
company and the defendant over the mortgaged property and the amount of the insurance policies
covering a part thereof which was destroyed by fire.
As we have seen in the statement of the pertinent facts necessary for the clear and accurate solution of
the questions of law involved in the present appeal, the firm of J. P. Heilbronn & Co., Inc., had a
mortgage credit against the Magallanes Press for the sum of P14,186.69, secured by a first chattel
mortgage. The plaintiff company, the Belgian Catholic Missionaries Co., Inc., also had a mortgage
credit for the amount of P30,500, secured by a second mortgage on the same personal property. After
this second mortgage had been executed, the payment of the mortgage credit of J. P. Heilbronn & Co.,
Inc., became due, which credit had been reduced to the sum of P8,280.90 through partial payments,
and the herein defendant-appellant Jose Ma, Memije acquired said mortgage credit and increased it
by P5,895.59, of which increase P2,000 was a previous loan.

There is no question but that J. P. Heilbronn & Co., Inc., at the time of the transfer of its mortgage
rights to Jose Ma. Memije, had a preferential right over that of the Belgian Catholic Missionaries Co.,
Inc., for the remainder of the amount of the mortgage credit, that is, P8,280.90. The plaintiff company
had a preferential right to the rest of the value of the mortgaged property after deducting the remaining
mortgage credit of J. P. Heilbronn & Co., Inc.

The increase of P5,895.59 made by the defendant Jose Ma. Memije in favor of the Magallanes Press
Co., Inc., and the extension of the mortgage thereto, are not only subordinate to the mortgage
credit of the plaintiff company, being subsequent in time and in registration, but said increase in
the security is also void. The increase of the mortgage security becomes a new mortgage in itself,
inasmuch as the original mortgage did not contain any stipulation in regard to the increase of the
mortgage credit, and even if it did, said increase would take effect only from the date of the increase. A
mortgage that contains a stipulation in regard to future advances in the credit will take effect only from
the date the same are made and not from the date of the mortgage (11 C. J., 448; 5 R. C. L., 420-
421). In accordance with the provisions of section 5 of Act No. 1508, known as the Chattle Mortgage
Law, the parties to the original deed swore that the same was mortgaged "to secure the obligations
specified therein and for no other purpose." Neither the increase in question, nor the extension of the
mortgage to secure the payment of the same, is specified in the deed, consequently said extension is
void. "Where the statute provides that the parties to a chattel mortgage must make oath that the debt
is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a
valid mortgage cannot be made to secure a debt to be thereafter contracted." (11 C. J., 448.)

Briefly, therefore, we have the following:

(a) That Jose Ma. Memije has a preferential right to the value of the chattels mortgaged and the
amount of the insurance policies up to the sum of P8,280.90;

(b) That the plaintiff corporation, the Belgian Catholic Missionaries Co., Inc., has a right to the
remainder of the value of said chattels and the insurance policies up to the amount of P30,500, after
deducting the preferential credit of Jose Ma. Memije;

(c) That as to the increase of P5,895.59, the right of the defendant Jose Ma. Memije is
that of an ordinary creditor.

In regard to the damages claimed by the defendant in his counterclaim and which is the subject-
matter of his remaining assignments of error, said defendant has a right to interest at 12 per cent on
the P8,280.90, the amount of the mortgage credit acquired by him from J. P. Heilbronn & Co., Inc.,
from February 26, 1923, the date of the acquisition until fully paid.

For the foregoing reasons, the judgment appealed from is revoked and it is ordered that another
be entered declaring all the mortgages overdue, and the mortgage credit of Jose Ma. Memije
preferential over that of the Belgian Catholic Missionaries Co., Inc., up to the amount of P8,280.90,
with interest at the rate of 12 per cent per annum from February 26, 1923, until fully paid; the mortgage
credit of the Belgian Catholic Missionaries Co., Inc., for the sum of P30,500 with interest at the rate of
12 per cent per annum, from June 19, 1922, until fully paid, plus the sum of P3,000 for attorney's fees,
over the additional credit of Jose Ma. Memije for P5,895.59; and ordering the foreclosure of the
said mortgages by selling the mortgaged property at public auction, to the proceeds of
which shall be added the amount of the insurance policies and the above-mentioned credits in the
order of preference above established, without special pronouncement as to costs. So ordered.

Avanceña, C. J., Johnson, Street, Ostrand, and Johns, JJ., concur.

------------------------------------------------------------------------------------------------------------------------

12. 110 Phil. 896

GUTIERREZ DAVID, J.:

On May 10, 1948, Rosario Cruzado, for herself and as administratrix of the intestate estate of her
deceased husband Pedro Cruzado in Special Proceedings No. 4959 of the Court of First Instance of
Manila, obtained from the defunct Rehabilitation Finance Corporation (hereinafter referred to as the
RFC) a loan in the amount of P11,000.00. To secure payment thereof, she mortgaged the land then
covered by Transfer Certificate of Title No. 61358 issued in her name and that of her deceased husband.
As she failed to pay certain installments on the loan, the mortgage was foreclosed and the RFC acquired
the property for P11,000.00, subject to her rights as mortgagor to repurchase the same. On July 26,
1951, upon her application, the land was sold back to her conditionally for the amount of P14,269.03,
payable in seven years.
About two years thereafter, or on February 13, 1953, Rosario Cruzado, as guardian of her minor children
in Special Proceedings No. 14198 of the Court of First Instance of Manila, was authorized by the court
to sell with the previous consent of the RFC the land in question together with the improvements
thereon for a sum not less than P19,000. Pursuant to such authority and with the consent of the RFC,
she sold to Pura L. Villanueva for P19,000.00 "all their rights, interest, title and dominion on and over
the herein described parcel of land together with the existing improvements thereon, including one
house and an annex thereon; free from all charges and encumbrances, with the exception of the sum of
P11,009.52, plus stipulated interest thereon which the vendor is still presently obligated to the RFC and
which the vendee herein now assumes to pay to the RFC under the same terms and conditions specified
in that deed of sale dated July 26, 1951." Having paid in advance the sum of P1,500.00, Pura L.
Villanueva, the vendee, in consideration of the aforesaid sale, executed in favor of the vendor Rosario
Cruzado a promissory note dated March 9, 1953, undertaking to pay the balance of P17,500.00 in
monthly installments. On April 22, 1953, she made an additional payment of P5,500.00 on the
promissory note. She was, subsequently, able to secure in her name Transfer Certificate of Title No.
32526 covering the house and lot above referred to, and on July 10, 1953, she mortgaged the said
property to Magdalena C. Barretto as security for a loan in the amount of P30,000.00.
As said Pura L. Villanueva had failed to pay the remaining installments on the unpaid balance of
P12,000.00 on her promissory note for the sale of the property in question, a complaint for the recovery
of the same from her and her husband was filed on September 21, 1953 by Rosario Cruzado in her own
right and in her capacity as judicial guardian of her minor children. Pending trial of the case, a lien was
constituted upon the property in the nature of a levy in attachment in favor of the Cruzados, said lien
being annotated at the back of Transfer Certificate of Title No. 32526. After trial, decision was rendered
ordering Pura Villanueva and her husband, jointly and severally, to pay Rosario Cruzado the sum of
P12,000.00, with legal interest thereon from the date of the filing of the complaint until fully paid plus
the sum of P1,500.00 as attorney's fees.
Pura Villanueva having, likewise, failed to pay her indebtedness of P30,000.00 to Magdalena C.
Barretto, the latter, jointly with her husband, instituted against the Villanueva spouses an action for
foreclosure of mortgage, impleading Rosario Cruzado and her children as parties defendants. On
November 11, 1956, decision was rendered in the case absolving the Cruzados from the complaint and
sentencing the Villanuevas to pay the Barrettos, jointly and severally, the sum of P30,000.00, with
interest thereon at the rate of 12% per annum from January 11, 1954, plus the sum of P4,000.00 as
attorney's fees. Upon the finality of this decision, the Barrettos filed a motion for the issuance of a writ
of execution which was granted by the lower court on July 31, 1958. On August 14, 1958, the Cruzados
filed their "Vendor's Lien" in the amount of P12,000.00, plus legal interest, over the real property
subject of the foreclosure suit, the said amount representing the unpaid balance of the purchase price
of the said property. Giving due course to the lien, the court on August 18, 1958 ordered the same
annotated in Transfer Certificate of Title No. 32526 of the Registry of Deeds of Manila, decreeing that
should the realty in question be sold at public auction in the foreclosure proceedings, the Cruzados shall
be credited with their pro-rata share in the proceeds thereof "pursuant to the provisions of Articles
2248 and 2249 of the new Civil Code in relation to Article 2242, paragraph 2 of the same Code." The
Barrettos filed a motion for reconsideration on September 12, 1958, but on that same date, the sheriff
of the City of Manila, acting in pursuance of the order of the court granting the writ of execution, sold
at public auction the property in question. As highest bidder, the Barrettos themselves acquired the
properties for the sum of P49,000.00.
On October 4, 1958, the Court of First Instance issued an order confirming the aforesaid sale and
directing the Register of Deeds of the City of Manila to issue to the Barrettos the corresponding
certificate of title, subject, however, to the order of August 18, 1958 concerning the vendor's lien. On
the same date, the motion of the Barrettos seeking reconsideration of the order of the court giving due
course to the said vendor's lien was denied. From this last order, the Barrettos spouses interposed the
present appeal.
The appeal is devoid of merit.
In claiming that the decision of the Court of First Instance of Manila in Civil Case No. 20675 awarding
the amount of P12,000.00 in favor of Rosario Cruzado and her minor children cannot constitute a basis
for the vendor's lien filed by the appellee Rosario Cruzado, appellants allege that the action in said civil
case was merely to recover the balance of a promissory note. But while, apparently, the action was to
recover the remaining obligation of promissor Pura Villanueva on the note, the fact remains that
Rosario P. Cruzado as guardian of her minor children was an unpaid vendor of the realty in question,
and the promissory note was, precisely, for the unpaid balance of the purchase price of the property
bought by said Pura Villanueva.
Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that constitute an
encumbrance on specific immovable property, and among them are:
"(2) For the unpaid price of real property sold, upon the immovable sold"; and

"(5) Mortgage credits recorded in the Registry of Property."

Article 2249 of the same Code provides that "if there are two or more credits with respect to the same
specific real property or real rights, they shall be satisfied pro-rata, after the payment of the taxes and
assessments upon the immovable property of real rights.
Application of the above-quoted provisions to the case at bar would mean that the herein appellee
Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with
the appellants the proceeds of the foreclosure sale.
The appellants, however, argue that inasmuch as the unpaid vendor's lien in this case was not
registered, it should not prejudice the said appellants' registered rights over the property. There is
nothing to this argument. Note must be taken of the fact that article 2242 of the new Civil Code
enumerating the preferred claims, mortgages and liens on immovables, specifically requires that unlike
the unpaid price of real property sold mortgage credits, in order to be given preference, should be
recorded in the Registry of Property. If the legislative intent was to impose the same requirement in the
case of the vendors lien, or the unpaid price of real property sold, the lawmakers could have easily
inserted the same qualification which now modifies the mortgage credits. The law, however, does not
make any distinction between registered and unregistered vendor's lien, which only goes to show that
any lien of that kind enjoys the preferred credit status.
Appellants also argue that to give the unrecorded vendor's lien the same standing as the registered
mortgage credit would be to nullify the principle in land registration system that prior unrecorded
interests cannot prejudice persons who subsequently acquire interests over the same property. The
Land Registration Act itself, however, respects without reserve or qualification the paramount rights of
alien holders on real property. Thus, section 70 of that Act provides that:
"Registered land, and ownership therein shall in all respects be subject to the same burdens and
incidents attached by law to unregistered land. Nothing contained in this Act shall in any way be
construed to relieve registered land or the owners thereof from any rights incident to the relation of
husband and wife, or from liability to attachment on mesne process or levy on execution, or from
liability to any lien of any description established by law on land and the buildings thereon, or the
interest of the owners of such land or buildings, or to change the laws of descent, or the rights of
partition between co-owners, joint tenants and other co-tenants, or the right to take the same by
eminent domain, or to relieve such land from liability to be appropriated in any lawful manner for the
payment of debts, or to change or affect in any other way any other rights or liabilities created by law
and applicable to unregistered land, except as otherwise expressly provided in this Act or in the
amendments thereof." (Italics supplied)
As to the point made that the articles of the Civil Code on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such
limitation. If we are to interpret this portion of the Code as intended only for insolvency cases, then
other creditor-debtor relationships where there are concurrence of credits would be left without any
rules to govern them, and it would render purposeless the special laws on insolvency.
Premises considered, the order appealed from is hereby affirmed. Costs against the appellants.
Bengzon, Padilla, Bautista Angelo, Labrador, Paredes, and Dizon JJ., concur.

Concepcion, Reyes, J. B. L., and Barrera, JJ., concur in the result.

RESOLUTION

December 29, 1962

REYES, J.B.L., J.:

Appellants, spouses Barretto, have filed a motion vigorously urging, for reason to be discussed in the
course of this resolution, that our decision of 28 January 1961 be reconsidered and set aside, and a new
one entered declaring that their right as mortgagees remain superior to the unrecorded claim of herein
appellee for the balance of the purchase price of her rights, title, and interest in the mortgaged property.
It will be recalled that, with Court authority Rosario Cruzado sold all her right, title, and interest and
that of her children in the house and lot herein involved to Pura L. Villanueva for P19,000.00. The
purchaser paid P1,500 in advance, and executed promissory note for the balance of P17,500.00.
However, the buyer could only pay P5,500 on account of the note, for which reason the vendor obtained
judgment for the unpaid balance. In the meantime, the buyer Villanueva was able to secure a clean
certificate of title (No. 32526), and mortgaged the property to appellant Magdalena C. Barretto, married
to Jose G. Barretto, to secure a loan of P30,000.00, said mortgage having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the mortgage
in her favor, obtained judgment, and upon its becoming final asked for execution on 31 July 1958. In 14
August 1958. Cruzado filed a motion for recognition of her "vendors lien" in the amount of P12,000.00,
plus legal interest, involving Articles 2242, 2243 and 2249 of the new Civil Code. After hearing, the
court below ordered the "lien" annotated on the back of Certificate of Title No. 32526, with the proviso
that in case of sale under the foreclosure decree the vendor's lien and the mortgage credit of appellant
Barretto should be paid pro rata from the proceeds. Our original decision affirmed this order of the
Court of First Instance of Manila.
Appellants insist that:
(1) The vendor's lien under Articles 2242 and 2243 of the new Civil Code of the Philippines, can only
become effective in the event of insolvency of the vendee, which has not been proved to exist in the
instant case; and
(2) That the appellee Cruzado is not a true vendor of the foreclosed property.
We have given protracted and mature consideration to the facts and law of this case, and have reached
the conclusion that our original decision must be reconsidered and set aside, for the following reasons:

A. The previous decision failed to take fully into account the radical changes introduced by the Civil
Code of the Philippines into the system of priorities among creditors ordained by the Civil Code
of 1889.

Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real property
under Article 1923 were to be resolved according to an order of priorities established by Article 1927,
whereby one class of creditors could exclude the creditors of lower order until the claims of the former
were fully satisfied out of the proceeds of the sale of the real property subject of the preference, and
could exhaust such proceeds if necessary.
Under the system of the Civil Code of the Philippines, however, only taxes enjoy a similar absolute
preference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority
among themselves, but must be paid pro rata, i.e., in proportion to the amount of the respective credits.
Thus, Article 2249 provides:
"if there are two or more credits with respect to specific real property or real rights, they shall be
satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real
right."
But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14 of
Article 2242 (or such of them as have credits outstanding) must necessarily be convened, and the
import of their claims ascertained. It is thus apparent that the full application of Articles 2249 and 2242
demands that there must be first some proceeding where the claims of all the preferred creditors may
be bindingly adjudicated, such as insolvency, the settlement of a decedent's estate under Rule 87 of the
Rules of Court, or other liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that
"The claims or credits enumerated in the two preceding articles[1] shall be considered as mortgages or
pledges of real or personal property of liens within the purview of legal provisions governing
insolvency * * *." (Italics supplied);
and the rule is further clarified in the Report of the Code Commission, as follows:
"The question as to whether the Civil Code and the Insolvency Law can be harmonized is settled by this
Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be
enforced in accordance with the insolvency law." (Italics supplied)
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure
sale (as in the case now before us) is not the proceeding contemplated by law for the enforcement of
preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court to
ascertain the pro rata dividend corresponding to each, because the rights of the other creditors likewise
enjoying preference under Article 2242 can not be ascertained. Wherefore, the order of the Court of
First Instance of Manila now appealed from, decreeing that the proceeds of the foreclosure sale be
apportioned only between appellant and appellee is incorrect, and must be reversed.
In the absence of insolvency proceedings (or other equivalent general liquidation of the debtor's estate),
the conflict between the parties (now before us) must be decided pursuant to the well established
principle concerning registered lands: that a purchaser in good faith and for value (as the appellant
concededly is) takes registered property free from liens and encumbrances other than statutory liens
and those recorded in the certificate of title. There being no insolvency or liquidation, the claim of the
appellee, as unpaid vendor, did not acquire the character and rank of a statutory lien co-equal to the
mortgagee's recorded encumbrance, and must remain subordinate to the latter.
We are understandably loath (absent a clear precept of law so commanding) to adopt a rule that would
undermine the faith and credit to be accorded to registered Torrens titles and nullify the beneficent
objectives sought to be obtained by the Land Registration Act. No argument is needed to stress that if
a person dealing with registered land were to be held to take it in every instance subject to all the
fourteen preferred claims enumerated in Article 2242 of the new Civil Code, even if the existence and
import thereof can not be ascertained from the records, all confidence in Torrens titles would be
destroyed, and credit transactions on the faith of such titles would be hampered, if not prevented, with
incalculable results. Loans on real estate security would become aleatory and risky transactions, for no
prospective lender could accurately estimate the hidden liens on the property offered as security, unless
he indulged in complicated, tedious investigations. The logical result might well be a contraction of
credit to unforseeable proportions that could lead to economic disaster.
Upon the other hand, it does not appear excessively burdensome to require the privileged creditors to
cause their claims to be recorded in the books of the Register of Deeds should they desire to protect
their rights even outside of insolvency liquidation proceedings.

B. The close study of the facts disclosed by the records casts strong doubt on the proposition that
appellees Cruzados should be regarded as unpaid vendors of the property (land, buildings and
improvements) involved in the case at bar, so as to be entitled to preference under Article 2242.
The record on appeal, specially the final decision of the Court of First Instance of Manila in the
suit of the Cruzados against Villanueva, clearly establishes that after her husband's death, and
with due court authority, Rosario Cruzado, for herself and as administratrix of her husband's
estate, mortgaged the property to the Rehabilitation Finance Corporation (RFC) to secure
repayment of a loan of P11,000, in installments, but that the debtor failed to pay some of the
installments; wherefore the RFC, on 24 August 1949, foreclosed the mortgage, and acquired the
property, subject to the debtor's right to redeem or repurchase the said property; and that on 25
September 1950, the RFC consolidated its ownership, and the certificate of title of the Cruzados
was cancelled and a new certificate issued in the name of the RFC.

While on 26 July 1951 the RFC did execute a deed selling back the property to the erstwhile mortgagors
and former owners Cruzados in installments, subject to the condition (among others) that the title to
the property and its improvements "shall remain in the name of the Corporation (RFC) until after said
purchase price, advances and interest shall have been fully paid" as of 27 September 1952, Cruzado had
only paid a total of P1,360, and had defaulted on six monthly amortizations; for which reason the RFC
rescinded the sale, and forfeited the payments made, in accordance with the terms of the contract of 26
July 1951.
It was only on 10 March 1953 that the Cruzados sold to Pura L. Villanueva all "their rights, title, interest
and dominion on and over" the property, lot, house, and improvements for P19,000.00, the buyer
undertaking to assume payment of the obligation to the RFC; and by resolution of 30 April 1953, the
RFC approved "the transfer of the rights and interests of Rosario P. Cruzado and her children in their
property herein above-described in favor of Pura L. Villanueva"; and on 7 May 1953 the RFC executed
a deed of absolute sale of the property to said party, who had fully paid the price of P14,269.03.
Thereupon, the spouses Villanueva obtained a new Transfer Certificate of Title No, 32526 in their name.
On 10 July 1953, the Villanuevas mortgaged the property to the spouses Barretto, appellants herein.
It is clear from the facts above-stated that ownership of the property had passed to the Rehabilitation
Finance Corporation since 1950, when it consolidated its purchase at the foreclosure sale, and obtained
a certificate of title in its corporate name. The subsequent contract of resale in favor of the Cruzados
did not revest ownership in them, since they failed to comply with its terms and conditions, and the
contract itself provided that the title should remain in the name of the RFC until the price was fully
paid.
Therefore, when after defaulting in their payments due the resale contract with the RFC the appellants
Cruzados sold to Villanueva 'their rights, title, interest and dominion" to the property, they merely
assigned whatever rights or claims they might still have thereto; the ownership of the property rested
with the RFC. The sale from Cruzado to Villanueva, therefore, was not so much a sale of the land and
its improvements as it was a quitclaim deed in favor of Villanueva. In law, the operative sale was that
from the RFC to the latter, and it was the RFC that should be regarded as the true vendor of the property.
At the most, the Cruzados transferred to Villanueva an option to acquire the property, but not the
property itself, and their credit, therefore, can not legally constitute a vendor's lien on the corpus of that
property that should stand on an equal footing with the mortgaged credit held by appellants Barretto.
In view of the foregoing, the previous decision of this Court, promulgated on 28 January 1961, is hereby
reconsidered and set aside, and a new one shall be entered reversing the judgment appealed from and
declaring the appellants Barrettos entitled to full satisfaction of their mortgaged credit out of the
proceeds of the foreclosure sale in the hands of the Sheriff of the City of Manila. No costs.
Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Regala, and Makalintal, JJ., concur.

------------------------------------------------------------------------------------------------------------------------
13. THIRD DIVISION

[G.R. No. 123240. August 11, 1997]

STATE INVESTMENT HOUSE, petitioner, vs. THE COURT OF APPEALS, the

SECURITIES & EXCHANGE COMMISION and PHILIPPINE BLOOMING MILLS,
CO., INC., respondents.

RESOLUTION
MELO, J.:
 In a minute resolution we issued on February 5, 1996, the petition at bench was denied due course
for its failure to show that respondent court committed any reversible error (p. 114, Rollo).
On March 1, 1996, petitioner filed a motion for reconsideration imputing upon this Court the
principal error of having that the doctrine in PCIB vs. Court of Appeals (172 SCRA 436 [1989]), had
already been abrogated by the rulings of this Court in the cases of Alemars Sibal & Sons
vs. Elbinias (186 SCRA 94 [1990]); BF homes Inc. vs. Court of Appeals, 190 SCRA 262 [1990]; Araneta
vs. Court of Appeals, 211 SCRA 390 [1992; and RCBC vs. Court of Appeals, 213 SCRA 830 [1992]),
where we ruled that whenever a distressed corporation asks the Securities and Exchange Commission
(SEC) for rehabilitation and suspension of payments, preferred creditors may no longer asserts such
preference, but shall stand on equal footing with other creditors. Petitioner points out two main matters
for consideration: (1) that the above above-cited cases of Alemars BF Homes, Araneta, and BPI vs.
Court of Appeals (229 SCRA 223 [1994]) all involved unsecured creditors and are, therefore, not
relevant to the resolution of this case, and (2) that of the above-cited cases where the Court ruled
contrary to PCIB, thereby abandoning the ruling in said case, only the RCBC Case could have complied
with the Constitutional requirement that no doctrine or principle of law rendered en banc or in division
may be modified or reversed except by the Court sitting en banc (Par. 3, Section 4, Article VIII, 1987
Constitution), because only the RCBC Case was rendered by the Court en banc. Nonetheless, petitioner
submits that the judgment in RCBC has not yet attained finality as the motion for reconsideration
therein up to the present time, has remained pending and unresolved, and could, therefore, not be
relied upon in the instant case as a precedent.
After review of the arguments presented in the motion for reconsideration, we find no cogent
reason to reverse our previous dismissal of the instant case. However, if only to clarify matters for the
guidance of the bench and the bar, we shall discuss the applicable law on the matter.
To put case at hand in its proper factual perspective, it is worthy to note that what petitioner filed
with the SEC in the pending action for settlement of claims of the various creditors of respondent
Philippine Blooming Mills Co., Inc. (PBM) was a Motion to Declare and Confirm the Highest Preference
of Movants First Mortgage Lien. The SEC hearing officer denied said motion. Petitioner appealed this
denial to the SEC en banc, which dismissed the appeal. Then on appeal before respondent court, the
Court of Appeals affirmed the SEC decision. Finally, finding no reversible error committed by
respondent Court of Appeals, we denied due course to the instant petition. Now, the present motion for
reconsideration.
Stated plainly, the issue squarely raised in the main petition is whether or not petitioner SIHI, as
mortgagee of respondent PBM, may be declared to have highest preference over specific property
subject of the mortgage, despite the pendency of rehabilitation/receivership proceeding pending before
the SEC.
Under the factual circumstances of obtaining in the instant case, as well as the applicable provisions
of the law, the Court is duty bound to resolve this issue in the negative.
In any rehabilitation/receivership proceedings where claims of several creditors shall have to be
resolved, the provisions of the Title XIX of the Civil Code Concurrence and Preference of Credits
applies. In the present case where a mortgage piece of realty is involved, the following relevant articles
govern, to wit:

Art. 2242 - With reference to specific immovable property and real rights of the debtor, the
following claims, mortgages and liens shall be preferred and shall constitute an encumbrance on the
immovable or real right:

(1) Taxes due upon the land or building;

(2) For unpaid price of real property, sold upon the immovable sold;
(3) Claims of laborers, mason, mechanics and other workmen, as well as architects, engineers and
contractors, engaged in the construction, reconstitution or repair of buildings, canals or other works,
upon said buildings, canals or other works;

(4) Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings,
canals or other works, upon said buildings, canals or other works;

(5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged;

(6) Expenses for the preservation or improvement of real property when the law authorizes
reimbursement, upon the immovable preserved or improved;

(7) Credits annotated in the Registry of Property in virtue of a judicial order, by attachment or
execution, upon the property affected, and only as to the latter credits;

(8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real
property thus divided;

(9) Claims of donors of real property of pecuniary charges or other conditions imposed upon the donee,
upon the immovable donated;

(10) Credits of insurers, upon the property insured, for the insurance premium for two years.

Art. 2243. The claims of credits enumerated in the two preceding articles shall be considered as
mortgagees or pledges of real or personal property, or liens within the purview of legal provisions
governing insolvency. Taxes mentioned in No.1, article 2241, and No. 1 , article 2242, shall first be
satisfied.

It may easily be seen that petitioners motion to declare and confirm the highest preference of it first
mortgage lien is at the very least premature. There may or may not exist claims enumerated in the
abovecited Article 2242 which, by virtue of Article 2243, shall be considered as mortgages of the specific
property involved. At best this issue should be resolve in the light of the rehabilitation plan approved
by the SEC on January 3, 1990 which includes the schedule of payment. Verily, this rehabilitation plan
is not included among the matters submitted for review in the present petition. On this score alone,
without having to refer to any of the above/cited decisions yet, the instant petition may already be
dismissed. We shall reserve our ruling on whether or not petitioner may be adjudge to be preferred
creditor at the proper opportunity when the entire judgment of the SEC shall be before us for review.
Petitioner cannot compel us to blindly adhere to the case of Philippine Commercial International
Bank vs. Court of Appeals (172 SCRA 436 [1989]), which relied upon the case of Chartered Bank vs.
Imperial and National Bank (48 Phil. 931 [1928]). It is significant to note that Chartered Bank was
decided before the passage of Republic Act No. 386, the Civil Code of the Philippines (which took effect
on August 30, 1950), when the abovecited Articles 2242 and 2243 or any similar provisions were not
yet operative.
However, if only to appease petitioner on its insistence that the instant case should be consolidated
with the RCBC as these two cases involve similar facts and issues, we rule to deny such prayer first,
because the decision in RCBC had long been rendered, and second, the factual premises in RCBC are
not on all fours with the instant case.
It is worthy to stress that RCBC was precipitated by the Rizal provincial sheriff's refusal to execute
a certificate of sale of the property sold on public auction before any writ of execution against the
conduct of such public auction had been issued. The regional trial court before which the action
for mandamus was filed by RCBC granted the petition, thereby ordering respondent provincial sheriff
to execute and deliver to petitioner the Certificate of Auction Sale of January 29, 1985, involving the
property sold therein. . . (RCBC vs. IAC , 213 SCRA 830, at pp. 833-834). Aggrieved thereby, BF
Homes filed an original complaint with then Intermediate Appellate Court (IAC) for the annulment of
this judgment of the regional trial court. This action for annulment before the IAC prospered and the
Register of Deeds of Pasay City was accordingly ordered to suspend the issuance to the mortgagee-
purchaser RCBC of the owners copies of the new land titles until the matter shall have been resolved by
the Securities and Exchange Commission in the rehabilitation case before it. It was this judgment of the
IAC which was the subject of the aforecited RCBC Case. The issues involved in the RCBC Case are,
therefore, essentially different from the issues in the instant case. There, the question of retroactive
application of the writ of injunction to the foreclosure proceedings was involved. Also, the propriety of
the IACs disposition of the original action for annulment of judgment which is the proper subject of the
petition in the RCBC Case necessarily involves issues concerning the requisite elements of a void
judgment, such as lack of jurisdiction and/or fraud, accident, mistake or excusable negligence.
In the present petition, the foreclosure sale of the mortgaged property was declared by this Court
in G.R. No. 87053 to be totally null and void, and petitioner SIHIs claim was accordingly referred to the
SEC for determination of the preferences or priorities under the law in the settlement of claims of firms
under receivership or liquidation. Hence, unlike in RCBC, in the present case there are no longer any
previous foreclosure proceedings to speak of. Also, in the present petition, the factual considerations in
the issuance of the pertinent rehabilitation plan where SIHIs claim had been reportedly included in the
schedule of payment finds relevance. This was not true in the RCBC Case.
As seen in the foregoing disquisition, the resolution of the motion for reconsideration in the RCBC
Case is not a crucial matter in the present case.
WHEREFORE, premises considered, petitioners motion for consolidation is denied and its
motion for reconsideration is hereby likewise DENIED, with finality.
SO ORDERED.
Narvasa, C.J., (Chairman), Davide, Jr., Francisco, and Panganiban, JJ., concur.

------------------------------------------------------------------------------------------------------------------------

14. 126 Phil. 885

CONCEPCION, C.J.:
This is an original action for certiorari, prohibition and injunction, with preliminary injunction, against
an order of the Court of First Instance of Manila, the dispositive part of which reads:
"WHEREFORE, upon the petitioner filing an injunction bond in the amount of P3,000.00, let a writ of
preliminary preventive and/or mandatory injunction issue, restraining the respondents, their agents or
representatives, from further searching the premises and properties and from taking custody of the
various documents and papers of the petitioner corporation, whether in its main office or in any of its
branches; and ordering the respondent Central Bank and/or its co-respondents to return to the
petitioner within five (5) days from service on respondents of the writ of preventive and/or mandatory
injunction, all the books, documents, and papers so far seized from the petitioner pursuant to the
aforesaid search warrant."
Upon the filing of the petition herein and of the requisite bond, we issued, on August 14, 1962, a writ of
preliminary injunction restraining and prohibiting respondents herein from enforcing the order above
quoted.
The main respondent in this case, the First Mutual Savings and Loan Organization, Inc. -- hereinafter
referred to as the Organization --- is a registered non-stock corporation, the main purpose of which,
according to its Articles of Incorporation, dated February 14, 1961, is "to encourage x x x and implement
savings and thrift among its members, and to extend financial assistance in the form of loans," to
them. The Organization has three (3) classes of "members"[1] namely: (a) founder members -- who
originally joined the organization and have signed the pre-incorporation papers -- with the exclusive
rightto vote and be voted for; (b) participating members -- with "no right to vote or be voted for" -- to
which category all other members belong; except (c) honorary members, so made by the board of
trustees, -- "at the exclusive discretion" thereof -- due to "assistance, honor, prestige or help extended
in the propagation" of the objectives of the Organization without any pecuniary expenses on the
part of said honorary members.
On February 14, 1962, the legal department of the Central Bank of the Philippines -- hereinafter referred
to as the Bank -- rendered an opinion to the effect that the Organization and others of similar nature
are banking institutions, falling within the purview of the Central Bank Act.[2] Hence, on April 1 and 3,
1962, the Bank caused to be published in the newspapers the following:
"A N N O U N C E M E N T
"To correct any wrong impression which recent newspaper reports on 'savings and loan associations'
may have created in the minds of the public and other interested parties, as well as to answer numerous
inquires from the public, the Central Bank of the Philippines wishes to announce that all 'savings and
loan associations' now in operation and other organizations using different corporate names, but
engaged in operations similar in nature to said 'associations' HAVE NEVER BEEN AUTHORIZED BY
THE MONETARY BOARD OF THE CENTRAL BANK OF THE PHILIPPINES TO ACCEPT DEPOSIT
OF FUNDS FROM THE PUBLIC NOR TO ENGAGE IN THE BANKING BUSINESS NOR TO
PERFORM ANY BANKING ACTIVITY OR FUNCTION IN THE PHILIPPINES.
"Such institutions violate Section 2 of the General Banking Act, Republic Act No. 337, should they
engage in the 'lending of funds obtained from the public through the receipts of deposits or the sale of
bonds, securities or obligations of any kind' without authority from the Monetary Board. Their
activities and operations are not supervised by the Superintendent of Banks and persons dealing with
such institutions do so at their risk.
"CENTRAL BANK OF THE PHILIPPINES",
Moreover, on April 23, 1962, the Governor of the Bank directed the coordination of the investigation
and gathering of evidence on the activities of the savings and loan associations which are operating
contrary to law." Soon thereafter, or on May 18, 1962, a member of the intelligence division of the Bank
filed with the Municipal Court of Manila a verified application for a search warrant against the
Organization, alleging that "after close observation and personal investigation, the premises at No.
2745 Rizal Avenue, Manila" -- in which the offices of the Organization were housed -- "are being used
unlawfully," because said Organization is illegally engaged in banking activities, "by receiving deposits
of money for deposit, disbursement, safekeeping or otherwise or transacts the business of a savings and
mortgage bank and/or building and loan association x x x without having first complied with the
provisions of Republic Act No. 337" and that the articles, papers, or effects enumerated in a list attached
to said application, as Annex A thereof,[3] are kept in said premises, and "being used or intended to be
used in the commission of a felony, to wit: violation of Sections 2 and 6 of Republic Act No. 337."[4] Said
articles, papers or effects are described in the aforementioned Annex A, as follows:
"I. BOOKS OF ORIGINAL ENTRY
(1) General Journal
(2) Columnar Journal or Cash Book
(a) Cash Receipts Journal or Cash Receipt Book
(b) Cash Disbursements Journal or Cash Disbursement Book
"II. BOOKS OF FINAL ENTRY
(1) General Ledger
(2) Individual Deposits and Loans Ledgers
(3) Other Subsidiary Ledgers
"III. OTHER ACCOUNTING RECORDS
(1) Application for Membership
(2) Signature Card
(3) Deposit Slip
(4) Passbook Slip
(5) Withdrawal Slip
(6) Tellers Daily Deposit Report
(7) Application for Loan Credit Statement
(8) Credit Report
(9) Solicitor's Report
(10) Promissory Note
(11) Indorsement
(12) Co-makers' Statements
(13) Chattel Mortgage Contracts
(14) Real Estate Mortgage Contracts
(15) Trial Balance
(16) Minutes Book - Board of Directors
"IV. FINANCIAL STATEMENTS
(1) Income and Expenses Statements
(2) Balance Sheet or Statement of Assets and Liabilities
"V. OTHERS
(1) Articles of Incorporation
(2) By-Laws
(3) Prospectus, Brochures, Etc.
(4) And other documents and articles which are being used or intended to be used in unauthorized
banking activities and operations contrary to law."
Upon the filing of said application, on May 18, 1962, Hon. Roman Cancino, as Judge of the said
municipal court, issued the warrant above referred to,[5] commanding the search of the aforesaid
premises at No. 2745 Rizal Avenue, Manila, and the seizure of the foregoing articles, there being "good
and sufficient reasons to believe" - upon examination, under oath, of a detective of the Manila Police
Department and said intelligence officer of the Bank --- that the Organization has under its control, in
the address given, the aforementioned articles, which are the subject of the offense adverted to above
or intended to be used as means for the commission of said offense.
Forthwith, or on the same date, the Organization commenced Civil Case No. 50409 of the Court of First
Instance of Manila, an original action for "certiorari, prohibition, with writ of preliminary injunction
and/or writ of preliminary mandatory injunction," against said municipal court, the Sheriff of Manila,
the Manila Police Department, and the Bank, to annul the aforementioned search warrant, upon the
ground that, in issuing the same, the municipal court had acted "with grave abuse of discretion, without
jurisdiction and/or in excess of jurisdiction" because: (a) "said search warrant is a roving commission,
general in its terms x x x;" (b) "the use of the word 'and others' in the search warrant x x x permits the
unreasonable search and seizure of documents which have no relation, whatsoever to any specific
criminal act x x x;" and (c) "no court in the Philippines has any jurisdiction to try a criminal case against
a corporation x x x."
The Organization, likewise, prayed that, pending hearing of the case on the merits, a writ of preliminary
injunction be issued ex-parterestraining the aforementioned search and seizure, or, in the alternative,
if the acts complained of, have been partially performed, that a writ of preliminary mandatory
injunction be forthwith issued ex-parte, ordering the preservation of the status quo of the parties, as
well as the immediate return to the Organization of the documents and papers so far seized under the
search warrant in question. After due hearing, on the petition for said injunction, respondent, Hon.
Jesus P. Morfe, Judge, who presided over the branch of the Court of First Instance of Manila to which
said Case No. 50409 had been assigned, issued, on July 2, 1962, the order complained of.
Within the period stated in said order, the Bank moved for a reconsideration thereof, which was denied
on August 7, 1962. Accordingly, the Bank commenced, in the Supreme Court, the present action,
against Judge Morfe and the Organization, alleging that respondent Judge had acted with grave abuse
of discretion and in excess of his jurisdiction in issuing the order in question.
At the outset, it should be noted that the action taken by the Bank, in causing the aforementioned
search to be made and the articles above listed to be seized, was predicated upon the theory that
the Organization was illegally engaged in banking - by receiving money for deposit, disbursement,
safekeeping or otherwise, or transacting the business of a savings and mortgage bank and/or building
and loan association, -- without first complying with the provisions of R. A. No. 337, and that the order
complained of assumes that the Organization had violated sections 2 and 6 of said Act.[6] Yet respondent
Judge found the searches and seizures in question to be unreasonable, through the following process
of reasoning: the deposition given in support of the application for a search warrant states that the
deponent personally knows that the premises of the Organization, at No. 2745 Rizal Avenue, Manila,
were being used unlawfully for banking purposes. Respondent Judge deduced, from this premise, that
the deponent "knows specific banking transactions of the petitioner with specific persons," and, then
concluded, that said deponent "x x x could have, if he really knew of actual violation of the law, applied
for a warrant to search and seize only books" or records
"covering the specific purportedly illegal banking transactions of the petitioner with specific
persons who are the supposed victims of said illegal banking transactions according to his
knowledge. To authorize and seize all the records listed in Annex A to said application for search
warrant, without reference to specific alleged victims of the purported illegal banking transactions,
would be to harrass the petitioner, and its officers with a roving commission or fishing expedition for
evidence which could be discovered by normal intelligence operations or inspection (not seizure) of
books and records pursuant to Section 4 of Republic Act No. 337 x x x."
The concern thus shown by respondent Judge for the civil liberty involved is, certainly, in line with the
function of courts, as ramparts of justice and liberty, and deserves the greatest encouragement and
warmest commendation. It lives up to the highest traditions of the Philippine Bench, which underlies
the people's faith in and adherence to the Rule of Law and the democratic principles in this part of the
World.
At the same time, it cannot be gainsaid that the Constitutional injunction against unreasonable searches
and seizures seeks to forestall, not purely abstract or imaginary evils, but specific and concrete
ones. Indeed, unreasonableness is, in the very nature of things, a condition dependent upon the
circumstances surrounding each case, in much the same way as the question whether or not "probable
cause" exists is one which must be decided in the light of the conditions obtaining in given situations.
Referring particularly to the one at bar, it is not clear from the order complained of whether respondent
Judge opined that the above mentioned statement of the deponent - to the effect that the Organization
was engaged in the transactions mentioned in his deposition - deserved credence or not. Obviously,
however, a mere disagreement with Judge Cancino, who issued the warrant, on the credibility of said
statement, would not justify the conclusion that said municipal Judge had committed a grave abuse of
discretion, amounting to lack of jurisdiction or excess of jurisdiction. Upon the other hand, the failure
of the witness to mention particular individuals does not necessarily prove that he had no personal
knowledge of specific illegal transactions of the Organizations, for the witness might be acquainted with
such specific transactions, even if the names of the individuals concerned were unknown to him.
Again, the aforementioned order would seem to assume that an illegal banking transaction, of the kind
contemplated in the contested action of the officers of the Bank, must always connote the existence of
a "victim." If this term is used to denote a party whose interests have been actually injured, then the
assumption is not necessarily justified. The law requiring compliance with certain requirements before
anybody can engage in banking obviously seeks to protect the public against actual, as well as potential,
injury. Similarly, we are not aware of any rule limiting the use of search warrants to papers or effects
which cannot be secured otherwise.
The line of reasoning of respondent Judge might, perhaps, be justified if the acts imputed to the
Organization consisted of isolatedtransactions, distinct and detached from the type of
business in which it is generally engaged. In such case, it may be necessary to specify or identify the
parties involved in said isolated transactions, so that the search and seizure be limited to the records
pertinent thereto. Such, however, is not the situation confronting us. The records suggest clearly that
the transactions objected to by the Bank constitute the general pattern of the business of the
Organization. Indeed, the main purpose thereof, according to its By-laws, is "to extend financial
assistance, in the form of loans, to its members," with funds deposited by them.
It is true, that such funds are referred to - in the Articles of Incorporation and the By-laws - as their
"savings," and that the depositors thereof are designated as "members," but, even a cursory
examination of said documents will readily show that anybody can be a depositor and thus be a
"participating member." In other words, the Organization is, in effect, open to the "public" for deposit
accounts, and the funds so raised may be lent by the Organization. Moreover, the power to so dispose
of said funds is placed under the exclusive authority of the "founder members," and "participating
members" are expressly denied the right to vote or be voted for, their "privileges and benefits," if any,
being limited to those which the board of trustee may, in its discretion, determine from time to time. As
a consequence, the "membership" of the ''participating members" is purely nominal in nature. This
situation is fraught, precisely, with the very dangers or evils which Republic Act No. 337 seeks to
forestall, by exacting compliance with the requirements of said Act, before the transactions in question
could be undertaken.
It is interesting to note, also, that the Organization does not seriously contest the main facts, upon
which the action of the Bank is based. The principal issue raised by the Organization is predicated upon
the theory that the aforementioned transactions of the Organization do not amount to "banking," as the
term is used in Republic Act No. 337. We are satisfied, however, in the light of the circumstances
obtaining in this case, that the Municipal Judge did not commit a grave abuse of discretion in finding
that there was probable cause that the Organization had violated Sections 2 and 6 of the aforesaid law
and in issuing the warrant in question, and that, accordingly, and in line with Alvarez vs. Court of First
Instance (64 Phil. 33), the search and seizure complained of have not been proven to be unreasonable.
WHEREFORE, the order of respondent Judge dated July 2, 1962, and the writ of preliminary
mandatory injunction issued in compliance therewith are hereby annulled, and the writ of preliminary
injunction issued by this Court on August 14, 1962, accordingly, made permanent, with costs against
respondent First Mutual Savings and Loan Organization, Inc.
IT IS SO ORDERED.
Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Sanchez, and Ruiz Castro, JJ., concur.

------------------------------------------------------------------------------------------------------------------------

15. 209 Phil. 382

GUTIERREZ JR., J.:

This is a petition for review of the decision of the Court of First Instance of Manila, Branch VII, presided
over by respondent Judge Gregorio T. Lantin, in Civil Case No. 79914 entitled Candido Ramos v.
Philippine Savings Bank and of the order denying a motion
for itsreconsideration. The dispositive portion of the decision reads:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant
ordering the defendant to pay the plaintiff the sum of P15,000.00 as his pro-rata share in the value of
the duplex-apartment house which was built by the plaintiff for the spouses Filameno Tabligan and
Socorro Espiritu, which is now registered in the name of the defendant under Transfer Certificate of
Title No. TCT 101864 issued by the Register of Deeds of the City of Manila, on August 6, 1970, with legal
interest from the date of the filing of the complaint until fully paid; to pay the sum of P500.00 as
attorney's fees; and to pay the costs.
"The counterclaim interposed by the defendant is hereby dismissed."
Involved in this case is a duplex-apartment house on a lot covered by TCT No. 86195 situated at San
Diego Street, Sampaloc, Manila, and owned by the spouses Filomeno and Socorro Tabligan.
The duplex-apartment house was built for the spouses by private respondent. Candido Ramos, a duly
licensed architect and building contractor, at a total cost of P32,927.00. The spouses paid private
respondent the sum of P7,139.00 only. Hence, the latter used his own money, P25,788.50 in all, to
finish the construction of the duplex-apartment.
Meanwhile, on December 16, 1966, February 1, 1967, and February 28, 1967, the
spouses Tabligan obtained from petitioner Philippine Savings Bank three (3) loans in the total amount
of P35,000.00, the purpose of which was to complete the construction of the duplex-apartment. To
secure payment of the loans, the spouses executed in favor of the petitioner three (3) promissory notes
and three (3) deeds of real estate mortgages over the property subject matter of this litigation.
On December 19, 1966, the petitioner registered the December 16, 1966 deed of real estate mortgage
with the Register of Deeds of Manila. The subsequent mortgages of February 1, 1967, and February 28,
1967, were registered with the Register of Deeds of Manila on February 2, 1967 and March 1, 1967,
respectively. At the time of the registration of these mortgages, Transfer Certificate of Title No. 86195
was free from all liens and encumbrances.
The spouses failed to pay their monthly amortizations. As a result thereof, the petitioner bank
foreclosed the mortgages, and at the public auction held on July 23, 1969, was the highest bidder.
On August 5, 1969, the petitioner bank registered the certificate or sale issued in its favor. On August
9, 1970, the bank consolidated its ownership over the property in question, and Transfer Certificate of
Title No. 101864 was issued by the Register of Deeds of Manila in the name of the petitioner bank.
Upon the other hand, the private respondent filed an action against the spouses to collect the
unpaid cost of the construction of the duplex-apartment before the Court of First Instance of Manila,
Branch I, which case was docketed therein as Civil Case No. 69228. During its pendency, the private
respondent succeeded in obtaining the issuance of a writ of preliminary attachment, and pursuant
thereto, had the property in question attached. Consequently, a notice of adverse claim was annotated
at the back of Transfer Certificate of Title No. 86195.
On August 26, 1968, a decision was rendered in Civil Case No. 69228 in favor of the private respondent
and against the spouses. A writ of execution was accordingly issued but was returned unsatisfied.
As the spouses did not have any properties to satisfy the judgment in Civil Case No. 69228, the private
respondent addressed a letter to the petitioner for the delivery to him (private respondent) of his pro-
rata share in the value of the duplex-apartment in accordance with Article 2242 of the Civil Code. The
petitioner refused to pay the pro-rata value prompting the private respondent to file the instant
action. As earlier stated, a decision was rendered in favor of the private respondent.
The parties are agreed that the only issue is whether or not the private respondent is entitled to claim a
pro-rata share in the value of the property in question. The applicable provision, Article 2242 of the
Civil Code, reads as follows:
"ART. 2242. With reference to specific immovable property and real rights of the
debtor, the following claims, mortgages and liens shall be preferred, and shall constitute an
encumbrance on the immovable or real right:
"(1) Taxes due upon the land or building;
"(2) For the unpaid price of real property sold, upon the immovable sold;
"(3) Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers
and contractors, engaged in the construction, reconstruction or repair of buildings, canals or other
works, upon said buildings, canals or other works;
"(4) Claims of furnisher of materials used in the construction, reconstruction, or repair of buildings,
canals or other works upon said buildings, canals or other works;
"(5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged;
"(6) Expenses for the preservation or improvement of real property when the law authorizes re-
imbursement, upon the immovablepreserved or improved;
"(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or
executions, upon the property affected, and only as to later credits;
"(8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real
property thus divided;
"(9) Claims of donors of real property for pecuniary charges or other conditions imposed upon
the donee, upon the immovable donated;
"(10) Credits of insurers upon the property insured, for the insurance premium for two years."
Both the petitioner bank and private respondent Ramos rely on the case of De Barretto v. Villanueva (6
SCRA 928).
The petitioner bank would impress upon this Court that the proceedings had before the court below is
not one of the proceedings contemplated in the De Barretto case that will sustain the authority of the
respondent court to adjudicate the claims of all preferred creditors under Article 2242 of the Civil
Code. Petitioner argues that for Article 2242 of the Civil Code to apply, there must have
been aninsolvency proceeding or other liquidation proceedings of similar import. And under the facts
then obtaining, there could have been no insolvency proceeding as there were only two known
creditors.* Consequently, it is argued that private respondent's unpaid contractor's claim did not
acquire the character of a statutory lien equal to the petitioner's registered mortgage.
Upon the other hand, private respondent Ramos maintains that the proceedings had before the court
below can qualify as a general liquidation of the estate of the spouses Tabligan because the only existing
property of said spouses is the property subject matter of this litigation.
Concurrence of credits occurs when the same specific property of the debtor or all of his property is
subjected to the claims of several creditors. The concurrence of credits raises no questions of
consequence where the value of the property or the value of all assets of the debtor is sufficient to pay
in full all the creditors. However, it becomes material when said assets are insufficient for then some
creditors of necessity will not be paid or some creditors will not obtain the full satisfaction of their
claims. In this situation, the question of preference will then arise, that is to say who of the creditors
will be paid ahead of the others. (Caguioa Comments and Cases on Civil Law,1970 ed., Vol. VI, 472.)
Under the system established by Article 2249 of the Civil Code of the Philippines, only taxes and
assessments upon immovable property enjoy absolute preference. All the remaining specified classes
of preferred creditors under Article 2242 enjoy no priority among themselves. Their credits shall be
satisfied pro-rata, i.e., in proportion to the amount of the respective credits.
Under the De Barretto decision, the full application of Articles 2242 and 2249 demands that there must
first be some proceeding where the claims of all the preferred creditors may be bindingly adjudicated,
such as insolvency, the settlement of a decedent's estate under Rule 87 of the Rules of Court, or other
liquidation proceedings of similar import.
The pertinent ruling reads:
"Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a
foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the
enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for taxes
that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will not
enable the Court to ascertain the pro rata dividend corresponding to each because the rights of the
other creditors likewise enjoying preference under Article 2242 can not be ascertained. Wherefore,
the order of the Court of First Instance of Manila now appealed from, decreeing that the proceeds of
the foreclosure sale be apportioned only between appellant and appellee, is incorrect and must be
reversed.
"In the absence of insolvency proceedings (or other equivalent general liquidation of the debtor's
estate), the conflict between the parties now before us must be decided pursuant to the well established
principle concerning registered lands; that a purchaser in good faith and for value (as the appellant
concededly is) takes registered property free from liens and encumbrances other than statutory liens
and those recorded in the certificate of title. There being no insolvency or liquidation, the claim of
the appellee, as unpaid vendor, did not acquire the character and rank of a statutory lien co-equal to
the mortgagee's recorded encumbrance, and must remain subordinate to the latter."
The resolution of this petition, therefore, hinges on the determination of whether an insolvency
proceeding or other liquidation proceeding of similar import may be considered to have been conducted
in the court below.
The respondent court ruled in the affirmative holding that:
"There were no known creditors, other than the plaintiff and defendant herein, and the proceedings in
the present case may ascertain and bindingly adjudicate the respective claims of the plaintiff and the
defendant, serving as a substantial compliance with what theSupreme Court stated:
"'x x x it is thus apparent that the full application of Articles 2242 and 2249 demands that there must
be first some proceeding where the claims of all the preferred creditors may be bindingly adjudicated,
such as insolvency, the settlement of a decedent's estate under Rule 87 of the Rules of Court, or other
liquidation proceedings of similar import. (de Barretto v. Villanueva, et al., G.R. No. L-14938,
December 29, 1962).'"
A careful consideration of this petition leads us to agree with the petitioner. The conclusions of the
lower court are not supported by the law and the facts.
The proceedings in the court below do not partake of the nature of insolvency proceedings or settlement
of a decedent's estate. The action filed by Ramos was only to collect the unpaid cost of the construction
of the duplex apartment. It is far from being a general liquidation of the estate of the Tabligan spouses.
Insolvency proceedings and settlement of a decedent's estate are both proceedings in rem which are
binding against the whole world. All persons having interest in the subject matter involved, whether
they were notified or not, are equally bound. Consequently, a liquidation of similar import or "other
equivalent general liquidation' must also necessarily be a proceeding in rem so that all interested
persons whether known to the parties or not may be bound by such proceeding.
In the case at bar, although the lower court found that "there were no known creditors other than the
plaintiff and the defendant herein", this can not be conclusive. It will not bar other creditors in the
event they show up and present their claims against the petitioner bank, claiming that they also have
preferred liens against the property involved. Consequently, Transfer Certificate of Title No. 101864
issued in favor of the bank which is supposed to be indefeasible would remain constantly unstable and
questionable. Such could not have been the intention of Article 2243 of the Civil Code although it
considers claims and credits under Article 2242 as statutory liens. Neither does the De Barretto case
sanction such instability. It emphasized the following:
"We are understandably loath (absent a clear precept of law so commanding) to adopt a rule that would
undermine the faith and credit to be accorded to registered Torrens titles and nullify
the beneficient objectives sought to be obtained by the Land Registration Act. No argument is
needed to stress that if a person dealing with registered land were to be held to take it in every instance
subject to all the fourteen preferred claims enumerated in Article 2242 of the new Civil Code, even if
the existence and import thereof can not be ascertained from the records, all confidence in Torrens
titles would be destroyed, and credit transactions on the faith of such titles would be hampered, if not
prevented, with incalculable results. Loans on real estate security would become aleatory and risky
transactions, for no prospective lender could accurately estimate the hidden liens on the property
offered as security, unless he indulged in complicated, tedious investigations. The logical result might
well be a contraction of credit to unforeseeable proportions that could lead to economic disaster.
"Upon the other hand, it does not appear excessively burden some to require the privileged creditors to
cause their claims to be recorded in the books of the Register of Deeds should they desire to protect
their rights even outside of insolvency or liquidation proceedings."
In fact, an annotation, as suggested above, would inure to the benefit of the public, particularly those
who may subsequently wish to buy the property in question or who have a business transaction in
connection therewith. It would facilitate the enforcement of a legal statutory right which cannot be
barred by laches. (See Manila Railroad Co. v. Luzon Stevedoring Co., 100 Phil. 135).
Respondent Ramos admitted in the partial stipulation of facts submitted by both parties that at the
time of the loans to the spouses, the petitioner bank had no actual or constructive knowledge of any lien
against the property in question. The duplex apartment house was built for P32,927.00. The
spouses Tabligan borrowed P35,000.00 for the construction of the apartment house. The bank could
not have known of any contractor's lien because, as far as it was concerned, it financed the entire
construction even if the stated purpose of the loans was only to "complete" the construction.
Since the action filed by the private respondent is not one which can be considered as "equivalent
general liquidation" having the same import as an insolvency or settlement of the decedent's estate
proceeding, the well established principle must be applied, that a purchaser in good faith and for value
takes registered land free from liens and encumbrances other than statutory liens and those recorded
in the Certificate of Title. It is an admitted fact that at the time the deeds of real estate mortgage in
favor of the petitioner bank were constituted, the transfer certificate of title of the spouses Tagliban was
free from any recorded lien and encumbrances, so that the only registered liens in the title were deeds
in favor of the petitioner.
Prescinding from the foregoing, the private respondent's claim must remain subordinate to the
petitioner bank's title over the property evidenced by TCT No. 101864.
WHEREFORE, the petition is granted. The decision of the Court of First Instance of Manila, Branch
VII is, hereby, reversed and set aside. The complaint and the counterclaim are dismissed.
SO ORDERED.

Teehankee, (Chairman), Melencio-Herrera, Plana, Vasquez, and Relova, JJ., concur.