Metropolitan Fabrics Inc. and Enrique Ang vs. Prosperity Credit Resources Inc.

,
Domingo Ang and Caleb Ang
G.R. 154390. 17 March 2014
First Division
Bersamin , J.

DOCTRINE: The genuineness and due execution of a deed of real estate mortgage that
has been acknowledged before a notary public are presumed. Any allegation of fraud and
forgery against the deed must be established by clear and competent evidence.

FACTS:

Metropolitan Fabrics Inc. (MFI) owned a 5.8 ha industrial compound in Quezon City.
Pursuant to a P2M, 10-year loan agreement with Manpil Investment Corporation
(Manpil) dated April 6, 1963, the lot was subdivided into 11 lots, with Manpil retaining
four lots as mortgage security while the remaining seven lots were released to MFI.

In July 1984, MFI obtained a loan from PCRI in the amount of P3.5M, represented by
herein respondents Domingo and Caleb Ang. The blank loan forms had no entries
specifying the rate of interest and schedules of amortization. In order to return the trust
and gesture of early release of the loan by the respondents, herein petitioner Enrique Ang,
together with his daughter Vicky Ang, entrusted to the respondents their seven (7) titles
covering an aggregate area of 3.36 ha and left it to said respondents to choose from
among the 7 titles those which would be sufficient to secure the P3.5M loan. An appraisal
report put the value of four (4) of the said properties at P6.8M. Vicky also stated that it
was agreed that once PCRI had chosen the lots to be covered by the mortgaged, the
respondents would return the remaining titles to the petitioners. Thereafter, twenty-four
(24) checks, bearing no dates and amounts and signed in blank by Enrique and Natividad,
were delivered to PCRI to cover the amortization payments.

In September 1984, the first amortization check bounced for insufficient fund due to
MFI’s continuing losses. It was then that the petitioners learned that PCRI had filled up
the said checks with dates and amounts reflected at 35% interest rate per annum, instead
of just 24%, and a two-year repayment period, instead of 10 years. It was only upon such
time that PCRI finally furnished MFI with its copy of the loan documents. Petitioners
found the terms to be prohibitive, burdensome, and unconscionable, and further averred
that had they known them they would have either negotiated or rejected the terms of the
loan and withdrew the application. Due to losses, petitioners’ business operations
stopped. An offsetting agreement was executed by the parties to cover the loan obligation
amounting to P4.1M. Thereafter, Vicky furnished respondents a copy of the appraisal
report prepared by Integrated Appraisal Corporation. However, PCRI’s statement showed
that all seven (7) titles were placed as collateral for their P3.5M loan. Petitioners averred
that as per the appraisal report, the value of the properties covered by the said titles were
largely in excess of the loan obligation.

On September 1986, petitioner Enrique received a Notice of Sherriff’s Sale announcing

the auction of the seven lots due to an unpaid indebtedness of P10.5M. Vicky insisted
that prior to the notice, they never received any statement or demand letter from the
defendants to pay the said amount, nor did the respondents inform them of the intended
foreclosure. The auction was then reset to a later date after petitioners assured PCRI that
they had found a serious buyer for the lots. In the meeting held between the parties and
the said buyer, Winston Wang, it was agreed that the mortgage was to be released upon
payment of P3.5M with an initial down-payment of P500, 000.00 to be paid by MFI to
PCRI as partial settlement of the P3.5M loan. Thereafter, Winston Wang confronted
Vicky about the sale agreement and PCRI’s refusal to accept the P3M payment because
according to the respondent Caleb, the three lots had been foreclosed. However, the said
foreclosure was executed before the lapse of the agreed 60-day period for the payment of
the balance. At the auction, PCRI was the sole bidder. Subsequent agreements were
further held for the release of the disputed three lots involving all three parties. Upon
failure to raise the required money for the payments on account of such agreements, MFI
was ultimately forced to vacate the lots. The RTC ruled in favour of the petitioners.
However, the CA reversed the decision and dismissed the complaint.

ISSUE:
Whether or not the action to assail the mortgage already prescribed

RULING:

YES. The Court held that in order to resolve the issue of prescription, it is important to
first determine if the mortgage was void or merely voidable. As held by the CA, the
petitioner’s contention of absence of consent which would make the mortgage void was
untenable. Herein petitioners failed to prove that they had been forced or coerced to enter
into the mortgage. Where consent was given through fraud alone, the contract was
voidable, not void ab initio. With the contract being voidable, petitioners’ action to annul
the real estate mortgage already prescribed. Article 1390, in relation to Article 1391 of
the Civil Code, provides that if the consent of the parties was obtained through fraud, the
contract is considered voidable and may be annulled within four (4) years from the time
of the discovery thereof. The discovery of said document was reckoned from the time the
document was registered in the Register of Deeds in view of the rule that registration was
notice to the whole world. Thus, because the mortgage involving the seven lots was
registered on September 5, 1984, they had until September 5, 1988 within which to assail
the validity of said mortgage. But their complaint was instituted in the RTC on October
10, 1991. Hence, the action had already prescribed.

IGLESIA FILIPINA INDEPENDIENTE vs HEIRS of BERNARDINO TAEZA

G.R. No. 179597, February 3, 2014

Third Division

Peralta, J.

DOCTRINE: A contract entered into in the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his powers are
unenforceable unless ratified.

FACTS:
The plaintiff-appellee Iglesia Filipina Independiente (IFI, for brevity), a duly registered
religious corporation, was the owner of a parcel of land situated in Tuguegarao. The said
lot is subdivided as follows: Lot Nos. 3653-A, 3653-B, 3653-C, and 3653-D.

Between 1973 and 1974, the plaintiff-appellee, through its then Supreme Bishop Rev.
Macario Ga, sold Lot 3653-D, with an area of 15,000 square meters, to one Bienvenido
de Guzman. On February 5, 1976, the other 2 lots were likewise sold by Rev. Macario
Ga, in his capacity as the Supreme Bishop to the defendant Bernardino Taeza, for the
amount of P100,000.00, through installment, with mortgage to secure the payment of the
balance. Subsequently, the defendant allegedly completed the payments.

In 1977, a complaint for the annulment of the February 5, 1976 Deed of Sale with
Mortgage was filed by the Parish Council of Tuguegarao, Cagayan, represented by
Froilan Calagui and Dante Santos, the President and the Secretary, respectively, of the
Laymen's Committee against their Supreme Bishop Macario Ga and the defendant
Bernardino Taeza. But said case was later dismissed.

Meanwhile, the defendant Bernardino Taeza registered the subject parcels of land.
Consequently, TCTs were issued in his name. The defendant then occupied a portion of
the land. The plaintiff-appellee allegedly demanded the defendant to vacate the said land
which he failed to do.

On November 6, 2001, the court a quo rendered judgment in favor of the plaintiff-
appellee. It held that the deed of sale executed by and between Rev. Ga and the
defendant-appellant is null and void.

Petitioner’s contention

Petitioner maintains that there was no consent to the contract of sale as Supreme Bishop
Rev. Ga had no authority to give such consent. It emphasized that Article IV (a) of their
Canons provides that "All real properties of the Church located or situated in such parish
can be disposed of only with the approval and conformity of the laymen's committee, the
parish priest, the Diocesan Bishop, with sanction of the Supreme Council, and finally
with the approval of the Supreme Bishop, as administrator of all the temporalities of the
Church." It is alleged that the sale of the property in question was done without the
required approval and conformity of the entities mentioned in the Canons; hence,
petitioner argues that the sale was null and void.

In the alternative, petitioner contends that if the contract is not declared null and void, it
should nevertheless be found unenforceable, as the approval and conformity of the other
entities in their church was not obtained, as required by their Canons.

ISSUE:

Whether or not the court of appeals erred in not finding the february 5, 1976 deed of sale
with mortgage as null and void

Assuming for the sake of argument that it is not void, whether or not the court of appeals
erred in not finding the february 5, 1976 deed of sale with mortgage as unenforceable

RULING:

Contract is unenforceable.

The first two issues boil down to the question of whether then Supreme Bishop Rev. Ga
is authorized to enter into a contract of sale in behalf of petitioner.

Petitioner provided in Article IV (a) of its Constitution and Canons of the Philippine
Independent Church, that "all real properties of the Church located or situated in such
parish can be disposed of only with the approval and conformity of the laymen's
committee, the parish priest, the Diocesan Bishop, with sanction of the Supreme Council,
and finally with the approval of the Supreme Bishop, as administrator of all the
temporalities of the Church."

Evidently, under petitioner's Canons, any sale of real property requires not just the
consent of the Supreme Bishop but also the concurrence of the laymen's committee, the
parish priest, and the Diocesan Bishop, as sanctioned by the Supreme Council. However,
petitioner's Canons do not specify in what form the conformity of the other church
entities should be made known. Thus, as petitioner's witness stated, in practice, such
consent or approval may be assumed as a matter of fact, unless some opposition is
expressed.

Here, the trial court found that the laymen's committee indeed made its objection to the
sale known to the Supreme Bishop. The Canons require that ALL the church entities
listed in Article IV (a) thereof should give its approval to the transaction. Thus, when the
Supreme Bishop executed the contract of sale of petitioner's lot despite the opposition
made by the laymen's committee, he acted beyond his powers.

This case clearly falls under the category of unenforceable contracts mentioned in Article
1403, paragraph (1) of the Civil Code, which provides, thus:

Art. 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who
has been given no authority or legal representation, or who has acted beyond his powers;

In Mercado v. Allied Banking Corporation, the Court explained that:

x x x Unenforceable contracts are those which cannot be enforced by a proper action in

court, unless they are ratified, because either they are entered into without or in excess of
authority or they do not comply with the statute of frauds or both of the contracting
parties do not possess the required legal capacity. x x x.

Closely analogous cases of unenforceable contracts are those where a person signs a deed
of extrajudicial partition in behalf of co-heirs without the latter's authority; where a
mother as judicial guardian of her minor children, executes a deed of extrajudicial
partition wherein she favors one child by giving him more than his share of the estate to
the prejudice of her other children; and where a person, holding a special power of
attorney, sells a property of his principal that is not included in said special power of
attorney.

In the present case, however, respondents' predecessor-in-interest, Bernardino Taeza, had

already obtained a transfer certificate of title in his name over the property in question.
Since the person supposedly transferring ownership was not authorized to do so, the
property had evidently been acquired by mistake. In Vda. de Esconde v. Court of
Appeals, the Court affirmed the trial court's ruling that the applicable provision of law in
such cases is Article 1456 of the Civil Code which states that "[i]f property is acquired
through mistake or fraud, the person obtaining it is, by force of law, considered a trustee
of an implied trust for the benefit of the person from whom the property comes."

Gonzalo v Tarnate, Jr.

DOCTRINE: The doctrine of in pari delicto which stipulates that the guilty parties to an
illegal contract are not entitled to any relief, cannot prevent a recovery if doing so
violates the public policy against unjust enrichment.

FACTS:

After the DPWH had awarded a construction contract to his company, Gonzalo
Construction, Domingo Gonzalo subcontracted to John Tarnate, Jr. the supply of
materials and labor for the project. Gonzalo executed a deed of assignment whereby he,
as the contractor, was assigning to Tarnate an amount equivalent to 10% of the total
collection from the DPWH for the project. This 10% retention fee was the rent for
Tarnate’s equipment that had been utilized in the project. Gonzalo further authorized
Tarnate to use the official receipt of Gonzalo Construction in the processing of the
documents relative to the collection of the 10% retention fee and in encashing the check
to be issued by the DPWH for that purpose. The deed of assignment was submitted to the
DPWH. During the processing of the documents for the retention fee, however, Tarnate
learned that Gonzalo had unilaterally rescinded the deed of assignment by means of an
affidavit of cancellation of deed of assignment; and that the disbursement voucher for the
10% retention fee had then been issued in the name of Gonzalo, and the retention fee
released to him.
Tarnate brought this suit against Gonzalo for breach of contract. Gonzalo claimed that
Tarnate, having been fully aware of the illegality and ineffectuality of the deed of
assignment from the time of its execution, could not go to court with unclean hands to
invoke any right based on the invalid deed of assignment or on the product of such deed
of assignment. RTC ruled judgment in favor of Tarnate. CA affirmed the RTC. CA did
not apply the doctrine of in pari delicto, explaining that the doctrine applied only if the
fault of one party was more or less equivalent to the fault of the other party. It found
Gonzalo to be more guilty than Tarnate, whose guilt had been limited to the execution of
the 2 illegal contracts while Gonzalo had gone to the extent of violating the deed of
assignment.

ISSUE:

Whether relief may be accorded despite the fact that the parties who entered into the void
contract are equally guilty.

RULING:

Yes. Every contractor is prohibited from subcontracting with or assigning to another

person any contract or project that he has with the DPWH unless the DPWH Secretary
has approved the subcontracting or assignment. Under Article 1409(1), a contract whose
cause, object or purpose is contrary to law is a void or inexistent contract. As such, a void
contract cannot produce a valid one. To the same effect is Article 1422, which declares
that "a contract, which is the direct result of a previous illegal contract, is also void and
inexistent."

We do not concur with the CA’s finding that the guilt of Tarnate for violation of Section
6 of PD 1594 was lesser than that of Gonzalo, for Tarnate had voluntarily entered into the
agreements with Gonzalo. Tarnate also admitted that he did not participate in the bidding
for the project because he knew that he was not authorized to contract with the DPWH.
Given that Tarnate was a businessman who had represented himself in the subcontract as
"being financially and organizationally sound and established, with the necessary
personnel and equipment for the performance of the project," he justifiably presumed to
be aware of the illegality of his agreements with Gonzalo. For these reasons, Tarnate was
not less guilty than Gonzalo.

According to Article 1412(1), the guilty parties to an illegal contract cannot recover from
one another and are not entitled to an affirmative relief because they are in pari delicto or
in equal fault. The doctrine of in pari delicto is a universal doctrine that holds that no
action arises, in equity or at law, from an illegal contract; no suit can be maintained for its
specific performance, or to recover the property agreed to be sold or delivered, or the
money agreed to be paid, or damages for its violation; and where the parties are in pari
delicto, no affirmative relief of any kind will be given to one against the other.

Nonetheless, the application of the doctrine of in pari delicto is not always rigid. An
accepted exception arises when its application contravenes well-established public policy.
The prevention of unjust enrichment is a recognized public policy of the State under for
Article 22. Tarnate provided the equipment, labor and materials for the project in
compliance with his obligations under the subcontract and the deed of assignment.
Gonzalo as the contractor who received the payment for his contract with the DPWH as
well as the 10% retention fee that should have been paid to Tarnate pursuant to the deed
of assignment. Considering that Gonzalo refused despite demands to deliver to Tarnate
the 10% retention fee that would have compensated the latter, Gonzalo would be unjustly
enriched at the expense of Tarnate if the latter was to be barred from recovering because
of the rigid application of the doctrine of in pari delicto. The prevention of unjust
enrichment called for the exception to apply in Tarnate’s favor.