CREDIT - PLEDGE, MORTGAGE AND ANTICHRESIS – COMMON PROVISIONS of Assignment provided that it was for and in consideration of certain
at it was for and in consideration of certain credits, loans, overdrafts
G.R. No. L-53955 January 13, 1989
THE MANILA BANKING CORPORATION, plaintiff-appellee,
vs.
ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendants-appellants.
BIDIN, J.:
This is an appeal from the decision* of the Court of First Instance of Manila, Branch XVII in Civil Case
No. 78178 for collection of sum of money based on promissory notes executed by the defendants-
appellants in favor of plaintiff-appellee bank. The dispositive portion of the appealed decision
(Record on Appeal, p. 33) reads as follows:
WHEREFORE judgment is hereby rendered (a) sentencing defendants, Anastacio Teodoro, Jr. and
Grace Anna Teodoro jointly and severally, to pay plaintiff the sum of P15,037.11 plus 12% interest
per annum from September 30, 1969 until fully paid, in payment of Promissory Notes No. 11487,
plus the sum of P1,000.00 as attorney's fees; and (b) sentencing defendant Anastacio Teodoro, Jr.
to pay plaintiff the sum of P8,934.74, plus interest at 12% per annum from September 30, 1969
until fully paid, in payment of Promissory Notes Nos. 11515 and 11699, plus the sum of P500.00
an attorney's fees.
With Costs against defendants.
The facts of the case as found by the trial court are as follows:
On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and severally,
executed in favor of plaintiff a Promissory Note (No. 11487) for the sum of P10,420.00 payable in
120 days, or on August 25, 1966, at 12% interest per annum. Defendants failed to pay the said
amount inspire of repeated demands and the obligation as of September 30, 1969 stood at P
15,137.11 including accrued interest and service charge.
On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father) and Anastacio
Teodoro, Jr. (Son) executed in favor of plaintiff two Promissory Notes (Nos. 11515 and 11699) for
P8,000.00 and P1,000.00 respectively, payable in 120 days at 12% interest per annum. Father and
Son made a partial payment on the May 3, 1966 promissory Note but none on the June 20, 1966
Promissory Note, leaving still an unpaid balance of P8,934.74 as of September 30, 1969 including
accrued interest and service charge.
The three Promissory Notes stipulated that any interest due if not paid at the end of every month
shall be added to the total amount then due, the whole amount to bear interest at the rate of 12%
per annum until fully paid; and in case of collection through an attorney-at-law, the makers shall,
jointly and severally, pay 10% of the amount over-due as attorney's fees, which in no case shall be
leas than P200.00.
It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed of Assignment of
Receivables from the Emergency Employment Administration in the sum of P44,635.00. The Deed
and other credit accommodations extended to defendants as security for the payment of said sum
and the interest thereon, and that defendants do hereby remise, release and quitclaim all its rights,
title, and interest in and to the accounts receivables. Further.
(1) The title and right of possession to said accounts receivable is to remain in the assignee, and
it shall have the right to collect the same from the debtor, and whatsoever the Assignor does in
connection with the collection of said accounts, it agrees to do as agent and representative of
the Assignee and in trust for said Assignee ;
xxx xxx xxx
(6) The Assignor guarantees the existence and legality of said accounts receivable, and the due
and punctual payment thereof unto the assignee, ... on demand, ... and further, that Assignor
warrants the solvency and credit worthiness of each and every account.
(7) The Assignor does hereby guarantee the payment when due on all sums payable under the
contracts giving rise to the accounts receivable ... including reasonable attorney's fees in
enforcing any rights against the debtors of the assigned accounts receivable and will pay upon
demand, the entire unpaid balance of said contract in the event of non-payment by the said
debtors of any monthly sum at its due date or of any other default by said debtors;
xxx xxx xxx
(9) ... This Assignment shall also stand as a continuing guarantee for any and all whatsoever
there is or in the future there will be justly owing from the Assignor to the Assignee ...
In their stipulations of Fact, it is admitted by the parties that plaintiff extended loans to defendants
on the basis and by reason of certain contracts entered into by the defunct Emergency
Employment Administration (EEA) with defendants for the fabrication of fishing boats, and that
the Philippine Fisheries Commission succeeded the EEA after its abolition; that non-payment of
the notes was due to the failure of the Commission to pay defendants after the latter had complied
with their contractual obligations; and that the President of plaintiff Bank took steps to collect
from the Commission, but no collection was effected.
For failure of defendants to pay the sums due on the Promissory Note, this action was instituted
on November 13, 1969, originally against the Father, Son, and the latter's wife. Because the Father
died, however, during the pendency of the suit, the case as against him was dismiss under the
provisions of Section 21, Rule 3 of the Rules of Court. The action, then is against defendants Son
and his wife for the collection of the sum of P 15,037.11 on Promissory Note No. 14487; and against
defendant Son for the recovery of P 8,394.7.4 on Promissory Notes Nos. 11515 and 11699, plus
interest on both amounts at 12% per annum from September 30, 1969 until fully paid, and 10% of
the amounts due as attorney's fees.
Neither of the parties presented any testimonial evidence and submitted the case for decision
based on their Stipulations of Fact and on then, documentary evidence.
The issues, as defined by the parties are: (1) whether or not plaintiff claim is already considered
paid by the Deed of Assign. judgment of Receivables by the Son; and (2) whether or not it is plaintiff
 who should directly sue the Philippine Fisheries Commission for collection.' (Record on Appeal, p.
29- 32).
On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8, 1972,
defendants filed a motion for reconsideration (Record on Appeal, p. 33) which was denied by the trial
court in its order of June 14, 1972 (Record on Appeal, p. 37). On June 23, 1972, defendants filed with
the lower court their notice of appeal together with the appeal bond (Record on Appeal, p. 38). The
record of appeal was forwarded to the Court of Appeals on August 22, 1972 (Record on Appeal, p.
42).
In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment of error,
that is —
THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING OF THE CONTRACT
BETWEEN THE PARTIES, IN VIOLATION OF LAW; HENCE, TANTAMOUNT TO LACK OR EXCESS OF
JURISDICTION.
As the appeal involves a pure question of law, the Court of Appeals, in its resolution promulgated on
March 6, 1980, certified the case to this Court (Rollo, p. 24). The record on Appeal was forwarded to
this Court on March 31, 1980 (Rollo, p. 1).
In the resolution of May 30, 1980, the First Division of this Court ordered that the case be docketed
and declared submitted for decision (Rollo, p. 33).
On March 7, 1988, considering the length of time that the case has been pending with the Court and
to determine whether supervening events may have rendered the case moot and academic, the
Court resolved (1) to require the parties to MOVE IN THE PREMISES within thirty days from notice,
and in case they fail to make the proper manifestation within the required period, (2) to consider the
case terminated and closed with the entry of judgment accordingly made thereon (Rollo, p. 40).
On April 27, 1988, appellee moved for a resolution of the appeal review interposed by defendants-
appellants (Rollo, p. 41).
The major issues raised in this case are as follows: (1) whether or not the assignment of receivables
has the effect of payment of all the loans contracted by appellants from appellee bank; and (2)
whether or not appellee bank must first exhaust all legal remedies against the Philippine Fisheries
Commission before it can proceed against appellants for collections of loan under the promissory
notes which are plaintiffs bases in the action for collection in Civil Case No. 78178.
Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor,
by a legal cause, such as sale, dation in payment, exchange or donation, and without the need of the
consent of the debtor, transfers his credit and its accessory rights to another, known as the assignee,
who acquires the power to enforce it to the same extent as the assignor could have enforced it
against the debtor. ... It may be in the form of a sale, but at times it may constitute a dation in
payment, such as when a debtor, in order to obtain a release from his debt, assigns to his creditor a
credit he has against a third person, or it may constitute a donation as when it is by gratuitous title;
or it may even be merely by way of guaranty, as when the creditor gives as a collateral, to secure his
own debt in favor of the assignee, without transmitting ownership. The character that it may assume
determines its requisites and effects. its regulation, and the capacity of the parties to execute it; and
in every case, the obligations between assignor and assignee will depend upon the judicial relation
which is the basis of the assignment: (Tolentino, Commentaries and Jurisprudence on the Civil Code
of the Philippines, Vol. 5, pp. 165-166).
There is no question as to the validity of the assignment of receivables executed by appellants in
favor of appellee bank.
The issue is with regard to its legal effects.
I
It is evident that the assignment of receivables executed by appellants on January 24, 1964 did not
transfer the ownership of the receivables to appellee bank and release appellants from their loans
with the bank incurred under promissory notes Nos. 11487,11515 and 11699.
The Deed of Assignment provided that it was for and in consideration of certain credits, loans,
overdrafts, and their credit accommodations in the sum of P10,000.00 extended to appellants by
appellee bank, and as security for the payment of said sum and the interest thereon; that appellants
as assignors, remise, release, and quitclaim to assignee bank all their rights, title and interest in and
to the accounts receivable assigned (lst paragraph). It was further stipulated that the assignment will
also stand as a continuing guaranty for future loans of appellants to appellee bank and
correspondingly the assignment shall also extend to all the accounts receivable; appellants shall also
obtain in the future, until the consideration on the loans secured by appellants from appellee bank
shall have been fully paid by them (No. 9).
The position of appellants, however, is that the deed of assignment is a quitclaim in consideration of
their indebtedness to appellee bank, not mere guaranty, in view of the following provisions of the
deed of assignment:
... the Assignor do hereby remise, release and quit-claim unto said assignee all its rights, title and
interest in the accounts receivable described hereunder. (Emphasis supplied by appellants, first
par., Deed of Assignment).
... that the title and right of possession to said account receivable is to remain in said assignee and
it shall have the right to collect directly from the debtor, and whatever the Assignor does in
connection with the collection of said accounts, it agrees to do so as agent and representative of
the Assignee and it trust for said Assignee ...(Ibid. par. 2 of Deed of Assignment).' (Record on
Appeal, p. 27)
The character of the transactions between the parties is not, however, determined by the language
used in the document but by their intention. Thus, the Court, quoting from the American
Jurisprudence (68 2d, Secured Transaction, Section 50) said:
The characters of the transaction between the parties is to be determined by their intention,
regardless of what language was used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a pledge. However, even though a transfer,
if regarded by itself, appellate to have been absolute, its object and character might still be
qualified and explained by a contemporaneous writing declaring it to have been a deposit of the
property as collateral security. It has been Id that a transfer of property by the debtor to a creditor,
 even if sufficient on its farm to make an absolute conveyance, should be treated as a pledge if the
debt continues in existence and is not discharged by the transfer, and that accordingly, the use of
the terms ordinarily exporting conveyance, of absolute ownership will not be given that effect in
such a transaction if they are also commonly used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and ambiguous
language or other circumstances excluding an intent to pledge. (Lopez v. Court of Appeals, 114
SCRA 671 [1982]).
Definitely, the assignment of the receivables did not result from a sale transaction. It cannot be said
to have been constituted by virtue of a dation in payment for appellants' loans with the bank
evidenced by promissory note Nos. 11487, 11515 and 11699 which are the subject of the suit for
collection in Civil Case No. 78178. At the time the deed of assignment was executed, said loans were
non-existent yet. The deed of assignment was executed on January 24, 1964 (Exh. "G"), while
promissory note No. 11487 is dated April 25, 1966 (Exh. 'A), promissory note 11515, dated May 3,
1966 (Exh. 'B'), promissory note 11699, on June 20, 1966 (Exh. "C"). At most, it was a dation in
payment for P10,000.00, the amount of credit from appellee bank indicated in the deed of
assignment. At the time the assignment was executed, there was no obligation to be extinguished
except the amount of P10,000.00. Moreover, in order that an obligation may be extinguished by
another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible with each other (Article 1292,
New Civil Code).
has resorted to all the legal remedies against the debtor, under Article 2058 of the New Civil Code
does not therefore apply to them. It is of course of the essence of a contract of pledge or mortgage
that when the principal obligation becomes due, the things in which the pledge or mortgage consists
may be alienated for the payment to the creditor (Article 2087, New Civil Code). In the instant case,
appellants are both the principal debtors and the pledgors or mortgagors. Resort to one is, therefore,
resort to the other.
Appellee bank did try to collect on the pledged receivables. As the Emergency Employment Agency
(EEA) which issued the receivables had been abolished, the collection had to be coursed through the
Office of the President which disapproved the same (Record on Appeal, p. 16). The receivable became
virtually worthless leaving appellants' loans from appellee bank unsecured. It is but proper that after
their repeated demands made on appellants for the settlement of their obligations, appellee bank
should proceed against appellants. It would be an exercise in futility to proceed against a defunct
office for the collection of the receivables pledged.
WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the trial court is
affirmed in toto.
SO ORDERED.

Obviously, the deed of assignment was intended as collateral security for the bank loans of
appellants, as a continuing guaranty for whatever sums would be owing by defendants to plaintiff,
as stated in stipulation No. 9 of the deed.

In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is

in favor of pledge, the latter being the lesser transmission of rights and interests (Lopez v. Court of
Appeals, supra).

In one case, the assignments of rights, title and interest of the defendant in the contracts of lease of
two buildings as well as her rights, title and interest in the land on which the buildings were
constructed to secure an overdraft from a bank amounting to P110,000.00 which was increased to
P150,000.00, then to P165,000.00 was considered by the Court to be documents of mortgage
contracts inasmuch as they were executed to guarantee the principal obligations of the defendant
consisting of the overdrafts or the indebtedness resulting therefrom. The Court ruled that an
assignment to guarantee an obligation is in effect a mortgage and not an absolute conveyance of title
which confers ownership on the assignee (People's Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).

II

As to whether or not appellee bank must have to exhaust all legal remedies against the Philippine
Fisheries Commission before it can proceed against appellants for collection of loans under their
promissory notes, must also be answered in the negative.

The obligation of appellants under the promissory notes not having been released by the assignment
of receivables, appellants remain as the principal debtors of appellee bank rather than mere
guarantors. The deed of assignment merely guarantees said obligations. That the guarantor cannot
be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and
CREDIT - PLEDGE, MORTGAGE AND ANTICHRESIS – COMMON PROVISIONS
G.R. No. L-5741 March 13, 1911
ESTANISLAUA ARENAS, ET AL., plaintiffs-appellees,
vs.
FAUSTO O. RAYMUNDO, defendant-appellant.
TORRES, J.:
This is an appeal field by the defendant from a judgment of conviction rendered by the Hon. Judge
Araullo.
On the date of August 31, 1908, the attorneys for the plaintiffs, Estanislaua Arenas and Julian La O,
brought suit against Fausto O. Raymundo, alleging, as a cause of action, that Estanislaua Arenas was
the owner and proprietor of the jewelry described below with the respective value thereof:
Two gold tamborin rosaries, without bow or reliquary at P40 each P80
One lady's comb for fastening the hair, made of gold and silver, adorned 80
with pearls of ordinary size and many small pearls, one of which is
missing
One gold ring set with a diamond of ordinary size 1,000
One gold bracelet with five small diamonds and eight brillantitos de 700
almendras
One pair of gold picaporte earrings with two diamonds of ordinary size 1,100
and two small ones
The plaintiffs alleged that the said jewelry, during the last part of April or the beginning of May, 1908,
was delivered to Elena de Vega to sell on commission, and that the latter, in turn, delivered it to
Conception Perello, likewise to sell on commission, but that Perello, instead of fulfilling her trust,
pledged the jewelry in the defendant's pawnshop, situated at No. 33 Calle de Ilaya, Tondo, and
appropriated to her own use the money thereby obtained; that on July 30, 1908, Conception Perello
was prosecuted for estafa, convicted, and the judgment became final; that the said jewelry was then
under the control and in the possession of the defendant, as a result of the pledge by Perello, and
that the former refused to deliver it to the plaintiffs, the owners thereof, wherefore counsel for the
plaintiffs asked that judgment be rendered sentencing the defendant to make restitution of the said
jewelry and to pay the costs.
In the affidavit presented by the attorney for the plaintiffs dated September 2, 1908, after a
statement and description of the jewelry mentioned, it is set forth that the defendant was retaining
it for the reason given in the complaint, and that it was not sequestrated for the purpose of satisfying
any tax or fine or by reason of any attachment issued in compliance with any judgment rendered
against the plaintiffs' property.
In discharge of the writ of seizure issued for the said jewelry on the 2nd of September, 1908,
aforementioned, the sheriff of this city made the return that he had, on the same date, delivered one
copy of the bond and another of the said writ to the defendant personally and, on the petition and
designation of the attorney for the plaintiffs, proceeded to seize the jewelry described in the writ,
taking it out of the defendant's control, and held it in his possession during the five days prescribed
by law.
On the 15th of the same month and year, five days having elapsed without the defendant's having
given bond before the court, the sheriff made delivery of all the jewelry described in the said order
to the attorney for the plaintiff to the latter's entire satisfaction, who with the sheriff signed the
return of the writ.
After the demurrer to the complaint had been overruled the defendant answered, setting forth that
he denied each and all of the allegations thereof which were not specifically admitted, explained, or
qualified, and as a special defense alleged that the jewelry, the subject matter of the complaint was
pledged on his pawnshop by Conception Perello, the widow of Pazos, as security for a loan of P1,524,
with the knowledge, consent, and mediation of Gabriel La O, a son of the plaintiffs, as their agent,
and that, in consequence thereof, the said plaintiffs were estopped from disavowing the action of
the said Perello; the defendant therefore prayed that the complaint be dismissed and that the jewelry
seized at the instance of the plaintiffs, or the amount of the loan made thereon, together with the
interest due, be returned to the defendant, with the costs of the suit against the plaintiffs.
The case came up for hearing on March 17, 1909, and after the presentation of oral testimony by
both parties, the count, on June 23 of the same year, rendered judgment sentencing the defendant
to restore to the plaintiff spouses the jewelry described in the complaint, the right being reserved to
the defendant to institute his action against the proper party. The counsel for the defendant excepted
to this judgment, asked that the same be set aside, and a new trial granted. This motion was denied,
exceptions was taken by the appellant, and the proper bill of exceptions was duly approved certified
to, and forwarded to the clerk of this court.
This is an action for the replevin of certain jewelry delivered by its owner for sale on commission, and
pledged without his knowledge by Concepcion Perello in the pawnshop of the defendant, Fausto O.
Raymundo, who refuses to deliver the said jewelry unless first redeemed.
The said Concepcion Perello, who appropriated to herself the money derived from the pledging of
the jewels before mentioned, together with others, to the prejudice of their owner Estanislaua
Arenas, was prosecuted in the Court of First Instance of this City in cause No. 3955 and sentenced on
July 30, 1908, to the penalty of one year eight months and twenty-one days of prision correccional,
to restore to the offended party the jewelry specified in the complaint, or to pay the value thereof,
amounting to P8,660, or, in case of insolvency, to suffer the corresponding subsidiary imprisonment,
and to pay the costs. This judgment is attested by the certified copy attached under letter D to folio
26 of the record of the proceedings in the case of the same plaintiff against Antonio Matute — the
pledgee of the other jewelry also appropriated by the said Concepcion Perello — which record forms
a part of the evidence in this cause.
Perello having pledged the jewelry in question to the defendant Raymundo, and not having
redeemed it by paying him the amount received, it follows that the convicted woman, now serving
the sentence imposed upon her, could not restore the jewelry as ordered in that judgment, which
has become final by the defendant's acquiescence.
Article 120 of the Penal Code prescribes:
 The restitution of the thing itself must be made, if be in the possession of a third person, who had
acquired it in a legal manner, reserving, however, his action against the proper person.
Restitution shall be made, even though the thing may be in the possession of a third person, who
had acquired it in a legal manner, reserving, however, his action against the proper person.
This provision is not applicable to a case in which the third person has acquired the thing in the
manner and with the requisites established by law to make it unrecoverable.
The provisions contained in the first two paragraphs of the preinserted article are based on the
uncontrovertible principle of justice that the party injured through a crime has, as against all others,
a preferential right to be indemnified, or to have restored to him the thing of which he was unduly
deprived by criminal means.
In view of the harmonious relation between the different codes in force in these Islands, it is natural
and logical that the aforementioned provision of the Penal Code, based on the rule established in
article 17 of the same, to wit, that every person criminally liable for a crime or misdemeanor is also
civilly liable, should be in agreement and accordance with the provisions of article 464 of the Civil
Code which prescribes:
The possession of personal property, acquired in good faith, is equivalent to a title thereto.
However, the person who has lost personal property or has been illegally deprived thereof may
recover it from whoever possesses it.
If the possessor of personal property, lost or stolen, has acquired it in good faith at a public sale,
the owner can not recover it without reimbursing the price paid therefor.
Neither can the owner of things pledged in pawnshops, established with the authorization of the
Government, recover them, whosoever may be the person who pledged them, without previously
refunding to the institution the amount of the pledge and the interest due.
With regard to things acquired on exchange, or at fairs or markets or from a merchant legally
established and usually employed in similar dealings, the provisions of the Code of Commerce shall
be observed.
On January 2, 1908, this court had occasion to decide, among other cases, two which were entirely
analogous to the present one. They were No. 3889, Varela vs. Matute, and No. 3890, Varela vs.
Finnick (9 Phil., 479, 482).
In the decisions in both cases it appears that Nicolasa Pascual received various jewels from Josefa
Varela to sell on commission and that, instead of fulfilling the trust or returning the jewels to their
owner, she pledged some of them in the pawnshop of Antonio Matute and others in that of H.J.
Finnick and appropriated to herself the amounts that she received, to the detriment of the owner of
the jewelry.
Tried estafa in cause No. 2429, the said Pascual was convicted and sentenced to the penalty of one
year and eleven months of prision correccional, to restore to Varela, the jewelry appropriated, or to
pay the value thereof, and, in case of insolvency, to subsidiary imprisonment; this judgment became
final, whereupon the defendant began to serve her sentence. The case just cited is identical to that
of Concepcion Perello.
Josefa Varela, in separate incidental proceedings, demanded the restitution or delivery of possession
of the said jewelry; the pledgees, the pawnbrokers, refused to comply with her demand, alleging,
among other reasons, that they were entitled to possession. The two cases were duly tried, and the
Court of First Instance pronounced judgment, supporting the plaintiff's claims in each. Both cases
were appealed by the defendants, Matute and Finnick, and this court affirmed the judgments on the
same grounds, with costs, and the decisions on appeal established the following legal doctrines:
1. Crimes against property; criminal and civil liability. — Where, in a proceeding instituted by
reason of a crime committed against property, the criminal liability of the accused has been
declared, it follows that he shall also be held civilly liable therefor, because every person who is
criminally responsible on account of a crime or misdemeanor is also civilly liable.
2. Id.; Recovery of property unlawfully in possession. — Whoever may have been deprived this
property in consequence of a crime is entitled to the recovery thereof, even if such property is in
the possession of a third party who acquired it by legal means other than those expressly stated in
article 464 of the Civil Code.
3. Personal property; title by possession. — In order that the possession of personal property may
be considered as a title thereto it is indispensable that the same shall have been acquired in good
faith.
4. Id.; Ownership; prescription. — The ownership of personal property prescribes in the manner
and within the time fixed by articles 1955 and 1962, in connection with article 464, of the Civil
Code.
In the cause prosecuted against Perello, as also in the present suit, it was not proven that Estanislaua
Arenas authorized the former to pawn the jewelry given to her by Arenas to sell on commission.
Because of the mere fact of Perello's having been convicted and sentenced for estafa, and for the
very reason that she is now serving her sentence must be complied with, that is, the jewelry
misappropriated must be restored to its owner, inasmuch as it exists and has not disappeared this
restitution must be made, although the jewelry is found in the pawnshop of Fausto O. Raymundo and
the latter had acquired it by legal means. Raymundo however retains his right to collect the amounts
delivered upon the pledge, by bringing action against the proper party. This finding is in accord with
the provisions of the above article 120 of the Penal Code and first paragraph of article 464 of the Civil
Code.
The aforementioned decision, No. 3890, Varela vs. Finnick, recites among other considerations, the
following:
The exception contained in paragraph 3 of said article is not applicable to the present case because
a pawnshop does not enjoy the privilege established by article 464 of the Civil Code. The owner of
the loan office of Finnick Brothers, notwithstanding the fact that he acted in good faith, did not
acquire the jewels at a public sale; it is not a question of public property, securities, or other such
effects, the transfer, sale, or disposal of which is subject to the provisions of the Code of
Commerce. Neither does a pawnshop enjoy the privilege granted to a monte de piedad; therefore,
Josefa Varela, who lost said jewels and was deprived of the same in consequence of a crime, is
entitled to the recovery thereof from the pawnshop of Finnick Brothers, where they were pledged;
the latter can not lawfully refuse to comply with the provisions of article 120 of the Penal Code, as
it is a question of jewels which has been misappropriated by the commission of the crime of estafa,
and the execution of the sentence which orders the restitution of the jewels can not be avoided
 because of the good faith with which the owner of the pawnshop acquired them, inasmuch as they
were delivered to the accused, who was not the owner nor authorized to dispose of the same.
Even supposing that the defendant Raymundo had acted in good faith in accepting the pledge of the
jewelry in litigation, even then he would not be entitled to retain it until the owner thereof reimburse
him for the amount loaned to the embezzler, since the said owner of the jewelry, the plaintiff, did
not make any contract with the pledgee, that would obligate him to pay the amount loaned to
Perello, and the trial record does not disclose any evidence, even circumstantial, that the plaintiff
Arenas consented to or had knowledge of the pledging of her jewelry in the pawnshop of the
defendant.
For this reason, and because Conception Perello was not the legitimate owner of the jewelry which
she pledged to the defendant Raymundo, for a certain sum that she received from the latter as a
loan, the contract of pledge entered the jewelry so pawned can not serve as security for the payment
of the sum loaned, nor can the latter be collected out of the value of the said jewelry.
Article 1857 of the Civil Code prescribes as one of the essential requisites of the contracts of pledge
and of mortgage, that the thing pledged or mortgaged must belong to the person who pledges or
mortgages it. This essential requisite for the contract of pledge between Perello and the defendant
being absent as the former was not the owner of the jewelry given in pledge, the contract is as devoid
of value and force as if it had not been made, and as it was executed with marked violation of an
express provision of the law, it can not confer upon the defendant any rights in the pledged jewelry,
nor impose any obligation toward him on the part of the owner thereof, since the latter was deprived
of her possession by means of the illegal pledging of the said jewelry, a criminal act.
Between the supposed good faith of the defendant Raymundo and the undisputed good faith of the
plaintiff Arenas, the owner of the jewelry, neither law nor justice permit that the latter, after being
the victim of the embezzlement, should have to choose one of the two extremes of a dilemma, both
of which, without legal ground or reason, are injurious and prejudicial to her interest and rights, that
is, she must either lose her jewelry or pay a large sum received by the embezzler as a loan from the
defendant, when the plaintiff Arenas is not related to the latter by any legal or contractual bond out
of which legal obligations arise.
It is true that the plaintiffs' son, attorney Gabriel La O, intervened and gave his consent when the
Concepcion Perello pawned the jewelry in litigation with Fausto Raymundo for P1,524? In view of the
evidence offered by the trial record, the answer is, of course, in the negative.
The parents of the attorney Gabriel La O being surprised by the disagreeable news of the
disappearance of various jewels, amounting in value to more than P8,600, delivered to Elena Vega
for sale on commission and misappropriated by Conception Perello, who received them from Vega
for the same purpose, it is natural that the said attorney, acting in representation of his parents and
as an interested party, should have proceeded to ascertain the whereabouts of the embezzled
jewelry an to enter into negotiations with the pawnshop of Fausto O. Raymundo, in whose possession
he had finally learned were to be found a part of the embezzled jewels, as he had been informed by
the said Perello herself; and although, at first, at the commencement of his investigations, he met
with opposition on the part of the pledgee Raymundo, who objected to showing him the jewels that
he desired to see in order to ascertain whether they were those embezzled and belonging to his
mother, the plaintiff Arenas, thanks to the intervention of attorney Chicote and to the fact that they
succeeded in obtaining from the embezzler, among other papers, the pawn ticket issued by
Raymundo's pawnshop, Exhibit E, of the date of May 4, 1908, folio 19 of the record in the case against
Matute, Gabriel La O succeeded in getting the defendant to show him the jewelry described in the
said ticket together with other jewels that did not belong to La O's mother, that had been given the
defendant by Ambrosia Capistrano, Perello's agent, in pledge or security for a loan of P170.
Gabriel La O, continuing the search for other missing jewelry belonging to his mother, found that
Fausto O. Raymundo was in possession of it and had received it from the same embezzler as security
for a debt, although the defendant Raymundo would not exhibit it until he issued the pawn tickets
corresponding to such jewels; therefore, at Raymundo's request, Perello, by means of the document
Exhibit C, signed by herself and bearing date of June 10, 1908, folio 28 of the record, authorized her
son Ramon to get from the defendant, in her name, the pawn tickets of the said other jewelry, for
which such tickets had not yet been issued; Raymundo then wrote out the tickets — Exhibits L, LL,
and M, all dated June 22, 1908, and found on folios 20, 21 and 22 of the record of the aforesaid
proceedings against Matute — in the presence of the attorney Gabriel La O, who kept the said three
pawn tickets, after he had made sure that the jewels described therein and which Raymundo, taking
them out of his cabinet, exhibited to him at the time, were among those embezzled from his mother.
So that, when the three aforementioned pawn tickets, Exhibits L, LL, and M, from the pawnshop of
the defendant were made out, the latter already, and for some time previous, had in his possession
as a pledge the jewelry described in them, and the plaintiffs' son naturally desiring to recover his
parent's jewelry, was satisfied for the time being with keeping the three pawn tickets certifying that
such jewelry was pawned to the defendant.
Moreover, the record discloses no proof that the attorney Gabriel La O consented to or took any part
in the delivery of the jewelry in question to the defendant as a pledge, and both the said defendant,
Raymundo, and the embezzler Perello, averred in their respective testimony that the said attorney
La O had no knowledge of and took no part in the pledging of the jewelry, and Perello further stated
that she had received all the money loaned to her by the defendant Raymundo. (Folios 13 to 14, and
76 to 80 of the record in the case against Matute.)
The business of pawnshops, in exchange for the high and onerous interest which constitutes its
enormous profits, is always exposed to the contingency of receiving in pledge or security for the
loans, jewels and other articles that have been robbed, stolen, or embezzled from their legitimate
owners; and as the owner of the pawnshop accepts the same and asks for money on it, without
assuring himself whether such bearer is or is not the owner thereof, he can not, by such procedure,
expect from the law better and more preferential protection than the owner of the jewels or other
articles, who was deprived thereof by means of a crime and is entitled to be excused by the courts.
Antonio Matute, the owner of another pawnshop, being convinced that he was wrong, refrained
from appealing from the judgment wherein he was sentenced to return, without redemption, to the
plaintiffs, another jewel of great value which had been pledged to him by the same Perello. He
undoubtedly had in mind some of the previous decisions of this court, one of which was against
himself.
For the foregoing reasons, whereby the errors attributed to the judgment of the Court of First
Instance have been discussed and decided upon, and the said judgment being in harmony with the
law, the evidence and the merits of the case, it is proper, in our opinion, to affirm the same, as we
hereby do, with the costs against the appellant. So ordered.
CREDIT - PLEDGE, MORTGAGE AND ANTICHRESIS – COMMON PROVISIONS
G.R. No. L-32116 April 2l, 1981
RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR., petitioners,
vs.
THE COURT OF APPEALS and MAXIMA CASTRO, respondents.
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 (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 P3,000.00 as 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, Severino Valencia 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 P3000.00, 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, address to the plaintiff, dated February 13, 1961, announcing that plaintiff's property
covered by TCT 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, Arsenio Reyes, 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. 1);
(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 co April 10, 1961 upon the request of
defendant spouses Valencia who needed more time within which to pay their loan of P3,000.00
with 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 wept, there to inquire if she could get a loan from the bank. The claims he asked the amount
and the purpose of the loan and the security to he 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. 811. 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 decision in effect relieved Castro of any liability to the promissory note (Exhibit 2) and the
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 APPEAL 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, IN AS MUCH 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 Valencias as 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.
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 an 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 income of P20,000.00 when according to plaintiff-
appellee, she his 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 Valencia 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.
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.

Question is, likewise, raised as to the propriety of respondent court's decision which declared that WHEREFORE, finding no reversible error in the judgment under review, We affirm the same in toto.
Castro's consignation in court of the amount of P3,383.00 was validly made. It is contended that the No pronouncement as to cost.
consignation was made without prior offer or tender of payment to the Bank, and it therefore, not
valid. In holding that there is a substantial compliance with the provision of Article 1256 of the Civil SO ORDERED.
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.
CREDIT - PLEDGE, MORTGAGE AND ANTICHRESIS – COMMON PROVISIONS
G.R. No. 3227 March 22, 1907
PEDRO ALCANTARA, plaintiff-appellee,
vs.
AMBROSIO ALINEA, ET AL., defendants-appellants.
TORRES, J.:
On the 13th day of March, 1905, the plaintiff filed a complaint in the Court of First Instance of La
Laguna, praying that judgment be rendered in his behalf ordering the defendants to de liver to him
the house and lot claimed, and to pay him in addition thereto as rent the sum of 8 pesos per month
from February of that year, and to pay the costs of the action; and the plaintiff alleged in effect that
on the 29th day of February, 1904, the defendants, Ambrosio Alinea and Eudosia Belarmino,
borrowed from him the sum of 480 pesos, payable in January of said year 1905 under the agreement
that if, at the expiration of the said period, said amount should not be paid it would be understood
that the house and lot, the house being constructed of strong materials, owned by the said
defendants and located in the town of San Pablo on the street of the same name, Province of La
Laguna, be considered as absolutely sold to the plaintiff for the said sum; that the superficial extent
and boundaries of said property are described in the complaint; and that, notwithstanding that the
time for the payment of said sum has expired and no payment has been made, the defendants refuse
to deliver to plaintiff the said property, openly violating that which they contracted to do and
depriving him to his loss of the rents which plaintiff should received, the same counting from
February, 1905.
The defendants, after the overruling of a demurrer to the complaint herein, answered denying
generally and specifically all the allegations contained in the complaint, except those which were
expressly admitted, and alleged that the amount claimed included the interest; and that the principal
borrowed was only 200 pesos and that the interest was 280 pesos, although in drawing the document
by mutual consent of the parties thereto the amount of indebtedness was made to appear in the
sum of 480 pesos; and that as their special defense defendants alleged that they offered to pay the
plaintiff the sum of 480 pesos, but the plaintiff had refused to accept the same, therefore they
persisted in making said offer and tender of payment, placing at the disposal of the plaintiff the said
480 pesos first tendered; and defendants asked for the costs of action.
After having taken the evidence of both parties and attaching the documents presented in evidence
to the record, the judge on November 27, 1905, rendered a judgment ordering the defendants to
deliver to the plaintiff the house and lot, the object of this litigation, and to pay the costs of the
action, not making any finding upon the question of loss or damages by reason of the absence of
proof on these points. The defendants duly took exception to this decision, and asked for a new trial
of the case on the ground that the findings of the court below in its decision were plainly contrary to
law, which motion was overruled and from which ruling defendants also excepted.
We have in this case a contract of loan and a promise of sale of a house and lot, the price of which
should be the amount loaned, if within a fixed period of time such amount should not be paid by the
debtor-vendor of the property to the creditor-vendee of same.
Either one of the contracts are perfectly legal and both are authorized respectively by articles 1451,
1740, and 1753, and those following, of the Civil Code. The fact that the parties have agreed at the
same time, in such a manner that the fulfillment of the promise of sale would depend upon the
nonpayment or return of the amount loaned, has not produced any charge in the nature and legal
conditions of either contract, or any essential defect which would tend to nullify the same.
If the promise of sale is not vitiated because, according to the agreement between the parties
thereto, the price of the same is to be the amount loaned and not repaid, neither would the loan be
null or illegal, for the reason that the added agreement provides that in the event of failure of
payment the sale of property as agreed will take effect, the consideration being the amount loaned
and not paid. No article of the Civil Code, under the rules or regulations of which such double contract
was executed, prohibits expressly, or by inference from any of its provisions, that an agreement could
not be made in the form in which the same has been executed; on the contrary, article 1278 of the
aforesaid code provides that "contracts shall be binding, whatever may be the form in which they
may have been executed, provided the essential conditions required for their validity exist." This legal
prescription appears firmly sustained by the settled practice of the courts.
The property, the sale of which was agreed to by the debtors, does not appear mortgaged in favor of
the creditor, because in order to constitute a valid mortgage it is indispensable that the instrument
be registered in the Register of Property, in accordance with article 1875 of the Civil Code, and the
document of contract, Exhibit A, does not constitute a mortgage, nor could it possibly be a mortgage,
for the reason of said document is not vested with the character and conditions of a public
instrument.
By the aforesaid document, Exhibit A, said property could not be pledged, not being personal
property, and notwithstanding the said double contract the debtor continued in possession thereof
and the said property has never been occupied by the creditor.
Neither was there ever nay contract of antichresis by reason of the said contract of loan, as is
provided in articles 1881 and those following of the Civil Code, inasmuch as the creditor-plaintiff has
never been in possession thereof, nor has he enjoyed the said property, nor for one moment ever
received its rents; therefore, there are no proper terms in law, taking into consideration the terms of
the conditions contained in the aforesaid contract, whereby this court can find that the contract was
null, and under no consideration whatever would it be just to apply to the plaintiff articles 1859 and
1884 of the same code.
The contract ( pactum commissorium) referred to in Law 41, title 5, and law 12, title 12, of the fifth
Partida, and perhaps included in the prohibition and declaration of nullity expressed in articles 1859
and 1884 of the Civil Code, indicates the existence of the contracts of mortgage or of pledge or that
of antichresis, none of which have coincided in the loan indicated herein.
It is a principle in law, invariably applied by the courts in the decisions of actions instituted in the
matter of compliance with obligations, that the will of the contracting parties is the law of contracts
and that a man obligates himself to that to which he promises to be bound, a principle in accordance
with Law 1, title 1, book 10 of the Novisima Recopilacion, and article 1091 of the Civil Code. That
which is agreed to in a contract is law between the parties, a doctrine established, among others, in
judgments of the supreme court of Spain of February 20, 1897, and February 13, 1904.
It was agreed between plaintiff and defendants herein that if defendants should not pay the loan of
480 pesos in January, 1905, the property belonging to the defendants and described in the contract
should remain sold for the aforesaid sum, and such agreement must be complied with, inasmuch as
there is no ground in law to oppose the compliance with that which has been agreed upon, having
been so acknowledged by the obligated parties.

The supreme court of Spain, applying the aforementioned laws of Spanish origin to a similar case,
establishes in its decision of January 16, 1872, the following legal doctrine:

Basing the complaint upon the obligation signed by the debtor, which judicially recognized his
signature; and after confessing to have received from the plaintiff a certain amount, binding
himself to return same to the satisfaction of the plaintiff within the term of four years, or in case
of default to transfer direct domain of the properties described in the obligation and to execute
the necessary sale; and the term having expired and the aforesaid amount not having been paid,
said plaintiff has his right free from impediment to claim same against the heirs of the debtor.

The document of contract has been recognized by the defendant Alinea and by the witnesses who
signed same with him, being therefore an authentic and efficacious document, in accordance with
article 1225 of the Civil Code; and as the amount loaned has not been paid and continues in
possession of the debtor, it is only just that the promise of sale be carried into effect, and the
necessary instrument be executed by the vendees.

Therefore, by virtue of the reasons given above and accepting the findings given in the judgment
appealed from, we affirm the said judgment herein, with the costs against the appellants.

After expiration of twenty days from the date of the notification of this decision let judgment be
entered in accordance herewith and ten days thereafter let the case be remanded to the court from
whence it came for proper action. So ordered.
CREDIT - PLEDGE, MORTGAGE AND ANTICHRESIS – COMMON PROVISIONS
G.R. No. 125055 October 30, 1998
A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P. JAVILLONAR,
respondents.
MENDOZA, J.:
This is a petition for review on certiorari of the decision rendered on February 29, 1996 by the Court
of Appeals 1 reversing, in toto, the decision of the Regional Trial Court of Pasig City in Civil Case No.
62290, as well as the appellate court's resolution of May 7, 1996 denying reconsideration.
Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to private
respondents, the spouses Romulo and Erlinda Javillonar, in consideration of which the latter
executed the following documents: (a) a promissory note, dated November 27, 1991, stating an
interest charge of 4% per month for six months; (b) a deed of mortgage over realty covered by TCT
No. 58748, together with the improvements thereon; and (c) an undated deed of sale of the
mortgaged property in favor of the mortgagee, petitioner A. Francisco Realty. 2
The interest on the said loan was to be paid in four installments: half of the total amount agreed
upon (P900,000.00) to be paid in advance through a deduction from the proceeds of the loan, while
the balance to be paid monthly by means of checks post-dated March 27, April 27, and May 27, 1992.
The promissory note expressly provided that upon "failure of the MORTGAGOR (private respondents)
to pay the interest without prior arrangement with the MORTGAGEE (petitioner), full possession of
the property will be transferred and the deed of sale will be registered. 3 For this purpose, the owner's
duplicate of TCT No. 58748 was delivered to petitioner A. Francisco Realty.
Petitioner claims that private respondents failed to pay the interest and, as a consequence, it
registered the sale of the land in its favor on February 21, 1992. As a result, TCT No. 58748 was
cancelled and in lieu thereof TCT No. PT-85569 was issued in the name of petitioner A. Francisco
Realty.4
Private respondents subsequently obtained an additional loan of P2.5 Million from petitioner on
March 13, 1992 for which they signed a promissory note which reads:
PROMISSORY NOTE
For value received I promise to pay A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, the
additional sum of Two Million Five Hundred Thousand Pesos (P2,500,000.00) on or before April 27,
1992, with interest at the rate of four percent (4%) a month until fully paid and if after the said
date this note and/or the other promissory note of P7.5 Million remains unpaid and/or unsettled,
without any need for prior demand or notification, I promise to vacate voluntarily and willfully
and/or allow A.FRANCISCO REALTY AND DEVELOPMENT CORPORATION to appropriate and occupy
for their exclusive use the real property located at 56 Dragonfly, Valle Verde VI, Pasig, Metro
Manila.5
Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly interest
from May 1992, plus surcharges. As respondent spouses refused to vacate, petitioner filed the
present action for possession before the Regional Trial Court in Pasig City.6
In their answer, respondents admitted liability on the loan but alleged that it was not their intent to
sell the realty as the undated deed of sale was executed by them merely as an additional security for
the payment of their loan. Furthermore, they claimed that they were not notified of the registration
of the sale in favor of petitioner A. Francisco Realty and that there was no interest then unpaid as
they had in fact been paying interest even subsequent to the registration of the sale. As an alternative
defense, respondents contended that the complaint was actually for ejectment and, therefore, the
Regional Trial Court had no jurisdiction to try the case. As counterclaim, respondents sought the
cancellation of TCT No. PT-85569 as secured by petitioner and the issuance of a new title evidencing
their ownership of the property.7
On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive portion of which
reads as follows:
WHEREFORE, prescinding from the foregoing considerations, judgment is hereby rendered
declaring as legal and valid, the right of ownership of A. Francisco Realty Find Development
Corporation, over the property subject of this case and now registered in its name as owner
thereof, under TCT No. 85569 of the Register of Deeds of Rizal, situated at No. 56 Dragonfly Street,
Valle Verde VI, Pasig, Metro Manila.
Consequently, defendants are hereby ordered to cease and desist from further committing acts of
dispossession or from withholding possession from plaintiff of the said property as herein
described and specified.
Claim for damages in all its forms, however, including attorney's fees, are hereby denied, no
competent proofs having been adduced on record, in support thereof.8
Respondent spouses appealed to the Court of Appeals which reversed the decision of the trial court
and dismissed the complaint against them. The appellate court ruled that the Regional Trial Court
had no jurisdiction over the case because it was actually an action for unlawful detainer which is
exclusively cognizable by municipal trial courts. Furthermore, it ruled that, even presuming
jurisdiction of the trial court, the deed of sale was void for being in fact a pactum commissorium
which is prohibited by Art. 2088 of the Civil Code.
Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of Appeals denied the
motion in its resolution, dated May 7, 1996. Hence, this petition for review on certiorari raising the
following issues:
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL TRIAL COURT
HAD NO JURISDICTION OVER THE COMPLAINT FILED BY THE PETITIONER.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE CONTRACTUAL
DOCUMENTS SUBJECT OF THE INSTANT CASE ARE CONSTITUTIVE OF PACTUM COMMISSORIUM
AS DEFINED UNDER ARTICLE 2088 OF THE CIVIL CODE OF THE PHILIPPINES.
On the first issue, the appellate court stated:
 Ostensibly, the cause of action in the complaint indicates a case for unlawful detainer, as contra-
distinguished from accion publiciana. As contemplated by Rule 70 of the Rules of Court, an action
for unlawful detainer which falls under the exclusive jurisdiction of the Metropolitan or Municipal
Trial Courts, is defined as withholding from by a person from another for not more than one year,
the possession of the land or building to which the latter is entitled after the expiration or
termination of the supposed rights to hold possession by virtue of a contract, express or implied.
(Tenorio vs. Gamboa, 81 Phil. 54; Dikit vs. Dicaciano, 89 Phil. 44). If no action is initiated for forcible
entry or unlawful detainer within the expiration of the 1 year period, the case may still be filed
under the plenary action to recover possession by accion publiciana before the Court of First
Instance (now the Regional Trial Court) (Medina vs. Valdellon, 63 SCRA 278). In plain language, the
case at bar is a legitimate ejectment case filed within the 1 year period from the jurisdictional
demand to vacate. Thus, the Regional Trial Court has no jurisdiction over the case. Accordingly,
under Section 33 of B.P. Blg. 129 Municipal Trial Courts are vested with the exclusive original
jurisdiction over forcible entry and unlawful detainer case. (Sen Po Ek Marketing Corp. vs. CA, 212
SCRA 154 [1990])9
We think the appellate court is in error. What really distinguishes an action for unlawful detainer
from a possessory action (accion publiciana) and from a reivindicatory action (accion reivindicatoria)
is that the first is limited to the question of possession de facto.
An unlawful detainer suit (accion interdictal) together with forcible entry are the two forms of an
ejectment suit that may be filed to recover possession of real property. Aside from the summary
action of ejectment, accion publiciana or the plenary action to recover the right of possession and
accion reivindicatoria or the action to recover ownership which includes recovery of possession,
make up the three kinds of actions to judicially recover possession.
Illegal detainer consists in withholding by a person from another of the possession of a land or
building to which the latter is entitled after the expiration or termination of the former's right to
hold possession by virtue of a contract, express or implied. An ejectment suit is brought before the
proper inferior court to recover physical possession only or possession de facto and not possession
de jure, where dispossession has lasted for not more than one year. Forcible entry and unlawful
detainer are quieting processes and the one-year time bar to the suit is in pursuance of the
summary nature of the action. The use of summary procedure in ejectment cases is intended to
provide an expeditious means of protecting actual possession or right to possession of the
property. They are not processes to determine the actual title to an estate. If at all, inferior courts
are empowered to rule on the question of ownership raised by the defendant in such suits, only
to resolve the issue of possession. Its determination on the ownership issue is, however, not
conclusive.10
The allegations in both the original and the amended complaints of petitioner before the trial court
clearly raise issues involving more than the question of possession, to wit: (a) the validity of the
Transfer of ownership to petitioner; (b) the alleged new liability of private respondents for
P400,000.00 a month from the time petitioner made its demand on them to vacate; and (c) the
alleged continuing liability of private respondents under both loans to pay interest and surcharges
on such. As petitioner A. Francisco Realty alleged in its amended complaint:
5. To secure the payment of the sum of 7.5 Million together with the monthly interest, the
defendant spouses agreed to execute a Deed of Mortgage over the property with the express
condition that if and when they fail to pay monthly interest or any infringement thereof they
agreed to convert the mortgage into a Deed of Absolute Sale in favor of the plaintiff by executing
Deed of Sale thereto, copy of which is hereto attached and incorporated herein as Annex "A";
6. That in order to authorize the Register of Deeds into registering the Absolute Sale and transfer
to the plaintiff, defendant delivered unto the plaintiff the said Deed of Sale together with the
original owner's copy of Transfer Certificate of Title No. 58748 of the Registry of Rizal, copy of
which is hereto attached and made an integral part herein as Annex "B";
7. That defendant spouses later secured from the plaintiff an additional loan of P2.5 Million with
the same condition as aforementioned with 4% monthly interest;
8. That defendants spouses failed to pay the stipulated monthly interest and as per agreement of
the parties, plaintiff recorded and registered the Absolute Deed of Sale in its favor on and was
issued Transfer Certificate of Title No. PT-85569, copy of which is hereto attached and
incorporated herein as Annex "C";
9. That upon registration and transfer of the Transfer Certificate of Title in the name of the plaintiff,
copy of which is hereto attached and incorporated herein as Annex "C", plaintiff demanded the
surrender of the possession of the above-described parcel of land together with the improvements
thereon, but defendants failed and refused to surrender the same to the plaintiff without
justifiable reasons thereto; Neither did the defendants pay the interest of 4% a month from May,
1992 plus surcharges up to the present;
10. That it was the understanding of the parties that if and when the defendants shall fail to pay
the interest due and that the Deed of Sale be registered in favor of plaintiff, the defendants shall
pay a monthly rental of P400,000.00 a month until they vacate the premises, and that if they still
fail to pay as they are still failing to pay the amount of P400,000.00 a month as rentals and/or
interest, the plaintiff shall take physical possession of the said property; 11
It is therefore clear from the foregoing that petitioner A. Francisco Realty raised issues which involved
more than a simple claim for the immediate possession of the subject property. Such issues range
across the full scope of rights of the respective parties under their contractual arrangements. As held
in an analogous case:
The disagreement of the parties in Civil Case No. 96 of the Justice of the Peace of Hagonoy, Bulacan
extended far beyond the issues generally involved in unlawful detainer suits. The litigants therein
did not raise merely the question of who among them was entitled to the possession of the
fishpond of Federico Suntay. For all judicial purposes, they likewise prayed of the court to rule on
their respective rights under the various contractual documents — their respective deeds of lease,
the deed of assignment and the promissory note — upon which they predicate their claims to the
possession of the said fishpond. In other words, they gave the court no alternative but to rule on
the validity or nullity of the above documents. Clearly, the case was converted into the
determination of the nature of the proceedings from a mere detainer suit to one that is "incapable
of pecuniary estimation" and thus beyond the legitimate authority of the Justice of the Peace Court
to rule on. 12
Nor can it be said that the compulsory counterclaim filed by respondent spouses challenging the title
of petitioner A. Francisco Realty was merely a collateral attack which would bar a ruling here on the
validity of the said title.
 A counterclaim is considered a complaint, only this time, it is the original defendant who becomes
the plaintiff (Valisno v. Plan, 143 SCRA 502 (1986). It stands on the same footing and is to be tested
by the same rules as if it were an independent action. Hence, the same rules on jurisdiction in an
independent action apply to a counterclaim (Vivar v. Vivar, 8 SCRA 847 (1963); Calo v. Ajar
International, Inc. v. 22 SCRA 996 (1968); Javier v. Intermediate Appellate Court, 171 SCRA 605
(1989); Quiason, Philippine Courts and Their Jurisdictions, 1993 ed., p. 203). 13
On the second issue, the Court of Appeals held that, even "on the assumption that the trial court has
jurisdiction over the instant case," petitioner's action could not succeed because the deed of sale on
which it was based was void, being in the nature of a pactum commissorium prohibited by Art. 2088
of the Civil Code which provides:
Art. 2088. The creditor cannot appropriate the things given by way to pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.
With respect to this question, the ruling of the appellate court should be affirmed. Petitioner denies,
however, that the promissory notes contain a pactum commissorium. It contends that —
What is envisioned by Article 2088 of the Civil Code of the Philippines is a provision in the deed of
mortgage providing for the automatic conveyance of the mortgaged property in case of the failure
of the debtor to pay the loan (Tan v. West Coast Life Assurance Co., 54 Phil. 361). A pactum
commissorium is a forfeiture clause in a deed of mortgage (Hechanova v. Adil, 144 SCRA 450;
Montevergen v. Court of Appeals, 112 SCRA 641; Report of the Code Commission, 156).
Thus, before Article 2088 can find application herein, the subject deed of mortgage must be
scrutinized to determine if it contains such a provision giving the creditor the right "to appropriate
the things given by way of mortgage without following the procedure prescribed by law for the
foreclosure of the mortgage" (Ranjo v. Salmon, 15 Phil. 436). IN SHORT, THE PROSCRIBED
STIPULATION SHOULD BE FOUND IN THE MORTGAGE DEED ITSELF.14
The contention is patently without merit. To sustain the theory of petitioner would be to allow a
subversion of the prohibition in Art. 2088.
15
In Nakpil v. Intermediate Appellate Court, which involved the violation of a constructive trust, no
deed of mortgage was expressly executed between the parties in that case: Nevertheless, this Court
ruled that an agreement whereby property held in trust was ceded to the trustee upon failure of the
beneficiary to pay his debt to the former as secured by the said property was void for being a pactum
commissorium. Itwas there held:
The arrangement entered into between the parties, whereby Pulong Maulap was to be
"considered sold to him (respondent) . . ." in case petitioner fails to reimburse Valdes, must then
be construed as tantamount to a pactum commissorium which is expressly prohibited by Art. 2088
of the Civil Code. For, there was to be automatic appropriation of the property by Valdez in the
event of failure of petitioner to pay the value of the advances. Thus, contrary to respondent's
manifestations, all the elements of a pactum commissorium were present: there was a creditor-
debtor relationship between the parties; the property was used as security for the loan; and, there
was automatic appropriation by respondent of Pulong Maulap in case of default of petitioner.16
Similarly, the Court has struck down such stipulations as contained in deeds of sale purporting to be
pacto de retro sales but found actually to be equitable mortgages.
It has been consistently held that the presence of even one of the circumstances enumerated in
Art. 1602 of the New Civil Code is sufficient to declare a contract of sale with right to repurchase
an equitable mortgage. This is so because pacto de retro sales with the stringent and onerous
effects that accompany them are not favored. In case of doubt, a contract purporting to be a sale
with the right to repurchase shall be construed as an equitable mortgage.
Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that
complete and absolute title shall be vested on the vendee should the vendors fail to redeem the
property on the specified date. Such stipulation that the ownership of the property would
automatically pass to the vendee in case no redemption was effected within the stipulated period
is void for being a pactum commissorium which enables the mortgagee to acquire ownership of
the mortgaged property without need of foreclosure. Its insertion in the contract is an avowal of
the intention to mortgage rather that to sell the property. 17
Indeed, in Reyes v. Sierra 18 this Court categorically ruled that a mortgagee's mere act of registering
the mortgaged property in his own name upon the mortgagor's failure to redeem the property
amounted to the exercise of the privilege of a mortgagee in a pactum commissorium.
Obviously, from the nature of the transaction, applicant's a predecessor-in-interest is a mere
mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran, the mortgagor.
The mortgagee, however, may recover the loan, although the mortgage document evidencing the
loan was nonregistrable being a purely private instrument. Failure of mortgagor to redeem the
property does not automatically vest ownership of the property to the mortgagee, which would
grant the latter the right to appropriate the thing mortgaged or dispose of it. This violates the
provision of Article 2088 of the New Civil Code, which reads:
The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose by
them. Any stipulation to the contrary is null and void.
The act of applicant in registering the property in his own name upon mortgagor's failure to
redeem the property would to a pactum commissorium which is against good morals and public
policy.19
Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of
respondent spouses to pay interest, ownership of the property would be automatically transferred
to petitioner A. Francisco Realty and the deed of sale in its favor would be registered, are in substance
a pactum commissorium. They embody the two elements of pactum commissorium as laid down in
Uy Tong v. Court of Appeals,20 to wit:
The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil
Code:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgagee, or
dispose of the same. Any stipulation to the contrary is null and void.
 The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that
there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of
security for the payment of the principal obligation; and (2) that there should be a stipulation for
an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-
payment of the principal obligation within the stipulated period.21

The subject transaction being void, the registration of the deed of sale, by virtue of which petitioner
A. Francisco Realty was able to obtain TCT No. PT-85569 covering the subject lot, must also be
declared void, as prayed for by respondents in their counterclaim.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it dismissed petitioner's
complaint against respondent spouses on the ground that the stipulations in the promissory notes
are void for being a pactum commissorium, but REVERSED insofar as it ruled that the trial court had
no jurisdiction over this case. The Register of Deeds of Pasig City is hereby ORDERED to CANCEL TCT
No. PT-85569 issued to petitioner and ISSUE a new one in the name of respondent spouses.

SO ORDERED.
CREDIT - PLEDGE, MORTGAGE AND ANTICHRESIS – COMMON PROVISIONS
G.R. No. L-28658 October 18, 1979
VICENTE C. REYES, applicant-appellee,
vs.
FRANCISCO SIERRA, EMILIO SIERRA, ALEJANDRA SIERRA, FELIMON SIERRA, AURELIO SIERRA,
CONSTANCIO SIERRA, CIRILO SIERRA and ANTONIA SANTOS, oppositors-appellants.
DE CASTRO, J.:
Appeal from the decision dated December 29, 1966 of the Court of First Instance of Rizal Branch 1,
Pasig, which declared applicant Vicente Reyes the true and rightful owner of the land covered by Plan
Psu-189753 and ordered the registration of his title thereto.
On January 3, 1961, Vicente Reyes filed an application for registration of his title to a parcel of land
situated in Antipolo, Rizal and covered by Plan Psu-189753 of the Bureau of Lands. In his application,
he declared that he acquired the land by inheritance from his father who died sometime in 1944.
Applicant is one of the heirs of the deceased Vicente Reyes Sr. but the other heirs executed a deed
of quit claim in favor of the applicant.
The notice of initial hearing was published in the Official Gazette, and a copy thereof was posted in a
conspicuous place in the land in question and in the municipal building of Antipolo, Rizal. An
opposition was filed by the Director of Lands, Francisco Sierra and Emilio Sierra. An Order of General
Default was issued on June 28, 1962. A motion to set aside an interlocutory default order was filed
by Alejandra, Felimon, Aurelio, Apolonio, Constancio, Cirilo, all surnamed Sierra and Antonia Santos,
thru counsel, and the trial court issued an Order on February 4, 1966 amending the general order of
default so as to include the aforementioned movants as oppositors.
The case was set for hearing, and after trial the court rendered a decision, the dispositive portion of
which reads as follows:
IN VIEW OF THE ABOVE CONSIDERATIONS this Court declares Vicente Reyes the true and rightful
owner of the land covered by Plan, Psu-189753 and orders the registration of his title thereto,
provided that the title to be issued shall be subject to a public easement of right of-way over a 2.00
meter-wide strip of the land along Lucay Street for the latter's widening and improvement.
As soon as this decision is final let, the corresponding degree be issued in favor of VICENTE REYES,
widower, Pilipino, of legal age and resident of 1851 P. Guevarra Street, Santa Cruz, Manila. (P. 25,
Record on Appeal).
Oppositors appealed from the aforesaid decision, with the following assignment of errors:
I Ngayon ika 19 nang Abril nang 1926. Antipolo, Rizal. K.P.
THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT ARTICLES 1134 AND 1137 OF THE
NEW CIVIL CODE ARE APPLICABLE TO THIS INSTANT CASE ALTHOUGH THERE WAS NO
FORECLOSURE OR SALE OF THE PROPERTY TO THE HIGHEST BIDDER.
II
THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT APPLICANT-APPELLEE AND HIS
PREDECESSOR-IN-INTEREST HAD BEEN IN CONSTRUCTIVE POSSESSION OF THE LAND FROM APRIL
19, 1926 UP TO THE PRESENT AS SHOWING BY THE FACT THAT THEY HAD PAID THE REALTY TAXES.
III
THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT BECAUSE OPPOSITORS-APPELLANTS
AND THEIR PREDECESSORS-IN-INTEREST HAD NOT TAKEN ANY ACTIVE INTEREST TO PAY REALTY
TAXES SINCE 1926 AND IT WAS APPLICANT- APPELLEE AND HIS PREDECESSOR-IN-INTEREST THAT
PAID THE REALTY 'TAXES FROM THE SAME PERIOD, THIS CONSTITUTES STRONG CORROBORATING
EVIDENCE OF APPLICANT'S ADVERSE POSSESSION.
IV
THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT DOCUMENT EXH. "D" EXECUTED BY
BASILIA BELTRAN IN 1926 WAS ALREADY A CONVEYANCE OF THE LAND I N QUESTION TO VICENTE
REYES AND THE FAILURE OF BASILIA BELTRAN AND HER CHILDREN TO REDEEM THE SAME, COULD
BE CONSIDERED AS IF THE LAND HAD ALREADY BEEN SOLD TO HIM. (p. 2 1, Rollo.)
The land applied for was originally owned by Basilia Beltran's parents, and upon their death in 1894,
Basilia inherited the property. On April 19, 1926, Basilia Beltran, a widow, borrowed from applicant's
father, Vicente Reyes, Sr. the amount of P100.00 and secured the loan with the piece of land in
question, AS evidenced by exhibit "D" quoted hereunder:
SA KAALAMAN NANG LAHAT NA BUMASA AT
NAKAKITA NITONG KASULATAN:
Kaming mag-kakapatid may sapat na gulang na nakalagda Sa kasulatan ito, bilang katibayan nang
pag papahintulot sa aming Ina na si Bacilia Beltran na ipananagutan kay G. Vicente Reyes sa inutang
ha halagang isang daan piso (P100.00) na walang anopamang pakinabang; ang isang lagay na lupa
sa kallehon Sukay, Antipolo, Rizal, naliligiran nang mga lupang may titulo Torrents, expendientes
Nos. 770, 1831, lote 1, 645 at 1839 lote 2, may kabu-uan humigit kumulang sa apat na raan metro;
ito'y aring naiwan ng ama naming namatay na si Melecio Sierra.
Ang katotohanan kahit isangla o ipag-bile man ng tuluyan ang nasabing pag-aaral' o lupa wala
kaming kinalaman, sapagkat ipinauubaya nang lubusan sa arming Ina ang kapamahalaan.
Sa katunayan nagsilagda kaming mga anak, at apo kay Esteban, sa harap nang saksing
magpapatotoo.
Lagda ni
 Bacilia Beltran The fact that the real transaction between the parties was a borrowing and lending, will, whenever,
or however, it may appear, show that a deed, absolute on its face was intended as a security for
Gregorio Sierra money; and whenever it can be ascertained to be a security for money, it is only a mortgage,
however artfully it may be disguised. (Villa vs. Santiago, 38 Phil. 163).
Saksi:
The whole case really turns on the question of whether the written instrument in controversy was
a mortgage or a conditional sale. ... The real intention of the parties at the time the written
Since the execution of this document, Vicente Reyes, Sr. began paying the realty taxes up to the time
instrument was made must concern in the interpretation given to it by the courts. ... The correct
of his death in 1944, after which, his children continued paying the taxes. Basilia Beltran died in 1938
test, where it can be applied, is the continued existence of a debt or liability between the parties.
before Reyes could recover from the loan.
If such exists, the conveyance may be held to be merely a security for the debt or an indemnity
against the liability. (Cuyugan vs. Santos, 34 Phil. 112).
Applicant, in seeking the registration of the land, relied on his belief that the property belongs to his
father who bought the same from Basilia Beltran, as borne out by his testimony during the trial on
The Cuyugan Case quoted some provisions in Jones' Commentaries on Evidence, vol. 3, paragraphs
direct examination.
446-447 which are likewise applicable to the facts of the case at bar:

Q. Mr. Reyes, do you claim to be the owner of this property included or described in your
446. To show that instruments apparently absolute are only securities. ... It is an established
application?
doctrine that a court of equity will treat a deed, absolute in form, as a mortgage, when it is
A Yes, sir.
executed as security for loan of money, The court looks beyond the terms of the instrument to the
Q How did you acquire this property'?
real transaction; and when that is shown to be one of security and not of sale, it will give effect to
A. Since 1926 we were the ones paying the land taxes.
the actual contract of the parties.
Q. From whom did you acquire this property?
A. Basilia Beltran.
Q. Do you mean to say that you yourself bought this property. 447. Same-Real intention of the parties to be ascertained ... As we have shown in the preceding
A. My father was the one who bought the property. section, the intention of the parties must govern and it matters not what peculiar form the
Q. What is the name of your father? transaction may have taken. The inquiry always is, Was a security for the loan of money or other
A. Vicente C. Reyes. property intended? ... A debt owing to the mortgagee, or a liability incurred for the grantor, either
Q. Where is he now? pre-existing or created at the time the deed is made, is essential to give the deed the character of
A. He is already dead. a mortgage. The relation of debtor and creditor must appear. The existence of the debt is one on
Q. Can you inform this Honorable Court, if you know, how your father acquired this property? the tests. ... In construing the deed to be a mortgage, its character as such must have existed from
A. Since 1926 my father bought that land. its very inception, - created at the time the conveyance was made.
Q. Was that transaction evidenced by a document?
A. Yes, there is a document. The same principle was laid down in a later case, that of Macapinlac vs. Gutierrez Rapide, 43 Phil.
Q. From whom did your father allegedly purchase the property? 781, quoting 3 Pomeroy's Equity Jurisdiction, Section .1195, wherein it was stated:
A. Basilia Beltran.
... The doctrine has been firmly established from an early day that when the character of a
From the above-quoted testimony of applicant, it is evident that he considered the document marked mortgage has attached at the commencement of the transaction, so that the instrument, whatever
Exhibit "D as contract of Sale and not as a mortgage. Oppositors contended that the words be its form, is regarded in equity as a mortgage, that character of mortgage must and will always
"isinangla," "na ipananagutan sa inutang na halagang isang daang piso," "Kahit isangla o ipagbili," continue. If the instrument is in its essence a mortgage, the parties cannot by any stipulations,
etc., manifest that the document should be treated as a mortgage, antichresis, or pactum however express and positive, render it anything but a mortgage or deprive it of the essential
commission and not as an absolute sale or pacto de retro sale. (p. 28, Brief, Oppositors-Appellants). attributes belonging to a mortgage in equity.

The Court is of the opinion that Exhibit "D" is a mortgage contract. The intention of the parties at the
time of the execution of the contract must prevail, that is, the borrowing and lending of money with
security. The use of the word Debt (utang) in an agreement helps to point out that the transaction
was intended to be a loan with mortgage, because the term "utang" implies the existence of a
creditor-debtor relationship. The ' Court has invariably upheld the validity of an agreement or
understanding whereby the lender of money has taken a deed to the land as security for repayment
of the loan. Thus:
Concerning the legal effects of such contract, Pomeroy observes:
... Whenever a deed absolute on its face is thus treated as a mortgage, the parties are clothed with
all the rights, are subject to all liabilities, and are entitled to all the remedies of ordinary mortgagors
and mortgagees. The grantee may maintain an action for the foreclosure of the grantor equity of
redemption; the grantor may maintain an action to redeem and to compel a reconvayance upon
his payment of the debt secured. If the grantee goes into possession, and as such is liable to
account for the rents and profits.
Obviously, from the nature of the transaction, applicant's predecessor-in-interest is a mere
mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran, the mortgagor. The
mortgagee, however, may recover the loan, although the mortgage document evidencing the loan
was non-registrable being a purely private instrument. Failure of mortgagor to redeem the property
does not automatically vest ownership of the property to the mortgagee, which would grant the
latter the right to appropriate the thing mortgaged or dispose of it. This violates the provision of
Article 2088 of the New Civil Code, which reads:
a mortgage" has been firmly established whatever be its form. (Macapinlac vs. Gutierrez Rapide,
supra) The parties cannot by any stipulation, however express and positive, render it anything but a
mortgage. No right passes to applicant except that of a mortgage since one cannot acquire a right
from another who was not in possession thereof A derivative right cannot rise higher than its source.
Applicant having failed to show by sufficient evidence a registrable title to the land in question, the
application for registration should be dismissed.

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose by WHEREFORE, the decision appealed from is hereby set aside, and let another one be entered ordering
them. Any stipulation to the contrary is null and void. the registration of the title of the land in question in the name of the oppositors- appellants. The said
oppositors-appellants are hereby directed to pay the applicant- appellee within ninety (90) days from
The act of applicant in registering the property in his own name upon mortgagor's failure to redeem the finality of this decision, the debt in the amount of P100.00 plus interest at the rate of six per cent
the property would amount to a pactum commissorium which is against good morals and public (6%) per annum from April 19, 1926 until paid. No pronouncement as to costs.
policy.
SO ORDERED.
In declaring applicant as the "true and rightful owner of the land in question," the trial court held
that applicant and his predecessor-in- interest acquired ownership over the property by means of
prescription having been in constructive possession of the land applied for since 1926, applying Arts,
1134 and 1137 of the New Civil Code:

Art. 1134. - Ownership and other real rights over immovable property are acquired by ordinary
prescription through possession of ten years.

Art. 1137. - Ownership and other real rights over immovables also prescribe through uninterrupted
adverse possession thereof for thirty years, without need of title or good faith.

Applicant in his testimony on cross-examination, admitted that he and his father did not take
possession of the property but only made use of the same for the purpose of spending vacation there,
which practice they discontinued for the last 23 years. Possession of the property must. be in the
concept of an owner. This is a fundamental principle of the law of prescription in this jurisdiction. In
the case at bar, the possession of applicant was not adverse, nor continuous.

An applicant for registration of title must prove his title and should not rely on the absence or
weakness of the evidence of the oppositors. For purposes of prescription, there is just title when
adverse claimant came into possession of the property through one of the modes recognized by law
for the acquisition of ownership (Art. 1129, New Civil Code). Just title must be proved and is never
presumed (Art. 1131, New Civil Code). Mortgage does not constitute just title on the part of the
mortgagee. since ownership is retained by the mortgagor. When possession is asserted to convert
itself into ownership, a new right is sought to be created, and the law becomes more exacting and
requires positive proof of title. Applicant failed to present sufficient evidence to prove that he is
entitled to register the property. The trial court's finding that since applicant and his father had been
continuously paying the realty taxes, that fact "constitutes strong corroborating evidence of
applicant's adverse possession," does not carry much weight. Mere failure of the owner to pay the
taxes does not warrant a conclusion that there was abandonment of a right to the property. The
payment of taxes on property does not alone constitute sufficient evidence of title. (Elumbaring vs.
Elumbaring, 12 Phil. 389)

The belief of applicant that he owns the property in question which he inherited from his father
cannot overthrow the fact that the transaction is a mortgage. The doctrine "once a mortgage always
CREDIT - PLEDGE, MORTGAGE AND ANTICHRESIS – COMMON PROVISIONS After making a downpayment of P7,700.00, the SPOUSES failed to pay the balance of P40,000.00.
Due to these unpaid balances, BAYANIHAN filed an action for specific performance against the
G.R. No. 77465 May 21, 1988 SPOUSES docketed as Civil Case No. 80420 with the Court of First Instance of Manila.

SPOUSES UY TONG & KHO PO GIOK, petitioners, On October 28, 1978, after hearing, judgment was rendered in favor of BAYANIHAN in a decision the
vs. dispositive portion of which reads:
HONORABLE COURT OF APPEALS, HONORABLE BIENVENIDO C. EJERCITO, Judge of the Court of
First Instance of Manila, Branch XXXVII and BAYANIHAN AUTOMOTIVE CORPORATION, WHEREFORE, judgment is hereby rendered, ordering the defendants, jointly and severally, to pay
respondents. the plaintiffs, the sum of P40,000.00, with interest at the legal rate from July 1, 1970 until full
payment. In the event of their failure to do so within thirty (30) days from notice of this judgment,
CORTES, J.: they are hereby ordered to execute the corresponding deed of absolute sale in favor of the plaintiff
and/or the assignment of leasehold rights over the defendant's apartment located at 307 Ligaya
Building, Alvarado Street, Binondo, Manila, upon the payment by the plaintiff to the defendants of
In the present petition, petitioners assail the validity of a deed of assignment over an apartment unit
the sum of P3,535.00. [emphasis supplied].
and the leasehold rights over the land on which the building housing the said apartment stands for
allegedly being in the nature of a pactum commissorium.
Pursuant to said judgment, an order for execution pending appeal was issued by the trial court and
a deed of assignment dated May 27, 1972, was executed by the SPOUSES [Exhibit "B", CFI Records,
The facts are not disputed.
p. 127] over Apartment No. 307 of the Ligaya Building together with the leasehold right over the land
on which the building stands. The SPOUSES acknowledged receipt of the sum of P3,000.00 more or
Petitioners Uy Tong (also known as Henry Uy) and Kho Po Giok (SPOUSES) used to be the owners of less, paid by BAYANIHAN pursuant to the said judgment.
Apartment No. 307 of the Ligaya Building, together with the leasehold right for ninety- nine (99) years
over the land on which the building stands. The land is registered in the name of Ligaya Investments,
Notwithstanding the execution of the deed of assignment the SPOUSES remained in possession of
Inc. as evidenced by Transfer Certificate of Title No. 79420 of the Registry of Deeds of the City of
the premises. Subsequently, they were allowed to remain in the premises as lessees for a stipulated
Manila. It appears that Ligaya Investments, Inc. owned the building which houses the apartment units
monthly rental until November 30,1972.
but sold Apartment No. 307 and leased a portion of the land in which the building stands to the
SPOUSES.
Despite the expiration of the said period, the SPOUSES failed to surrender possession of the premises
in favor of BAYANIHAN. This prompted BAYANIHAN to file an ejectment case against them in the City
In February, 1969, the SPOUSES purchased from private respondent Bayanihan Automotive, Inc.
Court of Manila docketed as Civil Case No. 240019. This action was however dismissed on the ground
(BAYANIHAN) seven (7) units of motor vehicles for a total amount of P47,700.00 payable in three (3)
that BAYANIHAN was not the real party in interest, not being the owner of the building.
installments. The transaction was evidenced by a written "Agreement" wherein the terms of payment
had been specified as follows:
On February 7, 1979, after demands to vacate the subject apartment made by BAYANIHAN's counsel
was again ignored by the SPOUSES, an action for recovery of possession with damages was filed with
That immediately upon signing of this Agreement, the VENDEE shall pay unto the VENDOR the
the Court of First Instance of Manila, docketed as Civil Case No. 121532 against the SPOUSES and
amount of Seven Thousand Seven Hundred (P7,000.00) Pesos, Philippine Currency, and the
impleading Ligaya Investments, Inc. as party defendant. On March 17, 1981, decision in said case was
amount of Fifteen Thousand (P15,000.00) Pesos shah be paid on or before March 30, 1969 and the
rendered in favor of BAYANIHAN ordering the following:
balance of Twenty Five Thousand (P25,000.00) Pesos shall be paid on or before April 30, 1969, the
said amount again to be secured by another postdated check with maturity on April 30, 1969 to
be drawn by the VENDEE; WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants
spouses UY TONG and KHO GIOK and defendant Ligaya Investment, Inc., dismissing defendants'
counterclaim and ordering:
That it is fully understood that should the two (2) aforementioned checks be not honored on their
respective maturity dates, herein VENDOR will give VENDEE another sixty (60) days from maturity
dates, within which to pay or redeem the value of the said checks; 1. The defendants spouses UY TONG and KHO PO GIOK and any andlor persons claiming right under
them, to vacate, surrender and deliver possession of Apartment 307, Ligaya Building, located at 64
Alvarado Street, Binondo, Manila to the plaintiff;
That if for any reason the VENDEE should fail to pay her aforementioned obligation to the VENDOR,
the latter shall become automatically the owner of the former's apartment which is located at No.
307, Ligaya Building, Alvarado St., Binondo, Manila, with the only obligation on its part to pay unto 2. Ordering defendant Ligaya Investment, Inc. to recognize the right of ownership and possession
the VENDEE the amount of Three Thousand Five Hundred Thirty Five (P3,535.00) Pesos, Philippine of the plaintiff over Apartment No. 307, Ligaya Building;
Currency; and in such event the VENDEE shall execute the corresponding Deed of absolute Sale in
favor of the VENDOR and or the Assignment of Leasehold Rights. [emphasis supplied]. (Quoted in 3. Ordering Ligaya Investment, Inc. to acknowledge plaintiff as assignee-lessee in liue of
Decision in Civil Case No. 80420, Exhibit "A" of Civil Case No. 1315321]. defendants spouses Uy Tong and Kho Po Giok over the lot on which the building was constructed;
 4. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay to the plaintiff the sum of
P200.00 commencing from June, 1971 to November 30, 1972, or a total amount of P3,400.00 as
rental for the apartment, and the sum of P200.00 from December 1, 1972 until the premises are
finally vacated and surrendered to the plaintiff, as reasonable compensation for the use of the
apartment; and
5. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay P3,000.00 as and for
attorney's fees to the plaintiff, and the costs of this suit.
Not satisfied with this decision, the SPOUSES appealed to the Court of Appeals. On October 2,1984,
the respondent Court of Appeals affirmed in toto the decision appealed from [Petition, Annex "A",
Rollo, pp. 15-20]. A motion for reconsideration of the said decision was denied by the respondent
Court in a resolution dated February 11, 1987 [Petition, Annex "C", Rollo, pp. 31- 34].
Petitioners-SPOUSES in seeking a reversal of the decision of the Court of Appeals rely on the following
reasons:
I. The deed of assignment is null and void because it is in the nature of a pactum commissorium
and/or was borne out of the same.
II. The genuineness and due Prosecution of the deed of assignment was not deemed admitted by
petitioner.
III. The deed of assignment is unenforceable because the condition for its execution was not
complied with.
IV. The refusal of petitioners to vacate and surrender the premises in question to private
respondent is justified and warranted by the circumstances obtaining in the instant case.
I. In support of the first argument, petitioners bring to the fore the contract entered into by the
parties whereby petitioner Kho Po Giok agreed that the apartment in question will automatically
become the property of private respondent BAYANIHAN upon her mere failure to pay her obligation.
This agreement, according to the petitioners is in the nature of a pactum commissorium which is null
and void, hence, the deed of assignment which was borne out of the same agreement suffers the
same fate.
The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil
Code:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of the same. Any stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that
there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security
for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic
appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the
principal obligation within the stipulated period.
A perusal of the terms of the questioned agreement evinces no basis for the application of the
pactum commissorium provision. First, there is no indication of 'any contract of mortgage entered
into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks.
Second, there is no case of automatic appropriation of the property by BAYANIHAN. When the
SPOUSES defaulted in their payments of the second and third installments of the trucks they
purchased, BAYANIHAN filed an action in court for specific performance. The trial court rendered
favorable judgment for BAYANIHAN and ordered the SPOUSES to pay the balance of their obligation
and in case of failure to do so, to execute a deed of assignment over the property involved in this
case. The SPOUSES elected to execute the deed of assignment pursuant to said judgment.
Clearly, there was no automatic vesting of title on BAYANIHAN because it took the intervention of
the trial court to exact fulfillment of the obligation, which, by its very nature is ". . anathema to the
concept of pacto commissorio" [Northern Motors, Inc. v. Herrera, G.R. No. L-32674, February 22,
1973, 49 SCRA 392]. And even granting that the original agreement between the parties had the
badges of pactum commissorium, the deed of assignment does not suffer the same fate as this was
executed pursuant to a valid judgment in Civil Case No. 80420 as can be gleaned from its very terms
and conditions:
DEED OF ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS:
This deed made and entered into by Uy Tiong also known as Henry Uy and Kho Po Giok, both of
legal age, husband and wife, respectively, and presently residing at 307 Ligaya Bldg., Alvarado St.,
Binondo, Manila, and hereinafter to be known and called as the ASSIGNORS, in favor of Bayanihan
Automotive Corporation, an entity duly organized and existing under the laws of the Philippines,
with principal business address at 1690 Otis St., Paco, Manila and hereinafter to be known and
called the ASSIGNEE;
-witnesseth-
WHEREAS, the ASSIGNEE has filed a civil complaint for "Specific Performance with Damages"
against the ASSIGNORS in the Court of First Instance of Manila, Branch V, said case having been
docketed as Civil Case No. 80420;
WHEREAS, the ASSIGNEE was able to obtain a judgment against the ASSIGNOR wherein the latter
was ordered by the court as follows, to wit:
WHEREFORE, judgment is hereby rendered ordering the defendants, jointly and severally to pay
the plaintiff the sum of P40,000.00, with interest at the legal rate from July 31, 1970 until full
payment. In the event of their failure to do so within thirty (30) days from notice of this
judgment, they are hereby ordered to execute the corresponding deed of absolute sale in favor
of the plaintiff and/or the assignment of leasehold, rights over the defendants' apartment
located at No. 307 Ligaya Building, Alvarado Street, Binondo, Manila, upon the payment by the
plaintiff to the defendants the sum of P 3,535.00. The defendants shall pay the costs.
 WHEREAS, the court, upon petition by herein ASSIGNEE and its deposit of sufficient bond, has
ordered for the immediate execution of the said decision even pending appeal of the aforesaid
decision;
WHEREAS, the ASSIGNORS have elected to just execute the necessary deed of sale and/or
assignment of leasehold rights over the apartment mentioned in the decision in favor of the herein
ASSIGNEE;
NOW, THEREFORE, for and in consideration of the foregoing premises, the ASSIGNORS have
transferred assigned and ceded, and by these presents do hereby transfer, assign and cede all their
rights and interests over that place known as Apartment No. 307 at the Ligaya Building which is
located at No. 864 Alvarado St., Binondo, Manila, together with the corresponding leasehold rights
over the lot on which the said building is constructed, in favor of the hererein ASSIGNEE, its heirs
or assigns.
IN WITNESS WHEREOF, We have hereunto signed our names this 27th day of May, 1971 at Manila,
Philippines.
UY TONG/HENRY UY KHO PO GIOK
Assignor Assignor
ACR-2151166 Manila 1/13/51 ACR-C-001620
Manila March 3, 1965
This being the case, there is no reason to impugn the validity of the said deed of assignment.
II. The SPOUSES take exception to the ruling of the Court of Appeals that their failure to deny the
genuineness and due execution of the deed of assignment was deemed an admission thereof. The
basis for this exception is the SPOUSES' insistence that the deed of assignment having been borne
out of pactum commissorio is not subject to ratification and its invalidity cannot be waived.
There is no compelling reason to reverse the abovementioned ruling of the appellate court.
Considering this Court's above conclusion that the deed of assignment is not invalid, it follows that
when an action founded on this written instrument is filed, the rule on contesting its genuineness
and due execution must be followed.
That facts reveal that the action in Civil Case No. 121532 was founded on the deed of assignment.
However, the SPOUSES, in their answer to the complaint, failed to deny under oath and specifically
the genuineness and due execution of the said deed. Perforce, under Section 8, Rule 8 of the Revised
Rules of Court, the SPOUSES are deemed to have admitted the deed's genuineness and due
execution. Besides, they themselves admit that ". . . the contract was duly executed and that the
same is genuine" [Sur-Rejoinder, Rollo, p. 67]. They cannot now claim otherwise.
III. The SPOUSES also question the enforceability of the deed of assignment. They contend that the
deed is unenforceable because the condition for its execution was not complied with. What
petitioners SPOUSES refer to is that portion of the disposition in Civil Case No. 80420 requiring
BAYANIHAN to pay the former the sum of P 3,535.00. To buttress their claim of non- compliance,
they invoke the following receipt issued by the SPOUSES to show that BAYANIHAN was P535.00 short
of the complete payment.
RECEIPT
This is to acknowledge the fact that the amount of THREE THOUSAND (P3,000.00) PESOS, more or
less as indicated in the judgment of the Hon. Conrado Vasquez, Presiding Judge of the Court of First
Instance of Manila, Branch V, in Civil Case entitled "Bayanihan Automotive Corp. v. Pho (sic) Po
Giok, etc." and docketed as Civil Case No. 80420 has been applied for the payment of the previous
rentals of the property which is the subject matter of the aforesaid judgment. [emphasis supplied.]
(Sgd.) Pho (sic) Po Glok
(Sgd.) Henry Uy
August 21, 1971
The issue presented involves a question of fact which is not within this Court's competence to look
into. Suffice it to say that this Court is of the view that findings and conclusion of the trial court and
the Court of Appeals on the question of whether there was compliance by BAYANIHAN of its
obligation under the decision in Civil Case No. 80420 to pay the SPOUSES the sum of P3,535.00 is
borne by the evidence on record. The Court finds merit in the following findings of the trial court:
... Defendants 'contention that the P 3,535.00 required in the decision in Civil Case No. 80420 as a
condition for the execution of the deed of assignment was not paid by the plaintiff to the
defendants is belied by the fact that the defendants acknowledged payment of P3,000.00, more or
less, in a receipt dated August 21, 1971. This amount was expressly mentioned in this receipt as
indicated in the judgment of the Honorable Conrado Vasquez, presiding Judge of the CFI of Manila,
Branch V, in Civil Case entitled Bayanihan Automotive Corp. versus Kho Po Giok, docketed as Civil
Case No. 80420, and also expressly mentioned as having been applied for the payment of the
previous rentals of the property subject matter of the said judgment. Nothing could be more
explicit. The contention that there is still a difference of P535.00 is had to believe because the
spouses Kho Po Giok and Uy Tong executed the deed of assignment without first demanding from
the plaintiff the payment of P535.00. Indeed, as contended by the plaintiff, for it to refuse to pay
this small amount and thus gave defendants a reason not to execute the Deed of Assignment. is
hard to believe Defendants further confirm by the joint manifestation of plaintiff and defendants,
duly assisted by counsel, Puerto and Associates, dated September, 1971, Exhibit "O", wherein it
was stated that plaintiff has fully complied with its obligation to the defendants caused upon it (sic)
by the pronouncement of the judgment as a condition for the execution of their (sic) leasehold
rights of defendants, as evidenced by the receipt duly executed by the defendants, and which was
already submitted in open court for the consideration of the sum of P3,535.00. [Emphasis supplied].
[Decision, Civil Case No. 121532, pp. 3-4].
This Court agrees with private respondent BAYANIHAN's reasoning that inasmuch as the decision in
Civil Case No. 80420 imposed upon the parties correlative obligations which were simultaneously
demandable so much so that if private respondent refused to comply with its obligation under the
judgment to pay the sum of P 3,535.00 then it could not compel petitioners to comply with their own
obligation to execute the deed of assignment over the subject premises. The fact that petitioners
executed the deed of assignment with the assistance of their counsel leads to no other conclusion
that private respondent itself had paid the full amount.

IV. Petitioners attempt to justify their continued refusal to vacate the premises subject of this
litigation on the following grounds:

(a) The deed of assingnment is in the nature of a pactum commissorium and, therefore, null and
void.

(b) There was no full compliance by private respondent of the condition imposed in the deed of
assignment.

(c) Proof that petitioners have been allowed to stay in the premises, is the very admission of private
respondent who declared that petitioners were allowed to stay in the premises until November
20, 1972. This admission is very significant. Private respondent merely stated that there was a
term-until November 30, 1972-in order to give a semblance of validity to its attempt to dispossess
herein petitioners of the subject premises. In short, this is one way of rendering seemingly illegal
petitioners 'possession of the premises after November 30, 1972.

The first two classifications are mere reiterations of the arguments presented by the petitioners and
which had been passed upon already in this decision. As regards the third ground, it is enough to
state that the deed of assignment has vested in the private respondent the rights and interests of the
SPOUSES over the apartment unit in question including the leasehold rights over the land on which
the building stands. BAYANIHAN is therefore entitled to the possession thereof. These are the clear
terms of the deed of assignment which cannot be superseded by bare allegations of fact that find no
support in the record.

WHEREFORE, the petition is hereby DENIED for lack of merit and the decision of the Court of Appeals
is AFFIRMED in toto.

SO ORDERED.
CREDIT - PLEDGE, MORTGAGE AND ANTICHRESIS – COMMON PROVISIONS
G.R. No. 109696 August 14, 1995
THELMA P. OLEA, petitioner,
vs.
COURT OF APPEALS, ELENA VDA. DE PACARDO, JESUS PALENCIA, ELIZABETH PALENCIA AND
MONSERRAT PACIENTE, respondents.
BELLOSILLO, J.:
This is a petition for review of the decision of the Court of Appeals affirming that of the court a quo
which dismissed the complaint of petitioner for recovery of possession on the ground that the action
had already prescribed and that the deed of sale with right to repurchase on which petitioner based
her claim was an equitable mortgage.
On 27 January 1947 spouses Filoteo Pacardo and Severa de Pacardo executed a deed of Sale Con
Pacto de Retro over Lot No. 767 of the Passi Cadastre covered by Transfer Certificate of Title No.
26424 in their name for a consideration of P950.00 in favor of Maura Palabrica, predecessor in
interest of petitioner, subject to the condition that —
. . . if we, the said spouses, Filoteo Pacardo and Severa de Pacardo, our heirs, assigns, successors-
in-interest, executors and administrators shall and will truly repurchase the above-described
parcel of land from the said Maura Palabrica, her heirs, assigns, successors-in-interest after THREE
YEARS counting from the date of the execution of this instrument, to wit, on January 27, 1950 in
cash payment in the sum of Five Hundred Pesos, Philippine currency, plus Four Hundred and Fifty
Pesos (P450), also lawful currency, in cash or eighteen (18) cavans of palay (Provincial
Measurement) at our option, then this sale shall become null and void and of no force and effect
whatsoever. On the contrary, the same will become irrevocable, definite and final and will vest
complete and absolute title on the vendee upon the premises. 1
The contract of sale with right to repurchase was acknowledged by the vendors before Notary Public
Victorio Tagamolila on the same day the contract was executed in the Municipality of Passi, Province
of Iloilo. The vendors also delivered to the vendee their owner's copy of the title.
After the execution of the sale, the Pacardo spouses as vendors remained in possession of the land
and continued the cultivation thereof. Since the sale on 27 January 1947 up to August 1987, or for a
period of about 40 years, the spouses delivered annually one-third (1/3) of the produce of the land
to Maura Palabrica and kept for themselves the remaining two-thirds (2/3).
On 27 January 1950, despite the lapse of three (3) years, the Pacardo spouses did not repurchase the
land but faithfully continued to give 1/3 of the produce to Maura Palabrica. When the spouses died,
their son Filoteo Jr., took over the possession and assumed the cultivation of the land and, like his
parents, gave 1/3 of the produce to Maura Palabrica and later to her daughter, petitioner herein,
who would eventually buy from her the lot subject of the litigation.
On 22 September 1966 Maura Palabrica caused the registration of the Sale Con Pacto de Retro with
the Register of Deeds of Iloilo and its annotation on Transfer Certificate of Title No. 26424 covering
the subject lot.
On 10 May 1978 Maura Palabrica sold Lot No. 767 for P40,000.00 to one of her daughters, petitioner
Thelma Olea. From then on it was petitioner who received the one-third (1/3) share of the annual
produce of the land from Filoteo Pacardo, Jr., until he died in August 1987. His widow Elena Vda. de
Pacardo however refused to give to petitioner the one-third (1/3) share of the produce. After Elena
transferred residence to another barangay the spouses Jesus and Elizabeth Palencia took over the
possession and cultivation of the property. Elizabeth Palencia is a sister of Filoteo Jr., and is one of
the children of spouses Filoteo and Severina Pacardo. The Palencias delivered the share of the
produce not to petitioner but to respondent Elena Pacardo.
Hence, on 25 January 1989, petitioner filed a complaint against Elena Pacardo and the spouses Jesus
and Elizabeth Palencia for recovery of possession with damages. She alleged that she was the owner
of Lot No. 767 having acquired the same from her mother Maura Palabrica through a deed of sale,
who in turn acquired the lot from the spouses Filoteo and Severa Pacardo through a pacto de retro
sale, and that due to the failure of the spouses to redeem the property three (3) years thereafter
ownership thereof passed on to Maura Palabrica who later caused the registration of the Sale Con
Pacto de Retro with the Registry of Deeds of Iloilo and its annotation on TCT No. 26424.
Private respondents Elena Vda. de Pacardo and Jesus and Elizabeth Palencia filed their answer
alleging that their parents intended the disputed transaction to be an equitable mortgage and not a
sale with right to repurchase. Respondent Monserrat Paciente, another daughter of the vendor-
spouses Filoteo and Severa Pacardo, filed an answer in intervention raising likewise as defense that
the Sale Con Pacto de Retro was indeed an equitable mortgage.
On 19 February 1991 the trial court rendered judgment dismissing the complaint. Petitioner appealed
to the Court of Appeals which on 16 December 1992 affirmed the judgment of the trial court.
In the instant recourse, petitioner assails the Court of Appeals for its conclusions and findings
allegedly grounded entirely on speculations, surmises, conjectures and misapprehension of facts.2
Petitioner submits that the terms and conditions of the Sale Con Pacto de Retro between her mother
Maura Palabrica and the Pacardos on 27 January 1947 are clear and leave no room for interpretation;
that the parties to the transaction have specified that the consideration of the sale was P950.00 and
the repurchase price was P500.00 in cash plus P450.00 cash or eighteen (18) cavans of palay at the
option of the vendor-spouses in case they repurchased the property three (3) years afterwards; and
that the Court of Appeals erred in holding that the repurchase price was only P450.00 or eighteen
cavans of palay.
Petitioner also asserts that the failure of her mother, the vendee Maura Palabrica, to consolidate
ownership under Art. 1607 of the New Civil Code should not be a ground for considering the sale to
be an equitable mortgage because both parties have stipulated in the contract that when the spouses
should fail to repurchase Lot No. 767 on 27 January 1950 complete and absolute title would forthwith
be vested in Maura Palabrica; and that even granting that Art. 1607 of the New Civil Code, which took
effect 30 August 1950, be granted retroactive effect Maura Palabrica had already acquired a vested
right of ownership over the land as of 27 January 1950 which Art. 1607 can no longer invalidate under
Art. 2252 of the New Civil Code. Moreover, petitioner submits that the Pacardo spouses remained in
possession of the land they sold to Palabrica because of their good relations with each other and the
latter consented that the spouses would be the ones to till the land.
We cannot sustain petitioner. Art. 1602 of the New Civil Code provides that the contract of sale with
right to repurchase shall be presumed to be an equitable mortgage in any of the following cases: (a)
when the price of the sale is unusually inadequate; (b) when the vendor remains in possession as
lessee or otherwise; (c) when upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period is executed; (d) when the
purchaser retains for himself a part of the purchase price; (e) when the vendor binds himself to pay
the taxes on the thing sold; and, (f) in any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the payment of a debt or the performance
of any other obligation. Being remedial in nature, Art. 1602 may be applied retroactively to cases
prior to the effectivity of the New Civil Code3 Hence it may apply to the instant case where the deed
of sale with right to repurchase was executed on 27 January 1947.
It has been held that a contract should be construed as a mortgage or a loan instead of a pacto de
retro sale when its terms are ambiguous or the circumstances surrounding its execution or its
performance are incompatible or inconsistent with the theory that it is a sale. 4 Even when a
document appears on its face to be a sale with pacto de retro the owner of the property may prove
that the contract is really a loan with mortgage by raising as an issue the fact that the document does
not express the true intent and agreement of the parties. In this case, parol evidence then becomes
competent and admissible to prove that the instrument was in truth and in fact given merely as a
security for the repayment of a loan. And upon proof of the truth of such allegations, the court will
enforce the agreement or understanding in consonance with the true intent of the parties at the time
of execution of the contract.5 This principle is applicable even if the purported Sale Con Pacto de
Retro was registered in the name of the transferee and a new certificate of title was issued in the
name of the latter.6
There is no dispute that when Maura Palabrica "bought" the land on 27 January 1947 the vendors,
the Pacardo spouses, remained in possession of the property and cultivated the same. Their son
continued the cultivation when the spouses died, which cultivation was continued later by his widow
Elena Vda. de Pacardo and then by his sister Elizabeth Palencia. During the direct examination,
petitioner admitted —
Q. And who later on cultivated this lot 767 if you know?
A. When the Pacardos sold to my mother, it was the spouses who cultivated the land. When Filoteo
Pacardo Sr. could no longer till, it was Filoteo Pacardo Jr. who took over.7
Defendant-intervenor Monserrat Paciente also testified —
Q. Do you know whether any transaction was had between your mother Severa Pacardo and
Maura Palabrica involving this Lot No. 767?
A. There was a transaction. Every year, dues was (sic) paid to this land when the land was
mortgaged. It was a 1/3 transaction, 1/3 was given to them and 2/3 were taken by us.
Q. When did you come to know that alleged transaction between your parents and the late Maura
Palabrica?
A. When I came to the age of reason, it was told to me by my parents. 8
The rule is settled that where in a contract of sale with pacto de retro the vendor remains in physical
possession of the land sold as lessee or otherwise, the contract should be considered an equitable
mortgage. 9 The same presumption applies when the vendee was given the right to appropriate the
fruits thereof in lieu of receiving interest on the loan. 10
Moreover, the terms of the document itself can aid in arriving at the true nature of the transaction.
Where the contract contains a stipulation, as in this case, that upon payment by the vendor of the
purchase price within a certain period the document shall become null and void and have no legal
force or effect, the purported sale should be considered a mortgage contract. In pacto de retro sale
the payment of the repurchase price does not merely render the document null and void but there
is the obligation on the part of the vendee to sell back the property. 11
It has been consistently held that the presence of even one of the circumstances enumerated in Art.
1602 of the New Civil Code is sufficient to declare a contract of sale with right to repurchase an
equitable mortgage. 12 This is so because pacto de retro sales with the stringent and onerous effects
that accompany them are not favored. In case of doubt, a contract purporting to be a sale with right
to repurchase shall be construed as an equitable mortgage. 13
Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that complete
and absolute title shall be vested on the vendee should the vendors fail to redeem the property on
the specified date. Such stipulation that the ownership of the property would automatically pass to
the vendee in case no redemption was effected within the stipulated period is void for being a
pactum commissorium which enables the mortgagee to acquire ownership of the mortgaged
property without need of foreclosure. Its insertion in the contract is an avowal of the intention to
mortgage rather than to sell the property. 14
Consequently, there was no valid sale to Maura Palabrica. Ownership over the property was not
transferred to her for she was merely a mortgagee. There being no title to the land that Palabrica
acquired from the spouses Filoteo and Severa Pacardo, it follows that Palabrica had no title to the
same land which could be conveyed to petitioner. 15 Hence there is no legal basis for petitioner to
recover possession of the property.
It is clear from the contract that the amount loaned to the Pacardo spouses was P950.00 and Lot No.
767 was mortgaged as security. The spouses were allowed under the contract to pay the amount of
the loan on 27 January 1950 by tendering the amount of the P500.00 in cash and P450.00 cash or 18
cavans of palay at their option. The trial court made its factual finding that from 1947 when the
purported sale was executed to 1972 alone, the spouses and their successors in interest delivered a
total of 1,166 cavans of palay to Maura Palabrica. The delivery of 1/3 of the annual produce to
Palabrica and later to petitioner continued until 1987. Under the last paragraph of Art. 1602, this
produce received by the alleged vendee as rent or otherwise should be considered as interest.
There is no dispute that the Pacardo spouses or their successors in interest failed to pay the amount
of the loan on 27 January 1950 as stipulated in the contract although they continued to deliver the
produce to Palabrica and petitioner until 1987 by way of interest on the loan. Even if we treat
petitioner's action to recover possession of Lot No. 767 as one for the enforcement of her right as
mortgagee, the same has already prescribed. Art. 1142 of the New Civil Code provides that a
mortgage action prescribes after ten (10) years. Since 27 January 1950 when the Pacardo spouses
failed to pay the loan up to 1989 when the action for recovery of possession was filed, thirty-nine
(39) years had already elapsed. As a result, petitioner is not only barred by prescription from
instituting her action; she is also guilty of estoppel by laches.
WHEREFORE, the petition is DENIED and the assailed decision of the Court of Appeals dated 16
December 1992 sustaining that of the Regional Trial Court of Iloilo City is AFFIRMED. Costs against
petitioner.
SO ORDERED.
CREDIT - PLEDGE, MORTGAGE AND ANTICHRESIS – COMMON PROVISIONS
[G.R. No. L-29388. December 28, 1970.]
VINCENT P. DAYRIT, Petitioner, v. THE COURT OF APPEALS, HON. FRANCISCO ARCA, Judge of the
Court of First Instance of Manila, Branch I, MOBIL OIL PHILIPPINES, INC., and ELADIO YLAGAN,
Special Sheriff, Respondents.
DECISION
CASTRO, J.:
Petition for certiorari by way of appeal from the Court of Appeals’ minute resolution of June 14,
1968 dismissing the petition for certiorari in CA-G.R. No. 41359-R, as well as its resolutions of July 9,
1968 and August 5, 1968 denying the first and second motions for reconsideration, respectively, in
the same case.
On July 21, 1965, the defendants Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles entered
into a contract with the Mobil Oil Philippines, Inc., entitled "LOAN & MORTGAGE AGREEMENT,"
providing, among others, that:
"(a) For and in consideration of Sales Agreement dated July 21, 1965 among, the parties herein,
Mobil grants a loan of P150,000 to borrowers.
"(b) Defendants-Borrowers shall repay Mobil the whole amount of P150,000 plus 10% interest per
annum on the diminishing balance for 48 months.
"(c) To secure the prompt repayment of such loan by defendants-borrowers to Mobil and the
faithful performance by Borrowers of that Sales Agreement, Defendants-Borrowers hereby transfer
in favor of Mobil by way of first mortgage lands covered by TCT No. 45169 and TCT No. 45170,
together with the improvements existing in said two (2) parcels of land.
"(d) In case of default of Defendants-Borrowers in payment of any of the installments and/or their
failure to purchase the quantity of products stated therein Mobil shall have the right to foreclose
this mortgage.
"(e) Mobil, in case of default and foreclosure, shall be entitled to attorney’s fees and cost of
collection equivalent to not less than 25% of total indebtedness remaining unpaid.
"(f) All expenses in connection with the preparation and registration of this mortgage as well as
cancellation of same shall be for the account of Defendants-Borrowers.
"(g) If Defendants-Borrowers shall perform the full obligation above stated according to the terms
thereof, then this obligation shall be null and void, otherwise, it shall remain in full force and
effect."
The defendants violated the Loan & Mortgage Agreement, they having paid but one installment in
the amount of P3,816, of which P1,250 was applied to interest, and the remaining P2,566 to the
principal obligation. The defendants likewise failed to buy the quantities of products as required in
the Sales Agreement (exh. D). The plaintiff made due demand (exh. I), which the defendant Dayrit
answered, acknowledging his liability in his letter exh. I-1.
On November 17, 1967, after trial and after the parties had submitted their memoranda, 1 the trial
court rendered its decision, the dispositive portion of which reads:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants
Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles, ordering them to pay to the plaintiff one-
third each of the sum of P147,434.00 with interest of 10% per annum from the time it fell due
according to agreement, and in default of such payment, the properties put up in collateral shall be
sold in foreclosure sale in accordance with law, the proceeds to be applied in payment of the
amount due to the plaintiff from the defendants as claimed in the complaint provided that, as to
Dayrit, his liability shall in no case exceed 1/3 of the total obligation.
"The defendants are likewise ordered to pay to the plaintiff, in the same proportion of 1/3 each,
25% of the obligation as attorney’s fees as provided in the contract; and P300.60 for the
registration of the contract.
x x x
"Each of the three said defendants shall also pay 1/3 of the costs."
No appeal having been interposed by the defendants, the above decision became final and
executory.
An undated Mobil’s motion for execution of the decision and for the appointment of Eladio Ylagan
as special sheriff (annex D) was received by the herein petitioner Dayrit on February 8, 1968.
Whereupon, he filed his opposition and motion to stay execution, alleging that before the finality of
the aforesaid judgment, he and the plaintiff had agreed not to appeal and/or file any motion for
reconsideration, the petitioner offering to pay his one-third share with a reasonable discount, if
possible, in so far as the interests and the award for attorney’s fees were concerned, with the
corresponding release of the mortgage on all his properties, and praying, in view thereof, for a 30-
day grace period within which to pay the plaintiff. The 30-day grace period was granted by the
court in its order of February 24, 1968.
On March 25, 1968 the petitioner filed another motion for 20 days’ extension within which to pay
his one-third share of the judgment obligation and to submit the corresponding compromise
agreement for the satisfaction of the judgment. The said motion was granted on April 1, 1968.
Thereafter, the respondent Mobil filed an "Urgent Reply to Opposition and Motion to Stay
Execution dated Feb. 21, 1968 and Motion dated March 25, 1968," alleging therein that the
respondent agreed to release the mortgage or collateral for the entire judgment obligation only if
"the whole principal mortgaged debt plus the whole accrued interest" were fully paid. Mobil
further prayed for a writ of execution to be issued against the petitioner after the lapse of 20 days
from March 25, 1968, if by then the parties shall not have submitted to compromise agreement for
the satisfaction of the judgment; Mobil also reiterated its prayer for the appointment of
respondent Eladio Ylagan as special sheriff.
On April 3, 1968 the petitioner filed a manifestation and motion, praying that he be allowed to
deposit with the Clerk of Court the amount corresponding to his one-third share of the obligation
under the decision of November 17, 1967, and that thereupon the collateral or mortgage over
petitioner’s properties or lands be ordered released or cancelled.
On April 10, 1968 the court a quo ordered all pending incidents set for hearing on April 19, 1968,
"so that the Court may have the opportunity to confer with the parties to thresh out the settlement
of this case." At this hearing Mobil did not appear; the court reset the hearing for May 23, 1968.
Under date of May 8, 1968, Mobil filed an addendum to its reply dated April 1, 1968 and opposition
to petitioner’s motion dated April 3, 1968, praying that the motion of petitioner Dayrit that the
entire mortgaged collateral be released upon his payment of mere 1/3 of the loan obligation, be
denied and instead a writ of execution against him in accordance with the dispositive portion of the
decision and sections 2 and 3 of Rule 68 of the Revised Rules of Court be issued.
On May 18, 1968 the petitioner filed his rejoinder to respondent Mobil’s aforesaid addendum and
opposition.
On May 23, 1968, after hearing oral argument, the court denied the manifestation and motion of
Dayrit filed thru counsel and dated April 3, 1968; the court further ruled that "There is no further
need to issue an order for the issuance of a writ of execution and appointment of special sheriff . . .
considering that the Court, in its order of February 24, 1968, has already ordered the issuance of a
writ of execution for the satisfaction of the judgment."
The petitioner then filed his petition for certiorari with the Court of Appeals, dated May 30, 1968,
alleging that "respondent Judge Arca acted without or in excess of his jurisdiction and/or with grave
abuse of discretion, in denying petitioner’s motion to allow him to pay or deposit his one-third
share of the judgment obligation" as well as the consequent release or cancellation of the
mortgage on his properties.
The Court of Appeals, however, in its minute resolution of June 14, 1968, dismissed the petition for
certiorari, in the following words:
"Upon consideration of the petition for certiorari filed in this case, the Court RESOLVED TO DISMISS
the petition, there being no abuse of discretion in ordering the execution of a final judgment.
Details of execution for satisfaction of Vincent Dayrit’s liability will be worked out in connection
with the sale of the collateral for mortgaged debt, and the judgment in Civil Case No. 64138 of the
CFI-Manila will control the disposition and application of the collateral."
The petitioner filed a motion for reconsideration dated June 9, 1968 which the Court of Appeals
denied in its resolution of July 9, 1968, as follows:
"Both the petition and the motion for reconsideration are based on a misapprehension of the terms
of the judgment. The mortgage obligation is one and indivisible. it was executed to assure payment
of the total indebtedness of the three defendants in Civil Case No. 64138, and not merely one-third
(1/3) thereof corresponding to petitioner Vincent P. Dayrit’s liability."
The petitioner’s second motion for reconsideration of July 25, 1968 was summarily dismissed on
August 5, 1968, for lack of merit.
The petitioner, in his present petition, tenders the following issues for resolution:=
"1) Whether or not respondent Judge [CFI-Manila] acted without or in excess of his jurisdiction,
and/or with grave abuse of discretion in denying petitioner’s motion to allow him to exercise his
clearly legal right to pay or deposit his one-third share of the judgment obligation;
"2) The next issue was that brought about by the Court of Appeals’ resolution dismissing the
petition for certiorari, and which was raised in petitioner’s motion dated June 19, 1968 for
reconsideration of said resolution, contending that the ground for dismissal did not jibe with the
issue raised in the petition for certiorari
"3) And lastly the Court of Appeals’ resolution of July 9, 1968 denying said motion for
reconsideration injected the issue of alleged misapprehension on the part of petitioner of the terms
of the judgment of respondent judge."
1. The question raised by the respondent Mobil that the present petition for certiorari was filed
way beyond the reglementary period of 15 days from appellant’s receipt of notice of judgment or
of the denial of his motion for reconsideration pursuant to section 1, Rule 45 of the Revised Rules
of Court, 2 needs to be resolved before consideration of this case on the merits. Admittedly, the ex
parte first motion for reconsideration filed by the herein petitioner was denied, and copy of such
denial was received by the petitioner on July 15, 1968. Still not satisfied, petitioner filed another ex
parte motion for reconsideration on July 26, 1968, notice of the denial of which, under CA
resolution dated August 5, 1968, was received by said petitioner on August 9, 1968.
Respondent Mobil contends that the second motion for reconsideration filed by the petitioner was
a mere scrap of paper and pro-forma since it was filed ex parte and without express leave of court,
contrary to the mandate of section 1, Rule 52 of the Rules of Court. 3
The rule appears to be inflexible in the sense that no more than one motion for reconsideration
shall be filed without express leave of court. The requirement that the second motion for
reconsideration must be presented, with leave of court, within fifteen days from notice of the order
or judgment, deducting the time during which the first motion was pending, is to afford the court
sufficient time to evaluate whether there is prima facie merit therein, so that, "if the court finds
merit prima facie in the motion for re-hearing or reconsideration, the adverse party shall be given
time to answer, after which the court, in its discretion, may set the case for oral argument." 4 And
only upon compliance with the above stated requirements may the second motion for
reconsideration stay the final order or judgment sought to be re-examined. 5
The Court of Appeals gave due course to the second motion for reconsideration of the herein
petitioner, but nevertheless, dismissed the same summarily for lack of merit.
However, even assuming, that the ex parte second motion for reconsideration was properly filed so
as to toll the reglementary period within which to appeal, it appears that the petition for certiorari
filed with this Court on August 20, 1968 was time-barred. From the date of denial of the
petitioner’s ex parte first motion for reconsideration received by him on July 15, 1968 — assuming
that the period was interrupted by the ex parte second motion for reconsideration from July 26,
1968 to August 9, 1968 (15 days) — to the elevation of the said case to this Court on August 20,
1968, 36 days had elapsed. Deducting the 15 days during which the ex parte second motion for
reconsideration was pending from the total period of 36 days leaves 21 days. This means that the
present petition was filed with this Court six days late, contrary to and in violation of section 1, Rule
45, which specifically provides that a petition for certiorari under such Rule should be filed within
15 days from notice of judgment or denial of motion for reconsideration. Hence, the present
petition may be dismissed on the aforestated ground.
But we opt, nevertheless, to consider the merits of this case, if only to demonstrate to the
petitioner his error.
2. The decision of the lower court, let it not be forgotten, has admittedly become final and
executory. The controverted judgment ordered the defendants (Dayrit, Sumbillo and Angeles) "to
pay to the plaintiff one-third each of the sum of P147,434.00 with interest of 10% per annum from
the time it fell due according to agreement, and in default of such payment, the properties put up
in collateral shall be sold in foreclosure sale in accordance with law, the proceeds to be applied in
payment of the amount due to the plaintiff from the defendants as claimed in the complaint,
provided that, as to Dayrit, his liability shall in no case exceed 1/3 of the total obligation."
In sum, the issue that must be resolved in the instant case is, whether or not the Court of First
Instance of Manila erred in ordering the sale at public auction of the mortgaged properties to
answer for the entire P147,434 principal obligation after the defendants (Dayrit, Sumbillo and
Angeles) had failed to pay their respective one-third shares of the obligation to the respondent
Mobil; otherwise stated, whether or not the respondents Court of First Instance and the Court of
Appeals erred in refusing to allow the alleged proposed deposit of a sum equivalent to 1/3 of the
loan agreed upon and in refusing to release forever the collaterals owned by Dayrit, although the
other 2/3 portion of the loan obligation had not been satisfied due to insolvency of the other two
co-defendants.
To begin with, the prayer of the complaint filed with the respondent Court of First Instance recites
as follows:
"WHEREFORE, it is respectfully prayed that judgment be rendered —
"a) Ordering the defendants to pay the sum of P147,434 with 10% interest per annum from the
time it fell due as agreed upon and that in default of such payment, the above described properties
be sold and the proceeds of sale be applied to the payment of the amount due to the plaintiff from
the defendant under this complaint."
The complaint, in effect, is a collection suit with damages and foreclosure of mortgage against the
three defendants, Leonila Sumbillo, Reynaldo Angeles and Vincent Dayrit. Although the Loan and
Mortgage Agreement was signed by the three defendants as mortgagors, the properties being
foreclosed belong solely to, and are registered solely in the name of, the petitioner Vincent Dayrit.
The pertinent dispositive portion of the decision rendered by the lower court reads:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants
Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles, ordering them to pay to the plaintiff one-
third each of the sum of P147,434 with interest of 10% per annum from the time it fell due
according to agreement, and in default of such payment, the properties put up in collateral shall be
sold in foreclosure sale in accordance with law, the proceeds to be applied in payment of the
amount due to the plaintiff from the defendants as claimed in the complaint, provided that, as to
Dayrit, his liability shall in no case exceed 1/3 of the total obligation."
The petitioner contends that the said judgment is a simple money judgment and not a foreclosure
judgment, and that because the respondent Mobil resorted to the remedy of enforcing his right by
a complaint against the defendant-petitioner for collection of a sum of money, with the consequent
simple money judgment, the satisfaction of his 1/3 share of the joint obligation would release all
the mortgaged properties put up as collateral to secure the payment of the whole obligation. The
reason advanced by the petitioner is that the decision rendered being a simple money judgment
and not a mortgage-foreclosure judgment, the distinction in its execution is decisive, that is,
whereas in mortgage foreclosure the judgment should conform to the requirement, embodied in
section 2, Rule 68 of the Rules of Court, that the order of payment be made into the court "within a
period not less than ninety (90) days . . . and in default of such payment, the property mortgaged
be sold to realize" the indebtedness, in a simple money judgment, upon satisfaction of part in the
instant case his 1/3 share) of the joint obligation, the mortgaged properties should be released
from such mortgage contract.
This contention of the petitioner is clearly devoid of merit.
The decision which the petitioner describes as a simple money judgment orders the defendants
Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles to pay the plaintiff the sum of P147,434,
and in default of such payment, the properties put up in collateral shall be sold in foreclosure sale
in accordance with law, the proceeds to be applied in payment of the amount due to the plaintiff
from the defendants as claimed in the complaint. While it is true that the obligation is merely joint
and each of the defendants is obliged to pay only his/her 1/3 share of the joint obligation, the
undisputed fact remains that the intent and purpose of the Loan and Mortgage Agreement was to
secure, inter alia, the entire loan of P150,000 that the respondent Mobil extended to the
defendants. The court below found that the defendants had violated the Loan and Mortgage
Agreement, they having paid but one installment. The undisputed fact also remains that the
petitioner alone benefited from the proceeds of the loan of P150,000, the said amount having been
paid directly to the Bank of the Philippines to bail out the same properties from a mortgage that
was about to be foreclosed. In effect, Mobil merely stepped into the shoes of the Bank of the
Philippines.
The petitioner insists that the dispositive portion of the judgment declaring the obligation merely
joint with the proviso that "as to Dayrit, his liability shall in no case exceed 1/3 of the total
obligation," should be construed in the light of the opinion of the lower court that "said collateral
must answer in full but only to the extent of Dayrit’s liability which as above determined" is 1/3 of
the obligation," thereby entitling him to pay or deposit in court his corresponding share of the joint
obligation in satisfaction thereof, with the automatic release of all the mortgaged properties.
A judgment must be distinguished from an opinion. The latter is the informal expression of the
views of the court and cannot prevail against its final order or decision. "While the two may be
combined in one instrument, the opinion forms no part of the judgment. There is a distinction
between the findings and conclusion of a court and its judgment. While they may constitute its
decision and amount to a rendition of a judgment they are not the judgment itself. They amount to
nothing more than an order for judgment which must be distinguished from the judgment Only the
dispositive portion may be executed." 6
Besides, well-entrenched in law is the rule that a mortgage directly and immediately subjects the
property upon which it is imposed, 7 the same being indivisible even though the debt may be
divided, 8 and such indivisibility likewise being unaffected by the fact that the debtors are not
solidarily liable. 9 As Tolentino, in his Commentaries and Jurisprudence on the Civil Code of the
Philippines, 10 puts it —
"When several things are pledged or mortgaged, each thing for a determinate portion of the debt,
the pledges or mortgages are considered separate from each other. But when the several things are
given to secure the same debt in its entirety, all of them are liable for the debt, and the creditor
does not have to divide his action by distributing the debt among the various things pledged or
mortgaged. Even when only a part of the debt remains unpaid, all the things are still liable for such
balance. Hence, a mortgage voluntarily constituted by the debtor on two or more parcels of land is
one and indivisible, and the mortgagee has the right to have either or both parcels, jointly or singly,
sold to satisfy his claim. In case the mortgaged properties are a house and lot, it can not be claimed
that the lot and the house should be sold separately and not together."

But then there is this other seeming posture of the petitioner: that the judgment which has become
final and executory either modified or superseded the Loan and Mortgage Agreement between the
parties, and since the obligation is merely joint, upon payment thereof, as in attachment, the
properties mortgaged are released from liability. The decision under consideration, however, did
nothing of the sort. The petitioner conveniently refuses to recognize the true import of the
dispositive portion of the judgment. The said portion unequivocally states that "in default of such
payment, the properties put up in collateral shall be sold in foreclosure sale in accordance with law,
the proceeds to be applied in payment of the amount due to the plaintiff as claimed in the
complaint." And the claim in the complaint was the full satisfaction of the total indebtedness of
P147,434; therefore, the release of all the mortgaged properties may be authorized only upon the
full payment of the above-stated amount secured by the said mortgage.

With respect to the provisions of section 2 of Rule 68 of the Rules of Court giving the petitioner a
period of 90 days within which he might voluntarily pay the debt before the sale of the collateral at
public auction was ordered, we agree that the trial court failed to provide such period. However,
this failure can be regarded as having resulted in mere damnum absque injuria. From November 17,
1967 when the decision was rendered to May 23, 1968 when the final order to sell the mortgaged
properties was issued, a period of more than six months had passed, which is considerably much
more than the 90-day period of grace allowed the petitioner to validly tender the proper payment.

ACCORDINGLY, the petition is denied, at petitioner’s cost.

CREDIT - PLEDGE, MORTGAGE AND ANTICHRESIS – COMMON PROVISIONS
G.R. No. L-45710 October 3, 1985
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE
DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island
Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February
15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio
M. Tolentino for injunction, specific performance or rescission, and damages with preliminary
injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las
Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title
the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in
semi-annual installments for a period of 3 years, with 12% annual interest. It was required that
Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other
property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank;
and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at
12% annual interest, payable within 3 years from the date of execution of the contract at semi-annual
installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-
month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this
pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed
by the Bank that there was no fund yet available for the release of the P63,000.00 balance (p. 47,
rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the
P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued Resolution No. 1049, which provides:
In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities,
the Board, by unanimous vote, decided as follows:
1) To prohibit the bank from making new loans and investments [except investments in
government securities] excluding extensions or renewals of already approved loans, provided that
such extensions or renewals shall be subject to review by the Superintendent of Banks, who may
impose such limitations as may be necessary to insure correction of the bank's deficiency as soon
as possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings
Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to
take charge of the assets of Island Savings Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for
January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan
for injunction, specific performance or rescission and damages with preliminary injunction, alleging
that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is
entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with
interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind
the real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the
mortgage (pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of
the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central
Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the
amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining
order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court
of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific
performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor
collect the P17,000.00 loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?
 3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be
foreclosed to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on
April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready
and willing to perform his part of the contract, the other party who has not performed or is not ready
and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he
signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings
Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan
started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the
Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from
doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish
the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over
insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which
took effect on June 15, 1948, the validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere did it
prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of
the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide
vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an
excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by
him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be
taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in
asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper considering
that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged
interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted
interest was an exercise of his right to it, which right exist independently of his right to demand the
completion of the P80,000.00 loan. The exercise of one right does not affect, much less neutralize,
the exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This
Court previously ruled that bank officials and employees are expected to exercise caution and
prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151
[1981]). It is the obligation of the bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and evaluation of the properties
being offered as a loan security. The recent rush of events where collaterals for bank loans turn out
to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere
reliance by bank officials and employees on their customer's representation regarding the loan
collateral being offered as loan security is a patent non-performance of this responsibility. If ever
bank officials and employees totally reIy on the representation of their customers as to the valuation
of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued.
The representation made by the customer is immaterial to the bank's responsibility to conduct its
own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had
enjoined petitioners from presenting proof on the alleged over-valuation because of their failure to
raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is
sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not
pleaded either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot
raise the same issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since Island Savings Bank is now
prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant
specific performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the
partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note
to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a
P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay
the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the
Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party,
that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for
payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan
because he cannot possibly be in default as there was no date for him to perform his reciprocal
obligation to pay.
Since both parties were in default in the performance of their respective reciprocal obligations, that
is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE
rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by
the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not
paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI
7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the
interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as that of the
principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration
of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate
mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid, FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED
voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code). FROM AUGUST 22, 1985 UNTIL PAID;

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was 2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25
then in existence, as there was no debt yet because Island Savings Bank had not made any release HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND
on the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary
that any consideration should pass at the time of the execution of the contract of real mortgage 3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE
(Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.
the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt
secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited
NO COSTS. SO ORDERED.
in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration,
the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172
N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder
of the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for
more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in
5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75%
of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent
of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for
the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among
the successors in interest of the debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is
not completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of other heirs who have not been
paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes
several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of
indivisibility of a mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY
MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM
OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD
CREDIT - PLEDGE, MORTGAGE AND ANTICHRESIS – COMMON PROVISIONS
G.R. No. 134330 March 1, 2001
SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO, petitioners,
vs.
PHILIPPINE NATIONAL BANK and SPOUSES MARCOS and ARSENIA ESLABON, respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision1 and Resolution2 in CA-G.R. No. 53865
of the Court of Appeals3 dated May 21, 1998 and June 29, 1998, respectively, which modified the
Decision4 dated April 30, 1996 of the Regional Trial Court of Roxas City, Branch 19 in a suit5 for
Declaration of Nullity of the Contract of Mortgage.
The facts are as follows:
Eduarda Belo owned an agricultural land with an area of six hundred sixty one thousand two hundred
eighty eight (661,288) square meters located in Timpas, Panitan, Capiz, covered and described in
Transfer Certificate of Title (TCT for brevity) No. T-7493. She leased a portion of the said tract of land
to respondents spouses Marcos and Arsenia Eslabon in connection with the said spouses' sugar
plantation business. The lease contract was effective for a period of seven (7) years at the rental rate
of Seven Thousand Pesos (P7,000.00) per year.
To finance their business venture, respondents spouses Eslabon obtained a loan from respondent
Philippine National Bank (PNB for brevity) secured by a real estate mortgage on their own four (4)
residential houses located in Roxas City, as well as on the agricultural land owned by Eduarda Belo.
The assent of Eduarda Belo to the mortgage was acquired through a special power of attorney which
she executed in favor of respondent Marcos Eslabon on June 15, 1982.
Inasmuch as the respondents spouses Eslabon failed to pay their loan obligation, extrajudicial
foreclosure proceedings against the mortgaged properties were instituted by respondent PNB. At the
auction sale on June 10, 1991, respondent PNB was the highest bidder of the foreclosed properties
at Four Hundred Forty Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00).
In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo of the sale at public
auction of her agricultural land on June 10, 1991 as well as the registration of the Certificate of
Sheriff's Sale in its favor on July 1, 1991, and the one-year period to redeem the land.
Meanwhile, Eduarda Belo sold her right of redemption to petitioners spouses Enrique and Florencia
Belo under a deed of absolute sale of proprietary and redemption rights.
Before the expiration of the redemption period, petitioners spouses Belo tendered payment for the
redemption of the agricultural land in the amount of Four Hundred Eighty Four Thousand Four
Hundred Eighty Two Pesos and Ninety Six Centavos (P484,482.96), which includes the bid price of
respondent PNB, plus interest and expenses as provided under Act No. 3135.
However, respondent PNB rejected the tender of payment of petitioners spouses Belo. It contended
that the redemption price should be the total claim of the bank on the date of the auction sale and
custody of property plus charges accrued and interests amounting to Two Million Seven Hundred
Seventy Nine Thousand Nine Hundred Seventy Eight and Seventy Two Centavos (P2,779,978.72). 6
Petitioners spouses disagreed and refused to pay the said total claim of respondent PNB.
On June 18, 1992, petitioners spouses Belo initiated in the Regional Trial Court of Roxas City, Civil
Case No. V-6182 which is an action for declaration of nullity of mortgage, with an alternative cause
of action, in the event that the accommodation mortgage be held to be valid, to compel respondent
PNB to accept the redemption price tendered by petitioners spouses Belo which is based on the
winning bid price of respondent PNB in the extrajudicial foreclosure in the amount of Four Hundred
Forty Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00) plus interest and expenses.
In its Answer, respondent PNB raised, among others, the following defenses, to wit:
xxx xxx xxx
77. In all loan contracts granted and mortgage contracts executed under the 1975 Revised Charter
(PD 694, as amended), the proper rate of interest to be charged during the redemption period is
the rate specified in the mortgage contract based on Sec. 25 7 of PD 694 and the mortgage contract
which incorporates by reference the provisions of the PNB Charters. Additionally, under Sec. 78 of
the General Banking Act (RA No. 337, as amended) made applicable to PNB pursuant to Sec. 38 of
PD No. 694, the rate of interest collectible during the redemption period is the rate specified in
the mortgage contract.
78. Since plaintiffs failed to tender and pay the required amount for redemption of the property
under the provisions of the General Banking Act, no redemption was validly effected;8
xxx xxx xxx
After trial on the merits, the trial court rendered its Decision dated April 30, 1996 granting the
alternative cause of action of spouses Belo, the decretal portion of which reads:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of plaintiffs
Spouses Enrique M. Belo and Florencia G. Belo and against defendants Philippine National Bank
and Spouses Marcos and Arsenia Eslabon:
1. Making the injunction issued by the court permanent, insofar as the property of Eduarda Belo
covered by Transfer Certificate of Title No. T-7493 is concerned;
2. Ordering defendant Philippine National Bank to allow plaintiff Enrique M. Belo to redeem only
Eduarda Belo's property situated in Brgy. Timpas, Panitan, Capiz, and covered by Transfer
Certificate of Title No. T-7493 by paying only its bid price of P447,632.00, plus interest and other
charges provided for in Section 30, Rule 39 of the Rules of Court, less the loan value, as originally
appraised by said defendant Bank, of the foreclosed four (4) residential lots of defendants
Spouses Marcos and Arsenia Eslabon; and
 3. Dismissing for lack of merit the respective counterclaims of defendants Philippine National
Bank and spouses Marcos and Arsenia Eslabon.
With costs against defendants.
SO ORDERED.9
Dissatisfied with the foregoing judgment of the trial court, respondent PNB appealed to the Court of
Appeals. In its Decision rendered on May 21, 1998, the appellate court, while upholding the decision
of the trial court on the validity of the real estate mortgage on Eduarda Belo's property, the
extrajudicial foreclosure and the public auction sale, modified the trial court's finding on the
appropriate redemption price by ruling that the petitioners spouses Belo should pay the entire
amount due to PNB under the mortgage deed at the time of the foreclosure sale plus interest, costs
and expenses.10
Petitioners spouses Belo sought reconsideration11 of the said Decision but the same was denied by
the appellate court in its Resolution promulgated on June 29, 1998, ratiocinating, thus:
Once more, the Court shies away from declaring the nullity of the mortgage contract obligating
Eduarda Belo as co-mortgagor, considering that it has not been sufficiently established that
Eduarda Belo's assent to the special power of attorney and to the mortgage contract was tainted
by any vitiating cause. Moreover, in tendering an offer to redeem the property (Exhibit "20", p.
602 Record) after its extrajudicial foreclosure, she has thereby admitted the validity of the
mortgage, as well as the transactions leading to its inception. Eduarda Belo, and the appellees as
mere assignees of Eduarda's right to redeem the property, are therefore estopped from
questioning the efficacy of the mortgage and its subsequent foreclosure.12
The appellate court further declared that petitioners spouses Belo are obligated to pay the total
bank's claim representing the redemption price for the foreclosed properties, as provided by Section
25 of P.D No. 694, holding that:
On the other hand, the court's ruling that the appellees, being the assignee of the right of
repurchase of Eduarda Belo, were bound by the redemption price as provided by Section 25 of P.D.
694, stands. The attack on the constitutionality of Section 25 of P.D. 694 cannot be allowed, as the
High Court, in previous instances, (Dulay v. Carriaga, 123 SCRA 794 [1983]; Philippine National Bank
v. Remigio, 231 SCRA 362 [1994]) has regarded the said provision of law with respect, using the
same in determining the proper redemption price in foreclosure of mortgages involving the PNB
as mortgagee.
The terms of the said provision are quite clear and leave no room for qualification, as the appellees
would have us rule. The said rule, as amended, makes no specific distinction as to assignees or
transferees of the mortgagor of his redemptive right. In the absence of such distinction by the law,
the Court cannot make a distinction. As admitted assignees of Eduarda Belo's right of redemption,
the appellees succeed to the precise right of Eduarda including all conditions attendant to such
right.
Moreover, the indivisible character of a contract of mortgage (Article 2089, Civil Code) will extend
to apply in the redemption stage of the mortgage.
As we have previously remarked, Section 25 of P.D. 694 is a sanctioned deviation from the rule
embodied in Rule 39, Section 30 of the Rules of Court, and is a special protection given to
government lending institutions, particularly, the Philippine National Bank. (Dulay v. Carriaga,
supra)13
Hence, the instant petition.
During the oral argument, petitioners, through counsel, Atty. Enrique M. Belo, agreed to limit the
assignment of errors to the following:
xxx xxx xxx
II. THE COURT OF APPEALS ERRED IN NOT REVERSING THE TRIAL COURT ON THE BASIS OF THE
ASSIGNMENT OF ERRORS ALLEGED BY PETITIONERS IN THEIR BRIEF:
(1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED BY EDUARDA BELO IN FAVOR OF
RESPONDENT ESLABON WAS NULL AND VOID:
(2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY RESPONDENT MARCOS ESLABON UNDER
SAID INVALID SPECIAL POWER OF ATTORNEY IS ALSO NULL AND VOID;
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB ACTED IN BAD FAITH
AND CONNIVED WITH RESPONDENTS-DEBTORS ESLABONS TO OBTAIN THE CONSENT OF EDUARDA
BELO, PETITIONERS' PREDECESSOR, THROUGH FRAUD.
IV. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB WAS NEGLIGENT IN
THE PERFORMANCE OF ITS DUTY AS COMMERCIAL MONEY LENDER.
V. THE COURT OF APPEALS ERRED IN HOLDING THAT EDUARDA BELO, PETITIONERS' PREDECESSOR,
HAD WAIVED THE RIGHT TO QUESTION THE LEGALITY OF THE ACCOMMODATION MORTGAGE.
VI. THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURT BY HOLDING THAT ON
REDEMPTION, PETITIONERS SHOULD PAY THE ENTIRE CLAIM OF PNB AGAINST RESPONDENTS-
DEBTORS ESLABONS.
VII. THE COURT OF APPEALS ERRED IN NOT ORDERING THAT SHOULD PETITIONERS DECIDE TO PAY
THE ENTIRE CLAIM OF RESPONDENT PNB AGAINST THE RESPONDENTS-DEBTORS ESLABONS,
PETITIONERS SHALL SUCCEED TO ALL THE RIGHTS OF RESPONDENT PNB WITH THE RIGHT TO
REIMBURSEMENT BY RESPONDENTS-DEBTORS ESLABONS.
VIII. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT SHOULD PETITIONERS DECIDE NOT TO
EXERCISE THEIR RIGHT OF REDEMPTION, PETITIONERS SHALL BE ENTITLED TO THE VALUE OF THEIR
IMPROVEMENTS MADE IN GOOD FAITH AND FOR THE REAL ESTATE TAX DUE PRIOR TO THE
FORECLOSURE SALE.14
Petitioners challenge the appreciation of the facts of the appellate court, pointing out the following
facts which the appellate court allegedly failed to fully interpret and appreciate:
 1. That respondent PNB in its Answer admitted that Eduarda Belo was merely an accommodation
mortgagor and that she has no personal liability to respondent PNB.
xxx xxx xxx
2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh. "D") used to bind Eduarda Belo
as accommodation mortgagor authorized the agent Eslabons to borrow and mortgage her
agricultural land for her (Eduarda Belo) use and benefit. Instead, said PNB SPA Form No. 74 was
used by debtors Eslabons and PNB to bind Eduarda Belo as accommodation mortgagor for the crop
loan extended by PNB to the Eslabons.
3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo in blank, without specifying the
amount of the loan to be granted by respondent PNB to the respondents-debtors Eslabons upon
assurance by the PNB manager that the SPA was merely a formality and that the bank will not lend
beyond the value of the four (4) [Roxas City] residential lots located in Roxas City mortgaged by
respondents-debtors Eslabons (see Exhibit "D"; Eduarda Belo's deposition, Exhibit "V", pp. 7 to 24).
4. That PNB did not advise Eduarda Belo of the amount of the loan granted to the Eslabons, did
not make demands upon her for payment, did not advise her of Eslabons' default. The pre-auction
sale notice intended for Eduarda Belo was addressed and delivered to the address of the debtors
Eslabons residence at Baybay Roxas City, not to the Belo Family House which is the residence of
Eduarda Belo located in the heart of Roxas City. The trial court stated in its Decision that the PNB
witness Miss Ignacio "admitted that through oversight, no demand letters were sent to Eduarda
Belo, the accommodation mortgagor" (see p. 7, RTC Decision).
xxx xxx xxx
5. As an agreed fact stated in the Pre-Trial Order of the Regional Trial Court, the loan which was
unpaid at the time of the extrajudicial foreclosure sale was only P789,897.00.
xxx xxx xxx
6. That herein petitioners Spouses Belo in making the tender to redeem Eduarda Belo's agricultural
land expressly reserved the right to question the legality of the accommodation mortgage in the
event that said tender to redeem was rejected by PNB (Exh. "I").15
Petitioners present basically two (2) issues before this Court. First, whether or not the Special Power
of Attorney (SPA for brevity), the real estate mortgage contract, the foreclosure proceedings and the
subsequent auction sale involving Eduarda Belo's property are valid. Second, assuming they are valid,
whether or not the petitioners are required to pay, as redemption price, the entire claim of
respondent PNB in the amount of P2,779,978.72 as of the date of the public auction sale on June 10,
1991.
On the first issue, the petitioners contend that the SPA is void for the reason that the amount for
which the spouses Eslabon are authorized to borrow from respondent bank was unlimited; and that,
while the SPA states that the amount loaned is for the benefit of Eduarda Belo, it was in fact used for
the benefit of the respondents spouses Eslabon. For the said reasons petitioners contend that the
mortgage contract lacks valid consent, object and consideration; that it violates a concept in the law
of agency which provides that the contract entered into by the agent must always be for the benefit
of the principal; and, that it does not express the true intent of the parties.
The subject SPA, the real estate mortgage contract, the foreclosure proceedings and the subsequent
auction sale of Eduarda Belo's property are valid and legal.
First, the validity of the SPA and the mortgage contract cannot anymore be assailed due to
petitioners' failure to appeal the same after the trial court rendered its decision affirming their
validity. After the trial court rendered its decision granting petitioners their alternative cause of
action, i.e., that they can redeem the subject property on the basis of the winning bid price of
respondent PNB, petitioners did not anymore bother to appeal that decision on their first cause of
action. If they felt aggrieved by the trial court's decision upholding the validity of the said two (2)
documents, then they should have also partially appealed therefrom but they did not. It is an abuse
of legal remedies for petitioners to belatedly pursue a claim that was settled with finality due to their
own shortcoming. As held in Caliguia v. National Labor Relations Commission,16 where a party did
not appeal from the Labor Arbiter's decision denying claims for actual, moral and exemplary damages
and instead moved for immediate execution, the decision then became final as to him and by asking
for its execution, he was estopped from relitigating his claims for damages.
Second, well-entrenched is the rule that the findings of trial courts which are factual in nature,
especially when affirmed by the Court of Appeals, deserve to be respected and affirmed by the
Supreme Court, provided it is supported by substantial evidence. 17 The finding of facts of the trial
court to the effect that Eduarda Belo was not induced by the manager of respondent PNB but instead
that she freely consented to the execution of the SPA is given the highest respect as it was affirmed
by the appellate court. In the case at bar, the burden of proof was on the petitioners to prove or show
that there was alleged inducement and misrepresentation by the manager of respondent PNB and
the spouses Eslabon. Their allegation that Eduarda Belo only agreed to sign the SPA after she was
assured that the spouses Eslabon would not borrow more than the value of their own four (4)
residential lots in Roxas City was properly objected to by respondent PNB. 18 Also their contention
that Eduarda Belo signed the SPA in blank was properly objected to by respondent PNB on the ground
that the best evidence was the SPA. There is also no proof to sustain petitioners' allegation that
respondent PNB acted in bad faith and connived with the debtors, respondents spouses Eslabon, to
obtain Eduarda Belo's consent to the mortgage through fraud. Eduarda Belo very well knew that the
respondents spouses Eslabon would use her property as additional mortgage collateral for loans
inasmuch as the mortgage contract states that "the consideration of this mortgage is hereby initially
fixed at P229,000.00."19 The mortgage contract sufficiently apprises Eduarda Belo that the
respondents spouses Eslabon can apply for more loans with her property as continuing additional
security. If she found the said provision questionable, she should have complained immediately.
Instead, almost ten (10) years had passed before she and the petitioners sought the annulment of
the said contracts.
Third, after having gone through the records, this Court finds that the courts a quo did not err in
holding that the SPA executed by Eduarda Belo in favor of the respondents spouses Eslabon and the
Real Estate Mortgage executed by the respondents spouses in favor of respondent PNB are valid. It
is stipulated in paragraph three (3) of the SPA that Eduarda Belo appointed the Eslabon spouses "to
make, sign, execute and deliver any contract of mortgage or any other documents of whatever nature
or kind . . . which may be necessary or proper in connection with the loan herein mentioned, or with
any loan which my attorney-in-fact may contract personally in his own name . . .20 This portion of the
SPA is quite relevant to the case at bar. This was the main reason why the SPA was executed in the
first place inasmuch as Eduarda Belo consented to have her land mortgaged for the benefit of the
respondents spouses Eslabon. The SPA was not meant to make her a co-obligor to the principal
contract of loan between respondent PNB, as lender, and the spouses Eslabon, as borrowers. The
accommodation real estate mortgage over her property, which was executed in favor of respondent
PNB by the respondents spouses Eslabon, in their capacity as her attorneys-in-fact by virtue of her
SPA, is merely an accessory contract.
Eduarda Belo consented to be an accommodation mortgagor in the sense that she signed the SPA to
authorize respondents spouses Eslabons to execute a mortgage on her land. Petitioners themselves
even acknowledged that the relation created by the SPA and the mortgage contract was merely that
of mortgagor-mortgagee relationship. The SPA form of the PNB was utilized to authorize the spouses
Eslabon to mortgage Eduarda Belo's land as additional collateral of the Eslabon spouses' loan from
respondent PNB. Thus, the petitioners' contention that the SPA is void is untenable. Besides, Eduarda
Belo benefited, in signing the SPA, in the sense that she was able to collect the rentals on her leased
property from the Eslabons.21
An accommodation mortgage is not necessarily void simply because the accommodation mortgagor
did not benefit from the same. The validity of an accommodation mortgage is allowed under Article
2085 of the New Civil Code which provides that "(t)hird persons who are not parties to the principal
obligation may secure the latter by pledging or mortgaging their own property." An accommodation
mortgagor, ordinarily, is not himself a recipient of the loan, otherwise that would be contrary to his
designation as such. It is not always necessary that the accommodation mortgagor be appraised
beforehand of the entire amount of the loan nor should it first be determined before the execution
of the SPA for it has been held that:
"(real) mortgages given to secure future advancements are valid and legal contracts; that the
amounts named as consideration in said contract do not limit the amount for which the mortgage
may stand as security if from the four corners of the instrument the intent to secure future and
other indebtedness can be gathered. A mortgage given to secure advancements is a continuing
security and is not discharged by repayment of the amount named in the mortgage, until the full
amount of the advancements are paid."22
Fourth, the courts a quo correctly held that the letter of Eduarda Belo addressed to respondent PNB
manifesting her intent to redeem the property is a waiver of her right to question the validity of the
SPA and the mortgage contract as well as the foreclosure and the sale of her subject property.
Petitioners claim that her letter was not an offer to redeem as it was merely a declaration of her
intention to redeem. Respondent PNB's answer to her letter would have carried certain legal effects.
Had respondent PNB accepted her letter-offer, it would have surely bound the bank into accepting
the redemption price offered by Eduarda Belo. If it was her opinion that her SPA and the mortgage
contract were null and void, she would not have manifested her intent to redeem but instead
questioned their validity before a court of justice. Her offer was a recognition on her part that the
said contracts are valid and produced legal effects. Inasmuch as Eduarda Belo is estopped from
questioning the validity of the contracts, her assignees who are the petitioners in the instant case,
are likewise estopped from disputing the validity of her SPA, the accommodation real estate
mortgage contract, the foreclosure proceedings, the auction sale and the Sheriff's Certificate of Sale.
The second issue pertains to the applicable law on redemption to the case at bar. Respondent PNB
maintains that Section 25 of Presidential Decree No. 694 should apply, thus:
SECTION 25. Right of redemption of foreclosed property — Right of possession during redemption
period. — Within one year from the registration of the foreclosure sale of real estate, the
mortgagor shall have the right to redeem the property by paying all claims of the Bank against him
on the date of the sale including all the costs and other expenses incurred by reason of the
foreclosure sale and custody of the property as well as charges and accrued interests.23
Additionally, respondent bank seeks the application to the case at bar of Section 78 of the General
Banking Act, as amended by P.D. No. 1828, which states that —
. . . In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate
which is security for any loan granted before the passage of this Act or under the provisions of this
Act, the mortgagor or debtor whose real property has been sold at public auction, judicially or
extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit
institution, within the purview of this Act shall have the right, within one year after the sale of the
real estate as a result of the foreclosure of the respective mortgage, to redeem the property by
paying the amount fixed by the court in the order of execution, or the amount due under the
mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage,
and all the costs, and judicial and other expenses incurred by the bank or institution concerned by
reason of the execution and sale and as a result of the custody of said property less the income
received from the property.24
On the other hand, petitioners assert that only the amount of the winning bidder's purchase together
with the interest thereon and on all other related expenses should be paid as redemption price in
accordance with Section 6 of Act No. 3135 which provides that:
SECTION 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore
referred to, the debtor, his successor in interest or any judicial creditor or judgment creditor of
said 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 of 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
Procedure25 , in so far as these are not inconsistent with the provisions of this Act.
Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states that:
SECTION 28. Time and manner of, and amounts payable on, successive redemptions; notice to be
given and filed. — The judgment obligor, or redemptioner, may redeem the property from the
purchaser, at any time within one (1) year from the date of the registration of the certificate of
sale, by paying the purchaser the amount of his purchase, within one per centum per month
interest thereon in addition, up to the time of redemption, together with the amount of any
assessments or taxes which the purchaser may have paid thereon after purchase, and interest on
such last named amount at the same rate; and if the purchaser be also a creditor having a prior
lien to that of the redemptioner, other than the judgment under which such purchase was made,
the amount of such other lien, with interest. (Italic supplied)
xxx xxx xxx
This Court finds the petitioners' position on that issue to be meritorious.
There is no doubt that Eduarda Belo, assignor of the petitioners, is an accommodation mortgagor.
The Pre-trial Order and respondent PNB's brief contain a declaration of this fact. The dispute between
the parties is whether Section 25 of P.D. No. 694 applies to an accommodation mortgagor, or her
assignees. The said legal provision does not make a distinction between a debtor-mortgagor and an
accommodation mortgagor as it uses the broad term "mortgagor". The appellate court thus ruled
that the provision applies even to an accommodation mortgagor inasmuch as the law does not make
any distinction. We disagree. Where a word used in a statute has both a restricted and a general
meaning, the general must prevail over the restricted unless the nature of the subject matter or the
context in which it is employed clearly indicates that the limited sense is intended.26 It is presumed
that the legislature intended exceptions to its language which would avoid absurd consequences of
this character.27 In the case at bar, the qualification to the general rule applies. The same provision
of Section 25 of P.D. No. 694 provides that "the mortgagor shall have the right to redeem the property
by paying all claims of the Bank against him". From said provision can be deduced that the mortgagor
referred to by that law is one from whom the bank has a claim in the form of outstanding or unpaid
loan; he is also called a borrower or debtor-mortgagor. On the other hand, respondent PNB has no
claim against accommodation mortgagor Eduarda Belo inasmuch as she only mortgaged her property
to accommodate the Eslabon spouses who are the loan borrowers of the PNB. The principal contract
is the contract of loan between the Eslabon spouses, as borrowers/debtors, and the PNB as lender.
The accommodation real estate mortgage (which secures the loan) is only an accessory contract. It is
our view and we hold that the term "mortgagor" in Section 25 of P.D. No. 694 pertains only to a
debtor-mortgagor and not to an accommodation mortgagor.
It is well settled that courts are not to give a statute a meaning that would lead to absurdities. If the
words of a statute are susceptible of more than one meaning, the absurdity of the result of one
construction is a strong argument against its adoption, and in favor of such sensible interpretation. 28
We test a law by its result. A law should not be interpreted so as not to cause an injustice. There are
laws which are generally valid but may seem arbitrary when applied in a particular case because of
its peculiar circumstances. We are not bound to apply them in slavish obedience to their language.29
The interpretation accorded by respondent PNB to Section 25 of P.D. No. 694 is unfair and unjust to
accommodation mortgagors and their assignees. Forcing an accommodation mortgagor like Eduarda
Belo to pay for what the principal debtors (Eslabon spouses) owe to respondent bank is to punish her
for the accommodation and generosity she accorded to the Eslabon spouses who were then hard
pressed for additional collateral needed to secure their bank loan. Respondents PNB and spouses
Eslabons very well knew that she merely consented to be a mere accommodation mortgagor.
The circumstances of the case at bar also provide for ample reason why petitioners cannot be made
to pay the entire liability of the principal debtors, Eslabon spouses, to respondent PNB.
The trial court found that respondent PNB's application for extrajudicial foreclosure and public
auction sale of Eduarda Belo's mortgaged property30 was filed under Act No. 3135, as amended by
P.D. No. 385. The notice of extrajudicial sale, the Certificate of Sheriff's Sale, and the letter it sent to
Eduarda Belo did not mention P. D. No. 694 as the basis for redemption. As aptly ruled by the trial
court —
In fairness to these mortgagors, their successors-in-interest, or innocent purchasers for value of
their redemption rights, PNB should have at least advised them that redemption would be
governed by its Revised Charter or PD 69, and not by Act 3135 and the Rules of Court, as commonly
practiced . . . This practice of defendant Bank is manifestly unfair and unjust to these
redemptioners who are caught by surprise and usually taken aback by the enormous claims of the
Bank not shown in the Notice of Extrajudicial Sale or the Certificate of Sheriff's Sale as in this case.31
Moreover, the mortgage contract explicitly provides that ". . . the mortgagee may immediately
foreclose this mortgage judicially in accordance with the Rules of Court or extrajudicially in
accordance with Act No. 3135, as amended and Presidential Decree No. 385 . . .32 Since the mortgage
contract in this case is in the nature of a contract of adhesion as it was prepared solely by respondent,
it has to be interpreted in favor of petitioners. The respondent bank however tries to renege on this
contractual commitment by seeking refuge in the 1989 case of Sy v. Court of Appeals33 wherein this
Court ruled that the redemption price is equal to the total amount of indebtedness to the bank's
claim inasmuch as Section 78 of the General Banking Act is an amendment to Section 6 of Act No.
3135, despite the fact that the extrajudicial foreclosure procedure followed by the PNB was explicitly
under or in accordance with Act No. 3135.
In the 1996 case of China Banking Corporation v. Court of Appeals,34 where the parties also stipulated
that Act No. 3135 is the controlling law in case of foreclosure, this Court ruled that;
By invoking the said Act, there is no doubt that it must "govern the manner in which the sale and
redemption shall be effected." Clearly, the fundamental principle that contracts are respected as
the law between the contracting parties finds application in the present case, specially where they
are not contrary to law, morals, good customs and public policy.35
More importantly, the ruling pronounced in Sy v. Court of Appeals and other cases,36 that the General
Banking Act and P.D. No. 694 shall prevail over Act No. 3135 with respect to the redemption price,
does not apply here inasmuch as in the said cases the redemptioners were the debtors themselves
or their assignees, and not an accommodation mortgagor or the latter's assignees such as in the case
at bar. In the said cases, the debtor-mortgagors were required to pay as redemption price their entire
liability to the bank inasmuch as they were obligated to pay their loan which is a principal obligation
in the first place. On the other hand, accommodation mortgagors as such are not in anyway liable for
the payment of the loan or principal obligation of the debtor/borrower The liability of the
accommodation mortgagors extends only up to the loan value of their mortgaged property and not
to the entire loan itself. Hence, it is only just that they be allowed to redeem their mortgaged
property by paying only the winning bid price thereof (plus interest thereon) at the public auction
sale.
One wonders why respondent PNB invokes Act No. 3135 in its contracts without qualification and yet
in the end appears to disregard the same when it finds its provisions unfavorable to it. This is unfair
to the other contracting party who in good faith believes that respondent PNB would comply with
the contractual agreement.
It is therefore our view and we hold that Section 78 of the General Banking Act, as amended by P.D.
No. 1828, is inapplicable to accommodation mortgagors in the redemption of their mortgaged
properties.
While the petitioners, as assignees of Eduarda Belo, are not required to pay the entire claim of
respondent PNB against the principal debtors, spouses Eslabon, they can only exercise their right of
redemption with respect to the parcel of land belonging to Eduarda Belo, the accommodation
mortgagor. Thus, they have to pay the bid price less the corresponding loan value of the foreclosed
four (4) residential lots of the spouses Eslabon.
The respondent PNB contends that to allow petitioners to redeem only the property belonging to
their assignor, Eduarda Belo, would violate the principle of indivisibility of mortgage contracts. We
disagree.
Article 2089 of the Civil Code of the Philippines, provides that:
A pledge or mortgage is indivisible, even though the debt may be divided among the successors in
interest of the debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things given in mortgage
or pledge, each one of them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is specially answerable is satisfied.
There is no dispute that the mortgage on the four (4) parcels of land by the Eslabon spouses and the
other mortgage on the property of Eduarda Belo both secure the loan obligation of respondents
spouses Eslabon to respondent PNB. However, we are not persuaded by the contention of the
respondent PNB that the indivisibility concept applies to the right of redemption of an
accommodation mortgagor and her assignees. The jurisprudence in Philippine National Bank v.
Agudelo37 is enlightening to the case at bar, to wit:
From the wording of the law, indivisibility arises only when there is a debt, that is, there is a debtor-
creditor relationship. But, this relationship is wanting in the case at bar in the sense that petitioners
are assignees of an accommodation mortgagor and not of a debtor-mortgagor. Hence, it is fair and
logical to allow the petitioners to redeem only the property belonging to their assignor, Eduarda Belo.
With respect to the four (4) parcels of residential land belonging to the Eslabon spouses, petitioners
— being total strangers to said lots — lack legal personality to redeem the same. Fair play and justice
demand that the respondent PNB's interest of recovering its entire bank claim should not be at the
expense of petitioners, as assignees of Eduarda Belo, who is not indebted to it. Besides, the letter39
sent by respondent PNB to Eduarda Belo states that "your (Belo) mortgaged property/ies with PNB
covered by TCT # T-7493 was/were sold at public auction . . . .". It further states that "You (Belo) have,
therefore, one year from July 1, 1991 within which to redeem your mortgaged property/ies, should
you desire to redeem it." Respondent PNB never mentioned that she was bound to redeem the entire
mortgaged properties including the four (4) residential properties of the spouses Eslabon. The letter
was explicit in mentioning Eduarda Belo's property only. From the said statement, there is then an
admission on the part of respondent PNB that redemption only extends to the subject property of
Eduarda Belo for the reason that the notice of the sale limited the redemption to said property.
WHEREFORE, the petition is partially granted in that the petitioners are hereby allowed to redeem
only the property, covered and described in Transfer Certificate of Title No. T-7493-Capiz registered
in the name of Eduarda Belo, by paying only the bid price less the corresponding loan value of the
foreclosed four (4) residential lots of the respondents spouses Marcos and Arsenia Eslabon,
consistent with the Decision of the Regional Trial Court of Roxas City in Civil Case No. V-6182.
SO ORDERED.

xxx xxx xxx

However, Paz Agudelo y Gonzaga (the principal) . . . gave her consent to the lien on lot No. 878 . .
. . This acknowledgment, however, does not extend to lots Nos. 207 and 61 . . . inasmuch as,
although it is true that a mortgage is indivisible as to the contracting parties and as to their
successors in interest (Article 1860, Civil code), it is not so with respect to a third person who did
not take part in the constitution thereof either personally or through an agent x x x. Therefore, the
only liability of the defendant-appellant Paz Agudelo y Gonzaga is that which arises from the
aforesaid acknowledgment but only with respect to the lien and not to the principal obligation
secured by the mortgage acknowledged by her to have been constituted on said lot No. 878 . . . .
Such liability is not direct but a subsidiary one.38

xxx xxx xxx

Wherefore, it is hereby held that the liability contracted by the aforesaid defendant-appellant Paz
Agudelo y Gonzaga is merely subsidiary to that of Mauro A. Garrucho (the agent), limited to lot
No. 87.

xxx xxx xxx

CREDIT - PLEDGE, MORTGAGE AND ANTICHRESIS – COMMON PROVISIONS
G.R. No. 118585 September 14, 1995
AJAX MARKETING & DEVELOPMENT CORPORATION, ANTONIO TAN, ELISA TAN, TAN YEE, and
SPS. MARCIAL SEE and LILIAN TAN, petitioners,
vs.
HON. COURT OF APPEALS, METROPOLITAN BANK AND TRUST COMPANY, and THE SHERIFF OF
MANILA, respondents.
FRANCISCO, J.:
In its March 30, 1994 decision, public respondent Court of Appeals affirmed the trial court's judgment
upholding the validity of the extra-judicial foreclosure of the real estate property of petitioners —
spouses Marcial See and Lilian Tan, located at Paco District, Manila covered by TCT 105233, by private
respondent Metropolitan Bank and Trust Company (Metrobank).1 Petitioners' motion for
reconsideration was denied; hence, this petition for review on certiorari raising the following
assignments of errors:
FIRST: The Honorable Court of Appeals erred in holding that the consolidation of the three (3) loans
granted separately to three entities into a single loan of P1.0 Million was a mere restructuring and
did not effect a novation of the loan as to extinguish the accessory mortgage contracts.
SECOND: The Honorable Court of Appeals erred in not holding that the consolidated loan of P1.0
Million was not accompanied by the execution of a new REM, as was done by the Bank in the
earlier three (3) loans, and hence, was, to all legal intents/purposes, unsecured.
THIRD: The Honorable Court of Appeals erred in holding that the inclusion in the extra-judicial
foreclosure of the admittedly unsecured loan of P970,000.00 is a mere error that does not
invalidated said foreclosure, contrary to the pronouncement in C & C Commercial Corp. vs. PNB,
175 SCRA 1.
FOURTH: The Honorable Court of Appeals erred in not declaring as null and void the extra-judicial
foreclosure undertaken by Metrobank on the property of Sps. Marcial See and Lilian Tan.2
The facts as found by public respondent Court of Appeals are as follows:
It is not disputed that Ylang-Ylang Merchandising Company, a partnership between Angelita
Rodriguez and Antonio Tan, obtained a loan in the amount of P250,000.00 from the Metropolitan
Bank and Trust Company, and to secure payment of the same, spouses Marcial See and Lilian Tan
constituted a real estate mortgage in favor of said bank over their property in the District of Paco,
Manila, covered by TCT No. 105233 of the Registry of Deeds of Manila. The mortgage was
annotated at the back of the title.
Subsequently, after the partnership had changed its name to Ajax Marketing Company albeit
without changing its composition, it obtained a loan in the sum of P150,000.00 from Metropolitan
Bank and Trust Company. Again to secure the loan, spouses Marcial See and Lilian Tan executed in
favor of said bank a second real estate mortgage over the same property. As in the first instance,
the mortgage was duly annotated at the back of TCT No. 105233.
On February 19, 1979, the partnership (Ajax Marketing Company) was converted into a
corporation denominated as Ajax Marketing and Development Corporation, with the original
partners (Angelita Rodriguez and Antonio Tan) as incorporators and three (3) additional
incorporators, namely, Elisa Tan, the wife of Antonio Tan, and Jose San Diego and Tessie San Diego.
Ajax Marketing and Development Corporation obtained from Metropolitan Bank and Trust
Company a loan of P600,000.00, the payment of which was secured by another real estate
mortgage executed by spouses Marcial See and Lilian Tan in favor of said bank over the same realty
located in the District of Paco, Manila. Again, the third real estate mortgage was annotated at the
back of TCT No. 105233.
In December 1980, the three (3) loans with an aggregate amount of P1,000,000.00 were re-
structured and consolidated into one (1) loan and Ajax Marketing and Development Corporation,
represented by Antonio Tan as Board Chairman/President and in his personal capacity as solidary
co-obligor, and Elisa Tan as Vice-President/Treasurer and in her personal capacity as solidary co-
obligor, executed a Promissory Note (PN) No. BDS-3605.3
In their interrelated first and second assignment of errors, petitioners argue that a novation occurred
when their three (3) loans, which are all secured by the same real estate property covered by TCT
No. 105233 were consolidated into a single loan of P1 million under Promissory Note No. BDS-3605,
thereby extinguishing their monetary obligations and releasing the mortgaged property from liability.
Basic principles on novation need to be stressed at the outset. Novation is the extinguishment of an
obligation by the substitution or change of the obligation by a subsequent one which extinguishes or
modifies the first, either by changing the object or principal conditions, or by substituting another in
place of the debtor, or by subrogating a third person in the rights of the creditor. 4 Novation, unlike
other modes of extinction of obligations, is a juridical act with a dual function, namely, it extinguishes
an obligation and creates a new one in lieu of the old. It can be objective, subjective, or mixed.
Objective novation occurs when there is a change of the object or principal conditions of an existing
obligation while subjective novation occurs when there is a change of either the person of the debtor,
or of the creditor in an existing obligation.5 When the change of the object or principal conditions of
an obligation occurs at the same time with the change of either in the person of the debtor or creditor
a mixed novation occurs.6
The well settled rule is that novation is never presumed.7 Novation will not be allowed unless it is
clearly shown by express agreement, or by acts of equal import. Thus, to effect an objective novation
it is imperative that the new obligation expressly declare that the old obligation is thereby
extinguished, or that the new obligation be on every point incompatible with the new one. 8 In the
same vein, to effect a subjective novation by a change in the person of the debtor it is necessary that
the old debtor be released expressly from the obligation, and the third person or new debtor assumes
his place in the relation.9 There is no novation without such release as the third person who has
assumed the debtor's obligation becomes merely a co-debtor or surety.10
The attendant facts herein do not make a case of novation. There is nothing in the records to show
the unequivocal intent of the parties to novate the three loan agreements through the execution of
PN No. BDS-3065. The provisions of PN No. BDS-3065 yield no indication of the extinguishment of, or
an incompatibility with, the three loan agreements secured by the real estate mortgages over TCT
No. 105233. On its face, PN No. BDS-3065 has these words typewritten: "secured by REM" and "9.
COLLATERAL. This is wholly/partly secured by: (x) "real estate",11 which strongly negate petitioners'
asseveration that the consolidation of the three loans effected the discharge of the mortgaged real
estate property. Otherwise, there would be no sense placing these material provisions. Moreover;
the real estate mortgages contained this common provision, to wit:
That for and in consideration of credit accommodations obtained from the MORTGAGEE
(Metropolitan Bank and Trust Company), by the MORTGAGOR and/or AJAX MKTG. DEV.
CORP./AJAX MARKETING COMPANY/YLANG-YLANG MERCHANDISING COMPANY detailed as
follows:
Nature Date Granted Due Date Amount or Line
Loans and/or P 600,000.00
Advances in 150,000.00
current account 250,000.00
and to secure the payment of the same and those that may hereafter be obtained including the
renewals or extension thereof.
xxx xxx xxx
the principal of all of which is hereby fixed at (P600,000.00/ P150,000.00/ P250,000.00) . . .as
well as those that the MORTGAGEE may have previously extended or may later extend to the
MORTGAGOR, including interest and expenses or any other obligation owing to the
MORTGAGEE, whether direct or indirect, principal or secondary, as appears in the accounts,
books and records of the MORTGAGEE, the MORTGAGOR hereby transfer and convey by way of
mortgage unto the MORTGAGEE, its successors or assigns, the parcels of land which are
described in the list inserted on page three of this document and/or appended hereto, together
with all the buildings and improvements now existing or which may hereafter be erected or
constructed thereon, of which the MORTGAGOR declares that he/it is the absolute owner free
from all liens and encumbrances. However, if the MORTGAGOR shall pay to the MORTGAGEE,
its successors or assigns, the obligation secured by this mortgage when due, together with
interest, and shall keep and perform all and singular the covenants and agreements herein
contained for the MORTGAGOR to keep and perform, then the mortgage shall be void;
otherwise, it shall remain in full force and effect.12
The foregoing shows that petitioners agreed to apply the real estate property to secure obligations
that they may thereafter obtain including their renewals or extensions with the principals fixed at
P600,000.00, P150,000.00, and P250,000.00 which when added have an aggregate sum of P1.0
million. PN No. BDS-3605 merely restructured and renewed the three previous loans to
expediently make the loans current. There was no change in the object of the prior obligations.
The consolidation of the three loans, contrary to petitioners' contention, did not release the
mortgaged real estate property from any liability because the mortgage annotations at the back
of TCT No. 105233, in fact, all remained uncancelled, thus indicating the continuing subsistence of
the real estate mortgages.
Neither can it be validly contended that there was a change, or substitution in the persons of either
the creditor (Metrobank) or more specifically the debtors (petitioners) upon the consolidation of the
loans in PN No. BDS 3605. The bare fact of petitioners' conversion from a partnership to a
corporation, without sufficient evidence, either testimonial or documentary, that they were
expressly released from their obligations, did not make petitioner AJAX, with its new corporate
personality, a third person or new debtor within the context of a subjective novation. If at all,
petitioner AJAX only became a co-debtor or surety. Without express release of the debtor from the
obligation, any third party who may thereafter assume the obligation shall be considered merely as
co-debtor or surety. Novation arising from a purported change in the person of the debtor must be
clear and express because, to repeat, it is never presumed. Clearly then, from the aforediscussed
points, neither objective nor subjective novation occurred here.
Anent the third assigned error, petitioners posit that the extra-judicial foreclosure is invalid as it
included two unsecured loans: one, the consolidated loan of P1.0 million under PN BDS No. 3605,
and two, the P970,000.00 loan under PN BDS No. 3583 subsequently extended by Metrobank.
An action to foreclose a mortgage is usually limited to the amount mentioned in the mortgage, but
where on the four corners of the mortgage contracts, as in this case, the intent of the contracting
parties is manifest that the mortgaged property shall also answer for future loans or advancements
then the same is not improper as it is valid and binding between the parties.13 For merely
consolidating and expediently making current the three previous loans, the loan of P1.0 million under
PN BDS No. 3605, secured by the real estate property, was correctly included in the foreclosure's bid
price. The inclusion of the unsecured loan of P970,000.00 under PN BDS NO. 3583, however, was
found to be improper by public respondent which ruling we shall not disturb for Metrobank's failure
to appeal therefrom. Nonetheless, the inclusion of PN BDS No. 3583 in the bid price did not invalidate
the foreclosure proceedings. As correctly pointed out by the Court of Appeals, the proceeds of the
auction sale should be applied to the obligation pertaining to PN BDS No. 3605 only, plus interests,
expenses and other charges accruing thereto. It is Metrobank's duty as mortgagee to return the
surplus in the selling price to the mortgagors.14
Lastly, petitioners cite as supporting authority C & C Commercial Corp. v. Philippine National Bank15
where this Court enjoined the foreclosure proceedings for including unsecured obligations.
Petitioners' reliance on the C & C Commercial Corp. v. Philippine National Bank case is misplaced. In
that case, the foreclosure sale included previously incurred unsecured obligations in favor of PNB
which were not in the contemplation of the mortgage contract, whereas in the instant case, the
mortgages were one in providing that the mortgaged real estate property shall also secure future
advancements or loans, as well as renewals or extensions of the same.
Prescinding from the above discussions, the fourth assignment of error obviously needs no further
discussion.
WHEREFORE, the decision appealed from is hereby AFFIRMED in toto.