[G.R. No. 141931.

December 4, 2000]
ANICETO

RECEBIDO, petitioner,
PHILIPPINES, respondent.

vs. PEOPLE

OF

THE

RESOLUTION
KAPUNAN, J.:
This is a petition for review on certiorari assailing the Decision of the Court
of Appeals in C.A.-G.R. CR No. 21347 entitled People of the Philippines versus
Aniceto Recebido, dated September 9, 1999 which found petitioner guilty beyond
reasonable doubt of Falsification of Public Document; and its Resolution dated
February 15, 2000 denying petitioners motion for reconsideration.
The antecedent facts are the following, to wit:
On September 9, 1990, private complainant Caridad Dorol went to the house of
her cousin, petitioner Aniceto Recebido, at San Isidro, Bacon, Sorsogon to
redeem her property, an agricultural land with an area of 3,520 square meters
located at San Isidro, Bacon, Sorsogon, which Caridad Dorol mortgaged to
petitioner sometime in April of 1985. Petitioner and Caridad Dorol did not execute
a document on the mortgage but Caridad Dorol instead gave petitioner a copy of
the Deed of Sale dated June 16, 1973 (Exhibit A) executed in her favor by her
father, Juan Dorol.
In said confrontation, petitioner refused to allow Caridad Dorol to redeem her
property on his claim that she had sold her property to him in 1979. Caridad
Dorol maintained and insisted that the transaction between them involving her
property was a mortgage.
Caridad Dorol verified from the Office of the Assessor in Sorsogon that there
exists on its file a Deed of Sale dated August 13, 1979 (Exhibit J), allegedly
executed by Caridad Dorol in favor of petitioner and that the property was
registered in the latters name. After comparison of the specimen signatures of
Caridad Dorol in other documents (Exhibits K to K-10) with that of the signature
of Caridad Dorol on the questioned Deed of Sale, NBI Document Examiner
Antonio Magbojas, found that the latter signature was falsified (Exhibits L-1 to L2).
Thereafter, Caridad Dorol filed her complaint against petitioner Aniceto Recebido
with the National Bureau of Investigation (NBI), Legaspi City and its Questioned
Documents Division conducted an examination in the original copy of the Deed of
Sale in question allegedly signed by Caridad, particularly her signature affixed
thereon.
Mr. Magbojas report was approved by the Chief of the Questioned Documents
Division, Arcadio Ramos, and the Deputy Director of Technical Services, Manuel
Roura, both of the NBI.[1]
Thus, the Office of the Provincial Prosecutor of Sorsogon filed the information
indicting petitioner for Falsification of Public Document with the Regional Trial
Court, 5th Judicial Region, Branch 51, Sorsogon, Sorsogon, reading as follows:
That on or about the 13th day of August, 1979, in the Municipality of Sorsogon,
Province of Sorsogon, Philippines, and within the jurisdiction of this Honorable
Court, the above-named accused, being a private individual, did then and there,
willfully, unlawfully and feloniously, with intent to defraud, falsify and/or imitate the
signature of one Caridad Dorol and/or cause it to appear that said Caridad Dorol
has signed her name on a Deed of Absolute Sale of Real Property in favor of the
herein accused and Notarized as Doc. No. 680; page No. 54; Boon No. XIV and
Series of 1979 of the Registry of Notary Public Dominador S. Reyes, when in
truth and in fact accused well knew, that Caridad Dorol did not execute said
document, to the damage and prejudice of the latter.
Contrary to law.[2]
Upon arraignment, petitioner pleaded not guilty.

As narrated by the Court of Appeals, the petitioner contends that the land
in question was mortgaged to him by Juan Dorol, the father of Caridad, on
February 25, 1977 and was subsequently sold to him on August 13, 1983
although it was made to appear that the deed of sale was executed on August
13, 1979. It was also on the said date that Recebido gave Caridad the amount of
P1,000.00 in addition to the P2,600.00 mortgage price given to Juan Dorol which
culminated into the execution of the Deed of Sale signed by Caridad. [3]
After trial on the merits, the trial court rendered the decision on December
2, 1996, convicting petitioner of the crime charged and sentencing him as
follows:
ACCORDINGLY, accused ANECITO RECEBIDO is sentenced to an
indeterminate penalty of one (1) year to three (3) years and six (6) months of
prision correccional as maximum and to pay a fine of Three Thousand
(P3,000.00) Pesos, with subsidiary imprisonment.
Accused is ordered to pay P5,000.00 damages and to vacate the land in
question owned by the offended party.
SO ORDERED.[4]
On appeal, the Court of Appeals affirmed with modification the decision of
the trial court, the dispositive portion of which reads:
WHEREFORE, with the modification that the award for damages is DELETED,
the assailed judgment is AFFIRMED in all other respects.
SO ORDERED.[5]
The petitioner raises his case before this Court seeking the reversal of the
assailed decision and resolution of the Court of Appeals. Based on his petition,
the following issues are before this Court:
1. Whether or not the crime charged had already prescribed at the
time the information was filed?
2. Whether or not the Court of Appeals committed grave abuse of
discretion in sustaining the conviction of the petitioner?
3. Whether or not the Court of Appeals committed grievous error in
affirming the decision of the trial court for the petitioner to
vacate the land in question owned by the offended party?
We rule in the negative on the three issues.
On the first issue: While the defense of prescription of the crime was
raised only during the motion for reconsideration of the decision of the Court of
Appeals, there was no waiver of the defense. Under the Rules of Court, the
failure of the accused to assert the ground of extinction of the offense, inter alia,
in a motion to quash shall not be deemed a waiver of such ground. [6] The reason
is that by prescription, the State or the People loses the right to prosecute the
crime or to demand the service of the penalty imposed. [7] Accordingly,
prescription, although not invoked in the trial, may, as in this case, be invoked on
appeal.[8] Hence, the failure to raise this defense in the motion to quash the
information does not give rise to the waiver of the petitioner-accused to raise the
same anytime thereafter including during appeal.
Nonetheless, we hold that the crime charged has not prescribed. The
petitioner is correct in stating that whether or not the offense charged has already
prescribed when the information was filed would depend on the
penalty imposable therefor, which in this case is prision correccional in its
medium and maximum periods and a fine of not more than 5,000.00 pesos.
[9]
Under the Revised Penal Code, [10] said penalty is a correctional penalty in the
same way that the fine imposed is categorized as correctional. Both the penalty
and fine being correctional, the offense shall prescribe in ten years. [11] The issue
that the petitioner has missed, however, is the reckoning point of the prescriptive
period. The petitioner is of the impression that the ten-year prescriptive period
necessarily started at the time the crime was committed. This is

inaccurate. Under Article 91 of the Revised Penal Code, the period of

prescription shall commence to run from the day on which the crime is
discovered by the offended party, the authorities, or their agents, x x x. In People
v. Reyes,[12] this Court has declared that registration in public registry is a notice
to the whole world. The record is constructive notice of its contents as well as all
interests, legal and equitable, included therein. All persons are charged with
knowledge of what it contains.

In view of the foregoing, this Court finds that the Court of Appeals did not
commit any reversible error in its Decision dated September 9, 1999 and its
Resolution dated February 15, 2000.
ACCORDINGLY, the instant petition is DENIED for lack of merit.
SO ORDERED.

The prosecution has established that private complainant Dorol did not
sell the subject land to the petitioner-accused at anytime and that sometime in
1983 the private complainant mortgaged the agricultural land to petitioner
Recebido. It was only on September 9, 1990, when she went to petitioner to
redeem the land that she came to know of the falsification committed by the
petitioner. On the other hand, petitioner contends that the land in question was
mortgaged to him by Juan Dorol, the father of private complainant, and was
subsequently sold to him on August 13, 1983. This Court notes that the private
offended party had no actual knowledge of the falsification prior to September 9,
1990. Meanwhile, assuming arguendo that the version of the petitioner is
believable, the alleged sale could not have been registered before 1983, the year
the alleged deed of sale was executed by the private complainant. Considering
the foregoing, it is logical and in consonance with human experience to infer that
the crime committed was not discovered, nor could have been discovered, by the
offended party before 1983. Neither could constructive notice by registration of
the forged deed of sale, which is favorable to the petitioner since the running of
the prescriptive period of the crime shall have to be reckoned earlier, have been
done before 1983 as it is impossible for the petitioner to have registered the deed
of sale prior thereto. Even granting arguendo that the deed of sale was executed
by the private complainant, delivered to the petitioner-accused in August 13,
1983 and registered on the same day, the ten-year prescriptive period of the
crime had not yet elapsed at the time the information was filed in 1991. The
inevitable conclusion, therefore, is that the crime had not prescribed at the time
of the filing of the information.
On the second issue: We hold that the Court of Appeals did not commit
any grave abuse of discretion when it affirmed petitioners conviction by the trial
court. The petitioner admits that the deed of sale that was in his possession is a
forged document as found by the trial and appellate court. [13] Petitioner,
nonetheless, argues that notwithstanding this admission, the fact remains that
there is no proof that the petitioner authored such falsification or that the forgery
was done under his direction. This argument is without merit. Under the
circumstance, there was no need of any direct proof that the petitioner was the
author of the forgery. As keenly observed by the Solicitor General, the questioned
document was submitted by petitioner himself when the same was requested by
the NBI for examination. Clearly in possession of the falsified deed of sale was
petitioner and not Caridad Dorol who merely verified the questioned sale with the
Provincial Assessors Office of Sorsogon. [14]In other words, the petitioner was in
possession of the forged deed of sale which purports to sell the subject land from
the private complainant to him. Given this factual backdrop, the petitioner is
presumed to be the author of the forged deed of sale, despite the absence of any
direct evidence of his authorship of the forgery. Since the petitioner is the only
person who stood to benefit by the falsification of the document found in his
possession, it is presumed that he is the material author of the falsification. [15] As
it stands, therefore, we are unable to discern any grave abuse of discretion on
the part of the Court of Appeals.
On the third issue: Petitioner submits that the trial court is without
jurisdiction to order petitioner to vacate the land in question considering that the
crime for which he is charged is falsification. [16] The petitioner insists that the civil
aspect involved in the criminal case at bar refer to the civil damages
recoverable ex delito or arising from the causative act or omission. [17] In addition,
petitioner argues that he is entitled to possession as mortgagee since the private
complainant has not properly redeemed the property in question.
These are specious arguments. The petitioner based his claim of
possession alternatively by virtue of two alternative titles: one, based on the
forged deed of sale and, two, as mortgagee of the land. As already discussed,
the deed of sale was forged and, hence, could not be a valid basis of
possession. Neither could his status as mortgagee be the basis of possession
since it is the mortgagor in a contract of mortgage who is entitled to the
possession of the property. We have taken note of the practice in the provinces
that in giving a realty for a collateral, possession usually goes with it. [18] Besides,
even assuming that petitioner had a right to possess the subject land, his
possession became unlawful when the private complainant offered to redeem the
property and petitioner unjustly refused. Petitioner cannot profit from the effects
of his crime. The trial court, therefore, did not commit any error in ordering
petitioner to vacate the subject property.

[G.R. No. 141970. September 10, 2001]

METROPOLITAN BANK, & TRUST COMPANY, petitioner, vs. Hon. FLORO T.
ALEJO, in His Capacity as Presiding Judge of Branch 172 of the
Regional Trial Court of Valenzuela; and SY TAN SE, represented
by his Attorney-in-Fact, SIAN SUAT NGO, respondents.
DECISION
PANGANIBAN, J.:
In a suit to nullify an existing Torrens Certificate of Title (TCT) in which a
real estate mortgage is annotated, the mortgagee is an indispensable party. In
such suit, a decision canceling the TCT and the mortgage annotation is subject to
a petition for annulment of judgment, because the non-joinder of the mortgagee
deprived the court of jurisdiction to pass upon the controversy.
The Case
Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of
the Rules of Court, assailing the March 25, 1999 Resolution of the Court of
Appeals (CA) in CA-GR SP No. 50638, which states in full:
This resolves the petition for annulment of judgment based on external (sic) fraud
filed by petitioner Metropolitan Bank and Trust Company seeking to annul the
Decision dated August 12, 1998 rendered by respondent judge, Honorable Floro
T. Alejo, Presiding Judge of the Regional Trial Court, Branch 172, Valenzuela,
Metro Manila, in Civil Case No. 4930-V-96 entitled Sy Tan Se, represented by his
attorney-in-fact Sian Suat Ngo v. Raul Acampado, et al.
This Court has observed that petitioner knew of the questioned Decision
sometime [i]n October 1998 (Petition, Rollo, p. 3).This being the case, petitioner
should have first sought recourse by way of petition for relief from judgment
under Rule 38 of the 1997 Rules of Civil Procedure. Accordingly, the petition for
annulment of judgment is DENIED DUE COURSE and DISMISSED outright for
being insufficient in form and substance (Section 2, Rule 47, 1997 Rules of Civil
Procedure).
Also challenged is the January 27, 2000 CA Resolution [2] denying
petitioners Motion for Reconsideration.
The Facts
On November 21, 1995[3] and January 30, 1996, [4] Spouses Raul and
Cristina Acampado obtained loans from petitioner in the amounts of P5,000,000
and P2,000,000, respectively. As security for the payment of these credit
accommodations, the Acampados executed in favor of petitioner a Real Estate
Mortgage[5] and an Amendment of Real Estate Mortgage [6]over a parcel of land
registered in their names. The land was covered by TCT No. V-41319 in the
Registry of Deeds of Valenzuela City, where the contracts were also registered
on November 20, 1995 and January 23, 1996, respectively.[7]
On June 3, 1996, a Complaint for Declaration of Nullity of TCT No. V41319 was filed by Respondent Sy Tan Se against Spouses Acampado. In the
Regional Trial Court (RTC) of Valenzuela, Branch 172, it was docketed as Civil
Case No. 4930-V-96,[8] the progenitor of the present controversy.
Despite being the registered mortgagee of the real property covered by
the title sought to be annulled, petitioner was not made a party to Civil Case No.
4930-V-96,[9] nor was she notified of its existence.

Because the spouses defaulted in the payment of their loan, extrajudicial

foreclosure proceedings over the mortgaged property were initiated on April 19,
1997.

party in any court through fraud, accident, mistake, or excusable negligence, he

may file a petition in such court and in the same case praying that the judgment,
order or proceeding be set aside. (Italics supplied)

On June 17, 1997, the sheriff of Valenzuela conducted an auction sale of

the property, during which petitioner submitted the highest and winning bid. [10] On
July 15, 1997, a Certificate of Sale was issued in its favor. [11] This sale was
entered in the Registry of Deeds of Valenzuela on July 28, 1997.

It must be emphasized that petitioner was never a party to Civil Case No.
4930-V-96. In Lagula et al. v. Casimiro et al.,[15] the Court held that -- relative to a
motion for relief on the ground of fraud, accident, mistake, or excusable
negligence -- Rule 38 of the Rules of Court only applies when the one deprived
of his right is a party to the case. Since petitioner was never a party to the case
or even summoned to appear therein, then the remedy of relief from judgment
under Rule 38 of the Rules of Court was not proper. This is plainly provided in the
italicized words of the present provision just quoted.

When the redemption period lapsed exactly a year after, on July 28, 1998,
petitioner executed an Affidavit of Consolidation of Ownership to enable the
Registry of Deeds of Valenzuela to issue a new TCT in its name.
Upon presentation to the Register of Deeds of the Affidavit of
Consolidation of Ownership, petitioner was informed of the existence of the
August 12, 1998 RTC Decision in Civil Case No. 4930-V-96, annulling TCT No.
V-41319. The dispositive portion of the Decision[12] stated:
WHEREFORE, judgment is hereby rendered declaring as null and void Transfer
Certificate of Title No.V-41319 in the name of defendant Raul Acampado for
having proceeded from an illegitimate source. With costs against the defendant.
SO ORDERED.
On January 27, 1999, petitioner filed with the Court of Appeals a Petition
for Annulment of the RTC Decision.
Ruling of the Court of Appeals
For being insufficient in form and substance, the Petition for Annulment
was outrightly dismissed by the CA. It ruled that petitioner ought to have filed,
instead, a petition for relief from judgment or an action for quieting of title.
Hence, this Petition.[13]
Issues
In its Memorandum, petitioner presents the following issues:
I
x x x [W]hether or not a petition for annulment of judgment under Rule 47 of the
1997 Rules of Civil Procedure is the proper remedy available to petitioner under
the circumstances.
II
x x x [W]hether or not the judgment of the trial court in Civil Case No. 4930-V-96
should be annulled.[14]
The Courts Ruling
The Petition is meritorious.
First Issue: Proper Remedy
Respondents aver that a petition for annulment is not proper, because
there were three different remedies available but they were not resorted to by
petitioner.
We are not persuaded. First, a petition for relief, the remedy pointed to by
the Court of Appeals, was not available to petitioner. Section 1, Rule 38 of the
Rules of Court, states:
Petition for relief from judgment, order, or other proceedings.-When a judgment
or final order is entered, or any other proceeding is thereafter taken against a

Second, in denying petitioners Motion for Reconsideration of the Decision

dismissing the Petition for Annulment of Judgment, the Court of Appeals
reasoned that another remedy, an action for quieting of title, was also available to
petitioner.
We do not agree. It should be stressed that this case was instituted to ask
for relief from the peremptory declaration of nullity of TCT No. V-41319, which
had been issued without first giving petitioner an opportunity to be
heard. Petitioner focused on the judgment in Civil Case No. 4930-V-96 which
adversely affected it, and which it therefore sought to annul.Filing an action for
quieting of title will not remedy what it perceived as a disregard of due process; it
is therefore not an appropriate remedy.
Equally important, an action for quieting of title is filed only when there is a
cloud on title to real property or any interest therein. As defined, a cloud on title is
a semblance of title which appears in some legal form but which is in fact
unfounded.[16] In this case, the subject judgment cannot be considered as a cloud
on petitioners title or interest over the real property covered by TCT No. V-41319,
which does not even have a semblance of being a title.
It would not be proper to consider the subject judgment as a cloud that
would warrant the filing of an action for quieting of title, because to do so would
require the court hearing the action to modify or interfere with the judgment or
order of another co-equal court. Well-entrenched in our jurisdiction is the doctrine
that a court has no power to do so, as that action may lead to confusion and
seriously hinder the administration of justice. [17] Clearly, an action for quieting of
title is not an appropriate remedy in this case.
Third, private respondent cites a last remedy: the intervention by petitioner
in Civil Case No. 4930-V-96. The availability of this remedy hinges on petitioners
knowledge of the pendency of that case, which would have otherwise been
alerted to the need to intervene therein. Though presumed by private
respondent, any such knowledge prior to October 1998 is, however, emphatically
denied by petitioner.
The Petition for Annulment before the Court of Appeals precisely alleged
that private respondent purposely concealed the case by excluding petitioner as
a defendant in Civil Case No. 4930-V-96, even if the latter was an indispensable
party.Without due process of law, the former intended to deprive petitioner of the
latters duly registered property right. Indeed, the execution of the Decision in Civil
Case No. 4930-V-96 necessarily entailed its enforcement against petitioner, even
though it was not a party to that case. Hence, the latter concludes that annulment
of judgment was the only effective remedy open to it.
The allegation of extrinsic fraud, if fully substantiated by a preponderance
of evidence, may be the basis for annulling a judgment. [18] The resort to
annulment becomes proper because of such allegation, coupled with the
unavailability of the other remedies pointed to by respondents.
Second Issue: Lack of Jurisdiction
It is undisputed that the property covered by TCT No. V-41319 was
mortgaged to petitioner, and that the mortgage was annotated on TCT No. V41319 before the institution of Civil Case No. 4930-V-96. It is also undisputed
that all subsequent proceedings pertaining to the foreclosure of the mortgage
were entered in the Registry of Deeds. The nullification and cancellation of TCT
No. V-41319 carried with it the nullification and cancellation of the mortgage
annotation.

Although a mortgage affects the land itself and not merely the TCT
covering it, the cancellation of the TCT and the mortgage annotation exposed
petitioner to real prejudice, because its rights over the mortgaged property would
no longer be known and respected by third parties. Necessarily, therefore, the
nullification of TCT No. V-41319 adversely affected its property rights,
considering that a real mortgage is a real right and a real property by itself. [19]
Evidently, petitioner is encompassed within the definition of an
indispensable party; thus, it should have been impleaded as a defendant in Civil
Case No. 4930-V-96.
An indispensable party is a party who has such an interest in the controversy or
subject matter that a final adjudication cannot be made, in his absence, without
injuring or affecting that interest[;] a party who has not only an interest in the
subject matter of the controversy, but also has an interest of such nature that a
final decree cannot be made without affecting his interest or leaving the
controversy in such a condition that its final determination may be wholly
inconsistent with equity and good conscience. It has also been considered that
an indispensable party is a person in whose absence there cannot be a
determination between the parties already before the court which is effective,
complete, or equitable. Further, an indispensable party is one who must be
included in an action before it may properly go forward.
A person is not an indispensable party, however, if his interest in the controversy
or subject matter is separable from the interest of the other parties, so that it will
not necessarily be directly or injuriously affected by a decree which does
complete justice between them.[20]
The joinder of indispensable parties to an action is mandated by Section
7, Rule 3 of the Revised Rules of Civil Procedures, which we quote:
SEC 7. Compulsory joinder of indispensable parties. Parties in interest without
whom no final determination can be had of an action shall be joined either as
plaintiffs or defendants.
Aside from the above provision, jurisprudence requires such joinder, as
the following excerpts indicate:
Indispensable parties must always be joined either as plaintiffs or defendants, for
the court cannot proceed without them. x x x. Indispensable parties are those
with such an interest in the controversy that a final decree would necessarily
affect their rights, so that the courts cannot proceed without their presence. [21]
"x x x. Without the precence of indispensable parties to a suit or proceeding, a
judgment of a Court cannot attain real finality." [22]
Whenever it appears to the court in the course of a proceeding that an
indispensable party has not been joined, it is the duty of the court to stop the trial
and to order the inclusion of such party. (The Revised Rules of Court, Annotated
& Commented by Senator Vicente J. Francisco, Vol. I, p. 271, 1973 ed., See also
Cortez vs. Avila, 101 Phil. 705.) Such an order is unavoidable, for the general
rule with reference to the making of parties in a civil action requires the joinder of
all necessary parties wherever possible, and the joinder of all indispensable
parties under any and all conditions, the presence of those latter parties being a
sine qua non of the exercise of judicial power. (Borlasa vs. Polistico, 47 Phil. 345,
at p. 347.) It is precisely when an indispensable party is not before the court
(that) the action should be dismissed. (People vs. Rodriguez, 106 Phil. 325. at p.
327.) The absence of an indispensable party renders all subsequent actuations
of the court null and void, for want of authority to act, not only as to the absent
parties but even as to those present.[23] (emphasis supplied)
The evident aim and intent of the Rules regarding the joinder of indispensable
and necessary parties is a complete determination of all possible issues, not only
between the parties themselves but also as regards to other persons who may
be affected by the judgment. A valid judgment cannot even be rendered where
there is want of indispensable parties.[24]
From the above, it is clear that the presence of indispensable parties is
necessary to vest the court with jurisdiction, which is the authority to hear and
determine a cause, the right to act in a case. [25] We stress that the absence of
indispensable parties renders all subsequent actuations of the court null and

void, because of that courts want of authority to act, not only as to the absent
parties but even as to those present.
It is argued that petitioner cannot possibly be an indispensable party,
since the mortgage may not even be valid because of the possible absence of
compliance with the requirement[26] that the mortgagor be the absolute owner of
the thing mortgaged. It should be emphasized, however, that at the time the
mortgage was constituted, there was an existing TCT (No. V-41319), which
named the mortgagors, the Acampado spouses, as the registered owners of the
property. In Seno v. Mangubat[27] this Court held as follows:
The well-known rule in this jurisdiction is that a person dealing with a registered
land has a right to rely upon the face of the Torrens Certificate of Title and to
dispense with the need of inquiring further, except when the party concerned has
actual knowledge of facts and circumstances that would impel a reasonably
cautious man to make such inquiry.
xxxxxxxxx
Thus, where innocent third persons relying on the correctness of the certificate of
title issued, acquire rights over the property, the court cannot disregard such
rights and order the total cancellation of the certificate for that would impair public
confidence in the certificate of title; otherwise everyone dealing with property
registered under the Torrens system would have to inquire in every instance as to
whether the title ha[s] been regularly or irregularly issued by the court. Indeed
this is contrary to the evident purpose of the law.
The peremptory disregard of the annotations registered and entered in
TCT No. V-41319 constituted a deprivation of private property without due
process of law and was therefore unquestionably unjust and iniquitous. This, we
cannot countenance.
Clearly, it was the trial courts duty to order petitioners inclusion as a party
to Civil Case No. 4930-V-96. This was not done. Neither the court nor private
respondents bothered to implead petitioner as a party to the case. In the absence
of petitioner, an indispensable party, the trial court had no authority to act on the
case. Its judgment therein was null and void due to lack of jurisdiction over an
indispensable party.
In Leonor v. Court of Appeals [28] and Arcelona v. Court of Appeals,[29] we
held thus:
A void judgment for want of jurisdiction is no judgment at all. It cannot be the
source of any right nor the creator of any obligation. All acts performed pursuant
to it and all claims emanating from it have no legal effect. Hence, it can never
become final and any writ of execution based on it is void:x x x it may be said to
be a lawless thing which can be treated as an outlaw and slain at sight, or
ignored wherever and whenever it exhibits its head.
WHEREFORE, the Petition is GRANTED and the assailed Resolutions of
the Court of Appeals are REVERSED. The Decision of the Regional Trial Court in
Civil Case No. 4930-V-41319 is hereby NULLIFIED and SET ASIDE. No costs.
SO ORDERED.
G.R. No. L-17500

May 16, 1967

PEOPLE'S BANK AND TRUST CO. and ATLANTIC GULF AND PACIFIC CO.
OF MANILA, plaintiffs-appellants,
vs.
DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER
CORPORATION and CONNELL BROS. CO. (PHIL.), defendants-appellants.
Angel S. Gamboa for defendants-appellants.
Laurel Law Offices for plaintiffs-appellants.
DIZON, J.:
On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West
Virginia corporation licensed to do business in the Philippines hereinafter

referred to as ATLANTIC sold and assigned all its rights in the Dahican
Lumber concession to Dahican Lumber Company hereinafter referred to as
DALCO for the total sum of $500,000.00, of which only the amount of
$50,000.00 was paid. Thereafter, to develop the concession, DALCO obtained
various loans from the People's Bank & Trust Company hereinafter referred to
as the BANK amounting, as of July 13, 1950, to P200,000.00. In addition,
DALCO obtained, through the BANK, a loan of $250,000.00 from the ExportImport Bank of Washington D.C., evidenced by five promissory notes of
$50,000.00 each, maturing on different dates, executed by both DALCO and the
Dahican America Lumber Corporation, a foreign corporation and a stockholder of
DALCO, hereinafter referred to as DAMCO, all payable to the BANK or its
order.
As security for the payment of the abovementioned loans, on July 13, 1950
DALCO executed in favor of the BANK the latter acting for itself and as trustee
for the Export-Import Bank of Washington D.C. a deed of mortgage covering
five parcels of land situated in the province of Camarines Norte together with all
the buildings and other improvements existing thereon and all the personal
properties of the mortgagor located in its place of business in the municipalities
of Mambulao and Capalonga, Camarines Norte (Exhibit D). On the same date,
DALCO executed a second mortgage on the same properties in favor of
ATLANTIC to secure payment of the unpaid balance of the sale price of the
lumber concession amounting to the sum of $450,000.00 (Exhibit G). Both deeds
contained the following provision extending the mortgage lien to properties to be
subsequently acquired referred to hereafter as "after acquired properties"
by the mortgagor:
All property of every nature and description taken in exchange or
replacement, and all buildings, machinery, fixtures, tools equipment
and other property which the Mortgagor may hereafter acquire,
construct, install, attach, or use in, to, upon, or in connection with the
premises, shall immediately be and become subject to the lien of this
mortgage in the same manner and to the same extent as if now
included therein, and the Mortgagor shall from time to time during the
existence of this mortgage furnish the Mortgagee with an accurate
inventory of such substituted and subsequently acquired property.

defendants' motion, however, the court, in its order of February 21, 1953,
discharged the Receiver.
On March 2, 1953, defendants filed their answer denying the material allegations
of the complaint and alleging several affirmative defenses and a counterclaim.
On March 4 of the same year, CONNELL, filed a motion for intervention alleging
that it was the owner and possessor of some of the equipments, spare parts and
supplies which DALCO had acquired subsequent to the execution of the
mortgages sought to be foreclosed and which plaintiffs claimed were covered by
the lien. In its order of March 18,1953 the Court granted the motion, as well as
plaintiffs' motion to set aside the order discharging the Receiver. Consequently,
Evans was reinstated.
On April 1, 1953, CONNELL filed its answer denying the material averment of the
complaint, and asserting affirmative defenses and a counterclaim.
Upon motion of the parties the Court, on September 30, 1953, issued an order
transferring the venue of the action to the Court of First Instance of Manila where
it was docketed as Civil Case No. 20987.
On August 30, 1958, upon motion of all the parties, the Court ordered the sale of
all the machineries, equipment and supplies of DALCO, and the same were
subsequently sold for a total consideration of P175,000.00 which was deposited
in court pending final determination of the action. By a similar agreement one-half
(P87,500.00) of this amount was considered as representing the proceeds
obtained from the sale of the "undebated properties" (those not claimed by
DAMCO and CONNELL), and the other half as representing those obtained from
the sale of the "after acquired properties".
After due trial, the Court, on July 15, 1960, rendered judgment as follows:
IN VIEW WHEREFORE, the Court:

Both mortgages were registered in the Office of the Register of Deeds of

Camarines Norte. In addition thereto DALCO and DAMCO pledged to the BANK
7,296 shares of stock of DALCO and 9,286 shares of DAMCO to secure the
same obligations.

1. Condemns Dahican Lumber Co. to pay unto People's Bank the

sum of P200,000,00 with 7% interest per annum from July 13, 1950,
Plus another sum of P100,000.00 with 5% interest per annum from
July 13, 1950; plus 10% on both principal sums as attorney's fees;

Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its
maturity, the BANK paid the same to the Export-Import Bank of Washington D.C.,
and the latter assigned to the former its credit and the first mortgage securing it.
Subsequently, the BANK gave DALCO and DAMCO up to April 1, 1953 to pay
the overdue promissory note.

2. Condemns Dahican Lumber Co. to pay unto Atlantic Gulf the sum
of P900,000.00 with 4% interest per annum from July 3, 1950, plus
10% on both principal as attorney's fees;

After July 13, 1950 the date of execution of the mortgages mentioned above
DALCO purchased various machineries, equipment, spare parts and supplies
in addition to, or in replacement of some of those already owned and used by it
on the date aforesaid. Pursuant to the provision of the mortgage deeds quoted
theretofore regarding "after acquired properties," the BANK requested DALCO to
submit complete lists of said properties but the latter failed to do so. In
connection with these purchases, there appeared in the books of DALCO as due
to Connell Bros. Company (Philippines) a domestic corporation who was
acting as the general purchasing agent of DALCO thereinafter called
CONNELL the sum of P452,860.55 and to DAMCO, the sum of
P2,151,678.34.
On December 16, 1952, the Board of Directors of DALCO, in a special meeting
called for the purpose, passed a resolution agreeing to rescind the alleged sales
of equipment, spare parts and supplies by CONNELL and DAMCO to it.
Thereafter, the corresponding agreements of rescission of sale were executed
between DALCO and DAMCO, on the one hand and between DALCO and
CONNELL, on the other.
On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC,
demanded that said agreements be cancelled but CONNELL and DAMCO
refused to do so. As a result, on February 12, 1953; ATLANTIC and the BANK,
commenced foreclosure proceedings in the Court of First Instance of Camarines
Norte against DALCO and DAMCO. On the same date they filed an exparte application for the appointment of a Receiver and/or for the issuance of a
writ of preliminary injunction to restrain DALCO from removing its properties. The
court granted both remedies and appointed George H. Evans as Receiver. Upon

3. Condemns Dahican Lumber Co. to pay unto Connell Bros, the sum
of P425,860.55, and to pay unto Dahican American Lumber Co. the
sum of P2,151,678.24 both with legal interest from the date of the
filing of the respective answers of those parties, 10% of the principals
as attorney's fees;
4. Orders that of the sum realized from the sale of the properties of
P175,000.00, after deducting the recognized expenses, one-half
thereof be adjudicated unto plaintiffs, the court no longer specifying
the share of each because of that announced intention under the
stipulation of facts to "pool their resources"; as to the other one-half,
the same should be adjudicated unto both plaintiffs, and defendant
Dahican American and Connell Bros. in the proportion already set
forth on page 9, lines 21, 22 and 23 of the body of this decision; but
with the understanding that whatever plaintiffs and Dahican American
and Connell Bros. should receive from the P175,000.00 deposited in
the Court shall be applied to the judgments particularly rendered in
favor of each;
5. No other pronouncement as to costs; but the costs of the
receivership as to the debated properties shall be borne by People's
Bank, Atlantic Gulf, Connell Bros., and Dahican American Lumber
Co., pro-rata.
On the following day, the Court issued the following supplementary decision:

IN VIEW WHEREOF, the dispositive part of the decision is hereby

amended in order to add the following paragraph 6:
6. If the sums mentioned in paragraphs 1 and 2 are not paid within
ninety (90) days, the Court orders the sale at public auction of the
lands object of the mortgages to satisfy the said mortgages and costs
of foreclosure.
From the above-quoted decision, all the parties appealed.
Main contentions of plaintiffs as appellants are the following: that the "after
acquired properties" were subject to the deeds of mortgage mentioned
heretofore; that said properties were acquired from suppliers other than DAMCO
and CONNELL; that even granting that DAMCO and CONNELL were the real
suppliers, the rescission of the sales to DALCO could not prejudice the mortgage
lien in favor of plaintiffs; that considering the foregoing, the proceeds obtained
from the sale of the "after acquired properties" as well as those obtained from the
sale of the "undebated properties" in the total sum of P175,000.00 should have
been awarded exclusively to plaintiffs by reason of the mortgage lien they had
thereon; that damages should have been awarded to plaintiffs against
defendants, all of them being guilty of an attempt to defraud the former when
they sought to rescind the sales already mentioned for the purpose of defeating
their mortgage lien, and finally, that defendants should have been made to bear
all the expenses of the receivership, costs and attorney's fees.
On the other hand, defendants-appellants contend that the trial court erred: firstly,
in not holding that plaintiffs had no cause of action against them because the
promissory note sued upon was not yet due when the action to foreclose the
mortgages was commenced; secondly, in not holding that the mortgages
aforesaid were null and void as regards the "after acquired properties" of DALCO
because they were not registered in accordance with the Chattel Mortgage Law,
the court erring, as a consequence, in holding that said properties were subject
to the mortgage lien in favor of plaintiffs; thirdly, in not holding that the provision
of the fourth paragraph of each of said mortgages did not automatically make
subject to such mortgages the "after acquired properties", the only meaning
thereof being that the mortgagor was willing to constitute a lien over such
properties; fourthly, in not ruling that said stipulation was void as against DAMCO
and CONNELL and in not awarding the proceeds obtained from the sale of the
"after acquired properties" to the latter exclusively; fifthly, in appointing a
Receiver and in holding that the damages suffered by DAMCO and CONNELL by
reason of the depreciation or loss in value of the "after acquired properties"
placed under receivership was damnum absque injuria and, consequently, in not
awarding, to said parties the corresponding damages claimed in their
counterclaim; lastly, in sentencing DALCO and DAMCO to pay attorney's fees
and in requiring DAMCO and CONNELL to pay the costs of the Receivership,
instead of sentencing plaintiffs to pay attorney's fees.
Plaintiffs' brief as appellants submit six assignments of error, while that of
defendants also as appellants submit a total of seventeen. However, the
multifarious issues thus before Us may be resolved, directly or indirectly, by
deciding the following issues:
Firstly, are the so-called "after acquired properties" covered by and subject to the
deeds of mortgage subject of foreclosure?; secondly, assuming that they are
subject thereto, are the mortgages valid and binding on the properties aforesaid
inspite of the fact that they were not registered in accordance with the provisions
of the Chattel Mortgage Law?; thirdly, assuming again that the mortgages are
valid and binding upon the "after acquired properties", what is the effect thereon,
if any, of the rescission of sales entered into, on the one hand, between DAMCO
and DALCO, and between DALCO and CONNELL, on the other?; and lastly, was
the action to foreclose the mortgages premature?
A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that
all property of every nature and description taken in exchange or replacement, as
well as all buildings, machineries, fixtures, tools, equipments, and other property
that the mortgagor may acquire, construct, install, attach; or use in, to upon, or in
connection with the premises that is, its lumber concession "shall
immediately be and become subject to the lien" of both mortgages in the same
manner and to the same extent as if already included therein at the time of their
execution. As the language thus used leaves no room for doubt as to the
intention of the parties, We see no useful purpose in discussing the matter
extensively. Suffice it to say that the stipulation referred to is common, and We
might say logical, in all cases where the properties given as collateral are
perishable or subject to inevitable wear and tear or were intended to be sold, or
to be used thus becoming subject to the inevitable wear and tear but with

the understanding express or implied that they shall be replaced with

others to be thereafter acquired by the mortgagor. Such stipulation is neither
unlawful nor immoral, its obvious purpose being to maintain, to the extent
allowed by circumstances, the original value of the properties given as security.
Indeed, if such properties were of the nature already referred to, it would be poor
judgment on the part of the creditor who does not see to it that a similar provision
is included in the contract.
B. But defendants contend that, granting without admitting, that the deeds of
mortgage in question cover the "after acquired properties" of DALCO, the same
are void and ineffectual because they were not registered in accordance with the
Chattel Mortgage Law. In support of this and of the proposition that, even if said
mortgages were valid, they should not prejudice them, the defendants argue (1)
that the deeds do not describe the mortgaged chattels specifically, nor were they
registered in accordance with the Chattel Mortgage Law; (2) that the stipulation
contained in the fourth paragraph thereof constitutes "mere executory
agreements to give a lien" over the "after acquired properties" upon their
acquisition; and (3) that any mortgage stipulation concerning "after acquired
properties" should not prejudice creditors and other third persons such as
DAMCO and CONNELL.
The stipulation under consideration strongly belies defendants contention. As
adverted to hereinbefore, it states that all property of every nature, building,
machinery etc. taken in exchange or replacement by the mortgagor "shall
immediately be and become subject to the lien of this mortgage in the same
manner and to the same extent as if now included therein". No clearer language
could have been chosen.
Conceding, on the other hand, that it is the law in this jurisdiction that, to affect
third persons, a chattel mortgage must be registered and must describe the
mortgaged chattels or personal properties sufficiently to enable the parties and
any other person to identify them, We say that such law does not apply to this
case.
As the mortgages in question were executed on July 13, 1950 with the old Civil
Code still in force, there can be no doubt that the provisions of said code must
govern their interpretation and the question of their validity. It happens however,
that Articles 334 and 1877 of the old Civil Code are substantially reproduced in
Articles 415 and 2127, respectively, of the new Civil Code. It is, therefore,
immaterial in this case whether we take the former or the latter as guide in
deciding the point under consideration.
Article 415 does not define real property but enumerates what are considered as
such, among them being machinery, receptacles, instruments or replacements
intended by owner of the tenement for an industry or works which may be carried
on in a building or on a piece of land, and shall tend directly to meet the needs of
the said industry or works.
On the strength of the above-quoted legal provisions, the lower court held that
inasmuch as "the chattels were placed in the real properties mortgaged to
plaintiffs, they came within the operation of Art. 415, paragraph 5 and Art. 2127 of
the New Civil Code".
We find the above ruling in agreement with our decisions on the subject:
(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334,
paragraph 5 of the Civil Code (old) gives the character of real property to
machinery, liquid containers, instruments or replacements intended by the owner
of any building or land for use in connection with any industry or trade being
carried on therein and which are expressly adapted to meet the requirements of
such trade or industry.
(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held that a
mortgage constituted on a sugar central includes not only the land on which it is
built but also the buildings, machinery and accessories installed at the time the
mortgage was constituted as well as the buildings, machinery and
accessories belonging to the mortgagor, installed after the constitution thereof .
It is not disputed in the case at bar that the "after acquired properties" were
purchased by DALCO in connection with, and for use in the development of its
lumber concession and that they were purchased in addition to, or in
replacement of those already existing in the premises on July 13, 1950. In Law,
therefore, they must be deemed to have been immobilized, with the result that

the real estate mortgages involved herein which were registered as such
did not have to be registered a second time as chattel mortgages in order to bind
the "after acquired properties" and affect third parties.
But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61
Phil. 709, claim that the "after acquired properties" did not
become immobilized because DALCO did not own the whole area of its lumber
concession all over which said properties were scattered.
The facts in the Davao Sawmill case, however, are not on all fours with the ones
obtaining in the present. In the former, the Davao Sawmill Company, Inc., had
repeatedly treated the machinery therein involved as personal property by
executing chattel mortgages thereon in favor of third parties, while in the present
case the parties had treated the "after acquired properties" as real properties by
expressly and unequivocally agreeing that they shall automatically become
subject to the lien of the real estate mortgages executed by them. In the Davao
Sawmill decision it was, in fact, stated that "the characterization of the property
as chattels by the appellant is indicative of intention and impresses upon the
property the character determined by the parties" (61 Phil. 112, emphasis
supplied). In the present case, the characterization of the "after acquired
properties" as real property was made not only by one but by both interested
parties. There is, therefore, more reason to hold that such consensus impresses
upon the properties the character determined by the parties who must now be
held in estoppel to question it.
Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central
Altagracia, Inc. (225 U.S. 58) where it was held that while under the general law
of Puerto Rico, machinery placed on property by a tenant does not become
immobilized, yet, when the tenant places it there pursuant to contract that it shall
belong to the owner, it then becomes immobilized as to that tenant and even as
against his assignees and creditors who had sufficient notice of such stipulation.
In the case at bar it is not disputed that DALCO purchased the "after acquired
properties" to be placed on, and be used in the development of its lumber
concession, and agreed further that the same shall become immediately subject
to the lien constituted by the questioned mortgages. There is also abundant
evidence in the record that DAMCO and CONNELL had full notice of such
stipulation and had never thought of disputed validity until the present case was
filed. Consequently all of them must be deemed barred from denying that the
properties in question had become immobilized.
What We have said heretofore sufficiently disposes all the arguments adduced
by defendants in support their contention that the mortgages under foreclosure
are void, and, that, even if valid, are ineffectual as against DAMCO and
CONNELL.
Now to the question of whether or not DAMCO CONNELL have rights over the
"after acquired properties" superior to the mortgage lien constituted thereon in
favor of plaintiffs. It is defendants' contention that in relation to said properties
they are "unpaid sellers"; that as such they had not only a superior lien on the
"after acquired properties" but also the right to rescind the sales thereof to
DALCO.
This contention it is obvious would have validity only if it were true that
DAMCO and CONNELL were the suppliers or vendors of the "after acquired
properties". According to the record, plaintiffs did not know their exact identity
and description prior to the filing of the case bar because DALCO, in violation of
its obligation under the mortgages, had failed and refused theretofore to submit a
complete list thereof. In the course of the proceedings, however, when
defendants moved to dissolve the order of receivership and the writ of
preliminary injunction issued by the lower court, they attached to their motion the
lists marked as Exhibits 1, 2 and 3 describing the properties aforesaid. Later on,
the parties agreed to consider said lists as identifying and describing the "after
acquire properties," and engaged the services of auditors to examine the books
of DALCO so as to bring out the details thereof. The report of the auditors and its
annexes (Exhibits V, V-1 V4) show that neither DAMCO nor CONNELL had
supplied any of the goods of which they respective claimed to be the unpaid
seller; that all items were supplied by different parties, neither of whom appeared
to be DAMCO or CONNELL that, in fact, CONNELL collected a 5% service
charge on the net value of all items it claims to have sold to DALCO and which,
in truth, it had purchased for DALCO as the latter's general agent; that CONNELL
had to issue its own invoices in addition to those o f the real suppliers in order to
collect and justify such service charge.
Taking into account the above circumstances together with the fact that DAMCO
was a stockholder and CONNELL was not only a stockholder but the general

agent of DALCO, their claim to be the suppliers of the "after acquired required
properties" would seem to be preposterous. The most that can be claimed on the
basis of the evidence is that DAMCO and CONNELL probably financed some of
the purchases. But if DALCO still owes them any amount in this connection, it is
clear that, as financiers, they can not claim any right over the "after acquired
properties" superior to the lien constituted thereon by virtue of the deeds of
mortgage under foreclosure. Indeed, the execution of the rescission of sales
mentioned heretofore appears to be but a desperate attempt to better or improve
DAMCO and CONNELL's position by enabling them to assume the role of
"unpaid suppliers" and thus claim a vendor's lien over the "after acquired
properties". The attempt, of course, is utterly ineffectual, not only because they
are not the "unpaid sellers" they claim to be but also because there is abundant
evidence in the record showing that both DAMCO and CONNELL had known and
admitted from the beginning that the "after acquired properties" of DALCO were
meant to be included in the first and second mortgages under foreclosure.
The claim that Belden, of ATLANTIC, had given his consent to the rescission,
expressly or otherwise, is of no consequence and does not make the rescission
valid and legally effective. It must be stated clearly, however, in justice to Belden,
that, as a member of the Board of Directors of DALCO, he opposed the
resolution of December 15, 1952 passed by said Board and the subsequent
rescission of the sales.
Finally, defendants claim that the action to foreclose the mortgages filed on
February 12, 1953 was premature because the promissory note sued upon did
not fall due until April 1 of the same year, concluding from this that, when the
action was commenced, the plaintiffs had no cause of action. Upon this question
the lower court says the following in the appealed judgment;
The other is the defense of prematurity of the causes of action in that
plaintiffs, as a matter of grace, conceded an extension of time to pay
up to 1 April, 1953 while the action was filed on 12 February, 1953,
but, as to this, the Court taking it that there is absolutely no debate
that Dahican Lumber Co., was insolvent as of the date of the filing of
the complaint, it should follow that the debtor thereby lost the benefit
to the period.
x x x unless he gives a guaranty or security for the debt . . . (Art.
1198, New Civil Code);
and as the guaranty was plainly inadequate since the claim of
plaintiffs reached in the aggregate, P1,200,000 excluding interest
while the aggregate price of the "after-acquired" chattels claimed by
Connell under the rescission contracts was P1,614,675.94, Exh. 1,
Exh. V, report of auditors, and as a matter of fact, almost all the
properties were sold afterwards for only P175,000.00, page 47, Vol.
IV, and the Court understanding that when the law permits the debtor
to enjoy the benefits of the period notwithstanding that he is insolvent
by his giving a guaranty for the debt, that must mean a new and
efficient guaranty, must concede that the causes of action for
collection of the notes were not premature.
Very little need be added to the above. Defendants, however, contend that the
lower court had no basis for finding that, when the action was commenced,
DALCO was insolvent for purposes related to Article 1198, paragraph 1 of the
Civil Code. We find, however, that the finding of the trial court is sufficiently
supported by the evidence particularly the resolution marked as Exhibit K, which
shows that on December 16, 1952 in the words of the Chairman of the Board
DALCO was "without funds, neither does it expect to have any funds in the
foreseeable future." (p. 64, record on appeal).
The remaining issues, namely, whether or not the proceeds obtained from the
sale of the "after acquired properties" should have been awarded exclusively to
the plaintiffs or to DAMCO and CONNELL, and if in law they should be
distributed among said parties, whether or not the distribution should be pro-rata
or otherwise; whether or not plaintiffs are entitled to damages; and, lastly,
whether or not the expenses incidental to the Receivership should be borne by
all the parties on a pro-rata basis or exclusively by one or some of them are of a
secondary nature as they are already impliedly resolved by what has been said
heretofore.
As regard the proceeds obtained from the sale of the of after acquired properties"
and the "undebated properties", it is clear, in view of our opinion sustaining the
validity of the mortgages in relation thereto, that said proceeds should be

awarded exclusively to the plaintiffs in payment of the money obligations secured

by the mortgages under foreclosure.

pay the amount of P20,000.00, plus interests, and to order defendants to pay
damages. Attached to the complaint was a copy of the private document
evidencing the alleged mortgage (Annex A), which is quoted hereunder:

On the question of plaintiffs' right to recover damages from the defendants, the
law (Articles 1313 and 1314 of the New Civil Code) provides that creditors are
protected in cases of contracts intended to defraud them; and that any third
person who induces another to violate his contract shall be liable for damages to
the other contracting party. Similar liability is demandable under Arts. 20 and 21
which may be given retroactive effect (Arts. 225253) or under Arts. 1902
and 2176 of the Old Civil Code.

August 20, 1970

This is to certify that I, Jose Yusay Servando, the sole
owner of three parcel of land under Tax Declaration No.
28905, 44123 and 31591 at Lot No. 1, 1863-Portion of
1863 & 1860 situated at Sto. Nino St., Arevalo, Compania
St. & Compania St., Interior Molo, respectively, have this
date mortgaged the said property to my cousin Pio
Servando, in the amount of TWENTY THOUSAND
PESOS (P20,000.00), redeemable for a period not
exceeding ten (10) years, the mortgage amount bearing
an interest of 10% per annum.

The facts of this case, as stated heretofore, clearly show that DALCO and
DAMCO, after failing to pay the fifth promissory note upon its maturity, conspired
jointly with CONNELL to violate the provisions of the fourth paragraph of the
mortgages under foreclosure by attempting to defeat plaintiffs' mortgage lien on
the "after acquired properties". As a result, the plaintiffs had to go to court to
protect their rights thus jeopardized. Defendants' liability for damages is therefore
clear.
However, the measure of the damages suffered by the plaintiffs is not what the
latter claim, namely, the difference between the alleged total obligation secured
by the mortgages amounting to around P1,200,000.00, plus the stipulated
interest and attorney's fees, on the one hand, and the proceeds obtained from
the sale of "after acquired properties", and of those that were not claimed neither
by DAMCO nor CONNELL, on the other. Considering that the sale of the real
properties subject to the mortgages under foreclosure has not been effected, and
considering further the lack of evidence showing that the true value of all the
properties already sold was not realized because their sale was under stress, We
feel that We do not have before Us the true elements or factors that should
determine the amount of damages that plaintiffs are entitled recover from
defendants. It is, however, our considered opinion that, upon the facts
established, all the expenses of the Receivership, which was deemed necessary
to safeguard the rights of the plaintiffs, should be borne by the defendants, jointly
and severally, in the same manner that all of them should pay to the plaintiffs,
jointly a severally, attorney's fees awarded in the appealed judgment.
In consonance with the portion of this decision concerning the damages that the
plaintiffs are entitled to recover from the defendants, the record of this case shall
be remanded below for the corresponding proceedings.
Modified as above indicated, the appealed judgment is affirmed in all other
respects. With costs.
G.R. No. L-49940 September 25, 1986
GEMMA R. HECHANOVA, accompanied by her husband, NICANOR
HECHANOVA, JR., and PRESCILLA R. MASA, accompanied by her
husband, FRANCISCO MASA, petitioners,
vs.
HON. MIDPANTAO L. ADIL, Presiding Judge, Branch II, Court of First
Instance of Iloilo, THE PROVINCIAL SHERIFF OF ILOILO, and PIO
SERVANDO, respondents.

YAP, J.:
Petitioners seek the annulment of various orders issued by the respondent
Presiding Judge of Branch II, Court of First Instance of Iloilo, in Civil Case No.
12312 entitled "Pio Servando versus Jose Y. Servando et al." A temporary
restraining order was issued by this Court on May 9, 1979, staying until further
orders the execution of the decision rendered by the respondent Judge in said
case.
The case under review is for the annulment of a deed of sale dated March 11,
1978, executed by defendant Jose Y. Servando in favor of his co-defendants, the
petitioners herein, covering three parcels of land situated in Iloilo City. Claiming
that the said parcels of land were mortgaged to him in 1970 by the vendor, who is
his cousin, to secure a loan of P20,000.00, the plaintiff Pio Servando impugned
the validity of the sale as being fraudulent, and prayed that it be declared null and
void and the transfer certificates of title issued to the vendees be cancelled, or
alternatively, if the sale is not annulled, to order the defendant Jose Servando to

I further certify that in case I fail to redeem the said

properties within the period stated above, my cousin Pio
Servando, shall become the sole owner thereof.
(SGD.) JOSE YUSAY SERVANDO
WITNESSES:
(Sgd) Ernesto G. Jeruta
(Sgd) Francisco B. Villanueva
The defendants moved to dismiss the complaint on the grounds that it did not
state a cause of action, the alleged mortgage being invalid and unenforceable
since it was a mere private document and was not recorded in the Registry of
Deeds; and that the plaintiff was not the real party in interest and, as a mere
mortgagee, had no standing to question the validity of the sale. The motion was
denied by the respondent Judge, in its order dated June 20, 1978, "on the ground
that this action is actually one for collection."
On June 23, 1978, defendant Jose Y. Servando died. The defendants filed a
Manifestation and Motion, informing the trial court accordingly, and moving for the
dismissal of the complaint pursuant to Section 21 of Rule 3 of the Rules of Court,
pointing out that the action was for. recovery of money based on an actionable
document to which only the deceased defendant was a party. The motion to
dismiss was denied on July 25, 1978, "it appearing from the face of the complaint
that the instant action is not purely a money claim, it being only incidental, the
main action being one for annulment and damages."
On August 1, 1978, plaintiff filed a motion to declare defendants in default, and
on the very next day, August 2, the respondent Judge granted the motion and set
the hearing for presentation of plaintiff's evidence ex-parte on August 24, 1978.
On August 2, 1978, or the same day that the default order was issued,
defendants Hechanova and Masa filed their Answers, denying the allegations of
the complaint and repeating, by way of special and affirmative defenses, the
grounds stated in their motions to dismiss.
On August 25, 1978, a judgment by default was rendered against the defendants,
annulling the deed of sale in question and ordering the Register of Deeds of Iloilo
to cancel the titles issued to Priscilla Masa and Gemma Hechanova, and to
revive the title issued in the name of Jose Y. Servando and to deliver the same to
the plaintiff.
The defendants took timely steps to appeal the decision to the Court of Appeals
by filing a notice of appeal, an appeal bond, and a record on appeal. However,
the trial court disapproved the record on appeal due to the failure of defendants
to comply with its order to eliminate therefrom the answer filed on August 2, 1978
and accordingly, dismissed the appeal, and on February 2, 1978, issued an order
granting the writ of execution prayed for by plaintiff.
We find the petition meritorious, and the same is hereby given due course.

It is clear from the records of this case that the plaintiff has no cause of action.
Plaintiff has no standing to question the validity of the deed of sale executed by
the deceased defendant Jose Servando in favor of his co-defendants Hechanova
and Masa. No valid mortgage has been constituted plaintiff's favor, the alleged
deed of mortgage being a mere private document and not registered; moreover,
it contains a stipulation (pacto comisorio)which is null and void under Article 2088
of the Civil Code. Even assuming that the property was validly mortgaged to the
plaintiff, his recourse was to foreclose the mortgage, not to seek annulment of the
sale.

presented for payment. The sale of the jewelry was never effected; the checks,
therefore, ceased to serve their purpose as security for the jewelry.

WHEREFORE, the decision of the respondent court dated August 25, 1973 and
its Order of February 2, 1979 are set aside, and the complaint filed by plaintiff
dated February 4, 1978 is hereby dismissed.

In this regard, Sec. 52 of the Negotiable Instruments Law provides

SO ORDERED.
G.R. No. 101163 January 11, 1993
STATE INVESTMENT HOUSE, INC., petitioner,
vs.
COURT OF APPEALS and NORA B. MOULIC, respondents.
Escober, Alon & Associates for petitioner.
Martin D. Pantaleon for private respondents.

BELLOSILLO, J.:
The liability to a holder in due course of the drawer of checks issued to another
merely as security, and the right of a real estate mortgagee after extrajudicial
foreclosure to recover the balance of the obligation, are the issues in this Petition
for Review of the Decision of respondent Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for
pieces of jewelry to be sold on commission, two (2) post-dated Equitable Banking
Corporation checks in the amount of Fifty Thousand Pesos (P50,000.00) each,
one dated 30 August 1979 and the other, 30 September 1979. Thereafter, the
payee negotiated the checks to petitioner State Investment House. Inc. (STATE).
MOULIC failed to sell the pieces of jewelry, so she returned them to the payee
before maturity of the checks. The checks, however, could no longer be retrieved
as they had already been negotiated. Consequently, before their maturity dates,
MOULIC withdrew her funds from the drawee bank.
Upon presentment for payment, the checks were dishonored for insufficiency of
funds. On 20 December 1979, STATE allegedly notified MOULIC of the dishonor
of the checks and requested that it be paid in cash instead, although MOULIC
avers that no such notice was given her.
On 6 October 1983, STATE sued to recover the value of the checks plus
attorney's fees and expenses of litigation.
In her Answer, MOULIC contends that she incurred no obligation on the checks
because the jewelry was never sold and the checks were negotiated without her
knowledge and consent. She also instituted a Third-Party Complaint against
Corazon Victoriano, who later assumed full responsibility for the checks.
On 26 May 1988, the trial court dismissed the Complaint as well as the ThirdParty Complaint, and ordered STATE to pay MOULIC P3,000.00 for attorney's
fees.
STATE elevated the order of dismissal to the Court of Appeals, but the appellate
court affirmed the trial court on the ground that the Notice of Dishonor to MOULIC
was made beyond the period prescribed by the Negotiable Instruments Law and
that even if STATE did serve such notice on MOULIC within the reglementary
period it would be of no consequence as the checks should never have been

We are not persuaded.

The negotiability of the checks is not in dispute. Indubitably, they were
negotiable. After all, at the pre-trial, the parties agreed to limit the issue to
whether or not STATE was a holder of the checks in due course. 1

Sec. 52. What constitutes a holder in due course. A

holder in due course is a holder who has taken the
instrument under the following conditions: (a) That it is
complete and regular upon its face; (b) That he became
the holder of it before it was overdue, and without notice
that it was previously dishonored, if such was the fact; (c)
That he took it in good faith and for value; (d) That at the
time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the
person negotiating it.
Culled from the foregoing, a prima facie presumption exists that the holder of a
negotiable instrument is a holder in due course. 2 Consequently, the burden of
proving that STATE is not a holder in due course lies in the person who disputes
the presumption. In this regard, MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-dated checks were
complete and regular: (b) petitioner bought these checks from the payee,
Corazon Victoriano, before their due dates; 3 (c) petitioner took these checks in
good faith and for value, albeit at a discounted price; and, (d) petitioner was
never informed nor made aware that these checks were merely issued to payee
as security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it holds the
instruments free from any defect of title of prior parties, and from defenses
available to prior parties among themselves; STATE may, therefore, enforce full
payment of the checks. 4
MOULIC cannot set up against STATE the defense that there was failure or
absence of consideration. MOULIC can only invoke this defense against STATE
if it was privy to the purpose for which they were issued and therefore is not a
holder in due course.
That the post-dated checks were merely issued as security is not a ground for
the discharge of the instrument as against a holder in due course. For the only
grounds are those outlined in Sec. 119 of the Negotiable Instruments Law:
Sec. 119. Instrument; how discharged. A negotiable
instrument is discharged: (a) By payment in due course
by or on behalf of the principal debtor; (b) By payment in
due course by the party accommodated, where the
instrument is made or accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract
for the payment of money; (e) When the principal debtor
becomes the holder of the instrument at or after maturity
in his own right.
Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds
for the discharge of the instrument. But, the intentional cancellation contemplated
under paragraph (c) is that cancellation effected by destroying the instrument
either by tearing it up, 5 burning it, 6 or writing the word "cancelled" on the
instrument. The act of destroying the instrument must also be made by the holder
of the instrument intentionally. Since MOULIC failed to get back possession of
the post-dated checks, the intentional cancellation of the said checks is
altogether impossible.
On the other hand, the acts which will discharge a simple contract for the
payment of money under paragraph (d) are determined by other existing
legislations since Sec. 119 does not specify what these acts are, e.g., Art. 1231
of the Civil Code 7 which enumerates the modes of extinguishing obligations.

Again, none of the modes outlined therein is applicable in the instant case as
Sec. 119 contemplates of a situation where the holder of the instrument is the
creditor while its drawer is the debtor. In the present action, the payee, Corazon
Victoriano, was no longer MOULIC's creditor at the time the jewelry was
returned.
Correspondingly, MOULIC may not unilaterally discharge herself from her liability
by the mere expediency of withdrawing her funds from the drawee bank. She is
thus liable as she has no legal basis to excuse herself from liability on her checks
to a holder in due course.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of
no moment. The need for such notice is not absolute; there are exceptions under
Sec. 114 of the Negotiable Instruments Law:
Sec. 114. When notice need not be given to drawer.
Notice of dishonor is not required to be given to the
drawer in the following cases: (a) Where the drawer and
the drawee are the same person; (b) When the drawee is
a fictitious person or a person not having capacity to
contract; (c) When the drawer is the person to whom the
instrument is presented for payment: (d) Where the
drawer has no right to expect or require that the drawee
or acceptor will honor the instrument; (e) Where the
drawer had countermanded payment.
Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the
checks when she returned the jewelry. She simply withdrew her funds from her
drawee bank and transferred them to another to protect herself. After withdrawing
her funds, she could not have expected her checks to be honored. In other
words, she was responsible for the dishonor of her checks, hence, there was no
need to serve her Notice of Dishonor, which is simply bringing to the knowledge
of the drawer or indorser of the instrument, either verbally or by writing, the fact
that a specified instrument, upon proper proceedings taken, has not been
accepted or has not been paid, and that the party notified is expected to pay it. 8
In addition, the Negotiable Instruments Law was enacted for the purpose of
facilitating, not hindering or hampering transactions in commercial paper. Thus,
the said statute should not be tampered with haphazardly or lightly. Nor should it
be brushed aside in order to meet the necessities in a single case. 9
The drawing and negotiation of a check have certain effects aside from the
transfer of title or the incurring of liability in regard to the instrument by the
transferor. The holder who takes the negotiated paper makes a contract with the
parties on the face of the instrument. There is an implied representation that
funds or credit are available for the payment of the instrument in the bank upon
which it is drawn. 10 Consequently, the withdrawal of the money from the drawee
bank to avoid liability on the checks cannot prejudice the rights of holders in due
course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic,
liable to STATE, a holder in due course of the checks.
Under the facts of this case, STATE could not expect payment as MOULIC left no
funds with the drawee bank to meet her obligation on the checks, 11 so that Notice
of Dishonor would be futile.
The Court of Appeals also held that allowing recovery on the checks would
constitute unjust enrichment on the part of STATE Investment House, Inc. This is
error.
The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the
obligation of Corazon Victoriano and her husband at the time their property
mortgaged to STATE was extrajudicially foreclosed amounted to P1.9 million; the
bid price at public auction was only P1 million. 12 Thus, the value of the property
foreclosed was not even enough to pay the debt in full.
Where the proceeds of the sale are insufficient to cover the debt in an
extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the
deficiency from the debtor. 13 The step thus taken by the mortgagee-bank in
resorting to an extra-judicial foreclosure was merely to find a proceeding for the
sale of the property and its action cannot be taken to mean a waiver of its right to
demand payment for the whole debt. 14 For, while Act 3135, as amended, does
not discuss the mortgagee's right to recover such deficiency, it does not contain
any provision either, expressly or impliedly, prohibiting recovery. In this

jurisdiction, when the legislature intends to foreclose the right of a creditor to sue
for any deficiency resulting from foreclosure of a security given to guarantee an
obligation, it so expressly provides. For instance, with respect to pledges, Art.
2115 of the Civil Code 15 does not allow the creditor to recover the deficiency from
the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a
thing sold on installment basis, in the event of foreclosure, the vendor "shall have
no further action against the purchaser to recover any unpaid balance of the
price. Any agreement to the contrary will be void". 16
It is clear then that in the absence of a similar provision in Act No. 3135, as
amended, it cannot be concluded that the creditor loses his right recognized by
the Rules of Court to take action for the recovery of any unpaid balance on the
principal obligation simply because he has chosen to extrajudicially foreclose the
real estate mortgage pursuant to a Special Power of Attorney given him by the
mortgagor in the contract of mortgage. 17
The filing of the Complaint and the Third-Party Complaint to enforce the checks
against MOULIC and the VICTORIANO spouses, respectively, is just another
means of recovering the unpaid balance of the debt of the VICTORIANOs.
In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the
holder in due course, STATE, without prejudice to any action for recompense she
may pursue against the VICTORIANOs as Third-Party Defendants who had
already been declared as in default.
WHEREFORE, the petition is GRANTED. The decision appealed from is
REVERSED and a new one entered declaring private respondent NORA B.
MOULIC liable to petitioner STATE INVESTMENT HOUSE, INC., for the value of
EBC Checks Nos. 30089658 and 30089660 in the total amount of P100,000.00,
P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any
action for recompense she may pursue against the VICTORIANOs as Third-Party
Defendants.
Costs against private respondent.
SO ORDERED.
[G.R. No. 138053. May 31, 2000]
CORNELIO M. ISAGUIRRE, petitioner, vs. FELICITAS DE LARA, respondent.
DECISION
GONZAGA-REYES, J.:
In this petition for review on certiorari under Rule 45 of the 1997 Revised Rules
of Civil Procedure, petitioner Cornelio M. Isaguirre assails the October 5, 1998
decision[1] of the Court of Appeals[2] and its Resolution promulgated on March 5,
1999.
The antecedent facts of the present case are as follows:
Alejandro de Lara was the original applicant-claimant for a Miscellaneous Sales
Application over a parcel of land identified as portion of Lot 502, Guianga
Cadastre, filed with the Bureau of Lands on January 17, 1942 and with an area of
2,342 square meters. Upon his death, Alejandro de Lara was succeeded by his
wife - respondent Felicitas de Lara, as claimant. On November 19, 1954, the
Undersecretary of Agriculture and Natural Resources amended the sales
application to cover only 1,600 square meters. Then, on November 3, 1961, by
virtue of a decision rendered by the Secretary of Agriculture and Natural
Resources dated November 19, 1954, a subdivision survey was made and the
area was further reduced to 1,000 square meters. On this lot stands a two-story
residential-commercial apartment declared for taxation purposes under TD 43927
in the name of respondents sons - Apolonio and Rodolfo, both surnamed de
Lara.
Sometime in 1953, respondent obtained several loans from the Philippine
National Bank. When she encountered financial difficulties, respondent
approached petitioner Cornelio M. Isaguirre, who was married to her niece, for
assistance. On February 10, 1960, a document denominated as "Deed of Sale

and Special Cession of Rights and Interests" was executed by respondent and
petitioner, whereby the former sold a 250 square meter portion of Lot No. 502,
together with the two-story commercial and residential structure standing
thereon, in favor of petitioner, for and in consideration of the sum of P5,000.
Sometime in May, 1968, Apolonio and Rodolfo de Lara filed a complaint against
petitioner for recovery of ownership and possession of the two-story building.
[3]
However, the case was dismissed for lack of jurisdiction.
On August 21, 1969, petitioner filed a sales application over the subject property
on the basis of the deed of sale. His application was approved on January 17,
1984, resulting in the issuance of Original Certificate of Title No. P-11566 on
February 13, 1984, in the name of petitioner. Meanwhile, the sales application of
respondent over the entire 1,000 square meters of subject property (including the
250 square meter portion claimed by petitioner) was also given due course,
resulting in the issuance of Original Certificate of Title No. P-13038 on June 19,
1989, in the name of respondent.[4]
Due to the overlapping of titles, petitioner filed an action for quieting of title and
damages with the Regional Trial Court of Davao City against respondent on May
17, 1990. The case was docketed as Civil Case No. 20124-90. After trial on the
merits, the trial court rendered judgment on October 19, 1992, in favor of
petitioner, declaring him to be the lawful owner of the disputed property. However,
the Court of Appeals reversed the trial courts decision, holding that the
transaction entered into by the parties, as evidenced by their contract, was an
equitable mortgage, not a sale.[5] The appellate courts decision was based on the
inadequacy of the consideration agreed upon by the parties, on its finding that
the payment of a large portion of the "purchase price" was made after the
execution of the deed of sale in several installments of minimal amounts; and
finally, on the fact that petitioner did not take steps to confirm his rights or to
obtain title over the property for several years after the execution of the deed of
sale. As a consequence of its decision, the appellate court also declared Original
Certificate of Title No.P-11566 issued in favor of petitioner to be null and void. On
July 8, 1996, in a case docketed as G. R. No. 120832, this Court affirmed the
decision of the Court of Appeals and on September 11, 1996, we denied
petitioners motion for reconsideration.
On May 5, 1997, respondent filed a motion for execution with the trial court,
praying for the immediate delivery of possession of the subject property, which
motion was granted on August 18, 1997. On February 3, 1998, respondent
moved for a writ of possession, invoking our ruling in G. R. No. 120832.
Petitioner opposed the motion, asserting that he had the right of retention over
the property until payment of the loan and the value of the improvements he had
introduced on the property. On March 12, 1998, the trial court granted
respondents motion for writ of possession. Petitioners motion for reconsideration
was denied by the trial court on May 21, 1998. Consequently, a writ of
possession dated June 16, 1998, together with the Sheriffs Notice to Vacate
dated July 7, 1998, were served upon petitioner.
Petitioner filed with the Court of Appeals a special civil action for certiorari and
prohibition with prayer for a temporary restraining order or preliminary injunction
to annul and set aside the March 12, 1998 and May 21, 1998 orders of the trial
court, including the writ of possession dated June 16, 1998 and the sheriffs
notice to vacate dated July 7, 1998.[6]
The appellate court summarized the issues involved in the case as follows: (1)
whether or not the mortgagee in an equitable mortgage has the right to retain
possession of the property pending actual payment to him of the amount of
indebtedness by the mortgagor; and (b) whether or not petitioner can be
considered a builder in good faith with respect to the improvements he made on
the property before the transaction was declared to be an equitable mortgage.
The Court of Appeals held that petitioner was not entitled to retain possession of
the subject property. It said that the mortgagee merely has to annotate his claim at the
back of the certificate of title in order to protect his rights
against third persons and thereby secure the debt. There
is therefore no necessity for him to actually possess the
property. Neither should a mortgagee in an equitable
mortgage fear that the contract relied upon is not
registered and hence, may not operate as a mortgage to
justify its foreclosure. In Feliza Zubiri v. Lucio Quijano, 74
Phil 47, it was ruled "that when a contract x x x is held as

an equitable mortgage, the same shall be given effect as

if it had complied with the formal requisites of mortgage. x
x x by its very nature the lien thereby created ought not to
be defeated by requiring compliance with the formalities
necessary to the validity of a voluntary real estate
mortgage, as long as the land remains in the hands of the
petitioner (mortgagor) and the rights of innocent parties
are not affected."
Proceeding from the foregoing, petitioners imagined fears
that his lien would be lost by surrendering possession are
unfounded.
In the same vein, there is nothing to stop the mortgagor
de Lara from acquiring possession of the property
pending actual payment of the indebtedness to petitioner.
This does not in anyway endanger the petitioners right to
security since, as pointed out by private respondents, the
petitioner can always have the equitable mortgage
annotated in the Certificate of Title of private respondent
and pursue the legal remedies for the collection of the
alleged debt secured by the mortgage. In this case, the
remedy would be to foreclose the mortgage upon failure
to pay the debt within the required period.
It is unfortunate however, that the Court of Appeals, in
declaring the transaction to be an equitable mortgage
failed to specify in its Decision the period of time within
which the private respondent could settle her account,
since such period serves as the reckoning point by which
foreclosure could ensue. As it is, petitioner is now in a
dilemma as to how he could enforce his rights as a
mortgagee. ...
Hence, this Court, once and for all resolves the matter by
requiring the trial court to determine the amount of total
indebtedness and the period within which payment shall
be made.
Petitioners claims that he was a builder in good faith and entitled to
reimbursement for the improvements he introduced upon the property were
rejected by the Court of Appeals. It held that petitioner knew, or at least had an
inkling, that there was a defect or flaw in his mode of acquisition. Nevertheless,
the appellate court declared petitioner to have the following rights:
He is entitled to reimbursement for the necessary
expenses which he may have incurred over the property,
in accordance with Art. 526 and Art. 452 of the Civil Code.
Moreover, considering that the transaction was merely an
equitable mortgage, then he is entitled to payment of the
amount of indebtedness plus interest, and in the event of
non-payment to foreclose the mortgage. Meanwhile,
pending receipt of the total amount of debt, private
respondent is entitled to possession over the disputed
property.
The case was finally disposed of by the appellate court in the following manner:
WHERFORE, the Petition is hereby DISMISSED, and this
case is ordered remanded to the Regional Trial Court of
Davao City for further proceedings, as follows:
1) The trial court shall determine
a) The period within which the mortgagor must pay his
total amount of indebtedness.
b) The total amount of indebtedness owing the petitionermortgagee plus interest computed from the time when the
judgment declaring the contract to be an equitable
mortgage became final.

c) The necessary expenses incurred by petitioner over the

property.[7]
On March 5, 1999, petitioners motion for reconsideration was denied by the
appellate court.[8] Hence, the present appeal wherein petitioner makes the
following assignment of errors:
A.......THE HONORABLE COURT OF APPEALS ERRED
IN NOT RULING THAT THE RTC ACTED WITHOUT OR
IN EXCESS OF ITS JURISDICTION OR WITH GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION IN ISSUING A WRIT OF
POSSESSION IN FAVOR OF RESPONDENT.
A.1......The RTC patently exceeded the scope of its
authority and acted with grave abuse of discretion in
ordering the immediate delivery of possession of the
Property to respondent as said order exceeded the
parameters of the final and executory decision and
constituted a variance thereof.
B.......THE HONORABLE COURT OF APPEALS ERRED
IN HOLDING THAT PETITIONER IS NOT ENTITLED TO
THE POSSESSION OF THE PROPERTY PRIOR TO
THE PAYMENT OF RESPONDENTS MORTGAGE
LOAN.

possession in favor of respondent since these decisions affirmed respondents

title over the subject property. As the sole owner, respondent has the right to
enjoy her property, without any other limitations than those established by law.
[13]
Corollary to such right, respondent also has the right to exclude from the
possession of her property any other person to whom she has not transmitted
such property.[14]
It is true that, in some instances, the actual possessor has some valid rights over
the property enforceable even against the owner thereof, such as in the case of a
tenant or lessee.[15] Petitioner anchors his own claim to possession upon his
declared status as a mortgagee. In his Memorandum, he argues that
4.8 It was respondent who asserted that her transfer of
the Property to petitioner was by way of an equitable
mortgage and not by sale. After her assertion was
sustained by the Courts, respondent cannot now ignore or
disregard the legal effects of such judicial declaration
regarding the nature of the transaction.
xxx......xxx......xxx

C.......THE HONORABLE COURT OF APPEALS ERRED

IN RULING THAT PETITIONER WAS NOT A BUILDER
IN GOOD FAITH.

4.13 Having delivered possession of the Property to

petitioner as part of the constitution of the equitable
mortgage thereon, respondent is not entitled to the return
of the Property unless and until the mortgage loan is
discharged by full payment thereof. Petitioners right as
mortgagee to retain possession of the Property so long as
the mortgage loan remains unpaid is further supported by
the rule that a mortgage may not be extinguished even
though then mortgagor-debtor may have made partial
payments on the mortgage loan:

D.......THE HONORABLE COURT OF APPEALS ERRED

IN RULING THAT PETITIONER IS ENTITLED TO
INTEREST COMPUTED ONLY FROM THE TIME WHEN
THE JUDGMENT DECLARING THE CONTRACT TO BE
AN EQUITABLE MORTGAGE BECAME FINAL.[9]

"Art. 2089. A pledge or mortgage

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

Basically, petitioner claims that he is entitled to retain possession of the subject

property until payment of the loan and the value of the necessary and useful
improvements he made upon such property.[10] According to petitioner, neither the
Court of Appeals decision in G.R. CV No. 42065 nor this Courts decision in G.R.
No. 120832 ordered immediate delivery of possession of the subject property to
respondent.

"Therefore, the debtors heir who

has paid a part of the debt cannot
ask for the proportionate
extinguishment of the pledge or
mortgage as long as the debt is
not completely satisfied.

The dispositive portion of the March 31, 1995 decision of the Court of Appeals in
G.R. CV No. 42065, which was affirmed by this Court, provides that

"Neither can the creditors heir who

has 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."

IN VIEW OF ALL THE FOREGOING, the judgment

appealed from is REVERSED and SET ASIDEand a new
one entered: (1) dismissing the complaint; (2) declaring
the "Document of Sale and Special Cession of Rights and
Interests" (Exhibit B) dated February 10, 1960, to be an
equitable mortgage not a sale; (3) upholding the validity of
OCT No. P-13038 in the name of Felicitas de Lara; and
(3) declaring null and void OCT No. P-11566 in the name
of plaintiff Cornelio Isaguirre. All other counterclaims for
damages are likewise dismissed. Costs against the
appellee.[11]
Petitioner argues that the abovementioned decision merely settled the following
matters: (1) that the transaction between petitioner and respondent was not a
sale but an equitable mortgage; (2) that OCT No. P-13038 in the name of
respondent is valid; and (3) that OCT No. P-11566 in the name of petitioner is
null and void. Since the aforementioned decision did not direct the immediate
ouster of petitioner from the subject property and the delivery thereof to
respondent, the issuance of the writ of possession by the trial court on June 16,
1998 constituted an unwarranted modification or addition to the final and
executory decision of this Court in G.R. No. 120832.[12]
We do not agree with petitioners contentions. On the contrary, the March 31,
1995 decision of the appellate court, which was affirmed by this Court on July 8,
1996, served as more than adequate basis for the issuance of the writ of

(Emphasis supplied.)
xxx......xxx......xxx
4.14 ......To require petitioner to deliver possession of the
Property to respondent prior to the full payment of the
latters mortgage loan would be equivalent to the
cancellation of the mortgage. Such effective cancellation
would render petitioners rights ineffectual and nugatory
and would constitute unwarranted judicial interference.
xxx......xxx......xxx
4.16 The fact of the present case show that respondent
delivered possession of the Property to petitioner upon
the execution of the Deed of Absolute Sale and Special
Cession of Rights and Interest dated 10 February 1960.
Hence, transfer of possession of the Property to petitioner
was an essential part of whatever agreement the parties

entered into, which, in this case, the Supreme Court

affirmed to be an equitable mortgage.
xxx......xxx......xxx
4.19 Petitioner does not have the mistaken notion that the
mortgagee must be in actual possession of the
mortgaged property in order to secure the debt. However,
in this particular case, the delivery of possession of the
Property was an integral part of the contract between
petitioner and respondent. After all, it was supposed to be
a contract of sale. If delivery was not part of the
agreement entered into by the parties in 1960, why did
respondent surrender possession thereof to petitioner in
the first place?
4.20 Now that the Courts have ruled that the transaction
was not a sale but a mortgage, petitioners entitlement to
the possession of the Property should be deemed as one
of the provisions of the mortgage, considering that at the
time the contract was entered into, possession of the
Property was likewise delivered to petitioner. Thus, until
respondent has fully paid her mortgage loan, petitioner
should be allowed to retain possession of the subject
property.[16]
Petitioners position lacks sufficient legal and factual moorings.
A mortgage is a contract entered into in order to secure the fulfillment of a
principal obligation.[17] It is constituted by recording the document in which it
appears with the proper Registry of Property, although, even if it is not recorded,
the mortgage is nevertheless binding between the parties. [18] Thus, the only right
granted by law in favor of the mortgagee is to demand the execution and the
recording of the document in which the mortgage is formalized. [19] As a general
rule, the mortgagor retains possession of the mortgaged property since a
mortgage is merely a lien and title to the property does not pass to the
mortgagee.[20] However, even though a mortgagee does not have possession of
the property, there is no impairment of his security since the mortgage directly
and immediately subjects the property upon which it is imposed, whoever the
possessor may be, to the fulfillment of the obligation for whose security it was
constituted.[21] If the debtor is unable to pay his debt, the mortgage creditor may
institute an action to foreclose the mortgage, whether judicially or extrajudicially,
whereby the mortgaged property will then be sold at a public auction and the
proceeds therefrom given to the creditor to the extent necessary to discharge the
mortgage loan. Apparently, petitioners contention that "[t]o require [him] to deliver
possession of the Property to respondent prior to the full payment of the latters
mortgage loan would be equivalent to the cancellation of the mortgage" is without
basis. Regardless of its possessor, the mortgaged property may still be sold, with
the prescribed formalities, in the event of the debtors default in the payment of
his loan obligation.
Moreover, this Court cannot find any justification in the records to uphold
petitioners contention that respondent delivered possession of the subject
property upon the execution of the "Deed of Sale and Special Cession of Rights
and Interests" on February 10, 1960 and that the transfer of possession to
petitioner must therefore be considered an essential part of the agreement
between the parties. This self-serving assertion of petitioner was directly
contradicted by respondent in her pleadings.[22] Furthermore, nowhere in the
Court of Appeals decisions promulgated on March 31, 1995 (G.R. CV No. 42065)
and on October 5, 1998 (G.R. SP No. 48310), or in our own decision
promulgated on July 8, 1996 (G.R. No. 120832) was it ever established that the
mortgaged properties were delivered by respondent to petitioner.
In Alvano v. Batoon,[23] this Court held that "[a] simple mortgage does not give the
mortgagee a right to the possession of the property unless the mortgage should
contain some special provision to that effect." Regrettably for petitioner, he has
not presented any evidence, other than his own gratuitous statements, to prove
that the real intention of the parties was to allow him to enjoy possession of the
mortgaged property until full payment of the loan.
Therefore, we hold that the trial court correctly issued the writ of possession in
favor of respondent. Such writ was but a necessary consequence of this Courts
ruling in G.R. No. 120832 affirming the validity of the original certificate of title
(OCT No. P-13038) in the name of respondent Felicitas de Lara, while at the

same time nullifying the original certificate of title (OCT No. P-11566) in the name
of petitioner Cornelio Isaguirre. Possession is an essential attribute of ownership;
thus, it would be redundant for respondent to go back to court simply to establish
her right to possess subject property. Contrary to petitioners claims, the issuance
of the writ of possession by the trial court did not constitute an unwarranted
modification of our decision in G.R. No. 120832, but rather, was a necessary
complement thereto.[24] It bears stressing that a judgment is not confined to what
appears upon the face of the decision, but also those necessarily included
therein or necessary thereto.[25]
With regard to the improvements made on the mortgaged property, we confirm
the Court of Appeals characterization of petitioner as a possessor in bad faith.
Based on the factual findings of the appellate court, it is evident that petitioner
knew from the very beginning that there was really no sale and that he held
respondents property as mere security for the payment of the loan obligation.
Therefore, petitioner may claim reimbursement only for necessary expenses;
however, he is not entitled to reimbursement for any useful expenses [26] which he
may have incurred.[27]
Finally, as correctly pointed out by the Court of Appeals, this case should be
remanded to the Regional Trial Court of Davao City for a determination of the
total amount of the loan, the necessary expenses incurred by petitioner, and the
period within which respondent must pay such amount.[28] However, no interest is
due on the loan since there has been no express stipulation in writing. [29]
WHEREFORE, the assailed Decision of the Court of Appeals dated October 5,
1998 and its Resolution dated March 5, 1999 are hereby AFFIRMED.
Respondent is entitled to delivery of possession of the subject property. This
case is hereby REMANDED to the trial court for determination of the amount of
the loan, the necessary expenses incurred by petitioner and the period within
which the respondent must pay the same.
SO ORDERED.
G.R. No. 97401 December 6, 1995
LUIS CASTRO, JR., MARISSA CASTRO, RAMON CASTRO, MARY ANN
CASTRO, CATHERINE CASTRO and ANTONIO CASTRO, petitioners,
vs.
HON. COURT OF APPEALS and UNION BANK OF THE
PHILIPPINES, respondents.

VITUG, J.:
The instant petition for review on certiorari of the decision, 1 dated 11 October
1990, of the Court of Appeals is focused on the issue of whether or not a
residential house, which was constructed by a lessee on a portion of the leased
property theretofore encumbered under a real estate mortgage by the lessor, can
be rightly covered by a writ of possession following the foreclosure sale of the
mortgaged land.
The facts are not in any serious dispute.
On 15 August 1974, Cabanatuan City Colleges obtained a loan from the Bancom
Development Corporation. In order to secure the indebtedness, the college
mortgaged to Bancom two parcels of land covered by TCT No. T-45816 and No.
T-45817 located in Cabanatuan City. The parcels were both within the school
site. While the mortgage was subsisting, the college board of directors agreed to
lease to petitioners a 1,000-square-meter portion of the encumbered property on
which the latter, eventually, built a residential house. Bancom, the mortgagee,
was duly advised of the matter.
The school defaulted in the due payment of the loan. In time, Bancom
extrajudicially foreclosed on the mortgage, and the mortgaged property was sold
at public auction on 22 August 1979 with Bancom coming out to be the only
bidder. A certificate of sale was accordingly executed by the provincial sheriff in
favor of Bancom. Subsequently, the latter assigned its credit to herein private
respondent Union Bank of the Philippines.

On 10 October 1984, following the expiration of the redemption period without

the college having exercised its right of redemption, private respondent
consolidated title to the property.
On 08 May 1985, private respondent filed with the Regional Trial
Court of Nueva Ecija, Branch XXVIII in Cabanatuan City, an exparte motion for the issuance of a writ of possession not only over the
land and school buildings but also the residential house constructed
by petitioners. 2 On 10 May 1985, the lower court granted the motion
and directed the issuance of the corresponding writ.
The ex-officio provincial sheriff, in implementing the writ, thereby also sought the
vacation of the premises by petitioners. When the latter refused, private
respondent filed an ex-parte motion for a special order directing the physical
ouster of the occupants.
On 23 May 1986, petitioners formally entered their appearance in the
proceedings to oppose the ex-parte motion. Petitioners averred that, being the
owners of the residential house which they themselves had built on the
foreclosed property with the prior knowledge of the mortgagee, they could not be
ousted simply on the basis of a petition for a writ of possession under Act No.
3135.
On 27 May 1986, the lower court, 3 nevertheless, issued an order granting private
respondent's motion, and it directed Atty. Luis T. Castro, in representation of
petitioners, to deliver "all the keys to all the rooms and premises" found on the
property foreclosed and authorized, in the event petitioners would refuse to
surrender the keys, private respondent "to enter the premises in question and do
what is best for the preservation of the properties belonging to the Cabanatuan
City Colleges." 4
Petitioners sought reconsideration of the order but the lower court denied the
motion on 13 June 1986. 5 It ruled that the residential building was included in the
writ of possession pursuant to Article 2127 of the Civil Code. Private respondent
still sought clarification of the Order, praying that the court issue another order
specifically mentioning the residential house to be among the property which the
sheriff should deliver to it. 6 Although the court found no need to clarify its
previous ruling, "in the interest of justice and to obviate any possible
misunderstanding between the parties, however, it issued its order of 18 June
1986 stating:

an assumption that the ownership of such accessions and

accessories also belongs to the mortgagor as the owner of the
principal. 10 The provision 11 has thus been seen by the Court, in a
long line of cases beginning in 1909 withBischoff vs. Pomar, 12 to
mean that all improvements subsequently introduced or owned
by the mortgagor on the encumbered property are deemed to form
part of the mortgage. That the improvements are to be considered so
incorporated only if so owned by the mortgagor is a rule that can
hardly be debated since a contract of security, whether, real or
personal, needs as an indispensable element thereof the ownership
by the pledgor or mortgagor of the property pledged or
mortgaged. 13 The rationale should be clear enough in the event of
default on the secured obligation, the foreclosure sale of the property
would naturally be the next step that can expectedly follow. A sale
would result in the transmission of title to the buyer which is feasible
only if the seller can be in a position to convey ownership of the thing
sold (Article 1458, Civil Code). It is to say, in the instant case, that a
foreclosure would be ineffective unless the mortgagor has title to the
property to be foreclosed. 14
It may not be amiss to state, in passing, that in respect of the lease on the
foreclosed property, the buyer at the foreclosure sale merely succeeds to the
rights and obligations of the pledgor-mortgagor subject, however, to the
provisions of Article 1676 of the Civil Code on its possible termination. 15
WHEREFORE, the decision of the Court of Appeals is REVERSED and SET
ASIDE, and a new one is entered declaring the residential house owned by
petitioners to have been improperly included in the writ of possession issued by
the court a quo. No costs.
SO ORDERED.
[G.R. No. 101747. September 24, 1997]
PERFECTA QUINTANILLA, petitioner, vs. COURT OF APPEALS** and RIZAL
COMMERCIAL BANKING CORPORATION, respondents.
DECISION
FRANCISCO, J.:

WHEREFORE, the Ex-Officio Provincial Sheriff, Atty.

Numeriano Y. Galang should implement the order of May
27, 1986 to include therein the residential house being the
subject of dispute between the parties hereto there being
no compelling reasons to exclude it.
SO ORDERED.

Petitioners elevated the case to the Court of Appeals, assailing the orders of the
court a quo of 27 May 1986, 13 June 1986 and 18 June 1986. On 11 October
1990, the appellate court rendered decision affirming the questioned orders. 8
There is merit in the instant petition for review on certiorari.
Shorn of unrelated matters, 9 the basic question raised in the petition relates to
the proper application of Article 2127 of the Civil Code. The law reads:
Art. 2127. The mortgage extends to the natural
accessions, to the improvements, growing fruits, and the
rents or income not yet received when the obligation
becomes due, and to the amount of the indemnity granted
or owing to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for public use,
with the declarations, amplifications and limitations
established by law, whether the estate remains in the
possession of the mortgagor, or passes into the hands of
a third person.
This article extends the effects of the real estate mortgage to
accessions and accessories found on the hypothecated property
when the secured obligation becomes due. The law is predicated on

The antecedents, as found by the trial court and affirmed by the Court of
Appeals (CA), are as follows:
Defendant, x x x (respondent RCBC) is a commercial banking institution,
organized under existing laws, doing business through its duly accredited offices
in the City of Cebu.
On 12 July 1983, plaintiff (petitioner) executed a Real Estate Mortgage on a
parcel of land, situated in the City of Cebu, under TCT No. 39409, in favor of
defendant, RCBC, to secure a credit line in the amount of P45,000.00. Plaintiff
availed, from this collateralized credit line, the amount of P25,000.00 only,
secured and evidenced by promissory note no. 84/615 in the said sum of
P25,000.00, with interest at the rate of 38% per annum, on 23 October 1984.
Plaintiff, Perfecta Quintanilla, who is engaged in business, under the name and
style, Cebu Cane Products, exports rattan products abroad. In connection
therewith, she established with defendant, RCBC, advance credit line, for her
export bills against Letters of Credit from her customers abroad.
Also, on an even date, 23 October 1984, plaintiff secured from defendant, RCBC,
a loan of P100,000.00, against her advance export credit line, secured by
promissory note no. 84/614, on a maturing period, one month from thence.
Again on November 8, 1984, plaintiff secured another advance credit of
P100,000.00 against her advance export credit line, which she again secured by
another promissory note no. 84/632, of even date.
On 20 November 1984, plaintiff shipped stocks of her Cane Products to her
buyer in Belgium, upon a Letter of Credit, under Export Bill No. 84/199, in the

amount of US $10,638.15. Defendant, RCBC, received the proceeds of this

export shipment, in the amount of P208,630.00, from Bank Brussels LambertNew York.
The full amount of the proceeds, was therefore credited to plaintiffs Current
Account No. 218 with defendant bank. Defendant RCBC, then debited plaintiffs
current account, in the amount of P125,000.00 as payment for the latters loan of
P100,000.00 to promissory note no. 84/614 and P25,000.00 to promissory note
no. 84/615. The latter amount was what plaintiff secured by the Real Estate
Mortgage, Exhibit A.
On November 27, 1984, plaintiff made another shipment from her Cebu Cane
Products, under Export Bill No. 84-205 for US $10,083.00. Consequently, RCBC
sent the export documents to the issuing bank for collection of this, latter export
shipment.
However, on November 28, 1984, the issuing bank, Brussels Lambert-Belgium,
refused payment on Export Bill No. 84-199, and demanded reimbursement from
defendant, RCBC, the amount of US $20,721.70, invoking its right for immediate
reimbursement, under Art. 16 of the International Chamber of Commerce (ICC)
Publication 400 through telex, to which plaintiff was so notified by defendant,
RCBC. The latter, subsequently advised plaintiff to communicate and arrange
matters with her buyers and customers in Belgium. After persistent demand for
reimbursement, from Bank Brussels Lambert-Belgium, defendant, RCBC,
returned and reimbursed the total sum of US $20,721.70 to Bank Brussels
Lambert-Belgium.
RCBC, then proceeded to revert the credit and debit entries on plaintiffs current
account, which it supposedly paid to promissory note nos. 84/614 and 84/615
and demanded payments from the plaintiff, the whole amount, including the
amount of P25,000.00, it collaterized by the real estate mortgage, Exh. A. [1]
For failing to comply with the demands, RCBC sought to foreclose the real estate
mortgage, not only for the amount of P25,000.00 but also for the amount
of P500,994.39 which represents petitioners subsequent credit accommodations.
RCBC alleged that the latter amount was likewise secured under the mortgage
contract.
Rejecting RCBCs claim, petitioner filed an action for specific performance,
damages and attorneys fees with prayer for a writ of preliminary injunction,
alleging that the obligation for which the mortgage was executed was only for the
maximum amount of P45,000.00 and that petitioner had already paid her other
unsecured loans.RCBC filed an answer denying petitioners claim and set up a
counterclaim for the payment of all her other outstanding loans totalling
P500,694.39.
After trial, the RTC rendered judgment, the dispositive portion of which

Aggrieved, petitioner moved for a partial reconsideration, arguing for the first time
that respondent RCBCs counterclaim is permissive in nature for which the trial
court has not acquired jurisdiction due to the non-payment of the docket fees.
Petitioners motion was denied by the CA, though it amended its earlier decision
by ordering respondent RCBC to pay docket fees on the counterclaim. [4] Hence
this petition.
The pivotal issue is whether respondent RCBCs counterclaim is
compulsory or permissive in nature, the resolution of which hinges on the
interpretation of the following provision in the real estate mortgage which reads:
That for and in consideration of certain loans overdrafts and other credit
accommodations obtained from the mortgagee by the same and those that
hereafter be obtained, the principal of all of which is hereby fixed at forty-five
Thousand Pesos (P45,000.00), Philippine Currency, as well as those that the
mortgagee may extend to the mortgagor including interest and expenses of
any other obligation owing to the mortgagee, whether direct or indirect, principal
or secondary, as appears in the accounts, books and records of the mortgagee,
the mortgagor does hereby transfer and convey by way of mortgage unto the
mortgagee x x x (emphasis supplied).[5]
We disagree with the CAs ruling that RCBCs counterclaim is
permissive. In Ajax Marketing & Development Corporation vs. Court of Appeals,
[6]
a substantially similar provision appears, 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/YLANGYLANG MERCHANDISING COMPANY detailed as follows:
Nature Date Granted Due Amount or Line
Date
Loans and/or P600,000.00
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.
xxxxxxxxx

reads:
WHEREFORE, the writ of preliminary injunction, issued by this Court is hereby
lifted. The defendant, RCBC, and defendants may proceed to foreclose the real
estate mortgage for the satisfaction of plaintiffs obligation of P25,000.00 plus
stipulated interests thereon in accordance with the terms thereof, but not to
satisfy the other obligation of the plaintiff in excess thereof, which the said
mortgage did not secure, therefor. No pronouncement as to costs.
SO ORDERED.[2]
RCBC appealed to the CA imputing error to the trial court in not granting its
counterclaim and in ruling that the foreclosure of the mortgage was limited to the
P25,000.00 availed of by petitioner. The CA affirmed the RTC ruling in so far as
the foreclosure was limited to the amount of P25,000.00 but modified the same
by granting the counterclaim. The dispositive portion of the CA decision provides:
Premises considered, We affirm the appealed decision with the modification
consisting of ordering the appellee to pay the appellant, on the latters counterclaims, the sum of P500,694.39 due as of May 22, 1987 plus interest on the
principal sum of P298,097.47 at the rate of 18% per annum from May 23, 1987
and penalty charges of 12% per annum from the same date, until fully paid, and
the sum of P8,000.00 as reasonable attorneys fees plus the costs.
SO ORDERED.[3]

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, x x x.
This Court in the Ajax case, in upholding the validity of the extra-judicial
foreclosure of mortgage which included the loans obtained in excess of the
amount fixed in the mortgage contract as expressed in said proviso, ruled that:
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 mortgage property
shall also answer for future loans or advancements, then the same is not
improper as it is valid and binding between the parties. [7] (Italics supplied).
The amount stated in the mortgage contract between petitioner and RCBC
does not limit the amount for which it may stand as security considering that
under the terms of that contract, the intent to secure future indebtedness is
apparent. It would have been different if the mortgage contract in the case at bar
simply provides that it was intended only to secure the payment of the same and
those that may hereafter be obtained the principal of all of which is hereby fixed

at P45,000.00...[8] Yet the parties to the mortgage contract further stipulated: as

well as those that the Mortgagee may extend to the Mortgagor. [9] The latter
phrase clearly means that the mortgage is not limited to just the fixed amount but
also covers other credit accommodations in excess thereof. Thus, the general
rule that mortgage must be limited to the amount mentioned in the mortgage
cannot be applied herein. Rather by specific provision and agreement of the
parties, the mortgage contract was designed to secure even future
advancements.[10]
Having determined that the mortgage contract extends even to petitioners
other advances in excess of the P25,000.00, RCBCs counterclaim for such other
advances cannot but be considered as compulsory in nature. Such counterclaim
necessarily arises out of the transaction or occurrence that is the subject matter
of petitioners claim which is to enjoin the foreclosure of the latters other credit
accommodations in excess of P25,000.00. It thus satisfies the compelling test of
compulsoriness which requires a logical relationship between the claim and
counterclaim, that is, where conducting separate trials of the respective claims of
the parties would entail a substantial duplication of effort and time by the parties
and the court.[11] Both claims are merely offshoots of the same basic controversy.
[12]
Moreover, RCBCs counterclaim does not require for its adjudication the
presence of third parties upon whom the court cannot acquire jurisdiction and the
court has jurisdiction to entertain the claim. [13]
RCBCs counterclaim being compulsory in nature, there is no need to pay
docket fees therefor.Nevertheless, RCBC is still bound to pay the docket fees as
ordered by the CA in its August 19, 1991 Resolution, having failed to appeal
therefrom. The entrenched procedural rule in this jurisdiction is that a party who
has not himself appealed cannot obtain from the appellate court any affirmative
relief other than those granted in the decision of the lower court. [14]
Finally, even granting that RCBCs counterclaim is permissive where the
trial court has no/cannot exercise jurisdiction over said claim unless/until the
corresponding docket fees therefor has been paid, petitioner is however barred
by estoppel from challenging the trial courts jurisdiction. We quote with approval
the CAs observation in this matter.
x x x. The record clearly shows that never once, during the proceedings below,
was the question of docket fees and of jurisdiction raised by the appellee. Not
only did appellee not bother to answer counterclaim but she did [not] even hint at
it in her memorandum, notwithstanding that the Bank adduced the required
evidence to prove the counterclaim which was included in the Banks former (sic)
offer of evidence (EXG. C, Record, pp; 114-117). Neither was the issue raised in
appellees brief, again notwithstanding the fact that the counterclaim is the subject
of the first and second errors of the brief of the Bank, against which appellee did
not raise a single argument. The issue surfaced for the first time in the motion for
partial reconsideration filed by the appellee.
The objection should have been raised more seasonably, before the trial court or
at the very least in appellees brief. In the circumstances appellee is barred by
laches from raising the question of jurisdiction at this very late stage (Vide
Maersk vs. Court of Appeals, 187 SCRA 646).[15]
In addition, it has been consistently held by this Court that while jurisdiction may
be assailed at any stage, a partys active participation in the proceedings before a
court without jurisdiction will estop such party from assailing such lack of it. It is
an undesirable practice of a party participating in the proceedings and submitting
his case for decision and then accepting the judgment, only if favorable, and
attacking it for lack of jurisdiction, when adverse. [16]
WHEREFORE, save for the modification anent the nature of RCBCs
counterclaim and its related incidents, the decision of the Court of Appeals
promulgated October 31, 1990 as amended by its Resolution promulgated
August 19, 1991 is hereby AFFIRMED in all other respects.
SO ORDERED.
G.R. No. 118552

February 5, 1996

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,

vs.
COURT OF APPEALS and THE SPOUSES ALEJANDRO and AMPARO
CASAFRANCA, respondents.

DECISION
DAVIDE, JR., J.:
This petition for review on certiorari seeks: (1) a modification of the decision of 29
April 1994 of the Court of Appeals in CA-G.R. CV No. 38332 1 affirming in toto the
20 April 1992 ruling of the Regional Trial Court (RTC) of Cebu, Branch 16, in Civil
Case No. CEB-6779;2 and (2) a review of the appellate court's resolution of 4
January 19953 denying the petitioner's Motion for Partial Reconsideration 4 of the
aforementioned decision.
The sole issue in this case is whether, in the foreclosure of a real estate
mortgage, the penalties stipulated in two promissory notes secured by the
mortgage may be charged against the mortgagors as part of the sums secured,
although the mortgage contract does not mention the said penalties.
The Court of Appeals adopted the trial court's findings of facts, to wit:
The following antecedental facts are supported by the pleadings and
evidence on record: Plaintiff spouses Alejandro and Amparo
Casafranca, used to be the owners of Lot 802-B-2-B-2-F-1 of the
subdivision plan Psd-698545, located in Cebu City and covered by
TCT No. 32769 (Exh A). On 3 December 1976 they sold the lot to
Carlos Po who paid part of the agreed price. The latter, after securing
a title in his name (TCT No. 66446), mortgaged the lot to the
Philippine Bank of Communications (PBCom for short) to secure a
loan of P330,000 (Exh B). It appears that in a civil action that ensued
between them, plaintiff spouses obtained a favorable judgment
against Carlos Po (Exh C). Later, in an auction sale to satisfy Carlos
Po's judgment obligation, plaintiff spouses acquired the aforesaid lot
and a Certificate of Sale was executed in their favor (Exh D).
Meanwhile, under date of 9 September 1980 PBCom applied for
extrajudicial foreclosure of the mortgage executed by Carlos Po (Exh
E), and in the succeeding auction sale held on 4 November 1980, it
acquired the lot at its winning bid of P1,006,540.56. The
corresponding Certificate of Sale was then executed in its favor (Exh
F). It appears further that sometime in 1981 plaintiff Amparo
Casafranca who had stepped into the shoes of mortgagor Carlos Po
by virtue of the auction sale in her favor (Exh D) offered to redeem
the property from PBCom by tendering to its manager, Isidore Falek,
a check in the amount of P500,000 which, in her estimate, would be
sufficient to settle the account of Carlos Po. PBCom did not accept
the check as it insisted that any such redemption should be at the
price it acquired the lot in the auction sale. In reaction, plaintiffs filed
against PBCom Civil Case No. R-21700 in the RTC of Cebu for
nullification of the foreclosure and auction sale (Exh M). In a
judgment which became final and executory on 17 September 1986
(Exh H) the Court set aside the extrajudicial foreclosure and auction
sale and declared that the obligation secured by the mortgage
executed by Carlos Po was only P330,000 plus stipulated interest
and charges (Exh G). Subsequently, in a letter dated 4 December
1986 PBCom advised plaintiff spouses to pay the sum of
P884,281.38 purportedly representing Carlos Po's principal account
of P330,000, interest and charges thereon, attorney's fee[s] and
realty taxes which it paid for the lot (Exh I). Plaintiffs, however, did not
agree with said Statement of Account and since the account
remained unpaid, PBCom again applied for extrajudicial foreclosure
of mortgage (Exh J), which culminated in an auction sale of the lot on
2 April 1987, during which it was sold to Natalie Limchio for
P1,184,000 (Exh L).
On 6 April 1988 plaintiffs commenced the present action to nullify the
auction sale in favor of Natalie Limchio. It is alleged in the complaint
that the second foreclosure was void as it was based on a bloated
account. Plaintiffs further alleged that PBCom refused to turn over the
correct amount of residue after paying off the mortgage and costs of
the sale. Upon plaintiffs' application, the Court issued on 7 April 1988
a TRO enjoining defendant sheriffs from transferring the title of the lot
in favor of defendant Natalie Limchio and the latter, from taking
possession of the lot. This was followed by a preliminary injunctive
writ which was issued after hearing and upon plaintiffs' filing of a
bond. However, before the pre-trial conference could be held,
plaintiffs signified their intention to pursue only their alternative
demand for the residue or balance of the proceeds of the auction sale
less the correct outstanding account which was secured by the
mortgage. For this purpose they filed an amended complaint only
against PBCom (pp. 296-305, rollo) which was admitted, in which
they pray for recovery of the sum of P625,724.90 as residue after

paying off the outstanding account [to] the tune of P558,275.00, realty
taxes paid by PBCom and costs of the foreclosure proceeding.
Hence, what is left for the Court to ascertain is the true or correct
account of Carlos Po as of the auction sale on 2 April 1987 after
which, the determination of the residue would follow. . . . 5
As to the amounts due the parties, the trial court computed them as follows:
The mortgage contract (Exh B) explicitly provides for interest of
"Twelve per cent (12%) per annum or at such other higher rate or
rates as may be fixed by the MORTGAGEE from time to time, and
shall be payable at the end of every month or otherwise, as the
MORTGAGEE may elect and, if not so paid, shall be added to, and
become part of, the principal and shall earn interest at the same rate
as the principal." It is then evident that the parties agreed to capitalize
the interest due and unpaid, which as added principal, shall earn new
interest. Herein lies the discrepancy in the computation respectively
submitted by plaintiffs (pp. 190-191; 204-209, rollo) and PBCom (pp.
181-183, rollo), for while the former assessed only conventional or
simple interest, the latter computed compound interest conformable
to the mortgage contract. In this connection, the Court finds PBCom's
computation of interest to be in accordance with the contractual
stipulations of the parties. It may be stressed that the increase in the
rate of interest from 12% to 14% as of 1 December 1979 is
authorized in the mortgage contract itself as sanctioned by CB
Circular No. 705 dated 1 December 1979. PBCom is further entitled
to reimbursement for realty taxes it paid for the lot. But of course,
penalties and charges are not due for want of stipulation in the
mortgage contract.
To recapitulate, the principal loan obtained by Carlos Po (now
succeeded by plaintiffs) on 15 December 1976 was P330,000.
Interest thereon for the first year at 12% per annum was retained or
deducted from the proceeds of the loan. For the next two (2) years or
from 25 December 1977 to 30 November 1979, compound interests
earned at the same rate reached P77,660. And then from 1
December 1979 to 2 April 1987 (date of auction sale) the rate of
interest was raised to 14% per annum, as authorized in the mortgage
contract. At such rate, compound interests for said period would be in
the sum of P343,805. Adding both interest earnings to the principal
obligation, the total account would then be P751,465. Additionally, the
mortgage contract provides for attorney's fee[s] equivalent to 10% of
the amounts due. Hence, the sum of P75,146.50 in the concept of
attorney's fee[s] would raise the account to P826,611.50. Finally, the
amount of P83,028.18 representing realty taxes paid by PBCom for
the lot, inclusive of interest, which must be reimbursed, will bring the
grand total of the account to P909,639.68.
On the other hand, the publication and other expenses incurred in the
foreclosure and auction sale [to] the tune of P707 should be deducted
from the amount of P1,184,000 which Natalie Limchio paid for the lot,
leaving net proceeds of P1,183,293. Subtracting therefrom the total
account due to PBCom, the residue would be P273,653.32, which
must be delivered to plaintiffs.6
In the light of the above, the trial court thus ruled:
WHEREFORE, foregoing premises considered, judgment is hereby
rendered in favor of plaintiffs Alejandro and Amparo Casafranca for
the sum of P273,653.32 representing the residue or balance of the
proceeds of the auction sale conducted on 2 April 1987 after
deducting therefrom publication expenses and paying off the total
account due to defendant Philippine Bank of Communications, and
ordering the latter to pay unto plaintiffs the aforesaid amount.
SO ORDERED.7
Both parties appealed from the above judgment to the Court of Appeals. The
petitioner questioned the lower court's failure to include in its computation the
penalty stipulated in the aforementioned promissory notes. On the other hand,
the private respondents advanced that: (1) the interest on the sum due to the
petitioner should have stopped running on 31 July 1981; (2) the lower court
should have allowed twelve percent (12%) interest per annum on the amount
awarded to the private respondents from 3 April 1987 until the obligation was fully
paid; and (3) the lower court should have awarded the private respondents moral
and exemplary damages, attorney's fees, and litigation expenses.

The Court of Appeals affirmed the decision of the trial court in toto and
subsequently denied the parties' separate motions for reconsideration.
The petitioner and the private respondents then instituted with this Court
separate petitions for certiorari under Rule 45 of the Rules of Court. While that of
the petitioner was docketed as G.R. No. 118552 (this case), that of the private
respondents was docketed as G.R. No. 118809 and assigned to the Second
Division. However, the two actions were not consolidated.
The private respondents in this case filed their Comment 8 to the petition as
required in the resolution of 8 February 1995. 9
On 13 March 1995, the Second Division issued a resolution
which dismissed G.R. No. 118809, thus:
[F]or failure to persuasively demonstrate any reversible error in the
challenged judgment of the Fourth Division of the Court of Appeals
promulgated on April 29, 1994 - affirming in toto that of the Regional
Trial Court of Cebu rendered by Judge (now Court of Appeals
Justice) Godardo A. Jacinto on April 20, 1992 (Civil Case No. CEB6779) - it appearing on the contrary, that both judgments correctly
appreciated the evidence and applied the relevant legal provisions in
ruling, essentially, that there had been no valid tender of payment by
petitioners of the amount of the mortgage liability burdening the
property in question, and that the computation of the amount rightly
due said petitioners had been correctly made in accordance with the
law applicable to the case (Act No. 3135, as amended). Moreover,
the record discloses no important and special reason for the exercise
by this Court of its discretionary power of review in this case. 10
On 9 May 1995, this Court received the private respondents'
Manifestation11 drawing our attention to this resolution.
On 23 August 1995, we gave due course to the petition 12 and required the parties
to submit their respective memoranda, which they subsequently did. The private
respondents contended that "[a]ctually there are no more issues left for this
Honorable Court to decide because all the issues in controversy in this case has
[sic] already been decided with finality by the Second Division of the Supreme
Court in G.R. No. 118809."13 To which, the petitioner replied14 that the G.R. No.
118809 resolution dispensed with only those issues raised therein by the private
respondents and did not touch on the questions raised in this case.
The petition is not impressed with merit.
The two promissory notes in question, signed by Carlos Po,
worded and their pertinent provisions read:

15

are similarly

For value received, I/we jointly and severally, promise to pay the
Philippine Bank of Communications, at its office in the City of Cebu,
Philippines the sum of THREE HUNDRED THOUSAND PESOS
(P300,000.00), Philippine Currency, together with interest thereon at
the rate of TWELVE % per annum until paid, which interest rate the
Bank may at any time without notice, raise within the limits allowed by
law, and I/we also agree to pay, jointly and solidarily 12% per annum
penalty charge, by way of liquidated damages should this note be
unpaid or is not renewed on due date.
xxx

xxx

xxx

Should it become necessary to collect this note through an attorneyat-law, I/we hereby expressly agree to pay, jointly and severally, ten
per cent (10%) of the total amount due on this note as attorney's fees
which in no case shall be less than P100.00 exclusive of all costs and
fees allowed by law stipulated in the contract of real estate mortgage
if any there be.
while the mortgage contract provides in part: 16
This mortgage is given as security for the payment to the
MORTGAGEE on demand or at maturity, as the case may be, of all
promissory notes, letters of credit, trust receipts, bills of exchange,
drafts, overdrafts and all other obligations of every kind already
incurred or which hereafter may be incurred by the MORTGAGOR(S)
and Po's All Electrical Supply either as principal debtor(s) or as
surety(ies) or in any other capacity, including discounts of Chinese

and other drafts, bills of exchange, promissory notes, even without

any further endorsements by the Mortgagor(s), said property or
properties to stand security for the payment of the said obligations to
the fullest extent and for all that it is (or they are) worth, to the extent
of THREE HUNDRED THIRTY THOUSAND PESOS (P330,000.00)
Philippine Currency.
xxx

xxx

xxx

This mortgage shall be subject to the following conditions, to wit:

FIRST: The interest on the obligations secured by this mortgage shall
be computed at the rate of Twelve per cent (12%) per annum or at
such other or higher rate or rates as may be fixed by the
MORTGAGEE from time to time, and shall be payable at the end of
every month or otherwise, as the MORTGAGEE may elect and if not
so paid, shall be added to, and become part of, the principal and shall
earn interest at the same rate as the principal.
xxx

xxx

xxx

EIGHT: The MORTGAGOR(S) shall, during the existence of this

mortgage, promptly pay when due all taxes or assessments of every
kind that may be levied upon the property or properties hereby
mortgaged and deliver the corresponding tax receipts to the
MORTGAGEE, . . . In case of failure on the part of the
MORTGAGOR(S) to comply with the provisions of this condition, the
MORTGAGEE may and is hereby authorized to pay such taxes or
assessments and to have the buildings insured; and any sum or
sums so spent by the MORTGAGEE shall be fully secured hereby
and be subject to the terms hereof. . . .
xxx

xxx

xxx

ELEVENTH: The expenses incurred in the drafting,

acknowledgement and the registration of this mortgage and of its
cancellation, shall be for the account of, and shall be paid by, the
MORTGAGOR(S).
TWELFTH: Should the MORTGAGEE find it necessary to resort to
the courts in order to collect any amount which may be due, the
interest thereon or the expenses incurred on account of the matters
enumerated in the previous paragraphs, or should the MORTGAGEE
in any manner and for any reason be involved in litigation on account
of the property or properties mortgaged, or should foreclosure
proceedings be instituted in accordance with the fourth condition
hereof or should the MORTGAGOR(S) encumber the property or
properties hereby mortgaged with a second mortgage without the
written consent of the MORTGAGEE, the MORTGAGEE shall be
allowed a sum equivalent to Ten Per Centum (10%) of all the
amounts due, but in no case less than THIRTY THREE THOUSAND
PESOS as attorney's fees, said amount to be considered part of the
principal sum hereby secured, this mortgage answering for its
payment accordingly.
We immediately discern that the mortgage contract does not at all mention the
penalties stipulated in the promissory notes. However, the petitioner insists that
the penalties are covered by the following provision of the mortgage contract:
This mortgage is given as security for the payment to the
MORTGAGEE on demand or at maturity, as the case may be, of all
promissory notes, letters of credit, trust receipts, bills of exchange,
drafts, overdrafts and all other obligations of every kind already
incurred or which hereafter may be incurred. . . .
The petitioner's insistence is based on the supposed rule:
[T]hat the determination of the mortgage debt would not be limited on
the mortgage contract itself if from the face thereof, it is apparent that
other obligations are also intended to be secured.
To bolster its argument, the petitioner relies on the cases represented by Mojica
vs. Court of Appeals 17 which held:

It has long been settled by a long line of decisions that mortgages 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.18
The Court is unconvinced for the cases relied upon by the petitioner are
inapplicable. The doctrine first laid down in Lim Julian vs. Lutero19 pertains only to
mortgages securing future advancements. The petitioner would not have been
misled into thinking otherwise had it properly quoted Mojica in its petition. The
following explanation is helpful to distinguish future advancements from the loan
in the case at bench:
It is not uncommon that persons enter into a contract whereby they
draw sums of money from their creditors, usually banks, from time to
time, and as security therefor execute a mortgage on their property.
Such contracts are sometimes executed for an account smaller or
larger than that actually borrowed. Thus, it may appear in the contract
that the loan secured by the mortgage is only for P10,000 when by
reason of advancements made by the creditor to the debtor the
amount ultimately drawn and borrowed is P20,000. Under these
circumstances it is inequitable to consider that the mortgage can be
foreclosed only for the amount of P10,000. Indeed, no bank or
creditor would be willing to make such advancements which are in
excess of the amount stipulated if the payment thereof is not secured.
. . .20
The obligation in this case was not a series of indeterminate sums incurred over
a period of time, but two specific amounts procured in a single instance. Thus,
the inapplicability of Lim Julian. Instead, what applies here is the general rule that
"an action to foreclose a mortgage must be limited to the amount mentioned in
the mortgage."21
Aside from the foregoing, other factors militate against the petitioner's stance.
The mortgage provision relied upon by the petitioner is known in American
jurisprudence as a "dragnet" clause, which is specifically phrased to subsume all
debts of past or future origin. Such clauses are "carefully scrutinized and strictly
construed."22
The mortgage contract is also one of adhesion as it was prepared solely by the
petitioner and the only participation of the other party was the affixing of his
signature or "adhesion" thereto. Being a contract of adhesion, the mortgage is to
be strictly construed against the petitioner, the party which prepared the
agreement.23
A reading, not only of the earlier quoted provision, but of the entire mortgage
contract yields no mention of penalty charges.24 Construing this silence strictly
against the petitioner, it can fairly be concluded that the petitioner did not intend
to include the penalties on the promissory notes in the secured amount. This
explains the finding by the trial court, as affirmed by the Court of Appeals, that
"penalties and charges are not due for want of stipulation in the mortgage
contract."25
Indeed, a mortgage must sufficiently describe the debt sought to be secured,
which description must not be such as to mislead or deceive, and an obligation is
not secured by a mortgage unless it comes fairly within the terms of the
mortgage.26 In this case, the mortgage contract provides that it secures notes and
other evidences of indebtedness. Under the rule of ejusdem generis, 27 where a
description of things of a particular class or kind is "accompanied by words of a
generic character, the generic words will usually be limited to things of a kindred
nature with those particularly enumerated. . . ." 28 A penalty charge does not
belong to the species of obligations enumerated in the mortgage, hence, the said
contract cannot be understood to secure the penalty.
There is also sufficient authority to declare that any ambiguity in a contract whose
terms are susceptible of different interpretations must be read against the party
who drafted it.29
A mortgage and a note secured by it are deemed parts of one transaction and
are construed together,30 thus, an ambiguity is created when the notes provide for
the payment of a penalty but the mortgage contract does not. Construing the
ambiguity against the petitioner, it follows that no penalty was intended to be
covered by the mortgage. The mortgage contract consisted of three pages with
no less than seventeen conditions in fine print; it included provisions for interest
and attorney's fees similar to those in the promissory notes; and it even provided

for the payment of taxes and insurance charges. Plainly, the petitioner can be as
specific as it wants to be, yet it simply did not specify nor even allude to, that the
penalty in the promissory notes would be secured by the mortgage. This can then
only be interpreted to mean that the petitioner had no design of including the
penalty in the amount secured.
It should also be noted that the private respondents consistently excluded
penalty charges in their computation of the amount due to the petitioner,31 while
the petitioner seemed indecisive in including the said charges.
In its Manifestation32 of 14 May 1988 before the trial court, the petitioner
computed the penalty charge as follows:

Penalty charge on the principal amount of P330,000,00 from Dec.

25, 1977 to April 2, 1987 at the rate of 8% per
annum

The promissory notes provided for a 12% per annum penalty, 33 not eight percent
(8%). The petitioner explained this discrepancy in its Memorandum 34 submitted
to the trial court, claiming:
On the contrary, the bank's computation of the actual amount of the
mortgage debt should be upheld. In fact, the bank was lenient on the
spouses in computing the amount of the debt. For instance, the rate
of charges stipulated is 12% per annum . . . Yet the bank computed
the charges at a much lesser rate . . . thereby lessening the actual
amount of the mortgage debt.35
The petitioner, however, included in its Offer of Exhibits: 36

14. EXHIBIT "14"

Promissory Note No. 3838

dated 25 October 1977.

petitioner's imperfection, and the latter must bear the consequences of its
failings.
It is interesting to note that the petition in this case did not include a
computation of the sum due as penalty which is the very matter in
dispute. The petitioner merely pegged its claim at "12% per annum on
the principal amount of P330,000.00 computed from 1977," 38 which
was likewise a departure from the 8% interest rate which it insisted
upon during trial.
After interpreting the mortgage contract strictly against the petitioner, considering
the intention of the parties as evidenced by their various pleadings and
assertions, the inescapable conclusion is that the mortgage contract did not
authorize the petitioner to include in the secured amount the penalty stipulated in
the promissory notes. The mortgage contract did not contain a trace of the said
penalty and, proceeding by the rule that "an action to foreclose a mortgage must
be limited to the amount mentioned in the mortgage," such penalty can not be
recovered on the foreclosure of the mortgage.
WHEREFORE, finding no reversible error on the part of respondent Court of
Appeals, its challenged decision of 29 April 1994 in CA-G.R. CV No. 38332 is
hereby AFFIRMED in toto.
Costs against the petitioner.
SO ORDERED.
G.R. No. 77502 January 15, 1988
EMILIA B. SANTIAGO, plaintiff-appellant,
vs.
PIONEER SAVINGS AND LOAN BANK, ET. AL., defendants-appellees.

MELENCIO-HERRERA, J.:
An appeal certified by the Court of Appeals to this Tribunal for determination
since only a question of law is involved.

"14-A"

Stipulation on penalty/bank charges.

The facts are not controverted.

Plaintiff-appellant, Emilia P. Santiago, is the registered owner of a parcel of land
situated at Polo, Valenzuela, Metro Manila, with an area of approximately 39,007
square meters, covered by T.C.T. No. B-41669 (briefly, the Title) of the Register
of Deeds of Caloocan City (hereinafter, simply the Disputed Property).

PURPOSE:
. . . 3) It is stipulated that PBCom could impose penalty charges of
12% per annum; and 4) PBCom was liberal on plaintiffs as it did not
impose the full extent of the stipulated charges.
Far then from being a display of lenience or liberality, the above circumstances
evince the petitioner's uncertainty as to whether penalty charges were actually
due it. In fact, in a statement of account 37 signed by the petitioner's Senior VicePresident, Isidore Falek, there was no mention of a penalty charge, although
there was an entry stating:

On 7 April 1983, plaintiff-appellant executed a Special Power of Attorney in favor

of Construction Resources Corporation of the Philippines (CRCP, for short)
authorizing and empowering CRCP:
1. To borrow money and make, execute, sign and deliver
mortgages of real estate now owned by me and standing
in my name and to make, sign, execute and deliver any
and all promissory notes necessary in the premises.

Interest:
xxx

8% Bank charges

xxx

xxx

P248,233.33

Furthermore, the promissory notes are clear that the penalty shall be at 12% per
annum, neither more nor less. Thus, when the petitioner claims that under the
same notes it could impose, as in fact it did, the lower penalty of 8% - contrary to
what was covenanted - the petitioner only reveals that it is wont to stipulate what
it does not mean. The private respondent then should not be faulted for the

2. For the purpose of these presents, or for the purpose of

securing the payment of any loan, indebtedness or
obligation which my attorney-in-fact may obtain or
contract with the bank, its renewal, extension of payment
of the whole or any part thereof, said attorney-in-fact is
hereby authorized and empowered to transfer and convey
by way of mortgage in favor of the bank, ... (the Disputed
Property).
On 8 April 1983, CRCP executed a Real Estate Mortgage over the Disputed
Property in favor of FINASIA Investment and Finance Corporation to secure a
loan of P1 million. The mortgage contract specifically provided that in the event of
default in payment, the mortgagee may immediately foreclose the mortgage

judicially or extrajudicially. The promissory note evidencing the indebtedness was

dated 4 March 1983.
The Special Power of Attorney executed by plaintiff-appellant in CRCP's favor,
the Real Estate Mortgage by CRCP in favor of FINASIA, together with the Board
Resolution dated 28 March 1983 authorizing the CRCP President to sign for and
on its behalf, were duly annotated on the Title on 12 April 1983.
On 29 July 1983, FINASIA executed in favor of defendant-appellee, Pioneer
Savings & Loan Bank, Inc. (Defendant Bank, for brevity), an "Outright Sale of
Receivables without Recourse" including the receivable of P610,752.59 from
CRCP.
On 21 May 1984, FINASIA executed a "Supplemental Deed of Assignment" in
favor of Defendant Bank confirming and ratifying the assignment in the latter's
favor of the receivable of P610,752.59 from CRCP and of the mortgage
constituted by CRCP over the disputed property.
On 12 July 1984, the aforesaid Supplemental Deed of Assignment was inscribed
on the Title.
CRCP failed to settle its obligation and Defendant Bank opted for extrajudicial
foreclosure of the mortgage. The notice of auction sale was scheduled on 16 May
1985.

Plaintiff-appellant maintains that:

I. The Lower Court erred in dismissing the complaint and
lifting the Preliminary Injunction by relying solely on the
admission of the counsel of the plaintiff-appellant of
certain documentary exhibits presented by the counsel of
the defendant-appellee.
II. The Lower Court erred in relying on the case
of Wenceslao Vinzons Tan vs. Director of Forestrywhich it
qualifies as "on all fours with the case at bar."
III. The Lower Court erred in ignoring the pertinent
doctrines in the Supreme Court cases cited by the
plaintiff-appellant in her Opposition to Motion to Dismiss.
IV. The Lower Court erred in holding that notice of the
scheduled sale of the land sent to the agent (CRCP) is
also Notice to the principal (Plaintiff Appellant), the land
owner.
and prays that she be given "a real day in Court" so that she may testify and give
her side of the case.
Upon the factual and legal context, the errors assigned are without merit.

On 13 May 1985, on learning of the intended sale, plaintiff-appellant filed before

the Regional Trial Court of Valenzuela, Metro Manila, Branch CLXXII, an action
for declaration of nullity of the real estate mortgage with an application for a Writ
of Preliminary Injunction (Civil Case No. 2231-V-55).
On 14 May 1985, the Trial Court 1 issued a Temporary Restraining Order
enjoining the sale at public auction of the Disputed Property.
Basically, plaintiff-appellant claimed in her Complaint that she was not aware of
any real estate mortgage she had executed in favor of Defendant Bank; that she
had not authorized anyone to execute any document for the extrajudicial
foreclosure of the real estate mortgage constituted on the Disputed Property and
that since the notice of Sheriffs sale did not include her as a party to the
foreclosure proceedings, it is not binding on her nor on her property.
Defendant Bank opposed the application for Preliminary Injunction and asserted
its right to extrajudicially foreclose the mortgage on the Disputed Property based
on recorded public documents.
During the hearing on the petition for Preliminary Injunction, plaintiff-appellant,
through counsel, admitted the due execution of plaintiff-appellant's Special Power
of Attorney in favor of CRCP, the Real Estate Mortgage by CRCP to FINASIA, the
Outright Sale of Receivables by FINASIA to Defendant Bank, as well the
Supplemental Deed of Assignment by FINASIA to Defendant Bank.
On 30 May 1985, the Trial Court granted the Petition for Preliminary Injunction
enjoining the public auction sale of the mortgaged property upon plaintiffappellant's posting of a bond in the amount of P100,000.00.
On 7 June 1985, Defendant Bank filed a Motion to Dismiss the main case on the
ground that the complaint did not state a cause of action followed on 24 June
1985 with a Motion for Reconsideration of the Order granting the Writ of
Preliminary Injunction, both of which Motions plaintiff-appellant opposed.
On 30 August 1985, the Trial Court reconsidered its Order of 30 May 1985,
dissolved the Writ of Preliminary Injunction, and ordered the dismissal of the case
for lack of cause of action.
Plaintiff-appellant appealed to the Court of Appeals, which, as stated at the
outset, certified the case to us on a pure question of law.
In the meantime, with the dissolution of the Preliminary Injunction, it appears that
defendant Bank completed its extrajudicial foreclosure and the Disputed Property
was sold at public auction on January 1986, after a re-publication of the notice of
sale, since the first scheduled sale was enjoined by the Trial Court.

It is true that the determination of the sufficiency of a cause of action must be

limited to the facts alleged in the Complaint and no other should be
considered. 2 In this case, however, a hearing was held and documentary
evidence was presented, not on the Motion to Dismiss but on the question of
granting or denying plaintiff-appellant's application for a Writ of Preliminary
Injunction, Counsel for plaintiff-appellant admitted an the evidence presented.
That being so, the Trial Court committed no reversible error in considering said
evidence in the resolution of the Motion to Dismiss.
Furthermore, "even if the complaint stated a valid cause
of action, a motion to dismiss for insufficiency of cause of
action will be granted if documentary evidence admitted
by stipulation disclosing facts sufficient to defeat the claim
enabled the court to go beyond disclosure in the
complaint" (LOCALS No. 1470, No. 1469, and No. 1512
of the International Longshoremen's Association vs.
Southern Pacific Co., 6 Fed. Rules Service, p. 107; U.S.
Circuit Court of Appeals, Fifth Circuit, Dec. 7, 1952; 131 F.
2d 605). Thus, although the evidence of the parties were
presented on the question of granting or denying
petitioner-appellant's application for a writ of preliminary
injunction, the trial court correctly applied said evidence in
the resolution of the motion to dismiss. ... 3
While, as contended by plaintiff-appellant, some aspects of this case differ from
those in Tan, the doctrinal ruling therein, as quoted above, is squarely applicable
to the case at bar. The cases which plaintiff-appellant cites express the general
rule when there is no "documentary evidence admitted by stipulation disclosing
facts sufficient to defeat the claim." Where, however, such evidence is before the
Court and has been stipulated upon, a Court can go "beyond the disclosure in
the complaint." 4
Moreover, the rule is explicit that "rules of procedure are not to be applied in a
very rigid, technical sense; rules of procedure are used only to help secure
substantial justice." 5
The evidence on record sufficiently defeats plaintiff-appellant's claim for relief
from extrajudicial foreclosure. Her Special Power of Attorney in favor of CRCP
specifically included the authority to mortgage the Disputed Property. The Real
Estate Mortgage in favor of FINASIA explicitly authorized foreclosure in the event
of default. Indeed, foreclosure is but a necessary consequence of non-payment
of a mortgage indebtedness. Plaintiff-appellant, therefore, cannot rightfully claim
that FINASIA, as the assignee of the mortgagee, cannot extrajudicially foreclose
the mortgaged property. A mortgage directly and immediately subjects the
property upon which it is imposed to the fulfillment of the obligation for whose
security it was constituted. 6

The assignment of receivables made by the original mortgagee, FINASIA, to

Defendant Bank was valid, since a mortgage credit may be alienated or assigned
to a third person, in whole or in part, with the formalities required by law. 7 Said
formalities were complied with in this case. The assignment was made in a public
instrument and proper recording in the Registry of Property was made. 8 While
notice may not have been given to plaintiff-appellant personally, the publication of
the Notice of Sheriff's Sale, as required by law, is notice to the whole world.
The full-dress hearing that plaintiff-appellant prays for wherein she intends to
prove that she tried to contact the President of CRCP to urge him to pay the
mortgage loan, that she had failed to do so despite several attempts; that she did
not know that FINASIA had sold its receivables including that of CRCP to
Defendant Bank; and that she was not informed by CRCP of the scheduled
foreclosure sale will not tilt the scales of justice in her favor in the face of
incontrovertible documentary evidence before the Court.
Plaintiff-appellant's recourse is against CRCP, specially considering her
allegation that the latter had failed to observe their agreement.
WHEREFORE, the Order appealed from is hereby AFFIRMED, with costs
against plaintiff-appellant.

On March 10, 1981, or seven months after the foreclosure sale, PWHAS,
for the account of the spouses Litonjua, tendered payment of the full redemption
price to L & R Corporation in the form of China Bank Managers Check No. HOFM O12623 in the amount of P238,468.04. [6] See Exhibits G & 2, Letter of PWHAS
to L & R Corporation, id.6 L & R Corporation, however, refused to accept the
payment, hence, PWHAS was compelled to redeem the mortgaged properties
through the Ex-Oficio Sheriff of Quezon City. On March 31, 1981, it tendered
payment of the redemption price to the Deputy Sheriff through China Bank
Managers Check No. HOF-O14750 in the amount of P240,798.94. [7] The check
was deposited with the Branch Clerk of Court who issued Receipt No.
7522484[8] for the full redemption price of the mortgaged properties. Accordingly,
the Deputy Sheriff issued a Certificate of Redemption in favor of the spouses
Litonjua dated March 31, 1981.[9]
In a letter of the same date, the Deputy Sheriff informed L & R Corporation
of the payment by PWHAS of the full redemption price and advised it that it can
claim the payment upon surrender of its owners duplicate certificates of title. [10]
On April 2, 1981, the spouses Litonjua presented for registration the
Certificate of Redemption issued in their favor to the Register of Deeds of
Quezon City. The Certificate also informed L & R Corporation of the fact of
redemption and directed the latter to surrender the owners duplicate certificates
of title within five days.[11]

SO ORDERED.
[G.R. No. 130722. December 9, 1999]
SPS. REYNALDO K. LITONJUA and ERLINDA P. LITONJUA and PHIL.
WHITE HOUSE AUTO SUPPLY, INC., petitioners, vs. L & R
CORPORATION, VICENTE COLOYAN in his capacity as Acting
Registrar of the Register of Deeds of Quezon City thru Deputy
Sheriff ROBERTO R. GARCIA, respondents.
DECISION
YNARES-SANTIAGO, J.:
May a mortgage contract provide: (a) that the mortgagor cannot sell the
mortgaged property without first obtaining the consent of the mortgagee and that,
otherwise, the sale made without the mortgagees consent shall be invalid; and
(b) for a right of first refusal in favor of the mortgagee?
The controversy stems from loans obtained by the spouses Litonjua from
L & R Corporation in the aggregate sum of P400,000.00; P200,000.00 of which
was obtained on August 6, 1974 and the remaining P200,000.00 obtained on
March 27, 1978. The loans were secured by a mortgage [1] constituted by the
spouses upon their two parcels of land and the improvements thereon located in
Cubao, Quezon City covered by Transfer Certificates of Title No. 197232 and
197233, with an area of 599 and 1,436 square meters, respectively. The
mortgage was duly registered with the Register of Deeds of Quezon City.
On July 14, 1979, the spouses Litonjua sold to Philippine White House
Auto Supply, Inc. (PWHAS) the parcels of land they had previously mortgaged to
L & R Corporation for the sum of P430,000.00. [2] The sale was annotated at the
back of the respective certificates of title of the properties. [3]
Meanwhile, with the spouses Litonjua having defaulted in the payment of
their loans, L & R Corporation initiated extrajudicial foreclosure proceedings with
the Ex-Oficio Sheriff of Quezon City. On July 23, 1980, the mortgaged properties
were sold at public auction to L & R Corporation as the only bidder for the
amount of P221,624.58.[4] When L & R Corporation presented its corresponding
Certificate of Sale issued by Deputy Sheriff Roberto B. Garcia, to the Quezon
City Register of Deeds for registration on August 15, 1980, it learned for the first
time of the prior sale of the properties made by the spouses Litonjua to PWHAS
upon seeing the inscription at the back of the certificates of title. Thus, on August
20, 1980, it wrote a letter[5] to the Register of Deeds of Quezon City requesting for
the cancellation of the annotation regarding the sale to PWHAS. L & R
Corporation invoked a provision in its mortgage contract with the spouses
Litonjua stating that the mortgagees prior written consent was necessary in case
of subsequent encumbrance or alienation of the subject properties. Thus, it
argued that since the sale to PWHAS was made without its prior written consent,
the same should not have been registered and/or annotated.

On April 22, 1981, L & R Corporation wrote a letter to the Sheriff, copy
furnished to the Register of Deeds, stating: (1) that the sale of the mortgaged
properties to PWHAS was without its consent, in contravention of paragraphs 8
and 9 of their Deed of Real Estate Mortgage; and (2) that it was not the spouses
Litonjua, but PWHAS, who was seeking to redeem the foreclosed properties,
when under Articles 1236 and 1237 of the New Civil Code, the latter had no legal
personality or capacity to redeem the same.[12]
On the other hand, on May 8 and June 8, 1981, the spouses Litonjua
asked the Register of Deeds to annotate their Certificate of Redemption as an
adverse claim on the titles of the subject properties on account of the refusal of L
& R Corporation to surrender the owners duplicate copies of the titles to the
subject properties. With the refusal of the Register of Deeds to annotate their
Certificate of Redemption, the Litonjua spouses filed a Petition [13] on July 17,
1981 against L & R Corporation for the surrender of the owners duplicate of
Transfer Certificates of Title No. 197232 and 197233 before the then Court of
First Instance of Quezon City, Branch IV, docketed as Civil Case No. 32905.
On August 15, 1981, while the said case was pending, L & R Corporation
executed an Affidavit of Consolidation of Ownership. [14] Thereafter, on August 20,
1981, the Register of Deeds cancelled Transfer Certificates of Title No. 197232
and 197233 and in lieu thereof, issued Transfer Certificates of Title No.
280054[15] and 28055[16] in favor of L & R Corporation, free of any lien or
encumbrance.
With titles issued in its name, L & R Corporation advised the tenants of the
apartments situated in the subject parcels of land that being the new owner, the
rental payments should be made to them, and that new lease contracts will be
executed with interested tenants before the end of August, 1981. [17] Upon
learning of this incident from their tenants, the spouses Litonjua filed an adverse
claim[18] and a notice of lis pendens[19] with the Register of Deeds. In the process,
they learned that the prior sale of the properties in favor of PWHAS was not
annotated on the titles issued to L & R.
A complaint for Quieting of Title, Annulment of Title and Damages with
preliminary injunction was filed by the spouses Litonjua and PWHAS against
herein respondents before the then Court of First Instance of Quezon City,
Branch 9, docketed as Civil Case No. Q-33362. [20] On February 10, 1987, the
lower court rendered its Decision [21] dismissing the Complaint upon its finding that
the sale between the spouses Litonjua and PWHAS was null and void and
unenforceable against L & R Corporation and that the redemption made was also
null and void.
On appeal, the decision of the trial court was set aside by the Court of
Appeals in its Decision dated June 22, 1994, [22]on the ground that the sale made
to PWHAS as well as the redemption effected by the spouses Litonjua were
valid.However, the same was subsequently reconsidered and set aside in an
Amended Decision dated September 11, 1997.[23]

Hence, the instant Petition on the following issues:

(1) whether or not paragraphs 8 and 9 of the Real Estate Mortgage
are valid and enforceable;

Again, in Cruz v. Court of Appeals, [29] while a similar provision was

recognized and applied, no discussion as to its validity was made since the same
was not raised as an issue.
On the other hand, in Tambunting v. Rehabilitation Finance Corporation,
the validity of a similar provision was specifically raised and discussed and
found as invalid. It was there ratiocinated that -[30]

(2) whether or not the sale of the mortgaged properties by the

spouses Litonjua to PWHAS, without the knowledge and
consent of L & R Corporation, is valid and enforceable;
(3) whether or not PWHAS had the right to redeem the foreclosed
properties on the account of the spouses Litonjua; and
(4) whether or not there was a valid redemption.
Paragraphs 8 and 9 of the subject Deed of Real Estate Mortgage read as
follows
"8. That the MORTGAGORS shall not sell, dispose of, mortgage, nor in any other
manner encumber the real property/properties subject of this mortgage without
the prior written consent of the MORTGAGEE;
9. That should the MORTGAGORS decide to sell the real property/properties
subject of this mortgage, the MORTGAGEE shall be duly notified thereof by the
MORTGAGORS, and should the MORTGAGEE be interested to purchase the
same, the latter shall be given priority over all the other prospective buyers; [24]
There is no question that the spouses Litonjua violated both the aforesaid
provisions, selling the mortgaged properties to PWHAS without the prior written
consent of L & R Corporation and without giving the latter notice of such sale nor
priority over PWHAS.
Re: Validity of prohibition against subsequent sale of mortgaged property without prior written consent of mortgagee and validity
of subsequent sale to PWHAS

Petitioners defend the validity of the sale between them by arguing that
paragraph 8 violates Article 2130 of the New Civil Code which provides that (A)
stipulation forbidding the owner from alienating the immovable mortgaged shall
be void.
In the case of Philippine Industrial Co. v. El Hogar Filipino and Vallejo, [25] a
stipulation prohibiting the mortgagor from entering into second or subsequent
mortgages was held valid. This is clearly not the same as that contained in
paragraph 8 of the subject Deed of Real Estate Mortgage which also forbids any
subsequent sale without the written consent of the mortgagee. Yet, in Arancillo v.
Rehabilitation Finance Corporation, [26] the case of Philippine Industrial Co., supra,
was erroneously cited to have held that the prohibition in a mortgage contract
against the encumbrance, sale or disposal of the property mortgaged without the
consent of the mortgagee is valid. No similar prohibition forbidding the owner of
mortgaged property from (subsequently) mortgaging the immovable mortgaged is
found in our laws, making the ruling inPhilippine Industrial Co., supra, perfectly
valid. On the other hand, to extend such a ruling to include subsequent sales or
alienation runs counter not only to Philippine Industrial Co., itself, but also
to Article 2130 of the New Civil Code.
Meanwhile in De la Paz v. Macondray & Co., Inc., [27] it was held that while
an agreement of such nature does not nullify the subsequent sale made by the
mortgagor, the mortgagee is authorized to bring the foreclosure suit against the
mortgagor without the necessity of either notifying the purchaser or including him
as a defendant. At the same time, the purchaser of the mortgaged property was
deemed not to have lost his equitable right of redemption.
In Bonnevie v. Court of Appeals, [28] where a similar provision appeared in
the subject contract of mortgage, the petitioners therein, to whom the mortgaged
property were sold without the written consent of the mortgagee, were held as
without the right to redeem the said property. No consent having been secured
from the mortgagee to the sale with assumption of mortgage by petitioners
therein, the latter were not validly substituted as debtors. It was further held that
since their rights were never recorded, the mortgagee was charged with the
obligation to recognize the right of redemption only of the original mortgagorsvendors. Without discussing the validity of the stipulation in question, the same
was, in effect, upheld.

To be sure, the deed of second mortgage executed by the Escuetas in favor of

Aurora Tambunting, married to Antonio L. Tambunting, does contain a provision
that the property mortgaged shall not be x x x the subject of any new or
subsequent contracts of agreements, saving and excepting those having
connection with the first mortgage with the RFC, without first securing the written
permission and consent of the MORTGAGEE. But the provision can only be
construed as directed against subsequent mortgages or encumbrances, not to an
alienation of the immovable itself. For while covenants prohibiting the owner from
constituting a later mortgage over property registered under the Torrens Act have
been held to be legally permissible (Phil. Industrial Co. v. El Hogar Filipino, et al.,
45 Phil. 336, 341-342; Bank of the Philippines v. Ty Camco Sobrino, 57 Phil.
801), stipulations forbidding the owner from alienating the immovable mortgaged
are expressly declared void by law (Art. 2130, Civil Code). It is clear that the
stipulation against subsequent agreements above mentioned had not been
breached by the assignment by the Escuetas (to the Hernandezes) of their right
of redemption in connection with the mortgage constituted in favor of the
R.F.C. The assignment was not a subsequent mortgage or encumbrance, licitly
comprehended by the prohibitory stipulation, but was actually a sale or
conveyance of all their rights in the encumbered real property in truth, an
alienation of the immovable which could not lawfully be forbidden. Moreover,
since the subject of the assignment to the Hernandezes had connection with the
first assignment with the R.F.C., it did not fall within, but was explicitly excepted
from, the prohibitory stipulation in question. Finally, it should not be forgotten that
since the Tambuntings, in their own deed of conditional sale with the R.F.C., had
accepted without demur the provision that said contract could be revoked within
one (1) year from September 16, 1955 at the option of the RFC, as vendor,
should the former owner (Escueta) exercise his right to redeem the property; and
that the redemption of the property within said period by the former owner or
his successor-in-interest would render their instrument of conditional sale
automatically null and void and without effect, they cannot now assume a position
inconsistent with said provision. (underscoring, Ours)
Earlier, in PNB v. Mallorca,[31] it was reiterated that a real mortgage is
merely an encumbrance; it does not extinguish the title of the debtor, whose right
to dispose a principal attribute of ownership is not thereby lost. Thus, a
mortgagor had every right to sell his mortgaged property, which right the
mortgagee cannot oppose.
In upholding the validity of the stipulation in question, the amended
Decision relied on the cases of Cruz v. Court of Appeals, supra, and Medida v.
Court of Appeals.[32] According to the Court of Appeals, said cases, are not only
more recent that that of Tambunting, supra, but are also more applicable to the
issue at bar.
We are not convinced.
As we have mentioned, although a similar provision was recognized and
applied in Cruz v. Court of Appeals, supra, no discussion as to its validity was
made since the same was not raised as an issue. Thus, it cannot be said that the
specific pronouncement in the Tambunting case that such a stipulation can only
be construed as against subsequent mortgages or encumbrances but not to an
alienation of the immovable itself, which is prohibited under Article 2130, was
abandoned thereby. On the other hand, the facts in the case of Medida v. Court
of Appeals, are different from those in the present case for what was in issue in
the said case was a second mortgage over a foreclosed property during the
period of redemption.Thus, the ruling in Medida quoted in the Amended Decision
that what is delimited is not the mortgagors jus dispodendi, as an attribute of
ownership, but merely the rights conferred by such act of disposal which may
correspondingly be restricted, actually refers to the fact that the only rights which
a mortgagor can legally transfer, cede and convey after the foreclosure of his
properties are the right to redeem the land, and the possession use and
enjoyment of the same during the period of redemption. It has no connection or
reference to the right of a mortgagor to sell his mortgaged property without the
required consent of the mortgagee. To be sure, there is absolutely nothing
in Medida that upholds the validity of the stipulation in controversy.

Insofar as the validity of the questioned stipulation prohibiting the

mortgagor from selling his mortgaged property without the consent of the
mortgagee is concerned, therefore, the ruling in the Tambunting case is still the
controlling law.Indeed, we are fully in accord with the pronouncement therein that
such a stipulation violates Article 2130 of the New Civil Code. Both the lower
court and the Court of Appeals in its Amended Decision rationalize that since
paragraph 8 of the subject Deed of Real Estate Mortgage contains no absolute
prohibition against the sale of the property mortgaged but only requires the
mortgagor to obtain the prior written consent of the mortgagee before any such
sale, Article 2130 is not violated thereby. This observation takes a narrow and
technical view of the stipulation in question without taking into consideration the
end result of requiring such prior written consent. True, the provision does not
absolutely prohibit the mortgagor from selling his mortgaged property; but what it
does not outrightly prohibit, it nevertheless achieves. For all intents and
purposes, the stipulation practically gives the mortgagee the sole prerogative to
prevent any sale of the mortgaged property to a third party. The mortgagee can
simply withhold its consent and thereby, prevent the mortgagor from selling the
property. This creates an unconscionable advantage for the mortgagee and
amounts to a virtual prohibition on the owner to sell his mortgaged property. In
other words, stipulations like those covered by paragraph 8 of the subject Deed
of Real Estate Mortgage circumvent the law, specifically, Article 2130 of the New
Civil Code.
Being contrary to law, paragraph 8 of the subject Deed of Real Estate
Mortgage is not binding upon the parties.Accordingly, the sale made by the
spouses Litonjua to PWHAS, notwithstanding the lack of prior written consent of
L & R Corporation, is valid.
Re: Validity of redemption effected by PWHAS on the account of the spouses Litonjua

Coming now to the issue of whether the redemption offered by PWHAS on

account of the spouses Litonjua is valid, we rule in the affirmative. The sale by
the spouses Litonjua of the mortgaged properties to PWHAS is valid. Therefore,
PWHAS stepped into the shoes of the spouses Litonjua on account of such sale
and was in effect, their successor-in-interest.As such, it had the right to redeem
the property foreclosed by L & R Corporation. Again, Tambunting, supra, clarifies
that
x x x. The acquisition by the Hernandezes of the Escuetas rights over the
property carried with it the assumption of the obligations burdening the property,
as recorded in the Registry of Property, i.e., the mortgage debts in favor of the
RFC (DBP) and the Tambuntings. The Hernandezes, by stepping into the
Escuetas shoes as assignees, had the obligation to pay the mortgage debts,
otherwise, these debts would and could be enforced against the property subject
of the assignment.Stated otherwise, the Hernandezes, by the assignment,
obtained the right to remove the burdens on the property subject thereof by
paying the obligations thereby secured; that is to say, they had the right of
redemption as regards the first mortgage, to be exercised within the time and in
the manner prescribed by law and the mortgage deed; and as regards the
second mortgage, sought to be judicially foreclosed but yet unforeclosed, they
had the so-called equity of redemption.
The redemption of PWHAS to redeem the subject properties finds support
in Section 6 of Act 3135 itself which gives not only the mortgagor-debtor the right
to redeem, but also his successors-in-interest. As vendee of the subject
properties, PWHAS qualifies as such a successor-in-interest of the spouses
Litonjua.
Re: Validity of redemption made

It is clear from the records that PWHAS offered to redeem the subject
properties seven (7) months after the date of registration of the foreclosure sale,
well within the one year period of redemption.

Corporation is in effect stating that it consents to lend out money to the spouses
Litonjua provided that in case they decide to sell the property mortgaged to it,
then L & R Corporation shall be given the right to match the offered purchase
price and to buy the property at that price. Thus, while the spouses Litonjua had
every right to sell their mortgaged property to PWHAS without securing the prior
written consent of L & R Corporation, it had the obligation under paragraph 9,
which is a perfectly valid provision, to notify the latter of their intention to sell the
property and give it priority over other buyers. It is only upon failure of L & R
Corporation to exercise its right of first refusal could the spouses Litonjua validly
sell the subject properties to others, under the same terms and conditions offered
to L & R Corporation.
What then is the status of the sale made to PWHAS in violation of L & R
Corporations contractual right of first refusal?On this score, we agree with the
Amended Decision of the Court of Appeals that the sale made to PWHAS is
rescissible.The case of Guzman, Bocaling & Co v. Bonnevie [33] is instructive on
this point
The respondent court correctly held that the Contract of Sale was not voidable
but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a contract
otherwise valid may nonetheless be subsequently rescinded by reason of injury
to third persons, like creditors. The status of creditors could be validly accorded
the Bonnevies for they had substantial interests that were prejudiced by the sale
of the subject property to the petitioner without recognizing their right of first
priority under the Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the contracting
parties and even to third persons, to secure reparation for damages caused to
them by a contract, even if this should be valid, by means of the restoration of
things to their condition at the moment prior to the celebration of said contract. It
is a relief allowed for one of the contracting parties and even third persons from
all injury and damage the contract may cause, or to protect some incompatible
and preferential right created by the contract. Rescission implies a contract
which, even if initially valid, produces a lesion or pecuniary damage to someone
that justifies its invalidation for reasons of equity. (underscoring, Ours)
It was then held that the Contract of Sale there, which violated the right of
first refusal, was rescissible.
In the case at bar, PWHAS cannot claim ignorance of the right of first
refusal granted to L & R Corporation over the subject properties since the Deed
of Real Estate Mortgage containing such a provision was duly registered with the
Register of Deeds. As such, PWHAS is presumed to have been notified thereof
by registration, which equates to notice to the whole world.
We note that L & R Corporation had always expressed its willingness to
buy the mortgaged properties on equal terms as PWHAS. Indeed, in its Answer
to the Complaint filed, L & R Corporation expressed that it was ready, willing and
able to purchase the subject properties at the same purchase price of
P430,000.00, and was agreeable to pay the difference between such purchase
price and the redemption price of P249,918.77, computed as of August 13, 1981,
the expiration of the one-year period to redeem. That it did not duly exercised its
right of first refusal at the opportune time cannot be taken against it, precisely
because it was not notified by the spouses Litonjua of their intention to sell the
subject property and thereby, to give it priority over other buyers.
All things considered, what then are the relative rights and obligations of
the parties? To recapitulate:, the sale between the spouses Litonjua and PWHAS
is valid, notwithstanding the absence of L & R Corporations prior written consent
thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem and its
tender of the redemption price, as successor-in-interest of the spouses Litonjua,
within the one-year period should have been accepted as valid by L & R
Corporation.However, while the sale is, indeed, valid, the same is rescissible
because it ignored L & R Corporations right of first refusal.

Re: Validity and enforceability of stipulation granting the mortgagee the right of first refusal

While petitioners question the validity of paragraph 8 of their mortgage

contract, they appear to be silent insofar as paragraph 9 thereof is
concerned. Said paragraph 9 grants upon L & R Corporation the right of first
refusal over the mortgaged property in the event the mortgagor decides to sell
the same. We see nothing wrong in this provision. The right of first refusal has
long been recognized as valid in our jurisdiction. The consideration for the loanmortgage includes the consideration for the right of first refusal. L & R

Foreseeing a possible rescission of the sale, the spouses Litonjua

contend that with the restoration of the original statusquo, with no sale having
been made, they should now be allowed to redeem the subject properties, the
period of redemption having been suspended during the period of litigation. In
effect, the spouses Litonjua want to retain ownership of the same.We cannot,
however, sanction this belated reversal of the spouses Litonjuas decision to
sell. To do so would afford them undue advantage on account of the appreciation
of the value of the subject properties in the intervening years when they precisely
were the ones who violated and ignored the right of first refusal of L & R

Corporation over the same. Moreover, it must be stressed that in rescinding the
sale made to PWHAS, the purpose is to uphold and enforce the right of first
refusal of L & R Corporation.
WHEREFORE, the Decision appealed from is hereby AFFIRMED with the
following MODIFICATIONS:
(a) Ordering the rescission of the sale of the mortgaged properties
between petitioners spouses Reynaldo and Erlinda Litonjua
and Philippine White House Auto Supply, Inc. and ordering
said spouses to return to Philippine White House Auto Supply,
Inc. the purchase price of P430,000.00;

Dear Mr. Tobias:

My client, the INDUSTRIAL FINANCE CORPORATION,
has referred to me for appropriate legal action your
account with it (LCI-690) which is in arrears in the amount
of P4,254.65 and a balance of P25,249.65 as of May 16,
1970. In view of your default in the payment of your
installments due pursuant to the Promissory Note and
Chattel Mortgage you executed in favor of Leelin Motors,
Inc. and assigned to Industrial Finance Corporation,
demand is- hereby made upon you to pay the amount of
P25,249.65 on or before May 24, 1970 or to surrender
within the same period the following described
personality:

(c) Disallowing, due to the rescission of the sale made in its favor,
the redemption made by Philippine White House Auto Supply,
Inc. and ordering Quezon City Sheriff Roberto Garcia to return
to it the redemption check of P240,798.94;
(d) Allowing respondent L & R Corporation to retain its consolidated
titles to the foreclosed properties but ordering it to pay to the
Litonjua spouses the additional sum of P189,201.96
representing the difference from the purchase price of
P430,000.00 in the rescinded sale;
(e) Deleting the awards for moral and exemplary damages and
attorneys fees to the respondents.

One (1) Unit 1969 Motor Vehicle

Dodge
D-600 FFC 197 "WB"
Engine No. CPC4007
Serial No. 1589070794
otherwise, the corresponding action will be filed against
you plus damages and attorney's fees.
Please consider this a final demand.
Very truly yours,

No pronouncement as to costs.
C.R. SANCHEZ LAW OFFICE
SO ORDERED.
SGD. CATALINO R. SANCHEZ. 3
G.R. No. L-41555 July 27, 1977
INDUSTRIAL FINANCE CORPORATION, petitioner,
vs.
CASTOR TOBIAS, respondent.

At the time the foregoing letter was written, respondent Tobias was in arrear in
the payment of more than two (2) installments. 4
On May 27, 1970, respondent Tobias wrote petitioner's counsel the following
letter:

Santos S. Carlos for petitioner.

Dear Sir:
Amado J. Garcia for respondent.
This is in response to your letter of demand dated May
14, 1970 asking me to surrender Dodge Truck with engine
no. CPC-4007 Serial No. 1589070794. I am now
voluntarily and willingly surrendering said truck due to the
ff. reasons:

MARTIN, J:

1. That said truck has been with

Leelin Motors ever since the later
part of February when it met an
accident.

This is a petition for review of the decision of the Court of Appeals * in CA-G.R.
No. 53916, entitled "Industrial Finance Corporation vs. Castor Tobias", affirming
that of the Court of First Instance of Manila with a slight modification.
On June 16, 1968, respondent Castor Tobias bought on installment one (1)
Dodge truck from Leelin Motors, Inc. To answer for his obligation he executed a
promissory note in favor of the latter, for the sum of P29.070.28 payable in thirtysix (36) equal installments with interest at the rate of 12% per annum payable in
the amounts and dates indicated in said promissory note. 1 To secure payment of
the promissory note, respondent Tobias executed in favor of Leelin Motors, Inc. a
chattel mortgage on the Dodge truck.

2. That there is too much delay in

the repair of said truck because
until now the truck is not yet
completely finished.
3. That upon seeing said truck, I
am not satisfied with the repair of
the finished portions.

On June 19, 1969, Leelin Motors, Inc. indorsed the promissory note and
assigned the chattel mortgage to petitioner Industrial Finance Corporation. As a
consequence respondent Tobias paid six (6) installments on the promissory note
directly to the petitioner Industrial Finance Corporation the last of which was
made on February 19, 1970. 2

I am now giving full authority to your client Industrial

Finance Corporation to get said truck at Leelin Motors,
Inc.

On May 14, 1970, the petitioner's counsel wrote to respondent Tobias the
following letter:

I am hoping that due to the ff. good reasons my name will

not be blacklisted in your credit division.

xxx xxx xxx

Very truly yours,

Castor Tobias 5
Upon learning that the truck met an accident, petitioner decided not to get the
truck anymore from Leelin Motors, Inc.
On February 16, 1971, petitioner filed in the Court of First Instance of Manila an
action against respondent Tobias to recover the unpaid balance of the promissory
note.- The lower court dismissed the complaint on the ground that "(I)nasmuch
as the defendant voluntarily and willingly surrendered the truck and gave the
Industrial Finance Corporation full authority to get said truck from Leelin Motors,
Inc. (Exhibit 2) pursuant to the demand to surrender (Exhibit B) the defendant
complied with the demands of the plaintiff. 6
On appeal, the Court of Appeals affirmed the decision of the lower court
dismissing the complaint of petitioner Industrial Finance Corporation but
modifying the same by ordering respondent Tobias to pay the cost of repairs of
the damaged truck in the amount of P5,396.78 plus interest.
The main thrust of the petitioner's argument is that the respondent Court of
Appeals erred in affirming the dismissal of the complaint of the petitioner in the
lower court by not considering his right as an unpaid vendor of the truck in
question under Art. 1484 of the New Civil Code. 7 Petitioner claims that under Art.
1484 of the New Civil Code, an unpaid vendor may choose any of the remedies
provided therein and that as an unpaid vendor, it has chosen to exact fulfillment
of the obligation for failure of the vendee to pay. Respondent Tobias, however,
claims that petitioner is estopped to insist on its claim on the balance of the
promissory note when it demanded the return or surrender of the truck in its letter
of May 14, 1970, to which demand, respondent acceded in his letter dated May
27, 1970.
The claim of respondent cannot be sustained. Art. 1484 is clear that "should the
vendee or purchaser of a personal property be in default in the payment of two or
more of the agreed installments, the vendor or seller has the option to either
exact fulfillment by the purchaser of -the obligation, or to cancel the sale, or to
foreclose the mortgage on the purchased personal property, if one was
constituted.8 Since the case involves the sale of personal property on
installments Art. 1484 of the Civil Code should apply. The remedies provided for
in Art. 1484 are considered alternative, not cumulative 9 such that the exercise of
one would bar the exercise by the others. 10 Here, petitioner has not cancelled
the sale, nor has it exercised the remedy of foreclosure. Foreclosure, judicial or
extra-judicial, presupposes something more than a mere demand to surrender
possession of the object of the mortgage. 11 Since the petitioner has not availed
itself of the remedy of cancelling the sale of the truck in question or of foreclosing
the chattel mortgage on said truck, petitioner is still free to avail of the remedy of
exacting fulfillment ' of the obligation of respondent Tobias, the vendee of the
truck in question. In Radiowealth Inc. vs. Lavin, 12 the facts of which are similar to
the 'present case, the issue was "whether the plaintiff is precluded to press for
collection of an account secured by a chattel mortgagee after it shall have
informed the defendants of its intention to foreclose said mortgage, and the
voluntary acceptance of such step (foreclosure) by defendant mortgagor," the
Supreme Court ruled in favor of the plaintiff mortgagee. Said the Court:
The contract being a sale of machinery payable in
installments, the applicable provision of law is Article 1484
of the Civil Code, which gives the vendor the option to
exercise any one of the alternative remedies therein
mentioned: exact fulfillment of the obligation, cancel the
sale, or foreclose the chattel mortgage. But the vendormortgagor in the present case desisted, on its own
initiative, from consummating the auction sale, without
gaining any advantage or benefit, and without causing
any disadvantage, or harm to the vendees-mortgagees.
The least that could be said is that such desistance of the
plaintiff from proceeding with auction sale was a timely
disavowal that cancelled and rendered useless its
previous choice to foreclose; its acts, being extra-judicial,
brought no trouble upon any court, and were harmless to
the defendants. For this reason, the plaintiff can not be
considered as having "exercised" (the Code uses the
word "exercise") the remedy of foreclosure because of its
incomplete implementation, and, therefore, the plaintiff is
not barred from suing on the unpaid account.
In effect this ruling answers the issue of estoppel raised by respondent Tobias.
Besides, to hold the petitioner in estoppel, it must be shown that when it gave the

respondent the choice of either paying the balance of the purchase price or of
surrending the truck, it had already knowledge of the accident and the
consequent damage to the truck. In the present case petitioner claims it had no
knowledge of the accident 13 when it gave the respondent the choice of either
paying the balance of the promissory note or of surrendering the truck. It is hard
to believe that petitioner would make such offer to respondent either to pay the
balance on the promissory, note or to surrender the truck in question if it knew
that the truck has had an accident. The more plausible thing it would have asked
the respondent is to ask for the balance on the promissory note. Besides the
allegation of petitioner that it had no knowledge of the accident is a negative
allegation and needs no evidence to support it, not being an essential part of the
statement of the right on which the cause of action is founded. 14 It is therefore the
respondent Tobias who has the burden of disproving the claim of petitioner that
he has no knowledge of the accident when it made the offer to respondent either
to pay the balance on the promissory note or to surrender the truck. Respondent
failed in this.
It is claimed by respondent Tobias that he has surrendered the truck to petitioner
in his letter dated May 27, 1970. But the alleged surrender was ineffectual as far
as the petitioner is concerned because petitioner could not take possession of
the truck in question as it was in the custody of Leelin Motors, Inc., which had a
mechanic's lien over it. Even respondent Tobias cannot expect petitioner to
accept the term of surrender because aside from the fact that the truck being
surrendered met an accident petitioner was not satisfied with the repair of the
finished portion of the truck in question. Petitioner therefore was justified refusing
to accept such surrender and in bringing suit to recover the balance of the
purchase price.
IN VIEW OF THE FOREGOING, the judgment of the respondent Court of
Appeals and of the lower court are hereby set aside and a new one rendered
ordering respondent Tobias to pay petitioner the balance of the purchase price of
the truck in question in the amount of P27,210.77 plus legal rate of interest from
the time of the filing of the complaint. Costs against the respondent.
SO ORDERED.
[G.R. No. 121158. December 5, 1996]
CHINA BANKING CORPORATION, ATTYS. REYNALDO M. CABUSORA and
RENATO C. TAGUIAM, petitioners, vs. COURT OF APPEALS,
HON. PEDRO T. SANTIAGO, SPS. SO CHING and CRISTINA SO,
and
NATIVE
WEST
INTERNATIONAL
TRADING
CORP.,respondents.
DECISION
FRANCISCO, J.:
China Banking Corporation (China Bank) extended several loans to Native
West International Trading Corporation (Native West) and to So Ching, Native
Wests president. Native West in turn executed promissory notes [1] in favor of
China Bank. So Ching, with the marital consent of his wife, Cristina So,
additionally executed two mortgages over their properties, viz., a real estate
mortgage executed on July 27, 1989 covering a parcel of land situated in Cubao,
Quezon City, under TCT No. 277797,[2] and another executed on August 10, 1989
covering a parcel of land located in Mandaluyong, under TCT No. 5363.[3] The
promissory notes matured and despite due demands by China Bank neither
private respondents Native West nor So Ching paid. Pursuant to a provision
embodied in the two mortgage contracts, China Bank filed petitions for the extrajudicial foreclosure of the mortgaged properties before Notary Public Atty. Renato
E. Taguiam for TCT No. 277797,[4] and Notary Public Atty. Reynaldo M. Cabusora
for TCT No. 5363,[5] copies of which were given to the spouses So Ching and
Cristina So. After due notice and publication, the notaries public scheduled the
foreclosure sale of the spouses real estate properties on April 13, 1993. Eight
days before the foreclosure sale, however, private respondents filed a
complaint [6]with the Regional Trial Court[7]for accounting with damages and with
temporary restraining order against petitioners alleging the following causes of
action:
A. Defendants failed to comply with the mandates of Administrative Order
No. 3 of the Supreme Court dated October 19, 1984.

B. Defendants failed to comply with the mandates of Section 2

Presidential Decree No. 1079 dated January 28, 1977.
C. MORTGAGORS liability limited to P6,500,000.00 and P3,500,000.00
respectively in the Mortgages Annexes A and B respectively, but
the same are not included in the notice of foreclosure.
D. Violation of Truth in Lending Act (RP Act No. 3765).
E. In all the loans granted by DEFENDANT-BANK to plaintiffs and
Borrowers, the Bank charged interests in excess of the rate
allowed by the Central Bank.
F. Violation of Article 1308 of the Civil Code. [8]
On April 7, 1993, the trial court issued a temporary restraining order to enjoin the
foreclosure sale. Thereafter counsels for the respective parties agreed to file their
pleadings and to submit the case, without further hearing, for resolution. On April
28, 1993, the trial court, without passing upon the material averments of the
complaint, issued an Order granting the private respondents prayer for the
issuance of preliminary injunction with the following proffered justification:
From the foregoing, it is quite apparent that a question of accounting poses a
thorny issue as between the litigants. Variance in the amounts involved relating to
the loan agreements must be judiciously passed upon by the Court and this is
only possible if a trial on the merits could be had as the matters appurtenant
thereto are evidentiary in nature.
Under the premises, the accounting issue being evidentiary in character calls for
an issuance of a writ of preliminary injunction pending the adjudication of the
case. The issuance thereof at this particular stage of the case is merely a
preventive remedy designed to protect from irreparable injury to property or other
rights plaintiff may suffer, which a court of equity may take cognizance of by
commanding acts to be done or prohibiting their commission, as in the instant
suit, to restrain notaries public Cabusora and Taguiam as well as defendant
China Banking Corporation from continuing with the auction sale of the subject
properties, until further orders from this Court.
Wherefore, premises considered, finding that the circumstances warrant the
issuance of a preliminary injunction, plaintiffs prayer is hereby
GRANTED. Consequent thereto, plaintiffs are hereby ordered to post a bond
amounting to P1 (ONE) Million to answer for whatever damages defendant may
suffer as a consequence of the writ. [9]
Petitioners moved for reconsideration, but it was denied in an Order
dated September 23, 1993. To annul the trial courts Orders of April 28,
1993 and September
23,
1993,
petitioners
elevated
the
case
through certiorariand prohibition[10] before public respondent Court of Appeals.
[11]
In a decision dated January 17, 1995, respondent Court of Appeals held that
Administrative Circular No. 3 is the governing rule in extra-judicial foreclosure of
mortgage, which circular petitioners however failed to follow, and with respect to
the publication of the notice of the auction sale, the provisions of P.D. No. 1079 is
the applicable statute,[12] which decree petitioners similarly failed to obey.
Respondent Court of Appeals did not pass upon the other issues and confined its
additional lengthy discussion on the validity of the trial courts issuance of the
preliminary injunction, finding the same neither capricious nor whimsical exercise
of judgment that could amount to grave abuse of discretion. [13] The Court of
Appeals accordingly dismissed the petition, as well as petitioners subsequent
motion for reconsideration.[14] Hence, the instant petition under Rule 45 of the
Rules of Court reiterating the grounds raised before respondent court, to wit:
I. PETITIONER CBCS PETITIONS TO EXTRA-JUDICIALLY
FORECLOSE THE REAL ESTATE MORTGAGES
OF JULY 27, 1989 AND AUGUST 10, 1989 THRU
PETITIONERS-NOTARIES PUBLIC, AND THE
SCHEDULED FORECLOSURE SALE ARE VALID AND
LAWFUL;
II. PRIVATE RESPONDENTS AND PETITIONER CBC HAD EXPRESSLY
AGREED TO CONSIDER THE SAME MORTGAGES AS
VALID SECURITIES FOR PROMPT AND FULL

PAYMENT OF ALL AND ANY OBLIGATIONS OF THE

FORMER FROM THE LATTER;
III. THE SUPPOSED VARIANCE IN THE TOTAL AMOUNT OF UNPAID
LOANS IS NOT A VALID BASIS TO ENJOIN THE
FORECLOSURE OF THE QUESTIONED MORTGAGES.
THE MERE FAILURE TO PAY THE LOAN SECURED BY
SAID MORTGAGES IS THE ONLY, SINGLE REASON
FOR THEIR LAWFUL FORECLOSURE;
IV. PETITIONER BANK HAD FURNISHED PRIVATE RESPONDENTS
WITH COPIES OF DISCLOSURE STATEMENTS IN
COMPLIANCE WITH THE TRUTH IN LENDING ACT,
AND CHARGED THEM INTERESTS IN ACCORDANCE
WITH LAW AND PURSUANT TO ITS EXPRESS
AGREEMENT WITH THE LATTER;
V. THE P1.0 MILLION INJUNCTION BOND REQUIRED BY THE
HONORABLE COURT A QUO ON PRIVATE
RESPONDENTS IS GROSSLY AND PATENTLY
INADEQUATE.[15]
At the outset, the Courts attention is drawn to the fact that since the filing
of this suit before the trial court, none of the substantial issues have been
resolved. To avoid and gloss over the issues raised by the parties, as what the
trial court and respondent Court of Appeals did, would unduly prolong this
litigation involving a rather simple case of foreclosure of mortgage. Undoubtedly,
this will run counter to the avowed purpose of the rules, i.e., to assist the parties
in obtaining just, speedy and inexpensive determination of every action or
proceeding.[16] The Court, therefore, feels that the central issues of the case,
albeit unresolved by the courts below, should now be settled specially as they
involved pure questions of law. Furthermore, the pleadings of the respective
parties on file have amply ventilated their various positions and arguments on the
matter necessitating prompt adjudication.
Now to the core issues.
As the Court sees it, the crucial issues are: (1) whether or not the loans in
excess of the amounts expressly stated in the mortgage contracts can be
included as part of the loans secured by the real estate mortgages, (2) whether
or not petitioners can extrajudicially foreclose the properties subject of the
mortgages, (3) whether or not Administrative Order No. 3 should govern the
extrajudicial foreclosure of the properties, and (4) whether or not the writ of
preliminary injunction issued by the trial court is valid.
Petitioners aver that the additional loans extended in favor of private
respondents in excess ofP6,500,000.00 and P3,500,000.00 amounts respectively
stipulated in the July 27, 1989 and August 10, 1989 mortgage contracts are also
secured by the same collaterals or real estate properties, citing as bases the
introductory paragraph (whereas clause) of the mortgage contracts, as well as
the stipulations stated therein under the first and second paragraphs. Private
respondents for their part argue that the additional loans are clean loans, relying
on some isolated parts of the same introductory paragraph and first paragraph of
the contracts, and also of the third paragraph.
As both parties offered a conflicting interpretation of the contract, then
judicial determination of the parties intention is thus, inevitable. [17] Hereunder are
the pertinent identical introductory paragraphs and paragraphs 1 to 3 of the July
27, 1989 and August 10, 1989 mortgage contracts:
WHEREAS, the MORTGAGEE has granted, and may from time to time hereafter
grant to the MORTGAGOR(S)/either of them/and/or NATIVE WEST
INTERNATIONAL TRADING CORP. hereinafter called the DEBTOR(S) credit
facilities not exceeding SIX MILLION FIVE HUNDRED THOUSAND PESOS
ONLY (P6,500,000.00)* Philippine currency, and the MORTGAGEE had required
the MORTGAGOR(S) to give collateral security for the payment of any and all
obligations heretofore contracted/incurred and which may thereafter be
contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S), or any one of
them, in favor of the MORTGAGEE;
NOW, THEREFORE, as collateral security for the payment of the principal and
interest of the indebtedness/obligations herein referred to and the faithful
performance by the MORTGAGOR(S) of his (her, its) obligations hereunder, the

MORTGAGOR(S) hereby execute(s) a FIRST MORTGAGE, in favor of the

MORTGAGEE, free from all liens and encumbrances of any kind, that (those)
certain parcel(s) of land, together with all the buildings/machineries/equipment/
improvements now existing thereon, and which may hereafter be placed thereon,
described in the Schedule of mortgaged properties described hereunder and/or
which is hereto attached, marked Exhibit A and made a part thereof.
1. It is agreed that this mortgage shall respond for all the obligations
contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S) or any one of
them, in favor of the MORTGAGEE up to the said sum of SIX MILLION FIVE
HUNDRED THOUSAND PESOS ONLY (P6,500,000.00)* regardless of the
manner in which the said obligations may have been contracted/incurred by the
MORTGAGOR(S) and/or DEBTOR(S) whether by advances or loans made to
him (her, it) by the MORTGAGEE, by the negotiation of mercantile documents,
including trust receipts, by the execution by the MORTGAGOR(S) and/or
DEBTOR(S) of money market instruments/commercial papers, undertakings of
guaranty of suretyship, or by endorsement of negotiable instruments, or
otherwise, the idea being to make this deed a comprehensive and all embracing
security that it is.
2. Payments on account of the principal and interest of the credit granted by the
MORTGAGEE to the MORTGAGOR(S) and/or DEBTOR(S) may be made from
time to time, and as often as the MORTGAGOR(S) may elect; provided, however,
that in the event of such payments being so made that the indebtedness to the
MORTGAGEE may from time to time be reduced the MORTGAGEE may make
further advances and all sums whatsoever advanced by the MORTGAGEE shall
be secured by this mortgage, and partial payments of said indebtedness from
time to time shall not thereby be taken to reduce by the amount of such
payments the credit hereby secured. The said credit shall extend to and account
which shall, within the said limit of P6,500,000.00* exclusive of interest, be
fluctuating and subject to increase or decrease from time to time as the
MORTGAGEE may approve, and this mortgage shall stand as security for all
indebtedness of the MORTGAGOR(S) and/or DEBTOR(S), or any one of them,
at any and all times outstanding, regardless of partial or full payments at any time
or times made by the MORTGAGOR(S) and/or DEBTOR(S).
3. It is hereby agreed that the MORTGAGEE may from time to time grant the
MORTGAGOR(S)/DEBTOR(S) credit facilities exceeding the amount secured by
this mortgage, without affecting the liability of the MORTGAGOR(S) under this
mortgage up to the amount stipulated.[18]
An important task in contract interpretation is the ascertainment of the
intention of the contracting parties which is accomplished by looking at the words
they used to project that intention in their contract, i.e., all the words, not just a
particular word or two, and words in context, not words standing alone. [19] Indeed,
Article 1374 of the Civil Code, states that the various stipulations of a contract
shall be interpreted together, attributing to the doubtful ones that sense which
may result from all of them taken jointly. Applying the rule, we find that the parties
intent is to constitute the real estate properties as continuing securities liable for
future obligations beyond the amounts of P6.5 million and P3.5 million
respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage
contracts. Thus, while the whereas clause initially provides that the mortgagee
has granted, and may from time to time hereafter grant to the mortgagors x x x
credit facilities not exceeding six million five hundred thousand pesos only
(P6,500,000.00)** yet in the same clause it provides that the mortgagee had
required the mortgagor(s) to give collateral security for the payment of any and
all obligations heretofore contracted/incurred and which may thereafter be
contracted/incurred by the mortgagor(s) and/or debtor(s), or any one of them, in
favor of the mortgagee which qualifies the initial part and shows that the
collaterals or real estate properties serve as securities for future obligations. The
first which ends with the clause, the idea being to make this deed a
comprehensive and all embracing security that it is supports this qualification.
Similarly, the second provides that the mortgagee may take further
advances and all sums whatsoever advanced by the mortgagee shall be secured
by this mortgagee x x x. And although it was stated that [t]he said credit shall
extend to any account which shall, within the said limit of P6,500,000.00
exclusive of interest, this part of the second sentence is again qualified by its
succeeding portion which provides that this mortgage shall stand as security for
all indebtedness of the mortgagor(s) and/or debtor(s), or any one of them, at any
and all times outstanding ... Again, under the third paragraph, it is provided that
the mortgagee may from time to time grant the mortgagor(s)/debtor(s) credit
facilities exceeding the amount secured by this mortgage x x x. The fourth
paragraph,[20] in addition, states that x x x all such withdrawals, and payments,
whether evidenced by promissory notes or otherwise, shall be secured by this
mortgage which manifestly shows that the parties principally intended to

constitute the real estate properties as continuing securities for additional

advancements which the mortgagee may, upon application, extend. It is well
settled that mortgages given to secure future advancements or loans are valid
and legal contracts, and that the amounts named as consideration in said
contracts do not limit the amount for which the mortgage may stand as security if
from the four corners of the instrument the intent to secure future and other
indebtedness can be gathered.[21]
Anent the second issue, we find that petitioners are entitled to foreclose
the mortgages. In their complaint for accounting with damages pending with the
trial court, private respondents averred that:
8. Up to and until February, 1993, PLAINTIFF-CORPORATION had paid to the
DEFENDANT-BANK, the amount of THREE HUNDRED FIFTY THOUSAND
(P350,000.00) Pesos, Philippine Currency, and was willing to pay the balance in
installments of FOUR HUNDRED THOUSAND (P400,000.00) Pesos, Philippine
Currency, every month, in the meantime, but the DEFENDANT-BANK refused to
accept, demanding instead SEVEN HUNDRED MILLION (P700,000,000.00)
Pesos, Philippine Currency, a month.
9. Inspite of the expressed willingness and commitment of plaintiffs to pay their
obligation in a manner which they could afford, on March 11, 1993,
MORTGAGORS and DEFENDANT-CORPORATION, each received a Letter of
Demand from DEFENDANT-BANK, for the payment of P28,775,615.14 exclusive
of interest and penalty evidenced by 11 promissory notes enclosed therein x x x.
10. Upon receipt of the letter, PLAINTIFF-CORPORATION through its President
pleaded with the Chairman of the Board of the DEFENDANT-BANK, through
whom Defendant-Corporation was transacting business with, to accept its offer of
payment of FOUR HUNDRED THOUSAND (P400,000.00) Pesos, Philippine
Currency, a month, in the meantime, which was again refused by the said
Chairman. [22]
which allegations are a clear admission that they were unable to settle to the
fullest their obligation. Foreclosure is valid where the debtors, as in this case, are
in default in the payment of their obligation. [23] The essence of a contract of
mortgage indebtedness is that a property has been identified or set apart from
the mass of the property of the debtor-mortgagor as security for the payment of
money or the fulfillment of an obligation to answer the amount of indebtedness, in
case of default of payment. [24] It is a settled rule that in a real estate mortgage
when the obligation is not paid when due, the mortgagee has the right to
foreclose the mortgage and to have the property seized and sold in view of
applying the proceeds to the payment of the obligation. [25] In fact, aside from the
mortgage contracts, the promissory notes executed to evidence the loans also
authorize the mortgagee to foreclose on the mortgages. Thus:
x x x CHINA BANKING CORPORATION is hereby authorized to sell at public or
private sales such securities or things of value for the purpose of applying their
proceeds to such payments.[26]
And while private respondents aver that they have already paid ten million pesos,
an allegation which has still to be settled before the trial court, the same cannot
be utilized as a shield to enjoin the foreclosure sale. A mortgage given to secure
advancements, we repeat, 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.[27]
With respect to the third issue, we find private respondents contention that
Administrative Order No. 3 is the governing rule in foreclosure of mortgages
misplaced. The parties, we note, have stipulated that the provisions of Act No.
3135 is the controlling law in case of foreclosure. Thus:
17. The MORTGAGOR(S) hereby grant(s) unto the MORTGAGEE full and
irrevocable power of attorney coupled with interest, in the event of breach of any
of the conditions of this mortgage, to sell, in its discretion, the mortgaged
properties at public auction, for cash and to the highest bidder, in the Province or
City where the mortgaged properties are located, before the Sheriff, or a Notary
Public, without court proceedings, after posting notices of sale for a period of
twenty days in three public places in said place; and after publication of such
notice in a newspaper of general circulation in the said place once a week, for
three consecutive weeks, and the MORTGAGEE is hereby authorized to execute
the deed of sale and all such other documents as may be necessary in the
premises all in accordance with the provisions of Act No. 3135 of the Philippine

Legislature,as amended, and Section 78 of Republic Act No. 337; x x x.

[28]
(Underscoring supplied. )
By invoking the said Act, there is no doubt that it must govern the manner in
which the sale and redemption shall be effected. [29] Clearly, the fundamental
principle that contracts are respected as the law between the contracting parties
finds application in the present case, [30] specially where they are not contrary to
law, morals, good customs and public policy.
Moreover, Administrative Order No. 3 is a directive for executive judges
and clerks of courts which, under its preliminary paragraph is [i]n line with the
responsibility of an Executive Judge, under Administrative Order No. 6, dated
June 30, 1975, for the management of courts within his administrative area,
included in which is the task of supervising directly the work of the Clerk of Court,
who is also the Ex-Oficio Sheriff, and his staff, x x x Surely, a petition for
foreclosure with the notary public is not within the contemplation of the aforesaid
directive as the same is not filed with the court. At any rate, Administrative Order
No. 3 cannot prevail over Act No. 3135, as amended. It is an elementary principle
in statutory construction that a statute is superior to an administrative directive
and the former cannot be repealed or amended by the latter.
On the last issue, we find that the issuance of the writ of injunction by the
trial court unjustified. A writ of preliminary injunction, as an ancillary or preventive
remedy, may only be resorted to by a litigant to protect or preserve his rights or
interests and for no other purpose during the pendency of the principal action.
[31]
But before a writ of preliminary injunction may be issued, there must be a clear
showing by the complaint that there exists a right to be protected and that the
acts against which the writ is to be directed are violative of the said right. [32] In the
case at bench, we fail to see any reason why the foreclosure of the mortgages
should be enjoined. On the face of the clear admission by private respondents
that they were unable to settle their obligations which were secured by the
mortgages, petitioners have a clear right to foreclose the mortgages which is a
remedy provided by law. Thus, in Caltex Philippines, Inc. v. Intermediate
Appellate Court,[33] we reiterated the rule that:
x x x where a debt is secured by a mortgage and there is a default in payment on
the part of the mortgagor, the mortgagee has a choice of one (1) or two (2)
remedies, but he cannot have both. The mortgagee may:
1) foreclosure the mortgage; or
2) file an ordinary action to collect the debt.
When the mortgagee chooses the foreclosure of the mortgage as a remedy, he
enforces his lien by the sale on foreclosure of the mortgaged property. The
proceeds of the sale will be applied to the satisfaction of the debt. With this
remedy, he has a prior lien on the property. In case of a deficiency, the
mortgagee has the right to claim for the deficiency resulting from the price
obtained in the sale of the real property at public auction and the outstanding
obligation at the time of the foreclosure proceedings (Soriano v. Enriquez, 24
Phil. 584; Banco de Islas Filipinas v. Concepcion Hijos, 53 Phil. 86; Banco
Nacionalv. Barreto, 53 Phil. 101).
On the other hand, if the mortgagee resorts to an action to collect the debt, he
thereby waives his mortgage lien. He will have no more priority over the
mortgaged property. If the judgment in the action to collect is favorable to him,
and it becomes final and executory, he can enforce said judgment by execution.
He can even levy execution on the same mortgaged property, but he will not
have priority over the latter and there may be other creditors who have better lien
on the properties of the mortgagor.[34]
WHEREFORE, the instant petition is hereby GRANTED. The assailed
Decision, as well as the Resolution, of the Court of Appeals dated January 17,
1995 and July 7, 1995, respectively, are hereby REVERSED and SET
ASIDE. The preliminary writ of injunction issued by the trial court is
hereby NULLIFIED. This case isREMANDED to the court of origin for further
proceedings in conformity with this decision.
SO ORDERED.
G.R. No. 99308 November 13, 1992

STATE INVESTMENT HOUSE, INC., petitioner,

vs.
COURT OF APPEALS and SABINA VDA. DE CUENCA, respondents.

MELO, J.:
The Decision and Amended Decision of the Court of Appeals in CA-G.R. CV
24339, both reversing and affirming in part the Decision of Branch 90 of the
Regional Trial Court of Quezon City in "Sabina Vda. de Cuenca vs. State
Investment House, Inc." (Civil Case No. Q-42552), for declaration of nullity of the
foreclosure sale with an alternative prayer for redemption of the foreclosed
property, are assailed in the instant petition on questions of law.
As may be gleaned from the pleadings of the parties, the antecedent facts are as
follows:
On February 13, 1979, private respondent Sabina Vda. de Cuenca (Cuenca)
obtained a loan from petitioner State Investment House, Inc. (SIHI) under a
promissory note for P160,000.00, secured by a mortgage on Cuenca's property
at Tandang Sora, Quezon City.
On November 15, 1979, Cuenca obtained another loan of P500,000.00. This loan
was secured by a real estate mortgage executed by Cuenca on another property
located along Timog, Quezon City, with paragraph 6 of the contract expressly
giving SIHI the option of extra-judicially foreclosing the mortgaged property in the
event of Cuenca's default in the payment of her indebtedness. Cuenca's unpaid
balance of P120,000.00 under the first loan was deducted from the proceeds of
the second loan. The mortgage on her property at Tandang Sora, Quezon City
was cancelled.
Because of Cuenca's failure to pay on the maturity date of the loan, her account
was restructured and rolled over twelve times through the execution of various
promissory notes. On November 29, 1982, the maturity date of the twelfth
promissory note, SIHI claimed that Cuenca's obligations, inclusive of interest,
service charges, and penalties, reached a total of P621,483.57. The loan was not
anymore restructured and SIHI, on December 2 and 15, 1982, made written
demands on Cuenca for the payment of her outstanding obligation.
Cuenca did not heed SIHI's demands for payment. SIHI thus initiated extrajudicial foreclosure of Cuenca's mortgaged property for which the corresponding
notice of sheriff's sale was issued on February 23, 1983, setting the auction sale
on March 22, 1983. The scheduled foreclosure sale was, however, deferred by
SIHI on account of Cuenca's request to be given time to pay the loan. Although
Cuenca did make some payments, these were not enough to fully pay her
outstanding obligation and as of July 28, 1983, SIHI claimed that Cuenca's
outstanding loan amounted to P637,793.86. Consequently, SIHI proceeded with
the auction sale on August 8, 1983 where it was declared the highest bidder for
P742,181.55, Cuenca's outstanding debt at that time per SIHI's computation.
The certificate of sale was registered with the Register of Deeds of Quezon City
on August 24, 1983.
On July 10, 1984, SIHI received a letter (Exhibit 54, p. 18, Vol. I, Record) from
Cuenca requesting that she be furnished a Statement of Account "before and
after the foreclosure/auction sale" for her to be able to redeem the foreclosed
property from SIHI. This was followed by another letter (Exhibit 54-A; also Exhibit
J, p. 20, Vol. I, Record) from Cuenca on July 17, 1984 wherein she signified her
intention to redeem the property for P500,000.00, payable in the following
manner:
1. P100,000.00 payable within thirty (30) days upon
receipt of (SIHI's) approval of this proposal.
2. The balance of P400,000.00 shall be paid in eight (8)
monthly installments. Each installment payment shall be
due on the 30th day of each month, the first monthly
payment to be reckoned from the date the amount stated
in No. 1 has been paid.

In a letter dated August 16, 1984 (Exhibit K, p. 22 Vol. I, Record), SIHI rejected
Cuenca's offer to redeem, reasoning that she should pay her total outstanding
obligation amounting at that time to P870,739.36.
On August 23, 1984, Cuenca, through counsel, sent another letter to SIHI
(Exhibit 54-B; also Exhibit L, pp. 23-24, Vol. I, Record) and reiterated her offer to
redeem the property by stating:
. . . we are now finally offering and tendering to you the
full sum of P426,874.72 as the redemption price of the
property. This sum of P426,874.72 is the difference
between the redemption price of P870, 739.36 which you
fixed in your letter of 16 August 1984, and the sum of
P441,312.76 which is the aggregate of the payment which
our client made to you on account of her loan of
P500,000.00. . .
Without, however, waiting for SIHI's reply, Cuenca, on August 24, 1984, filed a
complaint with the Regional Trial Court of Quezon City seeking annulment of the
foreclosure sale on the ground that she had not defaulted in the payment of her
loan to SIHI. Alternatively, Cuenca prayed that the trial court fix the redemption
price in the event it is found that she is still indebted to SIHI.
After the expiration of the one-year redemption period, the Register of Deeds
issued a new title on the foreclosed property in SIHI's name.
On October 19, 1989, Judge Abraham P. Vera, presiding judge of Branch 90 of
the Regional Trial Court of the National Capital Judicial Region stationed in
Quezon City, promulgated his decision declaring the foreclosure sale, as well as
SIHI's title obtained in such sale, null and void.
In its decision, the trial court made the following essential findings: (a) that the
filing of the petition for extrajudicial foreclosure was valid because as of the date
of the filing thereof, Cuenca was still indebted to SIHI in the sum of P222,890.41
based on the trial court's own computation; and (b) that the foreclosure sale held
on August 8, 1983 was not valid because at that time, Cuenca no longer owed
any amount to SIHI, as in fact from the computations made by the trial court,
Cuenca had made an overpayment to SIHI in the amount of P27,054.14.
The dispositive portion of the trial court's decision stated:
ACCORDINGLY, judgment is
hereby rendered:
(a) Declaring plaintiff to have fully paid her obligations
under the promissory notes, marked Exhs. 1 and 4, and
all of those deriving their being from Exh. 4;
(b) Declaring the sale of the mortgaged property of
plaintiff under the foreclosure proceedings and of the
resultant Certificate of Sale executed and issued by the
foreclosing Sheriff by reason of such foreclosure to be null
and void;
(c) Directing the Register of Deeds of Quezon City to
cancel Transfer Certificate of Title No. 325372 (Exh. N) in
the name of SIHI, and to reinstate Transfer Certificate of
Title No. T-12678 (Exh. B) in the name of plaintiff;
(d) Directing defendant SIHI to refund to plaintiff the sum
of P27,054.14, which was the overpayment she made on
account of her loans with SIHI, with interest at 12% per
annum from the date of the filing of the complaint until the
same is fully paid;
(e) Directing the defendant SIHI to pay to plaintiff the
sums of P50,000.00 as moral damages; P50,000.00 as
exemplary damages; and P50,000.00, as attorney's fees;

(f) Directing defendant SIHI to pay [plaintiff the sum of

P62,903.18 as a refund of the penalties which it had
collected from plaintiff, with interest thereon at 6% per
annum from date of this decision until the same is fully
paid;
(g) Directing plaintiff to pay to defendant SIHI the sum of
P14,645.00, in reimbursement of SIHI's expenses in the
foreclosure of the mortgaged property, which includes
attorney's fees, with interest thereon at 6% per
annum from date of the decision until it is fully paid, which
amount shall, however, be offset by an equivalent amount
for the amounts due from SIHI to plaintiff; and
(h) Directing defendant SIHI to pay the costs of this suit.
All other claims which the parties may have against each
other are hereby denied and dismissed.
SIHI appealed the decision to the court of Appeals in CA-G.R. CV No. 24339. In
its Original Decision, the Court of Appeals (Campos [P], Lantin, Sempio-Diy, JJ)
rectified several errors committed by the trial court in its computation of Cuenca's
account with SIHI, but nevertheless affirmed the trial court's finding that at the
time of the foreclosure sale, Cuenca had already paid in full her indebtedness so
that the foreclosure sale and the transmission of title to SIHI were null and void.
Both parties asked for a reconsideration of the appellate Court's ruling.
SIHI's Motion for Reconsideration contended that on the basis of the
computations made by the trial court and as corrected by the Court of Appeals in
its decision, the net result showed that as of the date of the foreclosure sale on
August 8, 1983, Cuenca was still indebted to SIHI, and such being the case, the
foreclosure sale was valid.
In her Motion for Reconsideration, Cuenca asked the appellate court to
reconsider its finding that she had obtained a third loan from SIHI for P61,500.00.
She further asked that she be credited two amounts which were disallowed by
respondent court.
On April 30, 1991, respondent court promulgated its Amended Decision, reversed
its earlier ruling and held that in accordance with its own computations, Cuenca
was still indebted to SIHI in the amount of P279,963.42 as of the date of the
foreclosure sale. The dispositive portion of this Amended Decision reads:
The decision of this court is hereby modified as follows:
a) Plaintiff-appellee is ordered to pay defendant-appellant
the sum of P279,963.42, consisting of the unpaid balance
of her outstanding obligation within 30 days from receipt
of this Amended Decision with payment of interest at the
legal rate from date of this decision until final judgment.
b) The foreclosure proceedings and the resultant
Certificate of Sale executed and issued by the foreclosing
sheriff by reason of such foreclosure are rendered null
and void.
c) Transfer Certificate of Title No. 324372 issued in the
name of SIHI is declared null and void and the Register of
Deeds of Quezon City is ordered to reinstate Transfer
Certificate of Title No. 126578 in the name of plaintiff.
d) No pronouncement as to payment of damages and
attorney's fees.
SO ORDERED. (p. 49, Rollo.)
Dissatisfied, SIHI filed the instant petition and as clarified in pages 4 and 5 of the
petition, the appeal is limited to the following aspects:

(i) The original Decision in C.A.-G.R. CV No. 24339,

"Sabina Vda de Cuenca, plaintiff-appellee v. State
Investment House, Inc., defendant-appellant,"
promulgated by respondent Court on 28 February 1991,
only insofar as the decision voided the foreclosure sale of
the mortgaged property and SIHI's title acquired by virtue
of such foreclosure sale, the challenged part of the
dispositive portion reading as follows:
(b) Declaring the sale of the
mortgaged property of plaintiff
under the foreclosure proceedings
and of the resultant Certificate of
Sale executed and issued by the
foreclosing Sheriff by reason of
such foreclosure to be null and
void;
(c) Directing the Register of Deeds
of Quezon City to cancel Transfer
Certificate of Title No. 325372
(Exhibit N) in the name of SIHI,
and to reinstate Transfer
Certificate of Title No. T-12678
(Exhibit B) in the name of the
plaintiff.
(ii) And the Amended Decision in the same appealed
case, promulgated on 30 April 1991, only insofar as it
adjudicated as follows:
(a) Plaintiff-appellee is ordered to
pay defendant-appellant the sum
of P279,963.42, consisting of the
unpaid balance of her outstanding
obligation within 30 days from
receipt of this Amended Decision
with payment of interest at the
legal rate from date of this
decision until final judgment.
(b) The foreclosure proceedings
and the resultant Certificate of
Sale executed and issued by the
foreclosing Sheriff by reason of
such foreclosure are rendered null
and void.
(c) Transfer Certificate of Title No.
324372 issued in the name of SIHI
is declared null and void and the
Register of Deeds of Quezon City
is ordered to reinstate Transfer
Certificate of Title No. 126578 in
the name of plaintiff.
(b) Petitioner is not appealing the rest of the dispositive
portions of the Decision and Amended Decision.
SIHI presents the following as grounds for its petition:

SHOULD THE SUPREME COURT AFFIRM THE

VOIDING OF THE FORECLOSURE SALE AND OF
PETITIONER'S TITLE, PETITIONER IS ENTITLED, IN
LAW AND EQUITY TO THE PAYMENT OF LEGAL
INTEREST ON THE PRINCIPAL SUM OF P279,963.42
(THE SUM ADJUDGED IN PETITIONER'S FAVOR BY
RESPONDENT COURT) COMPUTED FROM THE DATE
OF THE FORECLOSURE SALE UP TO THE DATE OF
ACTUAL PAYMENT OF THE PRINCIPAL SUM. (pp. 1516, Rollo)
On July 25 1991, shortly after she filed her Comment, Cuenca consigned with
this Court Metro Bank Cashier's Check No. CC-17743 in the sum of
P279,963.42, representing the amount ordered by the Court of Appeals (in its
Amended Decision) to be paid to SIHI. Thereafter, SIHI filed its Reply on August
15, 1991, to which a Rejoinder was filed by Cuenca on August 27, 1991.
As correctly formulated by SIHI, the principal issue in this case is the effect upon
the validity of the extra-judicial foreclosure proceedings of a judicial determination
that the debtor-mortgagor (Cuenca), at the time of the foreclosure, was still
indebted and in default in the payment of the obligations to the creditormortgagee (SIHI).
Cuenca's loan with SIHI was restructured and rolled over twelve (12) times, with
the last promissory note indicating the maturity date of November 29, 1982. The
recomputation (attached to the Amended Decision) of the Court of Appeals
shows, however, that on the said date Cuenca still had an outstanding
indebtedness of P416,188,08. SIHI, in its letters to Cuenca dated December 2
and 15, 1982 (Exhibits 36 and 36-A, pp. 435 and 436, Vol. I, Record) demanded
the payment of this unpaid amount. Cuenca, however, failed to make any
payments and thus, even at that point in time, was already debtor in default
under Article 1168 of the New Civil Code.
The extra-judicial foreclosure instituted by SIHI in February 1983 was, therefore,
valid as at that time, Cuenca's loan being then already almost three (3) months
overdue (Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983]). Aside from the
fact that Cuenca was already in default, the Real Estate Mortgage executed by
the parties expressly granted SIHI the option to foreclose when it provided that:
6. In the event that the Mortgagor/Debtor herein, should
fail or refuse to pay any of the sums of money secured by
this mortgage, or any part thereof, in accordance with the
terms and conditions herein set forth or those stipulated in
the correlative promissory note(s), or should he/it fail to
perform any of the conditions stipulated herein, or those
in the promissory note(s), then and in such case the
Mortgagee shall have the right, at its election, to foreclose
this mortgage. . .
SIHI, however, deferred the auction sale when Cuenca subsequently asked for
more time to pay her obligation. Cuenca's account, however, was not
restructured and she herself gave SIHI permission to proceed with the auction
sale on August 8, 1983 should she not be able to pay her account by then
(Exhibit 47, p. 457 Vol. I, Record). As of that date, the Court of Appeals computed
Cuenca's unpaid account with SIHI to be P279,963.42. It is worth noting that this
computation is not challenged or questioned by either SIHI or Cuenca and We
find no reason to disturb the same.
The obvious implication is that, at the time of the foreclosure sale on August 8,
1983, Cuenca had defaulted in the payment of P279,963.42. Thus, SIHI had the
option under the aforequoted provision of the Real Estate Mortgage, to foreclose
on the mortgaged property. SIHI cannot be faulted for having chosen that option.

MAIN GROUND OF THE PETITION

RESPONDENT COURT MANIFESTLY ERRED AND
MISAPPLIED THE LAW WHEN IT REFUSED TO
DECLARE THE FORECLOSURE PROCEEDINGS VALID
DESPITE ITS OWN DETERMINATION THAT
RESPONDENT CUENCA WAS TRULY AND GENUINELY
INDEBTED TO PETITIONER WHEN THE
FORECLOSURE PROCEEDINGS WERE INSTITUTED.
ALTERNATIVE GROUND

The Court of Appeals, therefore, erred in concluding that despite Cuenca's

default, the foreclosure sale and the resultant issuance of the certificate of sale
by the foreclosing Sheriff were null and void. Foreclosure is valid where the
debtor is in default in the payment of his obligation (Cf, Bicol Savings and Loan
Association vs. Court of Appeals, 171 SCRA 630 [1989]). In a real estate
mortgage when the principal obligation is not paid when due, the mortgagee has
the right to foreclose the mortgage and to have the property seized and sold with
the view of applying the proceeds to the payment of the obligation (Commodity
Financing Co., Inc., vs. Jimenez, 91 SCRA 57 [1979]). Once the proceeds have
been applied to the payment of the obligation, the debtor cannot anymore be
required to pay, unless, of course, there is a deficiency between the amount of

the loan and the foreclosure sale price, because the obligation has already been
extinguished.
We now come to the second issue posed by the parties: with the auction sale
having been done on August 8, 1992 and the certificate of foreclosure sale
having been validly registered with the Register of Deeds of Quezon City
on August 24, 1983, was Cuenca able to redeem the property in the manner and
within the period provided by law?
With the aforequoted provision of the Real Estate Mortgage having expressly
authorized SIHI to extra-judicially foreclose the mortgage in case of Cuenca's
failure to comply with her obligation to pay, the law governing the foreclosure is
Republic Act No. 3135 (An Act To Regulate The Sale of Property Under Special
Powers Inserted In Or Annexed To Real Estate Mortgages), as amended by
Republic Act No. 4118 (See Luna vs. Encarnacion, 91 Phil. 531 [1952]). Section
6 of the said Act states:
Sec. 6. In all cases in which an extrajudicial sale is made
under the special power herein before referred to, the
debtor, his successors 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 . . . (Emphasis supplied.)
In a long line of cases, We have consistently held that this one-year redemption
period should be counted not from the date of foreclosure sale, but from the time
the certificate of sale is registered with the Register of Deeds (Agbulos vs.
Alberto, 5 SCRA 790 [1962]; Salazar vs. Meneses, 8 SCRA 495 [1963]; Reyes
vs. Noblejas, 21 SCRA 1027 [1970]; Quimson vs. Philippine National Bank, 36
SCRA 26 [1970]). In this case, therefore, the one-year redemption period should
be reckoned from the time the certificate of sale was registered on August 24,
1983 (Bernardez vs. Reyes, 201 SCRA 648 [1991]).
Under Article 13 of the New Civil Code, a year is understood to be of three
hundred sixty-five (365) days. Thus, excluding the first day and counting from
August 25, 1983 (under paragraph 3 of Article 13 of the New Civil Code), and
bearing in mind that 1984 was a leap year, Cuenca had only until August 23,
1984, the 365th day after registration of the sale on August 24, 1983, within
which to redeem the foreclosed property in accordance with law. It was thus
already beyond the redemption period when Cuenca filed her suit below
on August 24, 1984.
It should be stressed in this regard that it is not proper to count, as Cuenca
submits in her Rejoinder, the period on the basis of 30 days per month. The law
speaks of a "one year" period within which to redeem, not twelve months as in
the case of redemption by a judgment debtor under Section 30 of Rule 39.
Applying Article 13 of the Civil Code, the period of one year within which to
redeem in the case at bar is to count 365 days from August 24, 1983.
Consequently, the last day to redeem would be and indeed fell on August 23,
1984, said year being a leap year (Cf Go vs. Dizon, et al., G.R. No. 75915-16,
Sept. 18, 1992).
Cuenca, however, was not able to exercise her right of redemption on or before
August 23, 1984. Although she wrote to SIHI twice on July 17 and August 23,
1984 and offered to redeem her property, these offers were not accompanied by
simultaneous bona fide tender or delivery of the redemption price to SIHI.
In Belisario vs. Intermediate Appellate Court (165 SCRA 101 [1988]), this Court,
through Justice Medialdea, held:
The general rule in redemption is that in making a
repurchase, it is not sufficient that a person offering to
redeem make manifestation of his desire to repurchase;
this statement of intention must be accompanied by an
actual and simultaneous tender of payment, which
constitutes the legal use of exercise of the right to
repurchase (Angao vs. Clavano, 17 Phil. 152). Likewise,
in several cases decided by this Court (Fructo vs.
Fuentes, 15 Phil. 362; Retes vs. Suelto, 20 Phil. 394;
Rosales vs. Reyes, et al., 98 Phil. 975) where the right to
repurchase was held to have been properly exercised,
there was definite finding of tender of payment having
been made by the vendor. The tender of payment must be

for the full amount of the repurchase price, otherwise the

offer to redeem will be held ineffectual. (Rumbaoa vs.
Arzaga, 84 Phil. 812). Bona fide redemption necessarily
imports a reasonable and valid tender of the entire
repurchase price. There is no cogent reason for requiring
the vendee to accept payment by installments from the
redemptioner, as it would ultimately result in an indefinite
extension of the redemption period (Conejero, et al. vs.
Court of Appeals, et al., L-21812, April 29, 1966, 16 SCRA
775, 780).
The rule that tender of payment of the repurchase price is
necessary to exercise in the right of redemption finds
support in civil law. Article 1616 of the Civil Code of the
Philippines, in the absence of an applicable provision in
Commonwealth Act No. 141, furnishes the guide, to wit:
The vendor cannot avail himself of the right to repurchase
without returning to the vendee the price of the sale . . .
(Uy Lee vs. Court of Appeals, L-28126, November 28,
1975, 68 SCRA 196, 204). (at pp. 107-108.)
Cuenca's use of the phrase "offering and tendering" in her letter dated August 23,
1984 does not comply with the ruling in Belisario. There is no showing
whatsoever here that the redemption price was delivered to SIHI. Redemption is
not a matter of intent but involves making the proper payment or tender of the
price of the land within the specified period (De la Merced vs. De Guzman, 160
SCRA 87 [1988]).
Neither is Cuenca correct in contending that SIHI in effect extended the
redemption period when it stated in its letter dated August 16, 1984 that Cuenca
had until August 24, 1984 within which to pay its outstanding account in full. In
Lazo vs. Republic Surety & Insurance Co., Inc., (31 SCRA 329 [1970]). We held
that it is only where, by voluntary agreement of the parties, consisting of
extensions of the redemption period, followed by commitment by the debtor to
pay the redemption price at a fixed date, will the concept of legal redemption be
converted by the parties into one of conventional redemption such that it
generates binding contracts when approved by the creditor. In the instant case,
however, there is no showing that Cuenca agreed to pay the redemption price on
or before August 24, 1984, as set by SIHI. On the contrary, Cuenca's filing of her
complaint on August 24, 1984 principally seeking to declare the nullity of the
foreclosure sale is indicative of her refusal to pay the redemption price on the
deadline mistakenly set by SIHI.
Cuenca's complaint filed on August 24, 1984 (the 365th day from the registration
of the certificate of sale, having fallen on August 23, 1984), did not have the
effect of a formal offer to redeem. In Belisario (supra), We further explained.
This case is different from Uy Lee vs. Court of Appeals,
supra where the action to compel redemption was filed
after the lapse of the period of redemption. Thus, the
Court held in said case, to wit:
It is clear that the mere sending of
letters by vendor Simeon
expressing his desire to
repurchase the property without
an accompanying tender of
redemption price fell short of the
requirements of law. Having failed
to properly exercise his right of
redemption within the statutory
five-year period, the right is lost
and the same can no longer be
revived by the filing of an action to
compel redemption after the lapse
of the period.
The same factual antecedent obtained in Conejero, et al.
vs. Court of Appeals, supra, where the complaint seeking
to be declared entitled to redeem was filed after the
expiration of the statutory period of redemption. What was
proper for determination then in said cases was whether
or not the right of redemption sans judicial action was
validly exercised. In said cases, the Court applied the
general rule that bona fide redemption necessarily

imports a reasonable and valid tender of the entire

purchase price. (at p. 109; emphasis added.)

recover at least his investment in case of redemption. In

the meantime, the landowner's needs and obligations
cannot be met. It is doubtful if any such result was
intended by the statute, absent clear wording to that
effect.

Thus, it is only when the complaint to enforce a repurchase is filed within the
period of redemption will it be equivalent to an offer to redeem and have the
effect of preserving the right of redemption (Belisario, supra, citingReoveros vs.
Abel and Sandoval, 48 O.G. 5318). Where, as in this case, the complaint for
redemption was filed after the redemption period expired, the complaint is a
useless exercise which can not defeat the purchaser's right to have the title of the
property transferred in his name. Cuenca's reliance on the ruling in Hulganza vs.
Court of Appeals (147 SCRA 77 [1987]) is without any basis. The doctrine laid
down in Hulganza finds no applicability to the instant case for unlike the
complaint filed by Cuenca in the case at bar, the action for redemption
in Hulganza was filed within the period of redemption.
Moreover, it bears noting that Cuenca sent letters (dated July 17 and August 23,
1984) to SIHI within the redemption period in which she offered to redeem her
property. In her letter dated July 17, 1984, she offered to pay her indebtedness
according to an installment plan which, if carefully analyzed, had the effect of
extending the period of redemption beyond one year contrary to the policy of the
law (Belisario, supra). In her other letter dated August 23, 1984, she offered to
pay the amount P426,874.72 in full settlement of her obligation, althrough, as We
earlier stated, this amount was never properly delivered to SIHI in accordance
with law. There is thus no proof at that time that Cuenca possessed the ability to
pay the redemption amount she was offering. This is especially true in the light of
the fact that in her first letter she merely offered to pay in installments.
If only to prove the veracity of her claim that at that time she was capable of
paying SIHI the full amount of what she thought was a reasonable redemption
price, the least that Cuenca could have done was to consign payment in court
simultaneous with her filing of the action to redeem on August 24, 1992. In so
stating, We do not here depart from our consistent ruling that a formal offer to
redeem, accompanied by a bona fide tender of the redemption price, although
proper, is not essential where the right to redeem is exercised through the filing
of a judicial action (Tolentino vs. Court of Appeals, 106 SCRA 513 [1981];
Tioseco vs. Court of Appeals, 143 SCRA 705 [1986]; Hulganza, supra; Beliserio,
supra). As earlier stated, this rule only holds where the action to redeem is filed
within the redemption period. Where, as in the instant case, the action is filed
after the statutory period has expired, the determination of whether the plaintiff
consigned the redemption price with the court simultaneous with the filing of the
action is necessary to see if the right of redemption sans judicial action was
validly exercised (Beliserio, supra).
Cuenca's consignation with this Court of the amount ordered by the Court of
Appeals to be paid to SIHI only eight (8) years after her action to redeem was
filed in 1984 is a belated move which merely shows that in 1984 she had no
ability to pay SIHI the redemption price. Her filing of the action was a mere
devise and scheme to buy time to raise the amount needed to redeem her
property. In Conejero, et al. vs. Court of Appeals, et al. (16 SCRA 775 [1966]),
We precisely stated that "a buyer can not be expected to entertain an offer of
redemption without attendant evidence that the redemptioner can, and is willing
to accomplish the repurchase immediately. A different rule would leave the buyer
open to harassment by speculators or crackpots, as well as to unnecessary
prolongation of the redemption period, contrary to the policy of the law. . . . Of
course, consignation of the price would remove all controversy as to the
redemptioner's ability to pay at the proper time. (at pp. 781-782.)"
We further stated in Basbas vs. Entena (28 SCRA 665, 671 [1969]) that:
. . . the right of legal redemption must be exercised within
specified time limits: and the statutory periods would be
rendered meaningless and of easy evasion unless the
redemptioner is required to make an actual tender in good
faith of what he believed to be the reasonable price of the
land sought to be redeemed. The existence of the right of
redemption operates to depress the market value of the
land until the period expires, and to render that period
indefinite by permitting the tenant to file a suit for
redemption, with either party unable to foresee when final
judgment will terminate the action, would render nugatory
the period of two years fixed by the statute for making the
redemption and virtually paralyze any efforts of the
landowner to realize the value of his land. No buyer can
be expected to acquire it without any certainty as to the
amount for which it may be redeemed, so that he can

The situation becomes worse when as shown by the

evidence in this case, the redemptioner has no funds and
must apply for them to the Land Authority, which, in turn,
must depend on the availability of funds from the Land
Bank. It then becomes practically certain that the
landowner will not be able to realize the value of his
property for an indefinite time beyond the two years
redemption period. (at pp. 671-672.)
WHEREFORE, the appealed portions of the Original Decision and the Amended
Decision are REVERSED and SET ASIDE and new judgment is hereby entered:
1) Declaring valid and effective the extrajudicial foreclosure of the mortgage of
respondent Sabina Vda. de Cuenca's property in Timog, Quezon City on August
8, 1983; and
2) Upholding and confirming the cancellation of Transfer Certificate of Title No.
126578 of the Register of Deeds of Quezon City in the name of Sabina Vda. de
Cuenca, as well as its replacement by Transfer Certificate of Title No. 324372 in
the name of State Investment House, Inc.
Neither party is to recover damages or costs.
SO ORDERED.
[G.R. No. 139884. February 15, 2001]
SPOUSES OCTAVIO and EPIFANIA LORBES, petitioners, vs. COURT OF
APPEALS,
RICARDO
DELOS
REYES
and
JOSEFINA
CRUZ, respondents.
DECISION
GONZAGA-REYES, J.:
This petition for review on certiorari arose from an action for reformation of
instrument and damages originally filed with the Regional Trial Court of Antipolo,
Rizal, Branch 74, the decision on which was reviewed and reversed by the Third
Division of the Court of Appeals.
Petitioners were the registered owners of a 225-square meter parcel of
land located in Antipolo, Rizal covered by Transfer Certificate of Title No.
165009. Sometime in August 1991, petitioners mortgaged this property to
Florencio and Nestor Carlos in the amount of P150,000.00.
About a year later, the mortgage obligation had increased to P500,000.00
and fearing foreclosure of the property, petitioners asked their son-in-law, herein
private respondent Ricardo delos Reyes, for help in redeeming their
property.Private respondent delos Reyes agreed to redeem the property but
because he allegedly had no money then for the purpose he solicited the
assistance of private respondent Josefina Cruz, a family friend of the delos
Reyeses and an employee of the Land Bank of the Philippines.
It was agreed that petitioners will sign a deed of sale conveying the
mortgaged property in favor of private respondent Cruz and thereafter, Cruz will
apply for a housing loan with Land Bank, using the subject property as
collateral. It was further agreed that out of the proceeds of the loan, P500,000.00
will be paid to the Carloses as mortgagees, and any such balance will be applied
by petitioners for capital gains tax, expenses for the cancellation of the mortgage
to the Carloses, transfer of title to Josefina Cruz, and registration of a mortgage
in favor of Land Bank.[1] Moreover, the monthly amortization on the housing loan
which was supposed to be deducted from the salary of private respondent Cruz
will be reimbursed by private respondent delos Reyes.

On September 29, 1992, the Land Bank issued a letter of guarantee in

favor of the Carloses, informing them that Cruzs loan had been approved. On
October 22, 1992, Transfer Certificate of Title No. 165009 was cancelled and
Transfer Certificate of Title No. 229891 in the name of Josefina Cruz was issued
in lieu thereof.[2] On November 25, 1992, the mortgage was discharged.

for non-payment of the mortgage obligation and that it was never the intention of
the plaintiffs to sell the property to the defendants, as it was their agreement that
plaintiffs can redeem the property or any member of the family thereof, when they
become financially stable.[4]
The dispositive portion of the trial courts decision thus provides:

Sometime in 1993, petitioners notified private respondent delos Reyes

that they were ready to redeem the property but the offer was
refused. Aggrieved, petitioners filed on July 22, 1994 a complaint for reformation
of instrument and damages with the RTC of Antipolo, Rizal, docketed as Civil
Case No. 94-3296.
In the complaint, petitioners claimed that the deed was merely a formality
to meet the requirements of the bank for the housing loan, and that the real
intention of the parties in securing the loan was to apply the proceeds thereof for
the payment of the mortgage obligation. [3] They alleged that the deed of sale did
not reflect the true intention of the parties, and that the transaction was not an
absolute sale but an equitable mortgage, considering that the price of the sale
was inadequate considering the market value of the subject property and
because they continued paying the real estate taxes thereto even after the
execution of the said deed of sale. Petitioners averred that they did not see any
reason why private respondents would retract from their original agreement other
than that they (petitioners) and the members of their family resigned en masse
from the Mahal Namin Organization, of which private respondent delos Reyes
was the president and chairman of the board of directors, and private respondent
Cruz was the treasurer. In the same complaint, they demanded moral damages,
exemplary damages, and attorneys fees.
On July 29, 1996, the trial court issued a temporary restraining order
enjoining private respondents from ejecting petitioners from the premises of the
disputed property; this was soon replaced by a writ of preliminary injunction.
Summons and a copy of the complaint were served upon private
respondents on August 1, 1994. Private respondents filed their answer beyond
the reglamentary period, or only on September 1, 1994. Thus, on September 5,
1994, petitioners filed a motion to declare private respondents in default, which
the trial court granted in an order dated September 16, 1994.On September 30 of
the same year, petitioners presented their evidence ex parte before the trial
court. The principal witness presented was petitioner Octavio Lorbes, whose
testimony was corroborated by his son, Atty. Salvador Lorbes.
On October 12, 1994, private respondents filed a motion to lift order of
default and to strike out evidence presented ex parte, which the court denied in
an order dated October 26, 1994.
On June 20, 1995, the trial court rendered judgment in favor of petitioners,
upon finding that: (1) the Deed of Absolute Sale dated October 21, 1992 did not
reflect the true intention of the parties, and (2) the transaction entered into
between petitioners and Cruz was not an absolute sale but an equitable
mortgage, considering that the price stated in the Deed of Absolute Sale was
insufficient compared to the value of the property, petitioners are still in
possession of the property, and petitioners had continued to pay the real estate
taxes thereon after the execution of the said deed of sale. As explained by the
trial court in its decision:
The foregoing uncontroverted facts clearly show that the transaction entered into
between the plaintiffs and the defendants is not an absolute sale but merely an
equitable mortgage as the sale was executed in order to secure a loan from a
certain bank to save the property from the danger of foreclosure and to use it as
collateral thereof for bank loan purposes and that the same does not reflect the
real intention of the parties in executing the said Deed of Sale. The court notes
that at the time the transaction and the Deed of Absolute Sale was executed by
the plaintiffs sometime in 1992, the prevailing market value of the lot alone was
P400,000.00 per square meter such that the lot alone consisting of 255 square
meters, excluding the house and improvements thereon would already cost more
than a million pesos already hence, the consideration of P600,000.00 in the said
Deed of Sale is considerably insufficient compared to the value of the
property. Further, the plaintiffs are still in possession of the subject property and
had been paying the realty taxes thereon even after the execution of the sale and
the transfer of the title from the plaintiffs to defendant Josephine Cruz which
clearly evinces the true badge of the transaction which occurred between the
plaintiffs and defendants as that of an equitable mortgage and not an absolute
sale and that the plaintiffs were only compelled to enter into the said transaction
of sale with the defendants as the former were in extreme need of money in
order to redeem their only conjugal property and to save it from being foreclosed

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of

the plaintiffs and against the defendants, ordering the latter jointly and severally,
as follows:
1. To reconvey the subject property to the plaintiffs upon payment
of the price stipulated in the contract of sale;
2. To pay plaintiffs the sum of P50,000.00 as moral damages;
3. To pay plaintiffs the sum of P50,000.00 as and by way of
attorneys fees plus P1,000.00 per court appearance;
4. To pay the costs of suit.
SO ORDERED.[5]
The Court of Appeals reversed the above decision, finding that private
respondents were denied due process by the refusal of the trial court to lift the
order of default against them, and that the transaction between petitioners and
Cruz was one of absolute sale, not of equitable mortgage. It also held the RTC
decision to be constitutionally infirm for its failure to clearly and distinctly state the
facts and the law on which it is based.
The Court of Appeals held that the reformation of the Deed of Absolute
Sale in the instant case is improper because there is no showing that such
instrument failed to express the true intention of the parties by reason of mistake,
fraud, inequitable conduct, or accident in the execution thereof. [6] To the Court of
Appeals, the transaction was unmistakably a contract of sale, as evidenced by
the numerous supporting documents thereto, such as the Contract to Sell dated
June 1992, Affidavit of Waiver/Assignment dated August 14, 1992, Receipt of
Partial Advance Payment dated September 9, 1992, and Transfer Certificate of
Title No. 229891 issued in the name of private respondent Cruz. Going over the
indicators giving rise to a presumption of equitable mortgage cited in the decision
of the RTC, the Court of Appeals held: (1) inadequacy of price is material only in
a sale with right to repurchase, which is not the case with herein petitioners and
Cruz; moreover, the estimate of the market value of the property came only from
the bare testimony of petitioner Octavio Lorbes, (2) petitioners remaining in
possession of the property resulted only from their refusal to vacate the same
despite the lawful demands of private respondent Cruz, and (3) there was no
documentary evidence that petitioners continued paying the taxes on the
disputed property after the execution of the Deed of Absolute Sale.
In its decision, the Court of Appeals also pointed out that under the usual
arrangement of pacto de retro the vendor of the property is a debtor of the
vendee, and the property is used as security for his obligation. In the instant
case, the mortgage creditors (the Carloses) are third persons to the Deed of
Absolute Sale.
This petition raises three issues before the Court: (1) whether respondent
court erred in ruling that the Deed of Absolute Sale dated October 21, 1992 was
an equitable mortgage, (2) whether respondent court erred in ruling that by
declaring private respondents in default they were denied due process of law,
and (3) whether respondent court erred in ruling that the trial courts decision
violates the constitutional requirement that it should clearly and distinctly state
the facts and the law on which it is based. [7]
We shall first deal with the second and third issues, these being
preliminary matters.
Well-settled is the rule that courts should be liberal in setting aside orders
of default for judgments of default are frowned upon, unless in cases where it
clearly appears that the reopening of the case is intended for delay. [8] The
issuance of orders of default should be the exception rather than the rule, to be

allowed only in clear cases of obstinate refusal by the defendant to comply with
the orders of the trial court.[9]
Under the factual milieu of this case, the RTC was indeed remiss in
denying private respondents motion to lift the order of default and to strike out the
evidence presented by petitioners ex parte, especially considering that an
answer was filed, though out of time. We thus sustain the holding of the Court of
Appeals that the default order of the RTC was immoderate and in violation of
private respondents due process rights. However, we do not think that the
violation was of a degree as to justify a remand of the proceedings to the trial
court, first, because such relief was not prayed for by private respondents, and
second, because the affirmative defenses and evidence that private respondents
would have presented before the RTC were capably ventilated before respondent
court, and were taken into account by the latter in reviewing the correctness of
the evaluation of petitioners evidence by the RTC and ultimately, in reversing the
decision of the RTC. This is evident from the discussions in the decision of the
Court of Appeals, which cited with approval a number of private respondents
arguments and evidence, including the documents annexed to their opposition to
the issuance of a writ of preliminary injunction filed with the RTC. [10] To
emphasize, the reversal of respondent court was not simply on due process
grounds but on the merits, going into the issue of whether the transaction was
one of equitable mortgage or of sale, and so we find that we can properly take
cognizance of the substantive issue in this case, while of course bearing in mind
the inordinate manner by which the RTC issued its default order.
As regards the third issue, we reverse for being unfounded the holding of
the Court of Appeals since the RTC decision, some parts of which we even
reproduced in our earlier discussions, clearly complied with the constitutional
requirement to state clearly and distinctly the facts and the law on which it was
based.
Thus, the one issue essential to the resolution of this case is the nature of
the transaction between petitioners and private respondent Cruz concerning the
subject parcel of land. Did the parties intend for the contested Deed of Absolute
Sale to be abona fide and absolute conveyance of the property, or merely an
equitable mortgage?
On the outset, it must be emphasized that there is no conclusive test to
determine whether a deed absolute on its face is really a simple loan
accommodation secured by a mortgage. [11] The decisive factor in evaluating such
agreement is the intention of the parties, as shown not necessarily by the
terminology used in the contract but by all the surrounding circumstances, such
as the relative situation of the parties at that time, the attitude, acts, conduct,
declarations of the parties, the negotiations between them leading to the deed,
and generally, all pertinent facts having a tendency to fix and determine the real
nature of their design and understanding. As such, documentary and parol
evidence may be submitted and admitted to prove the intention of the parties. [12]
The conditions which give way to a presumption of equitable mortgage, as
set out in Article 1602 of the Civil Code, apply with equal force to a contract
purporting to be one of absolute sale. [13] Moreover, the presence of even one of
the circumstances laid out in Article 1602, and not a concurrence of the
circumstances therein enumerated, suffices to construe a contract of sale to be
one of equitable mortgage. [14] This is simply in consonance with the rule that the
law favors the least transmission of property rights. [15]

It is not disputed that before the execution of the Deed of Absolute Sale
petitioners mortgage obligation to the Carloses was nearing maturity and they
were in dire need of money to meet the same. Hence, they asked for the help of
their son-in-law delos Reyes who in turn requested Cruz to take out a housing
loan with Land Bank. Since collateral is a standard requirement of banks in giving
out loans, it was made to appear that the subject property was sold to Cruz so
she can declare the same as collateral for the housing loan. This was simply in
line with the basic requirement in our laws that the mortgagor be the absolute
owner of the property sought to be mortgaged. [16] Consistent with their
agreement, as soon as the housing loan was approved, the full amount of the
proceeds were immediately turned over to petitioners, who promptly paid
P500,000.00 therefrom to the Carloses in full satisfaction of their mortgage
obligation. The balance was spent by petitioners in transferring title to the
property to Cruz and registering the new mortgage with Land Bank.
Understandably, the Deed of Absolute Sale and its supporting documents
do not reflect the true arrangement between the parties as to how the loan
proceeds are to be actually applied because it was not the intention of the parties
for these documents to do so. The sole purpose for preparing these documents
was to satisfy Land Bank that the requirement of collateral relative to Cruzs
application for a housing loan was met.
Were we to accept, as respondent court had, that the loan that Cruz took
out with Land Bank was indeed a housing loan, then it is rather curious that Cruz
kept none of the loan proceeds but allowed for the bulk thereof to be immediately
applied to the payment of petitioners outstanding mortgage obligation. It also
strains credulity that petitioners, who were exhausting all means to save their
sole conjugal real property from being foreclosed by the Carloses, would
concurrently part with the same in favor of Cruz.
Such urgent prospect of foreclosure helps to explain why petitioners would
subscribe to an agreement like the Deed of Absolute Sale in the herein case,
which on its face represents their unconditional relinquishment of ownership over
their property. Passing upon previous similar situations the Court has declared
that while it was true that plaintiffs were aware of the contents of the contracts,
the preponderance of the evidence showed however that they signed knowing
that said contracts did not express their real intention, and if they did so
notwithstanding this, it was due to the urgent necessity of obtaining funds.
Necessitous men are not, truly speaking, free men; but to answer a present
emergency, will submit to any terms that the crafty may impose upon them. [17]
The facts further bear out that petitioners remained in possession of the
disputed property after the execution of the Deed of Absolute Sale and the
transfer of registered title to Cruz in October 1992. Cruz made no demand on
petitioners to vacate the subject premises until March 19, 1994; [18] interestingly,
this was two days after petitioners signified their intention to redeem the property
by paying the full amount of P600,000.00. [19] On this basis, the finding of
respondent court that petitioners remained in possession of the property only
because they refused to vacate on Cruzs demand is not accurate because the
records reflect that no such demand was made until more than a year since the
purported sale of the property.
Copies of realty tax receipts attached to the record also show that
petitioners continued paying for the taxes on the property for the period 1992 to
[20]
1994, or after the property was supposed to have been sold to Cruz.

Thus, under Article 1602 of the Civil Code, a contract shall be presumed
to be an equitable mortgage when --- (a) the price of a sale with right to
repurchase is unusually inadequate; (b) the vendor remains in possession as
lessee or otherwise; (c) upon or after the expiration of the right of repurchase
another instrument extending the period of redemption or granting a new period
is executed; (d) the purchaser retains for himself a part of the purchase price; (e)
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.

From the above, the Court is satisfied that enough of the circumstances
set out in Article 1602 of the Civil Code are attendant in the instant case, as to
show that the true arrangement between petitioners and private respondent Cruz
was an equitable mortgage.

Applying the foregoing considerations to the instant case, the Court finds
that the true intention between the parties for executing the Deed of Absolute
Sale was not to convey ownership of the property in question but merely to
secure the housing loan of Cruz, in which petitioners had a direct interest since
the proceeds thereof were to be immediately applied to their outstanding
mortgage obligation to the Carloses.

xxx it must be borne in mind that the equitable doctrine xxx to the effect that any
conveyance intended as security for a debt will be held in effect to be a
mortgage, whether so actually expressed in the instrument or not, operates
regardless of the form of the agreement chosen by the contracting parties as the
repository of their will. Equity looks through the form and considers the
substance; and no kind of engagement can be adopted which will enable the
parties to escape from the equitable doctrine to which reference is made. In other
words, a conveyance of land, accompanied by registration in the name of the

That a transfer certificate of title was issued in favor of private respondent

Cruz also does not import conclusive evidence of ownership or that the
agreement between the parties was one of sale. As was stated in Oronce vs.
Court of Appeals,[21] citing Macapinlac vs. Gutierrez Repide[22]

transferee and the issuance of a new certificate, is no more secured from the
operation of the equitable doctrine than the most informal conveyance that could
be devised.

(c) examine, in case of real estate mortgage foreclosure, whether the applicant
has complied with all the requirements before the public auction is conducted
under the direction of the sheriff or a notary public, pursuant to Sec. 4 of Act
3135, as amended;

Before we fully set aside this issue, it will be recalled that the instant
petition originated as a complaint for reformation filed before the RTC of Antipolo,
Rizal. The Court of Appeals found petitioners action for reformation unmeritorious
because there was no showing that the failure of the deed of sale to express the
parties true intention was because of mistake, fraud, inequitable conduct, or
accident.[23] Indeed, under the facts of the present case, reformation may not be
proper for failure to fully meet the requisites in Article 1359 of the Civil Code, and
because as the evidence eventually bore out the contested Deed of Absolute
Sale was not intended to reflect the true agreement between the parties but was
merely to comply with the collateral requirements of Land Bank. However, the
fact that the complaint filed by petitioners before the trial court was categorized to
be one for reformation of instrument should not preclude the Court from passing
upon the issue of whether the transaction was in fact an equitable mortgage as
the same has been squarely raised in the complaint and had been the subject of
arguments and evidence of the parties. Thus we have held that it is not the
caption of the pleading but the allegations therein that determine the nature of
the action, and the Court shall grant relief warranted by the allegations and the
proof even if no such relief is prayed for.[24]

(d) sign and issue the certificate of sale, subject to the approval of the Executive
Judge, or in his absence, the Vice-Executive Judge;

Finally, on the award of damages. Considering the due process flaws that
attended the default judgment of the RTC, and applying the rule adopted by this
Court that in instances where no actual damages are adjudicated the awards for
moral and exemplary damages may be reduced,[25] we reduce the award for
moral damages in the instant case from P50,000.00 to P30,000.00. At the same
time, we sustain the award of attorneys fees in the amount of P50,000.00, it
being clear that petitioners were compelled to incur expenses and undergo the
rigors of litigation to recover their property.
WHEREFORE, the decision of the Court of Appeals is REVERSED and
SET ASIDE. The decision of the Regional Trial Court of Antipolo, Rizal is
REINSTATED, with the MODIFICATION that the award of moral damages is
reduced to P30,000.00, and in all other respects AFFIRMED. Costs against
private respondents.
SO ORDERED.
TO: ALL EXECUTIVE JUDGES AND CLERKS OF COURTS OF THE
REGIONAL TRIAL COURTS
SUBJECT: PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF
MORTGAGE.
For the information and guidance of all concerned, quoted hereunder is the
Resolution of the Court En Banc dated December 14, 1999 in Administrative
Matter No. 99-10-05-0 Re: Procedure in Extra-Judicial Foreclosure of Mortgage.
"A.M. No. 99-10-05-0 Re: Procedure in Extra-Judicial Foreclosure of Mortgage.

(e) after the certificate of sale has been issued to the highest bidder, keep the
complete records, while awaiting any redemption within a period of one (1) year
from date of registration of the certificate of sale with the Register of Deeds
concerned, after which the records shall be archived.
"Where the application concerns the extra-judicial foreclosure of mortgages of
real estates and/or chattels in different locations covering one indebtedness, only
one filing fee corresponding to such indebtedness shall be collected. The
collecting Clerk of Court shall, apart from the official receipt of the fees, issue a
certificate of payment indicating the amount of indebtedness, the filing fees
collected, the mortgages sought to be foreclosed, the real estates and/or chattels
mortgages and their respective locations, which certificate shall serve the
purpose of having the application docketed with the Clerks of Court of the places
where the other properties are located and of allowing the extrajudicial
foreclosure to proceed thereat.
"3. The notices of auction sale in extra-judicial foreclosure for publication by the
sheriff or by a notary public shall be published in a newspaper of general
circulation pursuant to Section 1, Presidential Decree No. [1079], dated January
26, 1977, and non-compliance therewith shall constitute a violation of Section 6,
thereof.
"4. The Executive Judge shall, with the assistance of the Clerk of Court, raffle
applications for extrajudicial foreclosure of mortgage under the direction of the
sheriff among all sheriffs, including those assigned to the Office of the Clerk of
Court and Sheriff IV assigned in the branches.cralaw
"5. No auction sale shall be held unless there are at least two (2) participating
bidders, otherwise the sale shall be postponed to another date. If on the new
date set for the sale there shall not be at least two bidders, the sale shall then
proceed. The names of the bidders shall be reported by the sheriff or the notary
public who conducted the sale to the Clerk of Court before the issuance of the
certificate of sale.
"This Resolutions amends or modifies accordingly Administrative Order No. 3
issued by the then Chief Justice Enrique M. Fernando on 19 October 1984
and Administrative Circular No. 3-98 issued by [then] Chief Justice Andres R.
Narvasa on 5 February 1998.cralaw
"The Court Administrator may issue the necessary guidelines for the effective
enforcement of this Resolution.cralaw
"The Clerk of Court shall cause the publication of this Resolution in a newspaper
of general circulation not later than 27 December 1999 and furnish copies to the
Integrated Bar of the Philippines.cralaw
"This Resolution shall take effect on the fifteenth day of January of the year
2000.cralaw

"In line with the responsibility of an Executive Judge under Administrative Order
No. 6, dated June 30, 1975, for the management of courts within his
administrative area, included in which is the task of supervising directly the work
of the Clerk of Court, who is also the Ex-Officio Sheriff and his staff, and the
issuance of commissions to notaries public and enforcement of their duties under
the law, the following procedures are hereby prescribed in extra-judicial
foreclosure of mortgage:chanroblesvirtuallawlibrary
"1. All applications for extra-judicial foreclosure of mortgage whether under the
direction of the sheriff or a notary public, pursuant to Act 3135, as amended by
Act 4118, and Act 1508, as amended, shall be filed with the Executive Judge,
through the Clerk of Court who is also the Ex-Officio Sheriff.
"2. Upon receipt of an application for extra-judicial foreclosure of mortgage, it
shall be the duty of the Clerk of Court to:chanroblesvirtuallawlibrary

(a) receive and docket said application and to stamp thereon the corresponding
file number, date and time of filing;
(b) collect the filing fees therefor and issue the corresponding official receipt.

"Enacted this 14th day of December 1999 in the City of Manila."

January 3, 2000.
G.R. No. 111584

September 17, 2001

PRODUCERS BANK OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and SPOUSES SALVADOR Y. CHUA and EMILIA U.
CHUA, respondents.
MELO, J.:
The instant petition assails the decision of the Court of Appeals in its CA G.R.CV
No. 20220, dated October 31, 1991, affirming with modification the decision of
Branch 48 of the Regional Trial Court of the 6th Judicial Region stationed in
Bacolod City, as well as the resolution dated August 12, 1993 denying petitioner's
motion for partial consideration. Undersigned ponente was given this case in
pursuance of A. M. No. 00-9-03-SC dated February 27, 2001 distributing the socalled back-log cases.

The generative facts of the case may be chronicled as follows:

Sometime in April, 1982, respondent Salvador Chua was offered by Mr. Jimmy
Rojas, manager of petitioner bank, to transfer his account from Pacific Banking
Corporation to herein petitioner Producers Bank of the Philippines. In view of
Rojas' assurances of longer loan terms and lower rates of interest, respondent
spouses opened and maintained substantial savings and current deposits with
the Bacolod branch of petitioner bank. Likewise, private respondents obtained
various loans from petitioner bank, one of which was a loan for P2,000,000.00
which was secured by a real estate mortgage and payable within a period of
three (3) years or from 1982 to 1985. On January 20, 1984, private respondents
deposited with petitioner bank the total sum of P960,000.00, which was duly
entered in private respondents' savings account passbook. However, petitioner
bank failed to credit this deposit in private respondents' savings account due to
the fact that its Branch Manager, Sixto Castillo, absconded with the money of the
bank's depositors. Also, petitioner bank dishonored the checks drawn out by
private respondents in favor of their various creditors on the ground of insufficient
funds, despite the fact that at that time, the balance of private respondents'
deposit was in the amount of P1,051,051.19. These events prompted private
respondents to request for copies of their ledgers covering their savings and
current accounts, but petitioner bank refused. Due to petitioner bank's refusal to
furnish private respondents copies of their ledgers, private respondents instituted
on January 30, 1984 an action for damages against petitioner bank which was
docketed as Civil Case No. 2718. On the other hand, petitioner bank filed with
the City Sheriff of Bacolod a petition for extrajudicial foreclosure of the real estate
mortgage during the pendency of Civil Case No. 2718. As a result, private
respondents filed a complaint for injunction and damages docketed as Civil Case
No. 3276, alleging that the petition for extrajudicial foreclosure was without basis
and was instituted maliciously in order to harass private respondents. On April
26, 1988, the trial court rendered its decision on the latter case, the dispositive
portion of which reads:
WHEREFORE, from the evidence adduced, judgment is hereby
rendered in favor of plaintiff ordering the defendant as follows:
1) To pay plaintiff the sum of P2,000,000.00 as moral
damages, with legal rate of interest; the sum of
P90,000.00 per month and P18,000.00 per month
representing plaintiff's unrealized profits from his cement
and gasoline station business, respectively, to commence
from October 16, 1984, with legal rate of interest until fully
paid; the sum of P250,000.00 as exemplary damages;
2) To off-set the sum of P960,000.00 deposited by plaintiff
on January 20, 1984 and entered in his Passbook No.
38240, together with its incremental interests computed at
banking rate and to commence from January 20, 1984
with his agricultural loan account in the sum of
P1,300,000.00 with interest thereon computed at fourteen
(14%) percent per annum, to commence from January 4,
1984, covered by a real estate mortgage, both of which
shall have a cut-off time frame on the date of this
decision;
3) That should the said savings deposit and its interest be
sufficient to cover the off-setting, compensation shall take
place and to be taken from the amounts awarded to
plaintiff in the form of moral, actual and compensatory
damages;
4) That the time loan in the sum of P175,000.00 and the
clean loan of P400,000.00, both without interest, shall be
off-settled by the moral, actual and compensatory
damages herein awarded to plaintiff;
5) That after compensation or set-off had taken place, to
pay plaintiff the balance of the adjudged moral, actual and
compensatory damages, with legal rate of interest until
fully paid;

same rate of interest of fourteen (14%) percent per

annum, deducting from the original amount of the loan the
payments made on the principal and interests; this
reformation shall take place simultaneously with the offsetting of accounts;
8) To pay plaintiff the sum equivalent to fifteen (15%)
percent of the amount representing the balance of the
sums awarded as moral, actual and compensatory
damages as attorney's fees;
9) To pay plaintiff the costs of suit;
10) The writ of preliminary injunction issued by this Court
is rendered permanent; and
11) The counterclaim is hereby dismissed.
SO ORDERED.

(Rollo, pp. 261-263.)

On October 31, 1991, upon appeal by petitioner bank, the Court of Appeals
modified the decision of the trial court as follows:
WHEREFORE, from the evidence adduced, judgment is hereby
rendered as follows:
1. Ordering the defendant
a. To pay plaintiff the sum of P500,000.00 as moral and
exemplary damages;
b. To pay the sum of P18,000.00 per month representing
plaintiffs' unrealized profits from his gasoline station
business to commence from October 16, 1984, with legal
rate of interest, until fully paid;
c. To allow the plaintiffs to offset their financial obligation
with the defendant bank by the moral, exemplary, actual
and compensatory damages herein awarded in favor of
the aforesaid plaintiffs;
d. If, after the off-setting, a balance remains in favor of the
plaintiffs, to pay the said plaintiffs such balance of the
adjudged moral, exemplary, actual and compensatory
damages, with legal rate of interest until fully paid, as of
the time of off-setting;
e. To render an accounting to plaintiffs with respect to
their Account Nos. 0142-0014-0 and 042-0014-1 for the
period covering January to December, 1982;
f. To pay plaintiffs the sum of P100,000.00 as attorney's
fees.
g. To pay the costs of suit.
2. Ordering the plaintiffs

6) To render an accounting to plaintiff with respect to his

Account Nos. 0142-0014-0 and 042-0014-1 for the period
covering January to December, 1982;
7) That in order to make the bank's record complete, to
reform the deed of real estate mortgage conformably with
the agreement by stipulating in the said document that the
maturity date of the agricultural loan is April 5, 1987 at the

a. To settle their loan obligation with the defendant bank

within 90 days from the finality of this decision, subject to
the resolution of this Court to the effect that they shall be
relieved from the payment of penalties and surcharges on
their outstanding balance starting January 20, 1984;

3. The plaintiffs' prayer for reformation of their mortgage contract or

annulment thereof is hereby denied;
4. The counterclaim of defendant-appellant are hereby dismissed.
SO ORDERED.

(Rollo, pp. 86-87.)

Petitioner moved for a partial reconsideration of the above decision but the same
was denied on August 12, 1993. Hence, the instant petition with the following
submissions which allegedly warrant our review of the assailed decision, viz.:
1. The Court of Appeals erred in not ruling that the application for
extrajudicial foreclosure of real estate mortgage is legal and valid;
2. The Court of Appeals erred in not granting petitioner bank its right
to foreclose extrajudicially the real estate mortgage and to proceed
with its application for extrajudicial foreclosure of real estate
mortgage;
3. The Court of Appeals erred in ruling that private respondents be
relieved from the payment of penalties and surcharges on their
outstanding balance starting January 20, 1984;
4. The Court of Appeals erred in awarding moral and exemplary
damages of P500,000.00, unrealized profit of P18,000.00 per month,
and attorney's fees of P100,000.00 against petitioner bank;
5. The Court of Appeals erred in ordering an accounting to private
respondents with respect to their Account Nos. 0142-0014-0 and 0420014-1 for the period covering January to December, 1982.
It should at once be apparent that except for the first and second imputed errors
which involve petitioner bank's right to foreclose extrajudicially the real estate
mortgage, the resolution of the assigned errors entails a review of the factual
conclusions of the appellate court and the evidentiary bases thereof. Such an
assessment is not, as a rule, proper in appeals from the Court of Appeals which
should be confined to a consideration and determination only of issues of law as
its findings of fact are deemed conclusive (Villanueva vs. Court of Appeals, 294
SCRA 90 [1998]) especially so in this case because the findings of fact of the
appellate court concur with those of the trial court. To reiterate, this Court's
jurisdiction is only limited to reviewing errors of law in the absence of any
showing that the findings complained of are totally devoid of support in the record
or they are glaringly erroneous as to constitute serious abuse of discretion.
Nonetheless, considering the amount involved, as well as for the satisfaction of
the parties who have vigorously pursued this case since 1984, the Court, in the
exercise of its discretion, examined the factual bases, particularly with respect to
the propriety of the damages awarded to private respondents.
The first and second assignments of error, being interrelated, shall be jointly
discussed.
Petitioner contends that it has the right to foreclose the real estate mortgage
executed by private respondents in its favor as the loan under the real estate
mortgage contract had become due and demandable. This argument is not welltaken. Foreclosure is but a necessary consequence of non-payment of a
mortgage indebtedness. As a rule, the mortgage can be foreclosed only when the
debt remains unpaid at the time it is due (Gov't. of the P.I. vs. Espejo, 57 Phil.
496 [1932]). As found by the trial court and the Court of Appeals, and as borne by
the evidence on record, private respondents were constantly paying their loan
obligations with petitioner bank. In fact the amount of P960,000.00 was properly
deposited with petitioner bank as evidenced by the corresponding deposit slip
and the entry made in private respondents' savings account passbook. It is,
therefore, not the fault of private respondents that their payment amounting to
P960,000.00 was not credited to their account. Thus, it is certain that the loan
which was secured by a real estate mortgage cannot be considered as unpaid so
as to warrant foreclosure on the mortgage.
Clearly, private respondents have not yet defaulted on the payment of their loans.
Moreover, the term of the loan, as agreed upon by the parties, is three years, or

from 1982 to 1985. But petitioner filed its application for extrajudicial foreclosure
on October 15, 1984. Indisputably, the application for foreclosure of the mortgage
on October 15, 1984 was premature because by then, private respondents' loan
was not yet due and demandable.
Likewise, both the Court of Appeals and the trial court found that private
respondents are entitled to moral and exemplary damages. We agree. Moral and
exemplary damages may be awarded without proof of pecuniary loss. In
awarding such damages, the court shall take into account the circumstances
obtaining in the case and assess damages according to its discretion. As borne
out by the record of this case, private respondents are engaged in several
businesses, such as rice and corn trading, cement dealership, and gasoline
proprietorship. The dishonor of private respondents' checks and the foreclosure
initiated by petitioner adversely affected the credit standing as well as the
business dealings of private respondents as their suppliers discontinued credit
lines resulting in the collapse of their businesses. In the case of Leopoldo
Araneta vs. Bank of America (40 SCRA 144 [1971]), we held that:
"The financial credit of a businessman is a prized and valuable asset,
it being a significant part of the foundation of his business. Any
adverse reflection thereon constitutes some financial loss to him."
The damage to private respondents' reputation and social standing entitles them
to moral damages. Article 2217, in relation to Article 2220, of the Civil Code
explicitly provides that "moral damages include physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral
shock, social humiliation, and similar injury." Obviously, petitioner bank's wrongful
act caused serious anxiety, embarrassment, and humiliation to private
respondents for which they are entitled to recover moral damages in the amount
of P300,000.00 which we deem to be reasonable.
The award of exemplary damages is in order in view of the malicious and
unwarranted application for extrajudicial foreclosure by petitioner which was
obviously done to harass, embarrass, annoy, or ridicule private respondents.
Likewise, petitioner, in its application for extrajudicial foreclosure, included the
other loans of private respondents which were not covered by the real estate
mortgage agreement, such as the loan of P175,000.00 which was a time loan,
and the amount of P400,000.00 which was a clean loan. Moreover, petitioner
unjustifiably refused to give private respondents copies of their account ledgers
which would show the deposits made by them. Also, petitioner bank's failure to
credit the deposit in the account of private respondents constituted gross
negligence in the performance of its contractual obligation which amounts to
evident bad faith. Verily, all these acts of petitioner were accompanied by bad
faith and done in wanton, fraudulent and malevolent manner warranting the
award of exemplary damages in favor of private respondents, in accordance with
Article 2232 of the Civil Code which provides:
ART. 2232. In contracts and quasi-contracts, the court may award
exemplary damages if the defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner.
Of course, a plaintiff need not prove the actual extent of exemplary damages, for
its determination is addressed to the sound discretion of the court upon proof of
the plaintiff's entitlement to moral, temperate, or compensatory damages (Article
2234, Civil Code). In the instant case, exemplary damages in the amount of
P150,000.00 are proper.
Anent the award of actual damages, the Court of Appeals granted private
respondents the amount of P18,000.00 per month representing private
respondents' unrealized profits from his gasoline station business, to commence
from October 16, 1984. Under Articles 2199 and 2200 of the Civil Code, actual or
compensatory damages are those awarded in satisfaction of, or in recompense
for, loss or injury sustained. They proceed from a sense of natural justice and are
designed to repair the wrong that has been done. There are two kinds of actual
or compensatory damages one is the loss of what a person already possesses,
and the other is the failure to receive as a benefit that which would have
pertained to him (Tolentino, Civil Code of the Phil., Vol. V, 1992 ed., pp. 633-636).
In the latter instance, the familiar rule is that damages consisting of unrealized
profits, frequently referred as "ganacias frustradas" or "lucrum cessans," are not
to be granted on the basis of mere speculation, conjecture, or surmise, but rather
by reference to some reasonably definite standard such as market value,
established experienced, or direct inference from known circumstances (TalisaySilay Milling Co., Inc. vs. Asociacion de Agricultores de Talisay-Silay, Inc., 247
SCRA 361 [1995])
In the case at bar, actual damages in the form of unrealized profits were awarded
on the basis of the sole testimony of private respondent Salvador Chua, to wit:

Atty. Chua:
Q:
You mentioned earlier during your direct testimony that you
are engaged in gasoline business. Do you have a gasoline station?
A:

Yes, sir.

Q:

Where is that located?

A:

It is located at Corner Araneta-San Sebastian Sts.

Q:
Before the filing of the Extra Judicial Foreclosure, how much
more or less, you earned from that gasoline station by way of
conservative estimate?
A:
In my gasoline business, based on my record, I have an
average of 114,000 liters.
Q:

Do you mean to say you can dispose 114,000 liters a month?

A:

Yes, sir.

Q:

How much is the mark up per liter?

A:
Before the publication of the Extra Judicial Foreclosure the
markup is P0.27 per liter. So, it comes out that the profit is P30,78.00
(sic).

be admitted with extreme caution especially because it is not supported by

independent evidence. Private respondents could have presented such evidence
as reports on the average actual profits earned by their gasoline business, their
financial statements, and other evidence of profitability which could aid the court
in arriving with reasonable certainty at the amount of profits which private
respondents failed to earn. Private respondents did not even present any
instrument or deed evidencing their claim that they have transferred their right to
operate their gasoline station to their relatives. We cannot, therefore, sustain the
award of P18,000.00 a month as unrealized profits commencing from October
16, 1984 because this amount is not amply justified by the evidence on record.
Further, well-settled is the rule that even if the petition for extrajudicial foreclosure
filed by petitioner against private respondents is clearly unfounded, this does not
necessarily mean, in the absence of specific facts proving damages, that actual
damage has been sustained. The Court cannot rely on speculations as to the fact
and amount of damages. It must depend on actual proof of the damages alleged
to have been suffered (Perfecto vs. Gonzales, 128 SCRA 635 [1984]).
Finally, the award of attorney's fees as part of damages is deemed just and
equitable under the circumstances. Attorney's fees may be awarded when a party
is compelled to litigate or to incur expenses to protect his interest by reason of an
unjustified act of the other party (Ching Sen Ben vs. Court of Appeals, 314 SCRA
762 [1999]). In this case, petitioner bank's act of not crediting private
respondents' deposit of P960,000.00, as well as the premature filing of the
extrajudicial foreclosure, have compelled private respondents to institute an
action for injunction and damages primarily in order to protect their rights and
interests. The award of attorney's fees is also justified under Article 2208 of the
Civil Code which provides:
ART. 2208. In the absence of stipulation, attorney's fees and
expenses of litigation, other than judicial costs, cannot be recovered,
except:
(1) when exemplary damages are awarded;

Q:
How much is your overhead for disposing that much liters of
gasoline every month?
A:

The overhead is about 12,280.00.

Q:

That will give you an average of P18,000.00 a month?

A:

Yes, sir.

(2) when the defendant's act or omission has compelled

the plaintiff to litigate with third persons or to incur
expenses to protect his interest;
WHEREFORE, the decision of the Court of Appeals in its CA-G.R. CV No. 20220
is affirmed with MODIFICATION only as to the award of damages in that
petitioner bank is ordered to pay private respondents the following:

Q:
After the filing of the Extra Judicial Foreclosure, what
happened to your gasoline business?

1. Three Hundred Thousand Pesos (P300,000.00) as moral

damages;

A:
Because of the publication of the Extra Judicial Foreclosure I
did not have credit line anymore. Since I have no capital I was forced
to sell my right to operate to my relatives.

2. One Hundred Fifty Thousand Pesos (P150,000.00) as exemplary

damages; and
3. One Hundred Thousand Pesos (P100,000.00) as attorney's fees
and litigation expenses.

(tsn, March 25, 1986, pp. 9-12)

In all other respects, the said judgment is affirmed.

SO ORDERED.

However, other than the testimony of Salvador Chua, private respondents failed
to present documentary evidence which is necessary to substantiate their claim
for actual or compensatory damages. In order to recover this kind of damages,
the injured party must prove his case, thus:
When the existence of a loss is established, absolute certainty as to its amount is
not required. The benefit to be derived from a contract which one of the parties
has absolutely failed to perform is of necessity to some extent, a matter of
speculation, but the injured party is not to be denied for that reason alone. He
must produce the best evidence of which his case is susceptible and if that
evidence warrants the inference that he has been damaged by the loss of profits
which he might with reasonable certainty have anticipated but for the defendant's
wrongful act, he is entitled to recover. (Cerreno vs. Tan Chuco, 28 Phil. 312
[1914] quoted in Central Bank of the Philippines vs. Court of Appeals, 63 SCRA
431 [1975])
Applying the foregoing test to the instant case, the Court finds the evidence of
private respondents insufficient to be considered within the purview of "best
evidence." The bare assertion of private respondent Salvador Chua that he lost
an average of P18,000.00 per month is inadequate if not speculative and should

G.R. No. L-24571 December 18, 1970

JOSE L. PONCE DE LEON, plaintiff-appellant,
vs.
REHABILITATION FINANCE CORPORATION, defendant-appellant and thirdparty defendant-appellant,ROSALINA SORIANO, TEOFILA SORIANO and
REV. FR. EUGENIO R. SORIANO, third-party plaintiffs-appellants.

CONCEPCION, C.J.:
Appeal from a decision of the Court of First Instance of Rizal, the dispositive part
of which reads:

IN VIEW OF THE FOREGOING, the Court hereby

renders judgment dismissing plaintiff's complaint with
costs against plaintiff; ordering plaintiff Jose Ponce de
Leon to pay the defendant RFC the amount of FIVE
HUNDRED TWENTY-NINE THOUSAND TWO
HUNDRED SIXTY FIVE PESOS AND FIFTY FOUR
(P529,265.54) CENTAVOS, with interest at six percent
per annum from November 24, 1954 until fully paid, the
further sum of ONE HUNDRED EIGHTY (P180.00) pesos
per month from May 20, 1955 until plaintiff vacates the
house and lot at Taft Avenue, Pasay City, and FIVE
THOUSAND (P5,000.00) PESOS as damages for the
injunction and costs.
The Court declares the mortgage of one-half of the lot
covered by Original transfer certificate of title No. 8094 of
the lands records of Rizal Province belonging to the thirdparty plaintiffs, namely Rosalina Soriano, Rev. Fr.
Eugenio Soriano and Teofila Soriano del Rosario null and
void and the sheriff's sale in favor of the RFC of said onehalf share likewise null and void. 1
As correctly set forth in said decision, the main facts are:
On August 14, 1945, herein plaintiff Jose L. Ponce de
Leon and Francisco Soriano, father of third-party plaintiffs
Teofila Soriano del Rosario, Rosalina Soriano and Rev.
Fr. Eugenio Soriano, obtained a loan for P10,000.00 from
the Philippine National Bank (PNB), Manila, mortgaging a
parcel of land situated at Barrio Ibayo, Municipality of
Paraaque, Rizal, covered by original certificate of title
No. 8094 of the land records of Rizal Province in the
name of Francisco Soriano, married to Tomasa
Rodriguez, as security for the loan (Exhibit 15-Soriano).
On August 16, 1945, Ponce de Leon gave P2,000.00 to
Soriano from the proceeds of the loan (Exhibit "N"). The
loan was subsequently increased to P17,500.00 and an
amendment to the real estate mortgage, Exhibit "15Soriano," was executed by Jose L. Ponce de Leon and
Francisco Soriano on March 13, 1946 (Exhibit "16Soriano").
On May 4, 1951, Jose L. Ponce de Leon filed with the
Rehabilitation Finance Corporation (RFC for short)
Manila, his loan application, Exhibit "1-RFC," for an
industrial loan, for putting up a sawmill, in the amount of
P800,000.00 offering as security certain parcels of land,
among which, was the parcel which Ponce de Leon and
Soriano mortgaged to the PNB. The application stated
that the properties offered for security for the RFC loan
are encumbered to the PNB, Bacolod, and to Cu Unjieng
Bros. The properties offered for security to the RFC were
inspected by the appraisers of the latter, who submitted
the following appraisals:
1. Land ............................................. P480,228.00

P28,831.64 in connection with the mortgage deed. Before

the mortgage deed was signed, the Notary Public, Felipe
Cuaderno, Jr. before whom it was acknowledged,
translated it in Tagalog to Francisco Soriano, who
thereafter affixed his signature to the document. At the
time that Francisco Soriano signed the mortgage deed,
Exhibit "A," his spouse Tomasa Rodriguez was already
dead leaving as her heirs, her children namely, Rosalina,
Teofila and Rev. Fr. Eugenio Soriano, none of whom
signed the said mortgage deed or the promissory note.
The mortgage deed specifically stipulated that the
proceeds thereof shall be used exclusively for the
purchase of machinery and equipment, construction of
buildings and the payment of obligations and that the
release of the amounts loaned shall be at the discretion of
the RFC. In view of these conditions, the RFC paid Ponce
de Leon's obligations of P100,000.00 to the PNB;
P30,000.00 to Cu Unjieng Bros; and P5,000.00 to Arturo
Colmenares. From the balance of P360,000.00, the sum
of P352,000.00 was released to Jose L. Ponce de Leon at
various amounts during the period from December, 1951
to July 1952. The checks covering these releases were
issued to Jose L. Ponce de Leon in view of the authority
given to him in writing by Francisco Soriano and
Carmelina Russel (Exhibit "33-A-Soriano," Exhibit "A" and
Exhibit "16-RFC").
On March 12, 1952, Jose L. Ponce de Leon and his wife
Carmelina Russel executed an addendum to the chattel
mortgage for machineries and equipments (Exhibit "F").
None of the amortization and interests which had become
due was paid and, for this reason, the RFC took steps for
the extra-judicial foreclosure of the mortgaged properties
consisting of real estates and the sawmill and its
equipments of Ponce de Leon situated in two places in
Samar. The RFC was the purchaser of all the mortgaged
properties in the ensuing sheriff's sales, with the
exception of two parcels of land situated in Bacolod City
which were purchased by private individuals. Many items
of the mortgaged machineries and equipments could not
be found. The parcels of land mortgaged were sold as
follows:
1) Nine parcels at Bacolod
City ................................................P78,800.00
2) Two parcels acquired by private
individuals .................... P5,790.00
3) Two parcels at Pasay City with
improvements ................. P15,000.00
4) The land of Soriano at Paraaque,
Rizal ............................ P10,000.00

2. Building ........................................ P 12,000.00

3. Machinery & equiptment .......... P 67,101.00
4. Transportation equipment ......... P 14,000.00
Total .............................................. P573,329.00
(Exh. "6-a RFC")
The application was approved for P495,000.00 and the
mortgage contract (Exhibit "A," also "16-RFC & "33Soriano") was executed on October 8, 1951 by Jose L.
Ponce de Leon, his wife Carmelina Russel, and Francisco
Soriano. The same parties signed a promissory note
(Exhibit "A") for P495,000.00, with interest at 6% per
annum, payable on installments every month for

5) The Machineries & equipments that were

left ............................. P6,000.00
The Sheriff sold the land covered by original certificate of
Title No. 8094 in the name of Francisco Soriano, married
to Tomasa Rodriguez, on June 15, 1954 and the deed of
sale, dated April 19, 1955 was executed by the sheriff in
favor of the purchaser thereof, the RFC, including all the
other properties sold (Exhibit "15-RFC," also "54Soriano").
Previous to the expiration of the one-year period of
redemption, Francisco Soriano, through Teofila Soriano
del Rosario offered to repurchase the Soriano lot for
P14,000.00 and on June 14, 1955, the last day for the
redemption of the lot, Francisco Soriano, in company with

his daughter, Rosalina and Teofila, went to see Mr.

Bernardo, Chief of the assets department of the RFC, and
offered to redeem said lot for P14,000.00 but the offer
was rejected and they were told to participate in the public
sale of the land to be conducted by the RFC. Jose L.
Ponce de Leon did not offer to redeem the mortgaged
properties sold at anytime before the expiration of the
period of redemption.
The RFC scheduled a public sale of the lot registered in
the name of Francisco Soriano and of the other lots which
the RFC acquired in the Sheriff's sale for February 20,
1956 in view of the inability of Ponce de Leon or Soriano
to legally redeem the properties sold by the Sheriff within
the one year period after the sale.
On February 18, 1956, Jose L. Ponce de Leon instituted
the present action alleging that there was delay in the
releases of the amount of the loan; that the RFC withheld
the amount of P19,000.00 from the loan until it had
verified whether Ponce de Leon had still an unpaid
indebtedness to the defunct Agricultural and Industrial
Bank, the RFC's predecessor, and this was paid only after
one year had passed; that the typhoon in October and
November, 1952 had caused destructions to his sawmills
and hampered his operations for which reason, he asks,
in his complaint, that the amortizations on his obligations
which became due since October, 1952 be declared
extinguished; that the sheriff's sales be declared null and
void because the properties were sold at grossly
inadequate prices and that said sales were not conducted
in accordance with law; that the RFC be compelled to
account for his machineries and equipments at his lumber
mill in Calbayog and to reimburse him for the value of the
unaccounted machineries and equipments; that the RFC
be ordered to pay him actual and moral damages for
P105,000.00 and costs. De Leon asked for the issuance
of a writ of preliminary injunction to restrain the RFC from
carrying out its contemplated public sale. The Court set
the petition for injunction for hearing but no one appeared
for the RFC at the hearing thereof so that the Court had to
issue the preliminary injunction prayed for. De Leon
caused notice of lis pendens to be recorded in relation
with this case.
The RFC filed its answer sustaining the legality of the
mortgage and Sheriff's sales and counter-claimed that
Ponce de Leon be ordered to pay the deficiency claim
representing the balance of the latter's indebtedness,
rental of the lot and house at Taft Avenue, Pasay City
occupied by Ponce de Leon and damages.
Subsequent to the filing of Ponce de Leon's complaint
against the RFC, Francisco Soriano wrote a letter, dated
February 20, 1956, to the President asking the latter's
intervention so that the projected sale on the same date
to be conducted by the RFC may be suspended insofar
as the lot in his name is concerned and that he be
allowed to redeem it (Exhibit "27-Soriano"). This letter
was referred by the Executive Office to the RFC, which
sent a letter, Exhibit "29-Soriano," to Francisco Soriano
informing the latter that he could redeem his former
property for not less than its appraised value of
P59,647.05, payable 20% down and the balance in ten
years, with 6% interest. Soriano did not redeem the lot
under the conditions of the RFC. He then filed a thirdparty complaint in this case with the RFC and Jose L.
Ponce de Leon as the third-party defendants. Due to the
death of Francisco Soriano, he was substituted as thirdparty plaintiff by his children, namely, Teofila Soriano del
Rosario, Rosalina Soriano and Rev. Fr. Eugenio Soriano.
The Sorianos contend that the mortgage in favor of the
RFC and promissory note signed by Francisco Soriano
lacked the latter's consent and was without consideration
insofar as Francisco Soriano is concerned and hence null

and void as to him and his children; that the lot covered
by original certificate of title No. 8094 in the name of
Francisco Soriano belonged to the conjugal partnership of
the latter and his wife, Tomasa Rodriguez, now deceased,
and since the latter was already dead when the mortgage
was executed and her children who have thus inherited
her share have not signed the mortgage contract and
promissory note, at least, the one-half share of the lot
belonging now to the Soriano sisters and brothers, the
third-party plaintiffs, have not been legally included in the
mortgage to the RFC so that the latter had not acquired
said one-half share in the sheriff's sale. The Sorianos
further ask that they be allowed to redeem the remaining
one-half share, that which belonged to their father, for
one-half of P10,000.00 which was the amount for which
the RFC acquired the whole lot in the sheriff's sale. The
third party-plaintiffs also ask that Ponce de Leon be
ordered to reimburse them for whatever amount they may
use in redeeming the lot and expenses incident thereto
and that Ponce de Leon and the RFC be made to pay
them moral damages which their father suffered and
attorney's fees.
Answering the third-party complaint, the RFC and Ponce
de Leon affirm the legality of the mortgage deed insofar
as Soriano is concerned. The RFC further contends that
the mortgage was binding on the whole Soriano lot and
that there was no valid redemption of this lot.
Ponce de Leon interposed a counterclaim for various
sums of money allegedly received from him by Francisco
Soriano and the present third-party plaintiffs. 2
In due course, the lower court rendered judgment the dispositive part of which is
quoted at the beginning of this decision. Said court held that the typhoons in
October and November 1952 did not relieve the plaintiff from his obligations
under the promissory note and the deed of mortgage in favor of the RFC; that the
sheriff's sale of the mortgaged properties is valid; that the RFC need not account
for the machineries and equipment of the sawmill in Samar or reimburse the
value of such machinery and equipment as may be unaccounted for, they having
become property of the RFC, owing to plaintiff's failure to exercise the right of
redemption in accordance with law; that neither may he recover damages from
the RFC for the alleged delay in the releases made by the same, since their
contract stipulates that the proceeds of the loan shall be released at the
discretion of the Mortgagee and plaintiff's offer of redemption came long after the
expiration of the period therefor, and was not for the full amount of plaintiff's
liability, which he, moreover, asked to be reduced and wanted to pay in
installments; and that, accordingly, plaintiff has no right to recover any damages.
Upon the other hand, the court found that plaintiff should pay: (1) rentals for the
use of the mortgaged property (house and lot) at Pasay City, after the title thereto
had passed to the RFC, and (2) the sum of P529,265.54, representing the
balance of plaintiff's obligation in favor of the RFC which, as of November 24,
1954, amounted to P583,270.49, plus 10% thereof, as stipulated penalty, or the
aggregate sum of P641,597.54 -after deducting therefrom the sum of
P112,332.00 for which the mortgaged properties had been sold, (3) apart from
the sum of P5,000.00, as damages for the injunction issued, at his behest, and
the costs.
As regards the third party complaint of the Sorianos, the lower court: (1)
overruled their claim to the effect that Francisco Soriano had signed the
promissory note and the deed of mortgage in favor of the RFC without
knowledge of the contents thereof and without any consideration therefor; but (b)
held that, being registered in the name of "Francisco Soriano, married to Tomasa
Rodriguez," the property covered by original certificate of title No. 8094
hereinafter referred to as the Paraaque property is presumed to belong to the
conjugal partnership of said spouses, and that, the RFC having failed to offset
this presumption, the mortgage on and the sale of the property by the sheriff are
null and void as to one-half () thereof.
Moreover, the court declared: (a) that the RFC was justified in rejecting the offer,
made by the Sorianos, to redeem said property for, pursuant to section 78 of
Republic Act No. 337, redemption could be effected "only by paying the amount
fixed in the order of execution;" (b) that plaintiff's counterclaim against the
Sorianos is barred by the statute of limitations; (c) that neither may he recover

damages from the Sorianos, their alleged bad faith not bound to pay damages to
the RFC, the action of the former against the latter not being altogether
unjustified.
All of the parties namely, plaintiff, Jose Ponce de Leon, defendant,
Rehabilitation Finance Corporation, hereinafter referred to as RFC (now
Development Bank of the Philippines), and Rosalina Soriano, Fr. Eugenio
Soriano and Teofila Soriano del Rosario, hereinafter referred to as the Sorianos
have appealed from said decision.
Appeal of the Sorianos
The Sorianos maintain that the lower court erred: (1) in holding that the
promissory note and the deed of mortgage executed by Francisco Soriano in
favor of the RFC are valid as regards one-half of the Paraaque property; (2) in
ruling that the extrajudicial sale thereof to the RFC is valid as to the
aforementioned one-half of said property; (3) in not sentencing the RFC to allow
the redemption of such half of said property by the Sorianos, as heirs of the
deceased Francisco Soriano, for one-half of the sum of P10,000 for which the
whole lot was sold to the RFC, or, at least, for the whole sum of P10,000; (4) in
not declaring that section 78 of Rep. Act No. 337 is unconstitutional and in
holding that the same, instead of Act No. 3135, as amended by Act No. 4118, is
the law applicable to the case; (5) in considering that the case of Villar v. de
Paderanga 3 is authoritative or controlling in the case at bar; (6) in not sentencing
the plaintiff and the RFC to pay damages to the Sorianos; (7) in not ordering the
RFC to return OCT No. 8094, covering the Paraaque property, to the Sorianos,
free from any lien or encumbrance; and (8) in denying the motion for
reconsideration of the Sorianos.
The latter's first assignment of error is predicated upon theory that, when the
promissory note and the deed of mortgage in question were executed by
Francisco Soriano, he was somewhat absent-minded, owing to senility, he being
then a septuagenarian, apart from illiterate, for he could write only his name; that
he was persuaded to sign said promissory note and deed of mortrage thru fraud,
deceit and undue influence, and did not know the true nature of these
instruments when he affixed his signatures thereon; and that said instruments are
also null and void for lack of cause and consideration. In this connection, the
appealed decision has the following to say:
The third-party plaintiffs ask that the mortgage deed and
promissory note be declared null and void with respect to
Francisco Soriano for lack of consent and consideration.
It is claimed that Francisco Soriano was made to believe
by Ponce de Leon when he signed the mortgage deed
and the promissory note that these were documents
releasing his land from the previous mortgage in favor of
the PNB and that Francisco Soriano did not receive a
single centavo out of the RFC loan.
The principal witness on the above allegation of the thirdparty plaintiffs is Rosalina Soriano, who testified that her
father, Francisco was an old man who was absentminded; that in 1945, Ponce de Leon merely borrowed
her father's certificate of title on the pretext that he would
see if it were valid; that she gave it to Ponce de Leon who
never returned the certificate and it turned out that the
latter mortgaged it to the PNB by deceiving her father in
signing the mortgage contract; that in 1951, her father
received a sheriff's notice that the land would be
foreclosed; that her father went to see Ponce de Leon in
Negros but the latter assured him that nothing would
happen to his land; that in October, 1951, she and her
father went to see Ponce de Leon; that when the latter
told her father that the property was mortgaged to the
RFC, her father got angry at Ponce de Leon saying that
the latter fooled him but Ponce de Leon assured him that
he would redeem the land but he failed to do so.
Ponce de Leon denied having deceived Francisco
Soriano into signing the mortgage deed covering his land,
saying that the transaction was with the full and complete
knowledge and understanding of Francisco Soriano. He
was supported by Felipe Cuaderno, Jr., the Notary Public,
who notarized the mortgage deed, who said that he

explained and translated into Tagalog, a language known

and spoken by Francisco Soriano, the mortgage deed.
The fact that Francisco Soriano may have been absentminded could not be said to have the effect of vitiating his
consent to the mortgage deed because the execution and
signing of a contract is not a matter that concerns past
events in which absent-mindedness may be taken into
account. Besides, the testimony of Rosalina Soriano to
the effect that her father told Ponce de Leon that the latter
fooled him shows that the old man Soriano could
remember past events, for if truly absent-minded,
Francisco would not recollect what he claims to be what
really took place at the RFC office as testified to by
Rosalina.
Neither could Francisco Soriano be considered feebleminded if we believe the testimony of Rosalina which
shows Soriano's determination to see to it that the wrong
done him was righted and that his property may not be
taken away from him, for according to Rosalina, he even
went to Negros alone to see Ponce de Leon he received
the Sheriff's notice of foreclosure and as shown by his
alleged going to see Ponce de Leon a number of times
about his land and of his enlisting the aid of Ramon
Lacson.
The Sorianos stress that, according to Felipe Cuaderno,
Jr., the Notary Public, when the latter asked Francisco
Soriano, after he had translated the mortgage deed into
Tagalog if he (Francisco) understood it, it was Ponce de
Leon who said that the old man already (k)new it. But,
granting that this was what happened, yet, Francisco
Soriano would certainly have protested against the
statement of Ponce de Leon if Francisco did not really
know what the transaction was about or he would have
told Cuaderno that the document was not in accordance
with the agreement between him and Ponce de Leon
considering that the document was already translated to
the old man by Cuaderno in the Tagalog language which
Soriano understood.
Besides, if Ponce de Leon really deceived Francisco
Soriano into signing the mortgage deed and promissory
note so much so that in October, 1951, the old man
Soriano was so angry at Ponce de Leon that he told the
latter that he fooled him as testified to by Rosalina
Soriano, then why was it thatPonce de Leon was made
one of the sponsors of the thanksgiving mass of the NeoPrysbeter Rev. Fr. Eugenio Soriano, the old man's
son and one of the present third-party plaintiffs? The
conduct of the Sorianos in making Ponce de Leon one of
the sponsors in the thanksgiving mass of Rev. Fr. Eugenio
Soriano in which Ponce de Leon spent a considerable
amount for the big feast that followed the mass is
inconsistent with the Sorianos' claim that Ponce de Leon
had hoodwinked Francisco Soriano into signing the
mortgage instrument and the promissory note.
Moreover, the mere oral unsupported testimony of
Rosalina Soriano, an interested party and one of the
plaintiffs herein, is not sufficient to overcome the legal
presumption of the regularity of the mortgage deed, a
contract celebrated with all the legal requisites under the
safeguard of a notarial certificate (Naval, et al. v.
Enriquez, 3 Phil. 670-72). Such unsupported testimony of
the interested party Rosalina Soriano is not that clear,
strong and convincing evidence beyond mere
preponderance of evidence, required to show the falsity
or nullity of a notarial document (Sigue, et al. v. Escaro
CA, 53 Q.C. 1161; Jocson v. Ratacion, G.R. No. 41687;
Palanca v. Chillanchin v. Coquinco, G.R. No. L-1355;
Robinson v. Villafuerte, 18 Phil. 171).

With reference to the contention that there was no

consideration received by Francisco Soriano out of the
mortgage contract and the promissory note executed in
connection therewith, this is a matter which concerned
merely Francisco Soriano and Jose L. Ponce de Leon for
Francisco Soriano had expressly in writing (Exhibit '33-aSoriano') authorized Jose L. Ponce de Leon to have the
check or checks covering the amount of the mortgage
issued in the name of said Jose L. Ponce de Leon.
Whatever arrangements the latter and Francisco Soriano
may have had with respect to the amounts thus given by
the RFC on account of the mortgage is not the concern of
the RFC if Ponce de Leon did not in fact give any portion
of the amount to Francisco Soriano. At any rate, there is
ample evidence to show that Francisco Soriano received
part of the consideration of the loan from the RFC. It will
be recalled that part of this loan was paid for the
obligation of Francisco Soriano and Ponce de Leon to the
Philippine National Bank secured by a mortgage of the lot
in the name of Francisco Soriano. That Francisco Soriano
received portions of this PNB loan from Ponce de Leon is
shown by the fact that on August 16, 1945, Francisco
Soriano received the amount of P2,000.00 from Ponce de
Leon, evidenced by the receipt exhibit "N", and this
amount must have been part of the P10,000.00
consideration of the PNB mortgage because
this mortgage was executed on August 11, 1945 or two
days before Soriano received from Ponce de Leon the
amount of P2,000.00 on August 16, 1945. And two days
thereafter, on August 18, 1945, Francisco Soriano again
received from Ponce de Leon the amount of P350.00 as
shown by the receipt exhibit '0-3' and, on April 27, 1945,
the amount of P1,000.00 was received by Francisco
Soriano from Ponce de Leon as shown by his receipt
exhibit "0-1" to pay the mortgage on his lot to Apolonio
Pascual. On March 12, 1952,Francisco Soriano received
the amount of P3,000.00 from de Leon as shown by the
check exhibit 'X-2" and on June 3, 1952, the amount of
P50.00 as shown by the check exhibit "X-6" and P200.00
on October 22, 1952 as shown by the check exhibit "X7". Rosalina Soriano herself received P50.00 on March
30, 1952 from Ponce de Leon as shown by the check
marked Exhibit "X-3" and third-party plaintiff Rev. Eugenio
Soriano received P100.00 on March 3, 1952 as shown by
the check exhibit "X-1" and P50.00 on March 13, 1952 as
shown by exhibit "X-4." There is therefore no ground for
declaring the mortgage contract and promissory note
invalid for lack of consideration insofar as Francisco
Soriano and his children are concerned. 4
The facts thus relied upon by His Honor, the Trial Judge, are borne out by the
record, and We are fully in accord with the conclusions drawn therefrom.
In support of their second assignment of error, the Sorianos maintain that the
sum of P10,000, for which the Paraaque property was sold to the RFC, is
ridiculously inadequate, considering that said property had been assessed at
P59,647.05. This pretense is devoid of merit, for said property was subject to
redemption and:
... where there is the right to redeem ... inadequacy of
price should not be material, because the judgment
debtor may re-acquire the property or else sell his right to
redeem and thus recover any loss he claims to have
suffered by reason of the price obtained at the execution
sale. 5
Then, again, as the trial court had correctly of served:
But, mere inadequacy of the price obtained at the sheriff's
sale unless shocking to the conscience will not be
sufficient to set aside the sale if there is no showing that,
in the event of a regular sale, a better price can be
obtained. The reason is that, generally, and, in forced
sales, low prices are usually offered (1 Moran's Rules of
Court, pp. 834-835). Considering that in Gov't of P.I. v.
Sorna, G.R. No. 32196, wherein property worth

P120,000.00 was sold for only P15,000.00, in Philippine

National Bank v. Gonzales, 45 Phil. 693, wherein property
valued at P45,000.00 was sold for P15,000.00 and in Cu
Unjieng & Sons v. Mabalacat Sugar Co., 58 Phil. 439,
property worth P300,000.00 to P400,000.00 was sold for
P177,000.00, the Court cannot consider the sale of the
Bacolod properties, the Taft Avenue house and lot and the
Paraaque property of the Sorianos null and void for
having been sold at inadequate prices shocking to the
conscience and there being no showing that in the event
of a resale, better prices can be obtained. 6
The third, fourth and fifth assignments of error of the Sorianos refer to the
amount for which they feel entitled to redeem the aforementioned property.
It will be recalled that, before the expiration of the redemption period, Teofila
Soriano del Rosario offered to repurchase said property for P14,000; that she
and her sister Rosalina reiterated the offer on the last day of said period; and that
the offer was rejected by the RFC, whose action was upheld by the lower court,
inasmuch as sec. 78 of Rep. Act 337 provides that, "(i)n the event of
foreclosure ... the mortgagor or debtor whose real property has been sold at
public auction ... for the ... payment of an obligation to any bank, banking, or
credit institution, ... shall have the right ... to redeem the property by paying
the amount fixed by the court in the order of execution, ...," not the amount for
which it had been purchased by the buyer at public auction. We have already
declared that" ... (o)nly foreclosure of mortgages to banking institutions (including
the Rehabilitation Finance Corporation) and those made extrajudicially are
subject to legal redemption, by express provision of statute, ..." 7 and, although
neither an ordinary bank nor the RFC was involved in the case in which this
pronouncement had been made, the same was relevant to the subject-matter of
said case and to the issue raised therein. At any rate, We reiterate the
aforementioned pronouncement, it being in accordance with law, for, pursuant to
Rep. Act No. 337:
... The terms "banking institution" and "bank," as used in
this Act, are synonymous and interchangeable and
specifically include banks, banking institutions,
commercial banks, savings banks, mortgage banks, trust
companies, building and loan associations, branches and
agencies in the Philippines of foreign banks, hereinafter
called Philippine branches, and all other corporations,
companies, partnerships, and associations performing
banking functions in the Philippines. 8
The Sorianos insist that the present case is governed, not by Rep. Act No. 337,
but by Act No. 3135, as amended by Act No. 4118 pursuant to which, in
relation to section 465 of Act No. 190, the redemption may be made by "paying
the purchaser the amount of his purchase," with interest and taxes the deed of
real estate mortgage in favor of the RFC having allegedly been executed and the
aforementioned property having been sold pursuant to said Acts Nos. 3135 and
4118.
The conclusion drawn by the Sorianos from these facts is untenable. As set forth
in its title, Act No. 3135 was promulgated "to regulate the sale of property under
special powers inserted in or annexed to real estate mortgages," Section 6
thereof provides that in all cases of "extrajudicial sale ... made under the special
power hereinbefore referred to," the property sold may be redeemed within "one
year from and after the date of the sale ...." Act No. 4118 amended Act No. 3135
by merely adding thereto three (3) new sections. Upon the other hand, Rep. Act
No. 337, otherwise known as "The General Banking Act," is entitled "An
Act Regulating Banks and Banking Institutions and for other purposes." Section
78 thereof limits the amount of the loans that may be given by banks and banking
or credit institutions on the basis of the appraised value of the property given as
security, as well as provides that, in the event of foreclosure of a real estate
mortgage to said banks or institutions, the property sold may be redeemed "by
paying the amount fixed by the court in the order of execution," or the amount
judicially adjudicated to the creditor bank. This provision had the effect of
ammending section 6 of Act No. 3135, insofar as the redemption price is
concerned, when the mortgagee is a bank or a banking or credit institution, said
section 6 of Act No. 3135 being, in this respect, inconsistent with the abovequoted portion of section 78 of Rep. Act No. 337. In short, the Paraaque
property was sold pursuant to said Act No. 3135, but the sum for which it is
redeemable shall be governed by Rep. Act No. 337, which partakes of the nature
of an amendment to Act No. 3135, insofar as mortgages to banks are banking or
credit institutions are concerned, to which class the RFC belongs. At any rate, the

conflict between the two (2) laws must be resolved in favor of Rep. Act No. 337,
both as a special and as the subsequent legislation. 9
The sixth, seventh and eighth assignments of error made by the Sorianos are
mere consequences of those already disposed of. Hence, no further discussion
thereof is necessary.
Plaintiff's Appeal
Plaintiff Ponce de Leon alleges that the lower court has erred: (1) "in not setting
aside the foreclosure sales on the mortgage contract dated October 8, 1951"; (2)
"in stating that the proceeds of the foreclosure sales were conscionable"; (3) in
not granting Ponce de Leon's claim for adjustment and not "giving him a
reasonable time to pay whatever obligations he may have"; (4) in not granting
him damages nor directing the return of his properties; (5) "in not ordering a new
trial for the purpose of adjusting" his "obligations and determining the terms and
conditions of his obligation"; and (6) in not granting his claim against the
Sorianos.
With respect to his first assignment of error, plaintiff maintains that his promissory
note Exhibit A was not yet overdue when the mortgage was foreclosed, because
the installments stipulated in said promissory note have "no fixed or determined
dates of payment," so that the note is unenforceable and "the RFC should have
first asked the court to determine the terms, conditions and period of maturity
thereof."
In this connection, it should be noted that, pursuant to Exhibit A, the total sum of
P495,000 involved therein shall be satisfied in quarterly installments of
P28,831.64 each representing interest and amortization and that, although
the date of maturity of the first installment was left blank, the promissory note
states that the "date of maturity (was) to be fixed as of the date of the last
release," completing the delivery to the plaintiff of the sum of P495,000 lent to
him by the RFC. He now says that this sum of P495,000 has not, as yet, been
fully released by the RFC. But this is contrary to the facts of record, for, during
the trial, his counsel, Atty. Jose Orozco, made the following admission:
Out of the loan of P495,000.00, the following were paid to
the creditors of Jose Ponce de Leon: P100,000.00 to the
PNB, P30,000.00 to Cu Unijeng Bros. P5,000.00 to Arturo
Colmenares, P1,000.00 to Lorenzo Balagtas. The total
amount paid to the creditors is P136,000.00 which
weretaken out of the proceeds of P495,000.00. The rest
were all paid in the name of Jose Ponce de Leon. 10
In short, part of the sum of P495,000 had been delivered by the RFC to the
creditors of the plaintiff and Francisco Soriano, as agreed upon by them, in
payment of their outstanding obligations, and the balance of said sum of
P495,000 was turned over to the plaintiff, with the written authorization and
conformity of Francisco Soriano. This is borne out by the fact that, prior to the
institution of this case, plaintiff had not complained of failure of the RFC to fully
release the aforementioned sum of P495,000. Indeed, in his own complaint
herein, he merely alleged a "delay in the release." Even so, he impliedly admitted
that the first installment was due in October 1952 or, more specifically, on
October 24, 1952, this being the date given therefor in the letter-demands of the
RFC, the accuracy of which were not questioned by the plaintiff so that the last
release made by the RFC to complete the sum of P495,000 must have taken
place on July 24, 1952, although, in answer to a question propounded to him, by
his own counsel, as regards the date he "received the total amount granted by
the RFC," plaintiff said on the witness stand he "believed that it was in the
last part or quarter of 1953." At this juncture, it is noteworthy that plaintiff claims
the right to a suspension of payment or an extension of the period to pay the
RFC owing to the typhoons that had lashed his sawmill in October and
November 1952, thus indicating clearly that the amount of the loan extended to
him and Francisco Soriano had then been fully released by the RFC three (3)
months before October 1952 and that the first installment under the promissory
note Exhibit A was due that month, as claimed by the RFC.
At any rate, Annex A, in effect, authorized the RFC to fix the date of maturity of
the installments therein stipulated, which is allowed by the Negotiable
Instruments Law 11 and when a promissory note expresses "no time for payment,"
it is deemed "payable on demand." 12

Under his second assignment of error, plaintiff maintains that the aggregate price
of P112,332.00, for which the mortgaged properties had been sold at public
auction, is unconscionable, said properties being allegedly worth P1,202,976.
This premise is inaccurate.
It should be noted that plaintiff and Francisco Soriano were granted a P495,000
loan on the security, not only, of the existing properties offered as guarantee, but,
also, on that of assets appraised at P570,000 yet to be acquired only
plaintiff, partly with money thus received from the RFC and partly with his own
funds. After obtaining said loan and receiving the amount thereof, less the sum of
P136,000 applied to the payment of outstanding obligations, plaintiff failed to
purchase the machinery and equiptment he had promised to get, or to set up the
constructions he had undertaken to make. Moreover, the RFC found that the
mortgaged lots in the cities of Pasay and Bacolod, which were originally
appraised at P492,288.00, were actually worth P172,530,00 only. Again, a good
part of the machinery and equipment existing in one of the mortgaged lands,
when it was inspected before the granting of the loan, were subsequently lost or
missing, and those that remained were, at the time of the sale to the RFC, in bad
shape, so that the appraised value thereof was then estimated at P10,000 only.
Under these circumstances, it is clear that the lower court did not err in approving
the sale of the mortgaged properties for the aggregate sum of P112,332.
As regards his third assignment of error, it is urged by the plaintiff that he is
entitled to a "suspension of payment," or a postponement of the date of maturity
of obligation to pay, in view of the typhoons that had "practically wiped out" his
sawmill in Samar during the months of October and November 1952. This claim
is predicated upon Article 1174 of our Civil Code, reading:
... Except in cases expressly specified by the law, or when
it is otherwise declared by stipulation, or when the nature
of the obligation requires the assumption of risk, no
person shall be responsible for those events which could
not be foreseen, or which, though foreseen, were
inevitable.
Plaintiff cannot avail of the benefits of this provision since he was not bound to
deliver the aforementioned sawmill, or any other specific thing damaged or
destroyed by typhoons, to the RFC. His obligation was merely generic, namely, to
pay certain sums of money to the RFC, at stated intervals. As His Honor, the Trial
Judge had aptly put it:
... in the instant case, there was an obligation on the part
of the debtor to pay his loan, independently of the
purpose for which the money loaned was intended to be
used and this obligation to pay continues to subsist
notwithstanding the fact that it may have become
impossible for the debtor to use the money loaned for the
particular purpose that was intended (Milan v. Rio y
Glabarrieta, 45 Phil. 718). There is hence no ground for
declaring the amortizations due on the principal loan
since October, 1952 as extinguished due to fortuitous
event or to grant plaintiff a reasonable time to pay the due
amortizations as asked for by Ponce de Leon in his
complaint. 13
Being mere corollaries to his first three assignments of error, which cannot be
sustained, plaintiff's fourth, fifth and sixth assignments of error must have the
same fate.
Defendant's Appeals
The RFC contends that the lower court erred: (1) in holding that the Paraaque
property is presumed to belong to the conjugal partnership of Mr. and Mrs.
Francisco Soriano; (2) in failing to give due weight to the testimony of Gregorio
Soriano, and in holding that the same is insufficient to overcome the presumption
in favor of the conjugal nature of said property; (3) in failing to consider that the
Sorianos are now estopped from questioning the validity of the mortgage on and
the foreclosure sale of said property; (4) in annulling the mortgage insofar as
one-half of said property is concerned, despite the finding that part of the
proceeds of the RFC loan was paid to settle the PNB loan secured by the same
property; and (5) in holding that the mortgage thereon and the sheriff's sale
thereof to the RFC are null and void as regards, one-half of said property. These
assignments of error may be reduced to one, namely that the lower court erred in

avoiding the sale to the RFC of the Paraaque property, upon the ground that the
same formed part of the conjugal partnership of Mr. and Mrs. Francisco Soriano.
In this connection, it appears that the property was registered in the name of
"Francisco Soriano, married to Tomasa Rodriguez," and that based upon this fact
alone without any proof establishing satisfactorily that the property had
been acquired during coverture the lower court presumed that it belongs to the
conjugal partnership of said spouses. We agree with the RFC that the lower court
has erred in applying said presumption.

whom the deed of mortgage was acknowledged testified that, in a conference

he had before the execution of the promissory note and the deed of mortgage in
favor of said institution, Francisco Soriano assured him that the Paraaque
property was "his own separate property, having acquired it from his deceased
father by inheritance and that his children have nothing to do with the property."
This was, in effect, confirmed by no less than Rosalina Soriano, for she stated,
on cross-examination, that her father, Francisco Soriano,
"was born and ... raised" in said property, so that contrary to her testimony in
chief he could not have told her that he and his wife had bought it, as the
Sorianos would have Us believe.

We should not overlook the fact that the title to said property was not a transfer
certificate of title, but an originalone, issued in accordance with a decree which,
pursuant to law, merely confirms a pre-existing title. 14 Said original certificate of
title does not establish, therefore, the time of acquisition of the Paraaque
property by the registered owner thereof.

Needless to say, had the property been acquired by them during coverture, it
would have been registered, in the name not of "Francisco Soriano, married to
Tomasa Rodriguez," but of the spouses "Francisco Soriano and Tomasa
Rodriguez." In Litam v. Espiritu, 20 We quoted with approval the following
observation made in the decision under review therein:

Then, again, the lower court applied said presumption, having in mind,
presumably, Article 160 of our Civil Code, which reads:
... All property of the marriage is presumed to belong to
the conjugal partnership, unless it be proved that it
pertains exclusively to the husband or to the wife.
This provision must be construed in relation to Articles 153 to 159 of the same
Code, enumerating the properties "acquired ... during the marriage" that
constitute the conjugal partnership. Consistently therewith, We have held that
"the party who invokes this presumption must first prove that the property in
controversy was acquired during the marriage. In other words, proof of
acquisition during coverture is a condition sine qua non for the operation of the
presumption in favor of conjugal partnership." 15 It had, earlier, been
declared, 16 that "(t)he presumption under Article 160 of the Civil Code refers to
property acquired during the marriage ...." We even added that, there being "no
showing as to when the property in question was acquired ... the fact that the title
is in the wife's name alone is determinative." This is borne out by the fact that, in
the previous cases applying said presumption, 17 it was duly established that the
property in question therein had been acquired during coverture. Such was, also,
the situation obtaining in Servidad v. Alejandrino 18 cited in the decision appealed
from.
The case at bar is differently situated. The Sorianos have not succeeded in
proving that the Paraaque property was acquired "during the marriage" of their
parents. What is more, there is substantial evidence to the contrary.
Gregorio Soriano testified that his first cousin, Francisco Soriano, had acquired
said property from his parents, long before he got married. In this connection, the
lower court, however, said that:
... the credibility of this witness is subject to doubt for it
was shown that he had an improper motive in testifying
against the third-party plaintiffs because he had a niece
who was prosecuted by the third-party plaintiffs for estafa,
.... 19
This observation is, to our mind, hardly justifiable. To begin with, when counsel
for the Sorianos asked the witness whether or not his grandchild or grandniece
Flordeliza Clemente had been accused of "estafa" by the Sorianos, counsel for
the RFC objected thereto, and the court sustained the objection, upon the ground
that the question was "irrelevant." As a consequence, there is no evidence of the
prosecution of Flordeliza Clemente by the Sorianos. What is more, the ruling of
the court declaring the matter "irrelevant" to the present case rendered it
unnecessary for the RFC to prove that said prosecution if it were a fact had
nothing to do with the testimony of Gregorio Soriano. It would, therefore, be less
than fair to the RFC to draw an inference adverse thereto resulting from the
absence of evidence to this effect. At any rate, said prosecution does not
necessarily warrant the conclusion that Gregorio Soriano was impelled by an
"improper motive" in testifying as he did. After all, the Sorianos are, likewise,
nieces of Gregorio Soriano and he was not the party allegedly accused by them.
Again, this witness testified in a straightforward manner, and disclosed a good
number of details bearing the ear-marks of veracity. What is more, his
testimony was corroborated, not only by Felipe Cuaderno, Jr. and OCT No. 8094,
but, also, by the testimony of third-party plaintiff Rosalina Soriano. Indeed, Felipe
Cuaderno, Jr. an assistant attorney and notary public of the RFC, before

Further strong proofs that the properties in question are

the paraphernal properties of Marcosa Rivera, are the
very Torrens Titles covering said properties. All the said
properties are registered in the name of "Marcosa Rivera,
married to Rafael Litam." This circumstance indicates that
the properties in question belong to the registered owner,
Marcosa Rivera, as her paraphernal properties, for if they
were conjugal, the titles coveting the same should have
been issued in the names of Rafael Litam and Marcosa
Rivera. The words 'married to Rafael Litam'written after
the name of Marcosa Rivera, in each of the above
mentioned titles are merely descriptive of the civil status
of Marcosa Rivera, the registered owner of the properties
covered by said titles.
The records further show that on August 16, 1945 or two (2) days after the
execution of the deed of mortgage for P10,000 in favor of the PNB Francisco
Soriano received P2,000 from plaintiff herein; that, early in 1951, Francisco
Soriano received a letter informing him that the PNB mortgage on the Paraaque
property would be foreclosed, unless the debt guaranteed therewith were settled;
that, accordingly, his children came to know of the mortgage in favor of the PNB;
that on October 8, 1951, said mortgage was transferred to the RFC; that,
thereafter, or from March to October 1952, Francisco Soriano and his children,
Rosalina Soriano and Eugenio Soriano, received several sums of money,
aggregating P3,450, from plaintiff herein; that the latter, moreover, spent over
P6,000 on the occasion of the ordination of third-party plaintiff, Eugenio Soriano,
as a priest, on April 20, 1952; that plaintiff, also, paid the bills of Francisco
Soriano in the Singian Clinic when he fell sick in 1953; and that the former had,
likewise, paid the real estate tax on the Paraaque property from 1947 to 1952.
Under these circumstances, it is difficult to believe that Sorianos did not know
then of the mortgage constituted by Francisco Soriano, on October 8, 1951, in
favor of the RFC. In fact, Rosalina Soriano testified that when, that month,
Francisco Soriano and she conferred with the plaintiff, he stated that the
Paraaque property was mortgaged to the RFC, whereupon her father got angry
at the plaintiff and said that he had fooled him (Francisco Soriano). Being thus
aware of said mortgage since October 1951, the Sorianos did not question its
validity until January 12, 1957, when they filed in this cage their third-party
complaint in intervention as regards, at least, one-half of the Paraaque
property, which they now claim to be their mother's share in the conjugal
partnership. Worse still, after the foreclosure sale in favor of the RFC, they tried
to redeem the property for P14,000, and, when the RFC did not agree thereto,
they even sought the help of the Office of the President to effect said redemption.
Their aforementioned failure to contest the legality of the mortgage for over five
(5) years and these attempts to redeem the property constitute further indicia that
the same belonged exclusively to Francisco Soriano, not to the conjugal
partnership with his deceased wife, Tomasa Rodriguez. Apart from the fact that
said attempts to redeem the property constitute an implied admission of
the validity of its sale and, hence, of its mortgage to the RFC there are
authorities to the effect that they bar the Sorianos from assailing the same.
... defendants, by their repeated requests for time to
redeem had impliedly admitted and were estopped to
question the validity and regularity of the Sheriff's
sale. 21

The petitioner himself believed that the company had a

right to cancel, because in March, 1932, i.e., after the
cancellation, he proposed the repurchase of the property,
and the company agreed to resell it to him .... Unluckily he
could make no down payment and the repurchase fell
through. Wherefore, it is now too late for him to question
the cancellation, inasmuch as he practically ratified
it, .... 22
The fact that Mallorca failed to exercise her right of
redemption, which she sought to enforce in a judicial
court, ends her interest to the land she claims, and,
doubtless, estops her from denying PNB's mortgage lien
thereon. 23
It is thus clear that the lower court erred in annulling the RFC mortgage on the
Paraaque property and its sale to the RFC as regards one-half of said property,
and that the decision appealed from should, accordingly, be modified, by
eliminating therefrom the second paragraph of its dispositive part, quoted earlier
in this decision.
With this modification and that of other pertinent parts of the decision appealed
from, the same is hereby affirmed in all other respects, with the costs of this
instance against plaintiff, Jose L. Ponce de Leon and third-party plaintiffs,
Rosalina Soriano, Teofila Soriano del Rosario and Father Eugenio Soriano. It is
so ordered.
[G.R. No. 139437. December 8, 2000]
LANGKAAN REALTY DEVELOPMENT, INC., petitioner, vs. UNITED
COCONUT PLANTERS BANK, and HON. COURT OF
APPEALS, respondents.

[8]

and was certified by Court Deputy Sheriff Nonilon A. Caniya to have been duly
posted.[9]
On August 29, 1986, the mortgaged property was sold for P3,095,000.00
at public auction to private respondent UCPB as the highest bidder, and a
corresponding Certificate of Sale was issued in favor of the bank.
As petitioner LANGKAAN failed to redeem the foreclosed property within
the redemption period, the title of the property was consolidated in the name of
UCPB on December 21, 1987, and a new Transfer Certificate of Title with no. T232040 was issued in the latters favor.
On March 31, 1989, LANGKAAN, through counsel, Atty. Franco L. Loyola
wrote UCPB a letter offering to buy back the foreclosed property
for P4,000,000.00.[10] This offer was rejected by the bank in a letter dated May 22,
1989, stating that the current selling price for the property was
already P6,500,000.00.[11]
On May 30, 1989, petitioner LANGKAAN filed a Complaint for Annulment
of Extra-judicial Foreclosure and Sale, and of TCT No. 232040 with Damages,
with the RTC of Imus, Cavite, docketed as Civil Case No. 360-89.
After trial, the RTC of Imus ruled in favor of private respondent UCPB, and
dismissed the petition of LANGKAAN for lack of merit. On appeal, the Court of
Appeals affirmed en toto the decision of the RTC of Imus.The petitioner filed a
Motion for Reconsideration which was denied by the Court of Appeals in a
Resolution dated July 28, 1999. Hence this petition.
The sole issue in this case, as stated by the petitioner in its Memorandum,
is whether or not the extra-judicial foreclosure sale is valid and legal on account
of the alleged non-compliance with the provisions of Act No. 3135 on venue,
posting and publication of the Notice of Sale, and of the alleged defects in such
Notice.[12]

DECISION
GONZAGA-REYES, J.:
This is a Petition for Review on Certiorari under Rule 45 seeking to set
aside the decision of the Court of Appeals in CA-G.R. No. CV 53514 which
affirmed the decision of the Regional Trial Court of Imus, Cavite, Branch 20, in
Civil Case No. 360-89, and the Resolution of the Court of Appeals denying the
petitioners Motion for Reconsideration.
The antecedent facts are as follows:
Petitioner Langkaan Realty Development Corporation (LANGKAAN, for
brevity) was the registered owner of a 631,693 square meter parcel of land
covered by Transfer Certificate of Title No. 111322, and located at Langkaan,
Dasmarinas, Cavite.
On April 8, 1983, petitioner LANGKAAN executed a Real Estate Mortgage
over the above-mentioned property in favor of private respondent United Coconut
Planters Bank (UCPB) as a security for a loan obtained from the bank by
Guimaras Agricultural Development, Inc. (GUIMARAS) in the amount of
P3,000,000.00.[1]LANGKAAN and GUIMARAS agreed to share in the total loan
proceeds that the latter may obtain from UCPB. [2]Subsequently, another loan of
P2,000,000.00 was obtained by GUIMARAS, totaling its obligation to the bank to
P5,000,000.00. The loan was fully secured by the real estate mortgage which
covered all obligations obtained from UCPB by either GUIMARAS or LANGKAAN
before, during or after the constitution of the mortgage. [3] Also provided in the
mortgage agreement is an acceleration clause stating that any default in
payment of the secured obligations will render all such obligations due and
payable, and that UCPB may immediately foreclose the mortgage. [4]
GUIMARAS defaulted in the payment of its loan obligation. [5] On July 28,
1986, private respondent UCPB filed a Petition for Sale under Act No. 3135 [6], as
amended, with the Office of the Clerk of Court and Ex-officio Sheriff of RTC of
Imus, Cavite. The petition was given due course, and a Notice of Extra-judicial
Sale of LANGKAANs property was issued by Acting Clerk of Court II and Exofficio Sheriff Regalado Eusebio on August 4, 1986, setting the sale on August
29, 1986 at the main entrance of the Office of the Clerk of Court of RTC of Imus.
[7]
The Notice of Extra-judicial Sale was published in the Record Newsweekly,

At the outset, it must be stated that only questions of law may be raised
before this Court in a Petition for Review under Rule 45 of the Revised Rules of
Civil Procedure.[13] This Court is not a trier of facts, and it is not the function of this
Court to re-examine the evidences submitted by the parties. [14]
After a careful analysis of the issue set forth by the petitioner, we find the
same not to involve a pure question of law [15] It has been our consistent ruling
that the question of compliance or non-compliance with notice and publication
requirements of an extra-judicial foreclosure sale is a factual issue binding on this
Court.[16] In the case of Reyes vs. Court of Appeals, we declined to entertain the
petitioners argument as to lack of compliance with the requirements of notice and
publication prescribed in Act No. 3135, for being factual. [17] Hence, the matter of
sufficiency of posting and publication of a notice of foreclosure sale need not be
resolved by this Court, especially since the findings of the Regional Trial Court
thereon were sustained by the Court of Appeals. Well-established is the rule that
factual findings of the Court of Appeals are conclusive on the parties and carry
even more weight when the said court affirms the factual findings of the trial
court.[18]
The RTC found the posting of the Notice of Sale to have been duly
complied with, thus:
As regards the posting of the notices of sale, Deputy Sheriff Nonilon Caniya has
categorically declared that he posted the same in three conspicuous places, to
wit: (1) Municipal Hall of Dasmarinas, Cavite, (2) Barangay Hall of Langkaan, and
(3) in the place where the property is located (Exh. 6). He added gratuitously that
he even posted it at the Dasmarinas Public Market. Such being the case, the
negative testimony of Virgilio Mangubat, a retired sheriff of Trece Martires City, to
the effect that he did not see any notice posted in the Bulletin Board of
Dasmarinas, Cavite cannot prevail over the positive testimony of Deputy Sheriff
Caniya. In like manner, the general denial advanced by Barangay Captain
Benjamin Sangco of Langkaan that no notice was posted at the bulletin board of
said barangay in August, 1986 cannot take precedence over the positive
declaration of Deputy Sheriff Caniya who is presumed to have performed his
duties as such. Credence is generally accorded the testimonies of (sic) sheriff
who is presumed to have performed their (sic) duties in regular manner. xxx
xxx xxx xxx

xxx In another case, Bonnevie vs. Court of Appeals, 125 SCRA 122, it was even
ruled that a single act of posting satisfies the requirement of law.[19]
Due publication was likewise found by the RTC to have been effected.
It is beyond dispute that notice of Sheriffs Sale was published in Record
Newsweekly, a newspaper of general circulation in the Province of Cavite after a
raffle among the accredited newspaper thereat. No evidence was adduced by
plaintiff to disprove this fact. Its claim that said newspaper has no subscribers in
Cavite is without merit and belied by the Affidavit of Publication executed by the
Publisher of Records Newsweekly (Exh. 5) and by the Clerk of Court and ExOficio Sheriff of the Multiple Sala of Imus, Cavite. As held in the case of Olizon
vs. Court of Appeals, 236 SCRA 148, personal notice to the mortgagor in
extrajudicial foreclosure proceedings is not necessary. Sec. 3 of Act No. 3135
governing extra-judicial foreclosure of real estate mortgages, as amended by Act
No. 4118, requires only posting of the notice of sale in three public places and the
publication of that notice in a newspaper of general circulation. Hence, the lack of
personal notice to the mortgagors is not a ground to set aside the foreclosure
sale. It was further held thereat (ibid) that publication of the notice alone in the
newspaper of general circulation is more than sufficient compliance with the
notice-posting requirement of the law.[20]

Appellant next charges that the certificate of posting executed by Deputy Sheriff
Caniya is a falsified document resulting from the unlawful intercalations made
thereon, calculated to change the import and meaning of said certificate; and
contains untruthful statements of facts. A certificate of posting is however not a
statutory requirement and as such, is not considered indispensable for the
validity of a foreclosure sale under Act 3135 (see Bohanan vs. Court of Appeals,
256 SCRA 355)
Again, We accord a presumption of regularity in the conduct of the raffle whereby
publication of the Notice of Sale was awarded to the Record Newsweekly.
As to the erroneous designation of Guimaras Agricultural Development, Inc. as a
mortgagor as well as the mistakes in the technical description of the subject
property, both appearing in the Notice of Sale, We find these immaterial errors
and mistakes which do not affect the sufficiency of the Notice (Olizon vs. Court of
Appeals,supra.) xxx [21]
We refuse to disturb the factual findings of the lower courts. The notice of
the extra-judicial foreclosure sale was duly published and posted, and clerical
errors therein are not sufficient to invalidate the notice and nullify the sale.

On appeal, the findings of the RTC were sustained by the Court of

Appeals, to wit:

We are left with the issue on the legal propriety of the venue of the extrajudicial foreclosure sale which we deem proper for determination.

Next, appellant contends that the notice of sale was posted, at the very least, at
only one [1] public place the Municipal Building of Dasmarinas, Cavite contrary to
and in violation of the requirement in Act No. 3135, as amended, that said notice
shall be posted in at least three [3] public places. Deputy Sheriff Nonilon Caniya,
however, has categorically declared that he had posted Notices of Sale in four
public places; namely: (1) Municipal Hall of Dasmarinas, Cavite, (2) Barangay
Hall of Langkaan, (3) in the place where the property is located and (4) at the
Dasmarinas Public Market (t.s.n., January 12, 1994, pp. 6-11). We give credence
to said Sheriffs testimony and accord his actions with the presumption of
regularity of performance, having come from a public officer to whom no improper
motive to testify has been attributed.

In ascertaining whether or not the venue of the extra-judicial foreclosure

sale was improperly laid, it is imperative to consult Act No. 3135, as amended,
the law applicable to such a sale. [22] Act 3135 provides, insofar as pertinent, as
follows:

At any rate, even if it were true that the Notice of Sale was not posted in three
public places as required, this would not invalidate the foreclosure conducted. As
explained in Olizon vs. Court of Appeals, 238 SCRA 148, 155-156
Furthermore, unlike the situation in previous cases where the foreclosure sales
were annulled by reason of failure to comply with the notice requirement under
Section 3 of Act 3135, as amended, what is allegedly lacking here is the posting
of the notice in three public places, and not the publication thereof in a
newspaper of general circulation.
We take judicial notice of the fact that newspaper publications have more farreaching effects than posting on bulletin boards in public places. There is a
greater probability that an announcement or notice published in a newspaper of
general circulation which is distributed nationwide, shall have a readership of
more people than that posted in a public bulletin board, no matter how strategic
its location may be, which caters only to a limited few. Hence the publication of
the notice of sale in the newspaper of general circulation alone is more than
sufficient compliance with the notice-posting requirement of the law. By such
publication, a reasonably wide publicity had been effected such that those
interested might attend the public sale, and the purpose of the law had been
thereby subserved.
The object of a notice of sale is to inform the public of the nature and condition of
the property to be sold, and of the time, place and terms of the sale. Notices are
given for the purpose of securing bidders and to prevent a sacrifice of the
property. If these objects are attained, immaterial errors and mistakes will not
affect the sufficiency of the notice; but if mistakes or omissions occur in the
notices of sale which are calculated to deter or mislead bidders, to depreciate the
value of the property, or to prevent it from bringing a fair price, such mistakes or
omissions will be fatal to the validity of the notice, and also to the sale made
pursuant thereto.
In the case at bench, this objective was attained considering that there was
sufficient publicity of the sale through the Record Newsweekly.

SECTION 1. When a sale is made under a special power inserted in or attached

to any real estate mortgage hereafter made as security for the payment of money
or the fulfillment of any other obligation, the provisions of the following sections
shall govern as to the manner in which the sale and redemption shall be effected,
whether or not provision for the same is made in the power.
SEC. 2. Said sale cannot be made legally outside of the province which the
property sold is situated; and in case the place within said province in which the
sale is to be made is the subject of stipulation, such sale shall be made in said
place or in the municipal building of the municipality in which the property or part
thereof is situated.
Thus, the extra-judicial foreclosure sale cannot be held outside the
province where the property is situated.Should a place within the province be a
subject of stipulation, the sale shall be held at the stipulated place or in the
municipal building of the municipality where the property or part thereof is
situated.
In the case at bar, the Real Estate Mortgage contract contains the
following stipulation on the venue of the auction sale, viz:
ARTICLE XX
VENUE OF AUCTION SALE
It is hereby agreed that in case of foreclosure of this mortgage under Act 3135,
as amended, and Presidential Decree No. 385, the auction sale shall be held at
the capital of the province, if the property is within the territorial jurisdiction of the
province concerned, or shall be held in the city, if the property is within the
territorial jurisdiction of the city concerned.[23]
The foreclosed property is located in Dasmarinas, a municipality in
Cavite. Dasmarinas is within the territorial jurisdiction of the province of Cavite,
but not within that of the provincial capital, Trece Martires City, nor of any other
city in Cavite. The territorial jurisdiction of Dasmarinas is covered by the RTC of
Imus,[24] another municipality in Cavite.
The petitioner contends that the extra-judicial foreclosure sale should
have been held in Trece Martires City, the capital of Cavite, following the abovequoted stipulation in the real estate mortgage contract; or, in the alternative,
Section 2 of Act 3135 should have been applied, and the sale conducted at the

municipal building of Dasmarinas where the property is situated. [25] On the other
hand, the private respondent argues that the extra-judicial foreclosure sale was
properly held at the main entrance of the Office of the Clerk of Court and Exofficio Sheriff of the RTC of Imus which has territorial jurisdiction over
Dasmarinas, as provided in the Supreme Court Administrative Order No. 7
(1983) issued pursuant to Section 18 of B.P. Blg. 129. [26] The private respondent
further contends that Section 18 of B.P. Blg. 129 repealed the provision on venue
under Section 2 of Act 3135.
We agree with the petitioner that under the terms of the contract, the
extra-judicial foreclosure sale could be held at Trece Martires, the capital of the
province which has territorial jurisdiction over the foreclosed property.The
stipulation of the parties in the real estate mortgage contract is clear, and
therefore, should be respected absent any showing that such stipulation is
contrary to law, morals, good customs, public policy or public order.A contract is
the law between the parties. [27] However, since the stipulation of the parties lack
qualifying or restrictive words to indicate the exclusivity of the agreed forum, the
stipulated place is considered only as an additional, not a limiting venue.
[28]
Therefore, the stipulated venue and that provided under Act 3135 can be
applied alternatively. Now, applying Act 3135, the venue of the sale should be at
the municipal building of Dasmarinas since the foreclosed property is located in
the municipality of Dasmarinas.
We cannot sustain the contention of the private respondent that the proper
venue for the sale of the Dasmarinas property is the RTC of Imus which has
territorial jurisdiction thereon as provided under SC Administrative Order No. 7
issued pursuant to Section 18 of B.P. Blg. 129, which allegedly repealed the
venue provision under Section 2 of Act 3135.
Section 18 of B.P. Blg. 129 [29] provides for the power of the Supreme Court
to define the territorial jurisdiction of the Regional Trial Courts. Pursuant thereto,
the Supreme Court issued Administrative Order No. 7 [30], placing the
municipalities of Imus, Dasmarinas and Kawit within the territorial jurisdiction of
the RTC of Imus.[31] On the other hand, Section 2 of Act 3135 refers to the venue
of an extra-judicial foreclosure sale.[32]
It is difficult to fathom how a general law such as B.P. Blg. 129 can repeal
a special law like Act 3135. Aside from involving two entirely different legal
concepts such as jurisdiction (B.P. Blg. 129) and venue (Section 2 of Act 3135),
[33]
this proposition goes against a basic rule in statutory construction that the
enactment of a later legislation which is a general law cannot be construed to
have repealed a special law.[34] Much less can the private respondent invoke
Supreme Court administrative issuances [35] as having amended or repealed
Section 2 of Act 3135. A statute is superior to an administrative issuance, and the
former cannot be repealed or amended by the latter.[36]
Notwithstanding the foregoing, however, this Court finds the extra-judicial
foreclosure sale held at the RTC of Imus to be valid and legal.
Well-known is the basic legal principle that venue is waivable. Failure of
any party to object to the impropriety of venue is deemed a waiver of his right to
do so. In the case at bar, we find that such waiver was exercised by the
petitioner.
An extra-judicial foreclosure sale is an action in rem, and thus requires
only notice by publication and posting to bind the parties interested in the
foreclosed property. No personal notice is necessary. As such, the due
publication and posting of the extra-judicial foreclosure sale of the Dasmarinas
property binds the petitioner, and failure of the latter to object to the venue of the
sale constitutes waiver.
In the testimony of the President of LANGKAAN, Alfredo Concepcion, the
latter admitted that he was informed sometime in 1986 by GUIMARAS President
Antonio Barredo about the foreclosure sale of the Dasmarinas property held on
August 6, 1986, viz:
COURT:
Q: ATTORNEY CONCEPCION, YOU SAID THAT YOU CAME TO KNOW
THAT THE PROPERTY OF YOUR CORPORATION WAS SOLD BY
COCONUT PLANTERS BANK ONLY IN 1989?

A: At or about the date when Atty. Loyola made that written offer to the bank.
Q: IN THE YEAR 1989 OR PRIOR TO THAT DATE
ATTY. LOYOLA:
I think 1986, Your Honor.
COURT:
1986 WHEN HE LEARNED ABOUT THE SALE?
ATTY. LOYOLA:
Yes, Your Honor.
xxx xxx xxx
ATTY CATUBAY:
xxx xxx xxx
Q: So you talked to Ex-Justice Barredo?
A: I did.
Q: And of course he informed you about the proposal that took place on
August 6, 1986?
A: He told me that he is aware.
Q: And you were also aware of the Certificate of Sale executed by the
Sheriff, isnt it? (sic)
A: At that point there was a foreclosure sale and that it was the mortgagee
bank that was the highest bidder.
Q: After you were informed there was a foreclosure sale, you did not do
anything about it, isnt it? (sic)
A: Well, at that point when I was so informed, I did not take any step yet but
on the first opportunity, I consulted Atty. Loyola.
Q: And that was in 1986 also?
A: 1986, correct.[37]
From 1986 to April 1989, despite knowledge of the foreclosure sale of
their property, the President of petitioner LANGKAAN did not take any step to
question the propriety of the venue of the sale. It was only on May 30, 1989 that
the petitioner filed a Complaint for Annulment of the foreclosure sale, and only
after its offer to repurchase the foreclosed property, the title to which had been
consolidated in the name of private respondent UCPB, had been rejected by the
bank.
In the letter denominated as Offer to Reacquire by Langkaan Realty
Development, Inc. Without Prejudice, petitioner LANGKAAN, through its counsel
Atty. Franco L. Loyola, who is likewise the petitioners counsel in this case,
acknowledged that the title to the property then registered under the name of
LANGKAAN has been consolidated under the name of UCPB, which was the
highest bidder in the extra-judicial foreclosure sale conducted by the sheriff.
[38]
Nowhere can it be found that the petitioner objected to or opposed the holding
of the sale at the RTC of Imus. By neglecting to do so, petitioner LANGKAAN is
deemed to have waived its right to object to the venue of the sale, and cannot
belatedly raise its objection in this petition filed before us.

WHEREFORE, premises considered, the petition is hereby DENIED.

SO ORDERED.
[G.R. No. L-77468. August 25, 1999]
EDUARDO LUCENA and NATIVIDAD PARALES, petitioners, vs. COURT OF
APPEALS and RURAL BANK OF NAUJAN, INC., ROGELIO
PINEDA, MARIANITO BAJA, PATRICIA ARAJA, BRAULIO
BAGUS,
REYNALDO
MAMBIL
and
RAMON
GARCIA, respondents.
DECISION
QUISUMBING, J.:
This is a petition for review of the Decision dated January 20, 1987 of the
Court of Appeals in CA - G.R. CV No. 65526-R entitled Eduardo Lucena, et al.
vs. Rural Bank of Naujan, Inc., et al. as well as its Resolution dated February 16,
1987 denying petitioners motion for reconsideration. [1] The assailed decision
reversed the judgment of the then Court of First Instance of Oriental Mindoro in
Civil Case No. R-3004, Eduardo Lucena, et al. vs. Rural Bank of Naujan, et al.
(Reconveyance with Damages) and dismissed herein petitioners complaint.[2]
The factual antecedents are as follows:
Petitioners allege they are the registered owners of a parcel of land
located at the barrio of Mag-asawang Tubig, Municipality of Naujan, Oriental
Mindoro, covered by Transfer Certificate of Title No. T-41512 of the Registry of
Deeds of Oriental Mindoro. On October 29, 1969, petitioner Eduardo Lucena
obtained a loan from the private respondent Rural Bank of Naujan, Inc. in the
amount of three-thousand pesos (P3,000.00) secured by a real estate mortgage
constituted on said parcel of land. On October 1, 1970, after the loan had
matured, petitioners paid to the Rural Bank of Naujan, Inc., the sum of twothousand six pesos and ninety centavos (P2,006.90) in partial satisfaction of their
debt, thereby leaving a balance of one-thousand pesos (P1,000.00) in its favor.
On May 7, 1974, after previous demand by the rural bank for the
petitioners to settle the balance of their matured loan went unheeded, the subject
property was extrajudicially foreclosed and sold at public auction where the rural
bank as highest bidder acquired the property. Prior to the auction sale, notices of
foreclosure were posted in at least three conspicuous public places in the
municipality where the subject property was located, as indicated in the affidavit
of posting dated May 6, 1974.[3] No notices were posted in the barrio where the
property was located, nor were any published in a newspaper of general
circulation. The Certificate of Sale dated May 7, 1974 issued by private
respondent Deputy Sheriff Braulio Bagus was registered with the Registry of
Deeds of Oriental Mindoro only on January 9, 1975.[4]
On June 26, 1975, an affidavit of consolidation of ownership was executed
by the Rural Bank of Naujan through its manager, private respondent Rogelio P.
Pineda. The affidavit of consolidation was subsequently registered by private
respondent Reynaldo Mambil in his capacity as acting Register of Deeds on July
8, 1975, under Entry No. 134351. Transfer Certificate of Title No. T-41512 in the
name of the petitioners was thus cancelled and Transfer Certificate of Title No. T68547 of the Registry of Deeds of Oriental Mindoro was then issued in favor of
the rural bank also on July 8, 1975.Thereafter, on July 14, 1975, a deed of sale
was executed by the rural bank through its manager whereby the subject
property was sold to private respondent spouses Marianito Baja and Patricia
Araja, resulting in the cancellation of TCT No. T-68547 and the subsequent
issuance of TCT No. T-68680 in the name of said respondents. Said deed of sale
dated July 14, 1975 was accepted and registered by private respondent Ramon
G. Garcia, then acting Register of Deeds of Oriental Mindoro. [5]
On January 12, 1977, petitioners filed a complaint for reconveyance and
damages against private respondents before the then Court of First Instance of
Oriental Mindoro, to recover the subject property from private respondents and to
compel the latter to compensate them for damages and losses suffered. [6] After
trial, the court a quo promulgated its decision dated September 12, 1978, ruling
in sum that there was no valid foreclosure sale of the subject property. The
dispositive portion thereof reads:

WHEREFORE, in view of the foregoing the Court believes and so holds that the
preponderance of evidence militates in favor of the plaintiffs and against the
defendants, and the Court renders judgment, to wit:
(1) Orders the defendants Marianito Baja and Patricia Araja to reconvey the
parcel of land registered in their name under TCT No. T-68680 of the Register of
Deeds of Oriental Mindoro in favor of herein plaintiffs Eduardo Lucena and
Natividad Parales, free from all liens and encumbrances, except the remaining
unpaid balance including accrued interest thereon in favor of the Rural Bank of
Naujan, Inc.;
(2) Orders the Rural Bank of Naujan, Inc. and its manager Rogelio Pineda, jointly
and severally, to pay the herein plaintiffs actual damages in the amount of
P17,500.00 for unrealized rentals from subject property;
(3) Orders the Rural Bank of Naujan, Inc. and its manager Rogelio Pineda, jointly
and severally, to pay herein plaintiffs moral damages in the amount of
P10,000.00;
(4) Orders the Rural Bank of Naujan, Inc. and its manager Rogelio Pineda, jointly
and severally, to pay plaintiffs attorneys fees in the amount of P5,000.00, and to
pay the costs of suit.
SO ORDERED.[7]
Not satisfied with the judgement, both petitioners and private respondents
elevated the case to the Court of Appeals. On January 20, 1987, the respondent
court rendered its decision reversing and setting aside the trial courts
judgment. It ruled in sum that (a) posting of notices in the barrio where the
property is situated is not required, as all the law requires is posting in the
municipality or city where the property is located; (b) there is no need to publish
the notice of auction sale in a newspaper of general circulation, because the
balance of the loan was only one-thousand pesos (P1,000.00); (c) personal
notice of the auction sale to the petitioners was not required; (d) the trial court
was correct in holding that the date of registration of the sheriffs certificate of sale
and not the date of the sale itself was the reckoning point for the start of the oneyear redemption period of the petitioners; and (e) the petitioners did not redeem
their property within the one-year period from the date of registration of the
certificate of sale, and having lost their right of redemption, cannot squirm their
way out of their predicament by asking for reconveyance of the subject property.
[8]

Petitioners now seek recourse through this petition. They assign the
following errors:
(1) ABSENCE OF POSTING OF NOTICES IN THE BARRIO OF
MAGASAWANG TUBIG, WHERE THE LAND IS LOCATED, AS REQUIRED BY
REPUBLIC ACT NO. 5939, RENDERED NULL AND VOID THE SALE IN
QUESTION.
(2) PUBLICATION WAS A REQUISITE SINE QUA NON IN THIS CASE,
BECAUSE THE AMOUNT OF THE LOAN WAS P3,000.00; HENCE,
PARAGRAPH 3, SECTION 5 OF REPUBLIC ACT NO. 720, WAS NOT
APPLICABLE, BECAUSE THE LAW DOES NOT SPEAK OF THE BALANCE
UNPAID BUT THE AMOUNT OF THE LOAN.
(3) THE PREMATURE AND FRAUDULENT CONSOLIDATION OF OWNERSHIP
AND MALICIOUS IMMEDIATE SALE OF THE LAND IN QUESTION IN FAVOR
OF MARIANITO BAJA AND PATRICIA ARAJA BEFORE THE EXPIRATION OF
THE PERIOD OF REDEMPTION CLOSED THE DOOR FOR LEGAL
REDEMPTION; SO THAT AN ACTION FOR RECONVEYANCE BECAME THE
PROPER REMEDY.
(4) THE AFFIDAVIT OF CONSOLIDATION OF OWNERSHIP HEREIN WAS
NULL AND VOID FOR LACK OF NOTARIZATION.[9]
We find that the pertinent issues to be resolved are: (1) whether or not a
valid foreclosure sale of the subject property was conducted and (2) whether or
not reconveyance and damages is the proper remedy available to petitioners.

With respect to the first issue, this Court has ruled that failure to comply
with statutory requirements as to publication of notice of auction sale constitutes
a jurisdictional defect which invalidates the sale. [10] Even slight deviations
therefrom are not allowed. [11] Section 5 of Republic Act No. 720 as amended by
Republic Act No. 5939 provides:[12]
The foreclosure of mortgages covering loans granted by rural banks shall be
exempt from the publication in newspapers were the total amount of the loan,
including interests due and unpaid, does not exceed three thousand pesos. It
shall be sufficient publication in such cases if the notices of foreclosure are
posted in at least three of the most conspicuous public places in the municipality
and barrio were the land mortgaged is situated during the period of sixty days
immediately preceding the public auction. Proof of publication as required herein
shall be accomplished by affidavit of the sheriff or officer conducting the
foreclosure sale and shall be attached with the records of the case: x x x. (italics
supplied)
In the case at bar, the affidavit of posting executed by the sheriff states
that notices of the public auction sale were posted in three (3) conspicuous public
places in the municipality such as (1) the bulletin board of the Municipal Building
(2) the Public Market and (3) the Bus Station. There is no indication that notices
were posted in the barrio where the subject property lies. Clearly, there was a
failure to publish the notices of auction sale as required by law.
In Roxas vs. Court of Appeals,[13] this Court has ruled that the foreclosure
and public auction sale of a parcel of land foreclosed by a rural bank were null
and void when there was failure to post notices of auction sale in the barrio
where the subject property was located. This Court finds that the same situation
obtains in the case at bar. Further still, there was a failure on the part of private
respondents to publish notices of foreclosure sale in a newspaper of general
circulation. Section 5 of R.A. 720 as amended by R.A. 5939 provides that such
foreclosures are exempt from the publication requirement whenthe total amount
of the loan including interests due and unpaid does not exceed three-thousand
pesos (P3,000.00). The law clearly refers to the total amount of the loan along
with interests and not merely the balance thereof, as stressed by the use of the
word total. At the time of foreclosure, the total amount of petitioners loan
including interests due and unpaid was P3,006.90. Publication of notices of
auction sale in a newspaper was thus necessary.
In light of private respondents failure to comply with the statutory
requirements of notice and publication, we rule that the foreclosure and public
auction sale of petitioners property are null and void. Hence, the Rural Bank of
Naujan did not acquire valid title to the property in question. This reversal of the
Court of Appeals disposes of the other errors assigned by petitioners.
Anent the second issue, the above conclusion requires a determination of
whether or not petitioners are entitled to a reconveyance of their property. If the
property has not yet passed to an innocent purchaser for value, an action for
reconveyance is still available.[14] It is a condition sine qua non for an action for
reconveyance to prosper that the property should not have passed to the hands
of an innocent purchaser for value. [15] He is considered an innocent purchaser
who acquired the property for a valuable consideration not knowing that the title
of the vendor or grantor was null and void. [16]Good faith or its absence must thus
be established on the part of spouses Marianito Baja and Patricia Araja at the
time that they purchased the subject property from the Rural Bank of Naujan.
Good faith, or the lack of it, is in the last analysis a question of intention;
but in ascertaining the intention by which one is actuated on a given occasion,
we are necessarily controlled by the evidence as to the conduct and outward acts
by which alone the inward motive may, with safety, be determined. [17] To
determine whether or not the Baja spouses were in good faith at the time they
purchased the subject property from the Rural Bank of Naujan thus entails a
review of the evidence on record.
The trial court concluded that Marianito Baja and Patricia Araja were
purchasers in bad faith. The trial court noted that when Marianito Baja verified
the title of the subject property at the rural bank, he must have noticed that the
certificate of sale was registered with the Office of the Register of Deeds only on
January 9, 1975, so that he is presumed to know that the petitioners had at least
one year from that date or up to January 8, 1976 to redeem the subject property.
[18]

It is a well-settled rule that a purchaser cannot close his eyes to facts

which should put a reasonable man upon his guard, and then claim that he acted

in good faith under the belief that there was no defect in the title of the
vendor. His mere refusal to believe that such defect exists, or his willful closing of
his eyes to the possibility of the existence of a defect in his vendors title, will not
make him an innocent purchaser for value, if it afterwards develops that the title
was in fact defective, and it appears that he had such notice of the defect as
would have led to its discovery had he acted with that measure of precaution
which may reasonably be required of a prudent man in a like situation. [19]
In the case at bar, Marianito Baja testified on cross-examination that Victor
Atienza, Bajas cousin and petitioners tenant on the subject property, informed
him of the rural banks intention to sell the land in question. [20] He said that from
the time this information was relayed to him until the execution of the deed of
sale by the bank in favor of the Baja spouses on July 14, 1975, a period of about
half a year elapsed.[21] He further stated that upon learning from Victor Atienza
that the property was being sold, he immediately went to the rural bank to verify
this information, as well as ascertain if the land was titled. [22] Baja also said that
before the deed of sale was executed on July 14, 1975, he made his offer to buy
the property from the bank about one month before said date. [23] On direct
examination, however, Baja claimed that he verified the title to the subject
property to be in the rural banks name before the sale was effected. [24]
From the records, it appears that title to the property was issued in the
rural banks name only on July 8, 1975, when the banks affidavit of consolidation
of ownership dated June 26, 1975 was registered with the Registry of Deeds of
Oriental Mindoro.[25] Said registration was the operative act to prompt the
Register of Deeds to cancel the title in the name of petitioners and to issue a new
one in the name of the rural bank. Hence, if Marianito Baja claims to have offered
to buy the property one month before July 14 1975, or sometime in the middle of
June of that year, he must have noticed that the title was not yet in the rural
banks name. More so, he also would have noticed that the title was not yet in the
banks name when he verified the status of the property and the title thereto
immediately after Victor Atienza told him that the property was being sold, which,
according to him, was about half a year before July 14, 1975.
What Baja should have noticed, if we follow his own chronological
estimates, was that the title was still in the petitioners name when he verified the
status of the land in question. Thus, he must have seen that the certificate of
auction sale was registered only on January 9, 1975. As the trial court has said,
he is presumed by law to know that the petitioners had one year from this date or
until January 8, 1976 to redeem the subject property.
In addition, Baja was completely aware of the fact that Victor Atienza was
a tenant of the petitioners. Hence, at the time the property in question was being
sold to him by the rural bank, possession thereof was with the petitioners,
exercised through their tenant Victor Atienza. In Santiago vs. Court of Appeals,
[26]
we cited De Guzman, Jr. vs. Court of Appeals(156 SCRA 701 [1987]):
The failure of appellees to take the ordinary precautions which a prudent man
would have taken under the circumstances, specially in buying a piece of land in
the actual, visible and public possession of another person, other than the
vendor, constitutes gross negligence amounting to bad faith.
In this connection, it has been held that where, as in this case, the land sold is in
the possession of a person other than the vendor, the purchaser is required to go
beyond the certificate of title and ma[k]e inquiries concerning the rights of the
actual possessor. (Incala vs. Mendoza, CA-G.R. No. 13677-R, November 9,
1965; De Jesus vs. Revilla, CA-G.R. No. 13562-R, October 5, 1965; Martelino
vs. Manikan, CA-G.R. No. 32792-R, June 22, 1956])
xxx
One who purchases real property which is in the actual possession of another
should, at least make some inquiry concerning the right of those in
possession. The actual possession by other than the vendor should, at least put
the purchaser upon inquiry. He can scarcely, in the absence of such inquiry, be
regarded as a bona fide purchaser as against such possessors (Conspecto vs.
Fruto, 31 Phil. 144).
xxx
Marianito Baja testified on cross-examination that he was working for
about half a year in another area about a hundred meters away from the subject
property before the same was offered to him for sale. [27] He thus had visual notice

that petitioners tenant Victor Atienza was working on the land in question. He
also learned from Atienza that petitioner Eduardo Lucena was the landlord of the
former.[28] In fact, prior to the date that he acquired the property, Baja instructed
Atienza to inform said petitioner that the rural bank was selling the property to
him.[29] Baja, however, never communicated directly with petitioner Eduardo
Lucena, nor did he receive any response coming from said petitioner. [30] He did
learn, however, that Lucena scolded Victor Atienza when the latter went to see
him, indicating that he was aware of said petitioners aversion to the sale of the
property by the rural bank.[31]
All things considered, Marianito Baja did not make any reasonable inquiry
regarding the status of the land in question, despite being aware that the property
was still in the possession of the petitioners. He did not even make any effort to
communicate directly with petitioner Eduardo Lucena. All he did was to instruct
Victor Atienza to inform Lucena of the proposed sale of the property. He did not
instruct Atienza, however, to make inquiries concerning the status of the
property.Furthermore, Bajas claim that he saw that title to the property was in the
name of the rural bank prior to the sale is not credible. Granting arguendo that
the title was in the name of the rural bank when he first saw it, he nonetheless
had notice that possession of the property was with persons other than the
vendors thereof. It was thus incumbent upon him to look beyond the title to the
subject property and make the necessary inquiries. This he neglected to do.

DAVIDE, JR., C.J.:

In its petition for review, petitioner Philippine National Bank (hereafter
PNB) seeks the reversal of the decision of 29 July 1998 of the Court of Appeals
in CA-GR. CV No. 49800,[1] which affirmed the decision of 14 June 1994 of the
Regional Trial Court of Manila, Branch 14, in Civil Case No. 92-61122. [2]
The factual and procedural antecedents which gave rise to this appeal are
hereunder summarized.
On 25 August 1979, respondent spouses Francisco and Merced Rabat
(hereafter RABATs) applied for a loan with PNB. [3] Subsequently, the RABATs
were granted on 14 January 1980 a medium-term loan of P4.0 Million to mature
three years from the date of implementation. [4]
On 28 January 1980, the RABATs signed a Credit Agreement and
executed a Real Estate Mortgage [5] over twelve (12) parcels of land which
stipulated that the loan would be subject to interest at the rate of 17% per annum,
plus the appropriate service charge and penalty charge of 3% per annum on any
amount remaining unpaid or not renewed when due. [6]

When the Baja spouses purchased the subject property from the rural
bank on July 14, 1975, they did so well within the one-year redemption period of
petitioners. In doing so, not only did said respondents have notice of a defect in
the title of the rural bank over the subject property, but by purchasing the latter,
they also closed the door on the petitioners right to redeem it. Accordingly, we
adopt the finding of the lower court that said respondents purchased the subject
property in bad faith. We rule that petitioners are entitled to a reconveyance of
the property as it has not yet passed to an innocent purchaser for value.

On 25 September 1980, the RABATs executed another document

denominated as "Amendment to the Credit Agreement" purposely to increase the
interest rate from 17% to 21% per annum, inclusive of service charge and a
penalty charge of 3% per annum to be imposed on any amount remaining unpaid
or not renewed when due. [7] They also executed another Real Estate
Mortgage[8] over nine (9) parcels of land as additional security for their mediumterm loan of Four Million (P4.0 M).[9] These parcels of land are agricultural,
commercial and residential lots situated in Mati, Davao Oriental.

In their petition, petitioners also pray that this Court render a decision
pursuant to their prayers as appellants in the Court of Appeals. Essentially,
petitioners implored the respondent court to raise the amount of damages
awarded them by the trial court and to find private respondents Braulio Bagus,
Reynaldo Mambil and Ramon Garcia liable for damages as well. Petitioners also
asked for the inclusion of exemplary damages and litigation fees in the award.

The several availments of the loan accommodation on various dates by

the RABATs reached the aggregate amount of THREE MILLION FIVE
HUNDRED SEVENTEEN THOUSAND THREE HUNDRED EIGHTY
(P3,517,380), as evidenced by the several promissory notes, [10] all of which were
due on 14 March 1983.
The RABATs failed to pay their outstanding balance on due date.

We find that there is no substantial reason to modify the trial courts award
of damages. There is no convincing proof to support petitioners allegations that
private respondents Braulio Bagus, Reynaldo Mambil and Ramon Garcia
performed their duties as Deputy Provincial Sheriff and Registers of Deeds with
unlawful intent and in bad faith. Furthermore, petitioners allegations as to the
amount of unrealized rentals due them as actual damages are mere assertions
unsupported by factual evidence. In determining actual damages, the court
cannot rely on mere assertions, speculations, conjectures or guesswork but must
depend on competent proof and on the best evidence obtainable regarding the
actual amount of loss.[32]
There is also no sound basis for increasing the award of moral
damages. The well-entrenched rule is that the grant of moral damages depends
upon the discretion of the court based on the circumstances of each case. [33] We
find that the trial court exercised its sound discretion in awarding actual and
moral damages as it did to the petitioners, as well as in not granting the
exemplary damages for lack of sufficient basis.
WHEREFORE, the petition is hereby GRANTED. The decision of the
Court of Appeals dated January 20, 1987 is hereby SET ASIDE; and the decision
of the CFI of Oriental Mindoro dated September 12, 1978, is hereby
REINSTATED and AFFIRMED.
Costs against private respondents.
SO ORDERED.
[G.R. No. 134406. November 15, 2000]
PHILIPPINE NATIONAL BANK, petitioner, vs. SPOUSES FRANCISCO and
MERCED RABAT, respondents.
DECISION

In its letter[11] of 24 July 1986, in response to the letter of the RABATs of 16

June 1986 requesting for more time within which to arrive at a viable proposal for
the settlement of their account, PNB informed the RABATs that their request has
been denied and gave the RABATs until 30 August 1986 to settle their
account. The PNB sent the letter to 197 Wilson Street, San Juan, Metro Manila.
For failure of the RABATs to pay their obligation, the PNB filed a petition
for the extrajudicial foreclosure of the real estate mortgage executed by the
RABATs. After due notice and publication, the mortgaged parcels of land were
sold at a public auction held on 20 February 1987 and 14 April 1987. The PNB
was the lone and highest bidder with a bid of P3,874,800.00.[12]
As the proceeds of the public auction were not enough to satisfy the entire
obligation of the RABATs, the PNB sent anew demand letters. The letter dated 15
November 1990[13] was sent to the RABATs at 197 Wilson Street, San Juan,
Metro Manila; while another dated 30 August 1991 [14] was sent to the RABATs at
197 Wilson Street, Greenhills, San Juan, Metro Manila, and also in Mati, Davao
Oriental.
Upon failure of the RABATs to comply with the demand to settle their
remaining outstanding obligation which then stood at P14,745,398.25,
[15]
including interest, penalties and other charges, PNB eventually filed on 5 May
1992 a complaint for a sum of money before the Regional Trial Court of
Manila. The case was docketed as Civil Case No. 92-61122, which was assigned
to Branch 14 thereof.
The RABATs filed their answer with counterclaim [16] on 28 July 1992 to
which PNB filed its Reply and Answer to Counterclaim. [17] On 2 January 1993, the
RABATs filed an amended answer.[18] The RABATs admitted their loan availments
from PNB and their default in the payment thereof. However, they assailed the
validity of the auction sales for want of notice to them before and after the
foreclosure sales.

They further added that as residents of Mati, Davao Oriental since 1970
up to the present, they never received any notice nor heard about the foreclosure
proceeding in spite of the claim of PNB that the foreclosure proceeding had been
duly published in the San Pedro Times, which is not a newspaper of general
circulation.
The RABATs likewise averred that the bid price was grossly inadequate
and unconscionable.
Lastly, the RABATs attacked the validity of the accumulated interest and
penalty charges because since their properties were sold in 1987, and yet PNB
waited until 1992 before filing the case. Consequently, the RABATs contended
that they should not be made to suffer for the interest and penalty charges from
May 1987 up to the present. Otherwise, PNB would be allowed to profit from its
questionable scheme.
The PNB filed on 5 February 1993 its Reply to the Amended Answer and
Answer to Counterclaim.[19]
After appropriate proceedings, the trial court rendered on 14 June 1994 a
decision,[20] whose dispositive portion reads as follows:
WHEREFORE, and in view of the foregoing considerations, judgment is hereby
rendered dismissing the complaint.
On the counterclaim, the two (2) auction sales of the mortgaged properties are
hereby set aside and ordering the plaintiff to reconvey to the defendants the
remaining properties after the sale [of] sufficient properties for the satisfaction of
the obligation of the defendants.
The parties will bear their respective cost.
So ordered.

The evidence show that the foreclosed propert[ies] are near the Municipal
building, public market, provincial capital of Davao Oriental, the provincial
hospital of Davao Oriental, and the Sibala Village Subdivision wherein the last
sold at P200.00 per square meter. The prices paid for are indeed too low as [to]
be shocking to the conscience.
On the third and fourth issue, the trial court ruled:
although the movants properties were sold in 1987, the plaintiff waited until 1992
before filing this case, hence, the tremendous accumulation of interest and
penalty charges. The plaintiff has not given any plausible explanation for the
delay, hence, it may be presumed that the plaintiff had deliberately delayed the
filing of this case in order that it can collect more interest and penalty
charges. Consequently, the defendants should not be made to suffer for the
interest and penalty charges from May 1987 up to the present. Otherwise, the
plaintiff would be allowed to profit from its questionable scheme. Therefore, the
defendants should not only be made to answer for their loan in the amount of
P4,000,000.00 plus interest up to May 1987.
The defendants further claim that the interest and penalty charges should
be 21% and 3% respectively pursuant to the provision of the amended credit
accommodation; that the acceleration close should not be enforced as it is in
nature of a contract of adhesion. The amendment to the credit accommodation is
not a contract of adhesion. A contract of adhesion is one solely prepared by one
of the parties where the other party had no participation, but merely gives his
asset [sic] by adhering thereto. It is a take it or leave it situation.Standardized
contract form offered to consumers of goods and services on essentially (take it
or leave it) basis without affording consumer realistic opportunity to bargain and
under such conditions that consumers cannot obtain desires products or services
except by acquiescing in form contract. Distinctive feature of adhesion contract is
that weaker party has no realistic choice up to its term. (Cubic Corporation
versus Marty, Dist., 185 C.A. 3d 438-229 Cal/Rptr. 828, 833; Standard Oil Co. of
California versus Perkins, C.A. Or. 347 F. 2d 379, 383.).
Anent the last issue, the trial court ruled that while a mortgagee is entitled
to a deficiency judgment, it would be premature to adjudge it in the case since
the two auction sales in question are null and void.

The trial court addressed these five issues:

1. The validity of the foreclosure proceedings;
2. The validity of the auction sales;
3. The validity of the penalty charges and the interest charged by
the plaintiff;
4. Whether or not the defendants should be liable for the interests
and penalty charges from the date of the auction sales up to
the filing of this case; and
5. Whether or not the plaintiff is entitled to deficiency judgment.
The first issue was resolved against the RABATs who claimed that the
foreclosure was void due to lack of notice to them at their address in Mati, Davao
Oriental, and that there was no publication of the notice in a newspaper of
general circulation. It held that the mortgage contract did not specifically require
that personal service of notice of foreclosure sale be given to them and that
the San Pedro Times which published the notice of foreclosure sale is a
newspaper of general circulation as certified by the Sheriff and as shown in the
affidavit of its publisher.
Nevertheless, the trial court agreed with the RABATs that the two auction
sales were void in view of the gross inadequacy of the price, which is shocking to
the conscience. It ratiocinated thus:
Certainly, the price of P6.00/sq.m. for the properties sold in the first auction sale
and P3.00/sq.m. for the properties sold in the second auction sale are too low as
compared with P80.00 which according to Atty. Sibala was the price per square
meter of the properties in 1986.

Only PNB appealed from the judgment to the Court of Appeals. Its appeal
was docketed as CA-G.R. CV No. 49800.
In its Appellants Brief filed in CA-G.R. CV No. 49800, PNB raised the
following issues:[21]
I
WHETHER OR NOT THE TRIAL COURT ERRED IN NULLIFYING THE
SHERIFF'S AUCTION SALE ON THE GROUND THAT THE PNB'S WINNING
BID IS VERY LOW
II
WHETHER OR NOT THE TRIAL COURT ERRED IN RULING THAT THE
DEFENDANTS-APPELLEES ARE NOT LIABLE TO PAY INTEREST AND
PENALTY CHARGES AFTER THE AUCTION SALES UP TO THE FILING OF
THIS CASE.
In their Appellees Brief,[22] the RABATs prayed for the appellate court to
affirm in toto the decision of the trial court.
On 29 June 1998, the Court of Appeals rendered a decision [23] affirming
the trial court's ruling nullifying the auction sales, but on a different ground.
The Court of Appeals discovered that the RABATs did not actually receive
personal notices concerning the foreclosure proceedings. Hence, they could not
have known of said foreclosure sales. It pronounced and decreed, thus:
An examination of the exhibits show that the defendant-appellees given address
is Mati, Davao Oriental and not 197 Wilson Street, Greenhills, San Juan, Metro
Manila as alleged by the plaintiff-appellant (Exhibit C to J, pp. 208, 217, 220, 229,

236-239, Records). Records further show that all subsequent communications by

plaintiff-appellant was sent to defendant-appellees address at Wilson Street,
Greenhills, San Juan. This was the very reason why defendant-appellees were
not aware of the foreclosure proceedings.
As correctly found out by the trial court, there is a need for the setting aside of
the two (2) auction sales hence, there is yet no deficiency judgment to speak of.
WHEREFORE, the decision of the trial court dated 14 June 1994, is hereby
affirmed in toto.
SO ORDERED.
Unsatisfied with the decision, the PNB seasonably filed before us the
present petition raising the lone issue of:
WHETHER OR NOT THE COURT OF APPEALS MAY REVIEW AND PASS
UPON THE TRIAL COURTS FINDING AND CONCLUSION ON AN ISSUE
WHICH WAS NEVER RAISED ON APPEAL, AND, THEREFORE, HAD
ATTAINED FINALITY
In support thereof, PNB argues:

Consequently, the RABATs conclude that the Court of Appeals cannot be

faulted for ruling on a material fact whose consideration is essential to a
complete determination of the rights and obligations of the parties.
On 16 March 1999, the PNB filed its Reply to the Comment of the
RABATs.
In our resolution of 21 April 1999 we gave due course to the petition and
required the parties to submit their respective memoranda which they complied
with.
Section 8, Rule 51 of the 1997 Rules of Civil Procedure expressly
provides:
SEC. 8. Questions that may be decided. -- No error which does not affect the
jurisdiction over the subject matter or the validity of the judgment appealed from
or the proceedings therein will be considered unless stated in the assignment of
errors, or closely related to or dependent on an assigned error and properly
argued in the brief, save as the court pass upon plain errors and clerical errors.
In his book,[24] Mr. Justice Florenz D. Regalado commented on this
section, thus:

1. THE COURT OF APPEALS HAS SO FAR DEPARTED FROM

THE ACCEPTED AND USUAL COURSE OF JUDICIAL
PROCEEDINGS WHEN IT DECIDED AND RESOLVED A
QUESTION/OR ISSUE NOT RAISED IN PETITIONER PNBS
APPEAL;

1. Sec. 8, which is an amendment of the former Sec. 7 of this Rule, now includes
some substantial changes in the rules on assignment of errors. The basic
procedural rule is that only errors claimed and assigned by a party will be
considered by the court, except errors affecting its jurisdiction over the subject
matter. To this exception has now been added errors affecting the validity of the
judgment appealed from or the proceedings therein.

2. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF

DISCRETION WHEN IT REVERSED THE FINDING AND
CONCLUSION OF THE TRIAL COURT ON AN ISSUE
WHICH HAD ALREADY ATTAINED FINALITY.

Also, even if the error complained of by a party is not expressly stated in his
assignment of errors but the same is closely related to or dependent on an
assigned error and properly argued in his brief, such error may now be
considered by the court. These changes are of jurisprudential origin.

PNB maintains that pursuant to Section 8 of Rule 51 of the 1997 Rules of

Civil Procedure no error which does not affect the jurisdiction over the subject
matter or the validity of the judgment appealed from or the proceedings therein
will be considered unless stated in the assignment of errors, or closely related to
or dependent on an assigned error and properly argued on the Brief, save as the
court may pass upon plain errors and clerical errors.
PNB adds that nowhere in its Appellants Brief did it raise the issue of "lack
of notice" to the RABATs. Such being the case, in addition to the fact that the
RABATs did not appeal from the decision, the trial courts rejection of the RABATs
claim of lack of personal notice regarding the foreclosure proceedings had
already attained finality. The RABATs can no longer obtain from the appellate
court any affirmative relief other than the ones granted in the decision of the court
below.
PNB concludes that the Court of Appeals committed grave abuse of
discretion amounting to lack of jurisdiction when it resolved an issue which was
not raised in the appeal and the ruling on which by the trial court had already
become final.

2. The procedure in the Supreme Court being generally the same as that in the
Court of Appeals, unless otherwise indicated (see Secs. 2 and 4, Rule 56), it has
been held that the latter is clothed with ample authority to review matters, even if
they are not assigned as errors on appeal, if it finds that their consideration is
necessary in arriving at a just decision of the case. Also, an unassigned error
closely related to an error properly assigned (PCIB vs. CA, et al., L-34931, Mar.
18, 1988), or upon which the determination of the question raised by error
properly assigned is dependent, will be considered by the appellate court
notwithstanding the failure to assign it as error (Ortigas, Jr. vs. Lufthansa German
Airlines, L-28773, June 30, 1975; Soco vs. Militante, et al., G.R. No. 58961, June
28, 1983).
It may also be observed that under Sec. 8 of this Rule, the appellate court is
authorized to consider a plain error, although it was not specifically assigned by
the appellant (Dilag vs. Heirs of Resurreccion, 76 Phil. 649), otherwise it would
be sacrificing substance for technicalities.
It may at once be noticed that the exceptions are for the benefit of the
appellant and not for the appellee.

In their Comment filed on 18 November 1998, the RABATs assert that the
petition is procedurally defective, presents no justiciable question and
categorically frivolous. They point out that while the petition is designated as one
under Rule 45 of the 1997 Rules of Civil Procedure, yet it is predicated on
grounds involving question of law and lack or excess of jurisdiction, under Rule
65. The PNB cannot be allowed to avail simultaneously of both remedies.

The RABATs did not appeal from the decision of the trial court. As a
matter of fact, in their Appellees Brief filed with the Court of Appeals they prayed
that said decision be affirmed in toto. As against the RABATs the trial courts
findings of fact and conclusion are already settled and final. More specifically,
they are deemed to have unqualifiedly agreed with the trial court that the
foreclosure proceedings were valid in all respects, except as to the bid price.

Anent the want of justiciable question, the RABATs maintain that this case
involves the simple and fundamental issue of the validity of the auction sales
conducted by PNB, which hinges on compliance with the requirements set forth
under Republic Act (sic) 3135, governing extrajudicial foreclosure, as amended
by Republic Act No. 4148 (publication, posting and notices) and the
reasonableness of the bid price, which should be considered jointly for a
judicious resolution of the controversy/issue.

On the other hand, PNB, the sole appellant, never raised the issue of lack
of personal notice to the RABATs.Neither is such issue closely related to or
dependent on PNB's assigned error on appeal nor is it an exception to Section 8
of Rule 51.
Needless to stress, the Court of Appeals erred in resolving PNBs appeal
on the basis of an issue which was not raised on appeal and whose resolution
thereon by the trial court has long become firm and final against the party
adversely affected by the resolution.

Even granting arguendo that the issue of personal notice may be raised,
still we cannot agree with the Court of Appeals. In the first place, in extrajudicial
foreclosure sales, personal notice to the mortgagor is not necessary. [25] Section 3
of Act No. 3135 reads:
Section 3. Notice shall be given by posting 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 be published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city.
Clearly personal notice to the mortgagor is not required. Second, the
requirements of posting and publication in a newspaper of general circulation
were duly complied with by the PNB as correctly found by the trial court, to which
we accord great respect. A question of non-compliance with the notice and
publication requirements of an extrajudicial foreclosure sale is a factual issue and
the resolution thereof by the trial court is binding and conclusive upon us absent
any showing of grave abuse of discretion.[26]
WHEREFORE, the petition is GRANTED. The decision of the Court of
Appeals of 29 July 1998 in CA-G.R. CV No. 49800 is hereby SET ASIDE. The
Court of Appeals is directed to DECIDE, with reasonable dispatch, CA-G.R. CV
No. 49800 on the basis of the errors raised by petitioner Philippine National Bank
in its Appellants Brief.
No pronouncement as to costs
G.R. No. L-30079 January 30, 1976
MATILDA GOROSPE and MARIANO GOROSPE, plaintiffs-appellees,
vs.
DOLORES M. SANTOS, defendant-appellant.
DOLORES M. SANTOS, counterclaimant- defendant,
vs.
CARIDAD J. TORRENTO, THE PROVINCIAL SHERIFF OF RIZAL, and THE
REGISTER OF DEEDS OF QUEZON CITY, defendants-appellees.
Ruben L. Roxas for appellant.
Manuel A. Cammayo for appellees.

ANTONIO, J.:
This case was certified to this Court from the Court of Appeals on the ground that
the appeal raises purely legal questions.
The legal questions posed by this appeal involve the propriety of the summary
judgment rendered by the Court of First Instance of Quezon City in Civil Case
No. Q-5794, 1 and the correctness of the trial court's resolution of the other
substantive issues, such as on the right of plaintiffs-appellees as assignees of the
mortgagor to redeem the property sold on foreclosure and the legal efficacy of
the redemption thus made.
At bottom is the action filed by plaintiffs-appellees in the aforementioned Civil
Case No. Q-5794, against defendant-appellant Dolores M. Santos, wherein said
plaintiffs-appellees sought the confirmation of their rights of ownership over the
parcel of land covered by Transfer Certificate of Title No. 43761, of the Quezon
City land registry, redeemed by them as successors in interest, 2 and for the
surrender to them of the afore-mentioned transfer certificate of title which is in the
ion of the defendant-appellant, or in default thereof, its cancellation and the
issuance to them of a new certificate of title.
In the afore-mentioned complaint, 3 the following facts are alleged: On October
19, 1958, Caridad J. Torrento in order to secure her indebtedness in the amount
of P7,000, executed a deed of first mortgage over her parcel of land, covered by
Transfer Certificate of Title No. 43761, of the Registry of -Deeds of Quezon City,
in favor of defendant-appellant Dolores M. Santos. The deed was duly registered

and the corresponding owner's duplicate of Transfer Certificate of Title No. 43761
was delivered to defendant-appellant.
On September 1, 1959, "with the consent of . the first mortgagee the mortgagor,
Caridad J. Torrento executed a second mortgage (Annex "A") over the same
property, in favor of plaintiffs-appellees, to secure a principal indebtedness in the
amount of P6,000.00. This deed of second mortgage was not, however,
registered. In the meantime, the first mortgage was extra-judicially foreclosure
and the land sold at public auction on March 10, 1960 to Dolores M. Santos, the
highest bidder, for the sum of P3,500.00. The corresponding Sheriffs Certificate
of Sale was issued in her favor, which certificate was registered on October 20,
1960 and the same annotated in the original of Transfer Certificate of Title No.
43761.
On February 3, 1961, Dolores M. Santos filed a complaint against Caridad J.
Torrento in Civil Case No. 6479, with the Court of First Instance of Rizal, for the
recovery of the deficiency resulting between the price obtained in the sale of the
real property at public auction and the outstanding obligation at the time of the
foreclosure. On February 9, 1961, the court issued, in the aforesaid case, a writ
of preliminary attachment on the properties of Caridad J. Torrento and on
February 24, 1961, the Sheriff of Rizal caused the attachment of the rights and
interests of Caridad J. Torrento particularly her right of redemption over the parcel
of land sold at public auction. In consideration of the discharge of the second
mortgage, Caridad J. Torrento assigned to the second mortgagee (Matilda
Gorospe, wife of Mariano Gorospe) all her rights, interests and title over said
property, particularly her statutory right of redemption "subject to the attachment
in favor of the plaintiffs (second mortgagee) who took over the possession of the
property as a consequence thereof." 4
The deed of assignment of Caridad J. Torrento in favor of Matilda Gorospe, which
was made part of the complaint as Annex "B", contained the following stipulation:
4. That the ASSIGNEE shall, with the consent of her
husband Mariano Gorospe, release the ASSIGNOR of her
obligations on the Second Mortgage referred to above
and that the said Second Mortgage indebtedness shall be
considered paid by the execution of this instrument.
On March 10, 1961, Caridad J. Torrento filed, in Civil Case No. 6479, an ex parte
motion to lift the preliminary attachment on her right of redemption upon the filing
of a bond, which ex parte motion was granted by the court on the same date.
Likewise on the same occasion, plaintiffs-appellees, as successors-in-interest of
Caridad J. Torrento paid to the Sheriff the amount of P3,920.00, which
represented the amount of the purchase, with one per centum (1%) interest per
month thereon in addition, to effect the redemption of the foreclosed property.
Upon the filing of the requisite bond by Caridad J. Torrento on March 11, 1961
and its approval by the court in Civil Case No. 6479, the corresponding order
dissolving the attachment was issued.
On March 13, 1961, the Sheriff of Rizal, who conducted the sale of the foreclosed
property, issued a Certificate of Redemption in favor of plaintiffs-appellees as
successors in interest of Caridad J. Torrento over the foreclosed property. The
Certificate of Redemption was registered a on March 13, 1961 with the Register
of Deeds of Quezon City, and the corresponding entry and annotation made on
the original of said certificate of title.
Alleging that they became owners in fee simple of the aforementioned property
by virtue of the aforesaid ..redemption, plaintiffs-appellees demanded from
Dolores M. Santos the surrender to them of the owner's duplicate of Transfer
Certificate of Title No. 43761, but defendant-appellant "with malice aforethought
and in wanton disregard of the plaintiffs' right to the possession of the title ...
refused and still continue to refuse to recognize the right and ownership of the
plaintiffs over the said property ... and to, deliver to the plaintiffs the' duplicate of
the said certificate-of title." They, therefore, prayed that judgment be rendered
'confirming the rights of ownership of the plaintiffs" over said property, and
ordering the defendant-appellant to deliver to them the said owner's duplicate of
Transfer Certificate of title No. 43761, or declaring the same null and void and
directing the Register of Deeds of Quezon City to issue a new certificate of title in
favor of plaintiffs.
Defendant-appellant, in her answer, denied that Matilda J. Gorospe had validly
redeemed the property because: (a) under Section 26, Rule 39, Rules of Court, if
the purchaser at public auction is also a creditor having a prior lien (first
mortgage and a levy on attachment) to that of the redemptioner, the

redemptioner can redeem only if she pays the purchaser at public auction not
only the amount of her purchase in the sum of P3,500.00 with one per centum
per month interest thereon in addition, up to the time of redemption, but also the
balance of the mortgage indebtedness (P5,910.00); (b) the order lifting the levy
on attachment of the right of redemption of the debtor Caridad J. Torrento was
issued only on March 11, 1961 one day after the expiration of the period of
redemption and, therefore, the redemption made on March 13, 1961 was after
the expiry of the period of redemption; (c) the so-called certificate of redemption,
Annex "C" 6f the complaint, is not even acknowledged before any officer
authorized to take acknowledgment of conveyances of real property, contrary to
Section 27, Rule 39 of the Rules, and the same is, therefore, unregisterable; (d)
the document of assignment of the debtor's right of redemption, Annex "B", does
not show the amount then actually due on the lien of the supposed assignee,
contrary to Section 28 (c), Rule 39 of the Rules of Court; (e) the same document,
Annex "B' of the complaint, had never been registered with the Register of Deeds
of Quezon City and hence the same cannot affect third persons like the herein
defendant Dolores M. Santos. Besides, under the law, said document should,
and ought to be subject to the prior lien of herein defendant Dolores M. Santos
consisting of a levy on attachment of said right of redemption of the debtor
Caridad J. Torrento. 5
As a first counterclaim, defendant Dolores M. Santos that the Deed of
Assignment whereby Caridad J. Torrento transferred to Matilda Gorospe her right
of redemption should be declared void and/or rescinded as in fraud of creditors,
because (a) the alleged deed of assignment of Torrento's right to redeem dated
March 1, 1961, was simulated and fictitious (b) the transfer was made after suitCivil Case No. 6479-CFI-Rizal, entitled "Dolores M. Santos v. Caridad J.
Torrento" had been begun and while the same was pending against the said
debtor; and (e) the plaintiffs consented to the said assignment knowing that
Caridad J. Torrento's right to redeem the property was already subject to the levy
on attachment under Civil Case No. 6479, Court of First Instance of Rizal. 6
As a second counterclaim, defendant-appellant alleged that plaintiffs- appellees'
action is "clearly unfounded. and malicious as even previous to the present
action, plaintiff Matilda J. Gorospe had already filed against the defendant a
petition entitled "Caridad J. Torrento and Matilda J. Gorospe, petitioners, v.
Dolores M. Santos, oppositor, G.L.R.O. Rec. No. 5975" before Branch IV wherein
said Matilda J. Gorospe and the mortgage debtor Caridad J. Torrento sought-the
surrender of the Owner's Duplicate of TCT No. 43761-Quezon City from the
defendant, which case, as a result of defendant's opposition, was dismissed . 7

executed, the preliminary attachment, in defendant's favor

was already effected on the right of redemption over the
property herein in question early as February 24, 1961,
particularly on the original of TCT No. 43761 in the office
of the Register of Deeds of Quezon City;
c) That defendant should know or ought to know that
whoever acquires the right of redemption of the said
mortgagor-debtor-assignor Caridad J. Torrento subsiquent
to the preliminary attachment is subject to the right of
defendant as attaching creditor;
d) That, as clearly appearing in the deed of assignment of
the right of redemption, Annex 'B' of the complaint the
assignment is subject to the rights of defendant (Dolores
M. Santos, ...
e) That the said preliminary attachment having been
ordered lifted upon the filing of a bond which was
approved by the court to guaranty the payment of
defendant's claim Civil Case No. 6479- CFI, Rizal and
that defendant is, in fact, secured from her claim against
the mortgagor-debtor-assignor Caridad J. Torrento by
virtue of the bond, defendant's right as attaching creditor
over the subject property covered by T.C.T. No. 48761 is
thereby extinguished;
and denying the averments contained in defendant-appellant's second
counterclaim because their petition in G.L.R.O. Rec. No. 5795 was dismissed by
the court on the ground "that there are. issues raised in the pleadings which are
outside of the jurisdiction of this court, acting as a Land Registration Court, to
resolve." 10
On June 9, 1961, the court. a quo issued an order granting defendant-appellant's
Motion to Bring in New Parties and ordering that summons be issued to Caridad
J. Torrento the Provincial Sheriff of Rizal and the Register of Deeds of Quezon
City, who were made parties defendants in the case.
On June 11, 1961, plaintiffs filed a "Motion for Summary Judgment", alleging:

And in support of her third counterclaim, she averred that the defendant
Provincial Sheriff of Rizal notwithstanding that his attention was called to the fact
that no valid redemption was made, failed to issue the officer's Deed of Absolute
Sale contrary to Section 31, Rule 39 of the Rules of Court and Section 78 of Act
496, as amended, and since no valid redemption was made before March 10,
1961, the Register of Deeds of Quezon City should be ordered to cancel the
present TCT NO. 43761-Quezon City and a new certificate of title issued in her
name. 8
On the same day that she filed her answer to the complaint, defendant-appellant
filed a "Motion to Bring in New Parties", praying that Caridad J. Torrento the
Provincial Sheriff of Rizal, in his official capacity as Sheriff -of Quezon City, and
the Register of Deeds of Quezon City be brought in as parties defendants, 'in
order that she may be granted complete and final determination" of her
counterclaims.
On May 26, 1961, plaintiffs-appellees filed la "Manifestation and Countermotion"
wherein they alleged that defendant's answer does not specify which of the
paragraphs of the complaint "are specifically denied because of defendants claim
of lack of knowledge" and which paragraphs are denied "because some of the
allegations therein made are completely false and knowingly made false by the
plaintiffs to suit their unlawful purpose." Plaintiffs-appellees, therefore, prayed
that defendant-appellant be ordered to make the necessary specifications.
On May 27, 1961, defendant-appellant filed an opposition to the Manifestation
and Countermotion of the plaintiffs-appellees. On May 31, 1961, plaintiffsappellees filed their Answer to the counterclaims, 9 contending that the deed of
assignment (Annex "B") may not be rescinded as in fraud of creditors,
considering:
b) That defendant as alleged creditor could not have been
defrauded nor could it have been possible to defraud said
defendant because at the date the said deed of
assignment, Annex 'B' of the complaint, was made and

I. That, from the complaint, the answer with counterclaims

and the answer to counterclaims filed herein, including
the exhibits attached hereto, there appears no genuine
issue as to any 'material fact in this ease;
II. II That, other than the amounts of damages, attorney's
fees, and costs, which are within the discretion of the
court to fix, the determination of whether the plaintiffs are
entitled to the relief sought in the complaint and,
particularly, the questions of law raised by defendant's
answer, can be made on the basis of those facts, together
with supporting documents, alleged in pars. 1 to 14,
inclusive, of the complaint; and that the said facts will
likewise be the ultimate basis of this court in determining
whether the defendant has a valid counterclaim against
the plaintiffs and against the counterclaim-defendants
Caridad J. Torrento the Register of Deeds of Quezon City,
and the Provincial Sheriff of Rizal;
V. That, therefore, actually the only issues raised in the
answer remaining are issues of law, which should be
resolved in favor of the plaintiffs. more particularly as
follows:
1. Has the period of redemption expired? If so, when? If
the last day for redemption was on March 10, 1961, what
was the effect of the attachment of the right of
redemption?
xxx xxx xxx

2. Is the payment of the amount of P3,920 made by the

plaintiffs to the Sheriff on March 10,. 1961 covering the
purchase price and interest, without including in the
redemption price the payment of the amount of the lien by
virtue of the preliminary attachment effected on the right
of redemption in favor of the mortgagor purchaser and
attaching creditor (herein defendant), in compliance with
the requirements of Sec. 26, Rule 39, with respect to the
amount to be paid as redemption price?
xxx xxx xxx
3. Is it required under the provisions of Sec. 27, Rule 39
of the Rules of Court that the certificate of redemption
issued by the sheriff be acknowledged or approved before
a notary public or other officer authorized to take
acknowledgment of conveyance of real property?
xxx xxx xxx
4. Whether the certificate of redemption, Annex "C" of the
complaint is registerable?
xxx xxx xxx
5. Does the deed of assignment, of the mortgagordebtor/s right of redemption, Annex '3' hereof, comply with
the requirements of Section 28 (c), Rule 39?
xxx xxx xxx
6. is the deed of assignment of the right of redemption of
the mortgagor in favor of the plaintiffs, Annex '3' hereof,
void and/or rescissible as in fraud of creditors, particularly
with respect to the defendant herein as mortgagorpurchaser of the property and as attaching creditor of the
right of redemption of the mortgagor-debtor-assignor?" 11
On June 16, 1961, defendant Dolores M. Santos filed an opposition to the Motion
for Summary Judgment, 12 on the following grounds: (1) the issues as to all the
parties in the case at bar have not as yet been joined, as plaintiffs' motion for a
bill of particulars"(or specifications) directed against defendant's answer and
dated May 25, 1961, is still pending resolution by the court, and the persons
ordered by the court to be brought in as parties-defendants, namely, Caridad J.
Torrento the Provincial Sheriff of Rizal and the Register of Deeds of Quezon City,
have not yet filed their answers; and (2) a reading of the various allegations in
the Complaint, Answer with Counterclaims and Answer to Counterclaims will
show that there are numerous issues raised which should be tried and on which
evidence should be taken, being incapable of proof by mere affidavits.
On June 30, 1961, the court a quo rendered a "Summary Judgment",
that:

13

stating

... the Court finds no genuine issue as to any material fact

and that the issues raised in defendants answer are
purely questions of law which may be the property subject
of a summary judgment, and this conclusion of the Court,
becomes more patent by defendants failure to contest the
truth and genuineness of the documents attached to the
motion.
xxx xxx xxx
In her answer with counterclaims, defendant Santos
practically admits all the allegations of first in the
complaint, and her allegations in her special and
affirmative defenses are mere conclusions of law and are
not material to the issues involved. The main issue in this
case is whether or not the plaintiffs have substantially
complied with the provisions of law. relative to the

redemption of the real property in question, or whether or

not the redemption made by the plaintiffs was valid.
xxx xxx xxx
Of the issues of law raised in defendant's answer, the only
material issue of law relative to the validity of the
redemption is the defendant's contention that there has
been no valid redemption in the sense that the amount
that plaintiffs, as redemptioners, should have paid must
not only consist of the purchase price and interest but
also the amount due on the lien by virtue of the
preliminary attachment in favor of the defendant. Under
the liberal construction of the rule on redemption,
however, the Court believes that the plaintiffs were not
strictly bound to have included the amount of said lien in
the redemption price that was to be paid, although they
were bound to respect the existence of such lien,
because certainly the attachment issued in the aforesaid
Civil Case No. 6479 could not have been so issued to
prevent or defeat the right of redemption but rather was
issued merely to secure the satisfaction of a judgment
that may be rendered in said case in favor of the
mortgage creditor. The Court, therefore, holds that the
amount of P3,920.00 paid on March 10, 1961 by the
plaintiffs as redemption price of the property in question
was in accordance with law, and the fact that the
attachment was ordered lifted and dissolved upon the
filing of a bond approved by the Court on March 11, 1961
after the right of redemption was exercised, the lien over
the property was thereby extinguished.
Defendant Santos also raised other questions of law as to
the alleged defect of the certificate of redemption which
was not acknowledged before a Notary Public, and the
failure of the deed of assignment of right to redeem to
comply with the requirements of the Rule. The
requirement that the certificate of redemption be
acknowledged or ratified before a Notary Public is only for
the purpose of registration, but failure to comply with the
same could not be a 'valid ground to invalidate the
redemption. The validity of a redemption lies on the
existence of the right to redeem, the amount to be paid,
and the date of payment which must be made within the
period provided for by law. As to the defendant's
contention that the deed of assignment does not comply
with the requirements of Sec. 28 (c), Rule 39, the fact
remains that the plaintiffs have exercised the right of
redemption as successors-in-interest by virtue of the
assignment and, as such, it is enough for them to have
presented the said deed as required by sub-paragraph
(b), Sec. 28 of the Rule.
From the pleadings and the evidence as regards the first
counterclaim relative to the validity of the deed of
assignment, the Court is also convinced that there is no
genuine issue as to any material fact. Taking the facts
presented as a whole, the Court is inclined to uphold the
validity of the deed of assignment, and this is more so
considering the fact that the plaintiffs, 'as assignees, are
creditors by themselves. Moreover, the deficiency claim of
defendant Santos in the civil case referred to in the
counterclaim is now secured by a bond which was duly
approved by the Court where said case is pending.
Consequently, there could be no possible damage or
prejudice that the defendant Santos may suffer. Our
Supreme Court, in the case of Enage v. Vda. de Hijos F.
Escano, 38 Phil. 657 laid down the doctrine that a 'liberal
construction will be given to statutes governing the
redemption of property; that when a judgment creditor
permits the debtor's land to be sold for less than it is
worth, he exposes himself to the risk of the loss of the
surplus value by the assignment of the right of redemption
or its exercise by another creditor; that redemption are
looked upon with favor, and, where no injury is to follow, a
liberal construction will be given our redemption laws, to
the end that the property of the debtor may pay as many

of debtor's liabilities as possible.' Therefore, to uphold the

validity of the redemption would not cause any injury to
the defendant Santos because at any rate 'the deficiency
claim of the latter against counterclaim defendant Torrento
was secured by a bond approved by the Court.
IN VIEW OF ALL THE FOREGOING, summary judgment
is hereby rendered in favor of the plaintiffs and against the
defendant, as follows:
a) Confirming the rights and ownership of the plaintiffs, as
successors-in-interest of the mortgage debtor Caridad J.
Torrento, over the parcel of land covered by Transfer
Certificate of title No. 43761 of the Register of Deeds of
Quezon City by virtue of the legal exercise of the right of
redemption by the plaintiffs, which redemption is hereby
declared valid;
b) Ordering the defendant to deliver to the plaintiffs the
ion and ownership of the duplicate of Transfer Certificate
of Title No. 43761;
c) Dismissing the counterclaims of defendant; and,
d) Ordering the defendant to pay the costs.
On July 13, 1961, defendant-appellant Dolores M. Santos, after receipt of the
above Summary Judgment, filed her Record on Appeal, Notice of Appeal and
Appeal Bond. On August 2, 1961, plaintiffs filed a Motion for Immediate
Execution of the Summary Judgment, which motion was op by defendantappellant on August 5, 1961.
On August 16, 1961, defendant-appellant Dolores M. Santos filed a Motion for
Reconsideration of the summary judgment, after leave of court therefor had been
obtained. This was denied by the 'lower court in its order dated October 2, 1961.
A second motion for reconsideration was likewise denied on October 14, 1961.
On March 24, 1962, the court a quo approved defendant-appellant's Record on
Appeal and ordered the transmittal of the records of the case to the Court of
Appeals. As afore-mentioned, the Court of Appeals certified the case to the Court
on the ground that it involves the purely legal question of whether or not
summary judgment had been properly rendered by the court of origin.
I
The purpose of Rule 34 of the Revised Rules is to eliminate trial in those cases
where there is no genuine issue of fact, since a trial under such circumstances is
unnecessary and results in delay and expense which may operate to defeat in
whole or in part the recovery of a just claim. As explained by Moore, 14 'The very
object of a motion for summary judgment is to separate what is formal or
pretended in denial or averment from what is genuine and substantial, so that
only the latter may subject a suitor to the burden of a trial. To attain this end, the
rule permits a party to pierce the allegations of fact in the pleadings and to obtain
relief by summary judgment where facts set forth in detail in affidavits,
depositions, and admissions on file show that there are no genuine issues of
facts to be tried. The court is authorized to examine evidence, not for the purpose
of trying an issue but to determine whether there is a genuine issue of fact proper
for trial.'"
We have examined the pleadings and the affidavits as well as other documents
attached thereto, and We find that there is no genuine issue of fact. It is true that
appellant Dolores M. Santos asserted that the deed of assignment of the right to
redeem of March 1, 1961 was simulated and fictitious, but said party was unable
to serve upon the other party any affidavit or other proof to overcome the
probative weight of the public documents submitted by appellees in support of
the assignment. In any event, the transfer made by Caridad J. Torrento of her
right of redemption could not, in any manner, legally affect appellant Dolores M.
Santos, nor cause her damage. As We held in a previous case, if such transfer of
the right of redemption "has not caused him any damage, it matters not to him
whether same was, or was not, fraudulently executed." 15
Basically, the only issue then in the aforesaid Civil Case No. Q-5794 was whether
or not plaintiff-appellee Matilda J. Gorospe had validly made the redemption of

the aforesaid property on March 10, 1961. This is a question purely of law. In
short, "there is no genuine issue as to any material fact and ... the moving party"
was "entitled to a judgment as a matter of law," 16 so that the lower court properly
rendered a summary judgment.
Appellant likewise contends that issues have not been joined in so far as Caridad
J. Torrento, the Provincial Sheriff of Rizal and the Register of Deeds who were
ordered to be brought in as parties defendant, are concerned, for the reason that
they have not as yet filed their answers. Let it be noted that Caridad J. Torrento
adopted plaintiffs-appellees' answer to defendant-appellant's counterclaim as her
own. The claim against the Sheriff and Register of Deeds. of Quezon City is
exclusively against them and any answer of said officials could not be relevant to
the resolution of the basic issue which is the validity of the redemption. Indeed,
plaintiffs-appellees are not bound to wait for these persons to file their answer
which, anyway, are not material to their claim. Under the Rules, plaintiffsappellees may file a motion for summary judgment "at any time after the pleading
in answer" to their claim had been served.
II
Having disposed of this procedural point, We now turn to the basic legal issuewhether or not the plaintiffs-appellees have complied with the requirements of the
law relative to the redemption of the real property in question.
There is no question that Caridad J. Torrento had a perfect right to redeem said
property in view of the provisions of Section 6 of Act No. 3135, as amended by
Act No. 4148, which provides as follows:
Section 6. In all cases in which an extra-judicial sale is
made under the special power hereinbefore referred to,
the debtor, his successors-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 Procedure, in so far as
these are not inconsistent with the provisions of this Act.
The right of redemption provided for by the aforequoted provision, like any other
property right, may be transferred or assigned by its owner. 17 The transferee of
such right stands in the position of a successor-in-interest of the mortgagor within
the purview of Section 29 of Rule 39 of the Rules of Court, which states:
SEC. 29. Who may redeem real property so sold. Real
property sold as provided in the last preceding section, or
any part thereof sold separately, may be redeemed in the
manner hereinafter provided by the following persons:
(a) The judgment debtor, or his successor in interest in
the whole or any part of the property;
xxx xxx xxx
This latter provision, which ordinarily refers to redemptions of real property sold
on execution of judgments, is likewise applicable to redemption of real property
sold on extra-judicial foreclosure of mortgage, by virtue of the afore-mentioned
Section 6 of Act No. 3135, as amended, which states that "such redemption shall
be governed by the provisions of sections four hundred and sixty-four to four
hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these
are not inconsistent with the provisions of this Act." Sections 464, 465 and 466 of
the Code of Civil Procedure are now embodied in Sections 29, 30 and 31 of Rule
39 of the Rules of Court.
We held in Magno v. Viola 18 that the term "successor-in-interest' includes one to
whom the debtor has transferred his statutory right of redemption; or one to
whom the debtor has conveyed his interest in the property for the purpose of
redemption; or one who succeeds to the interest of the debtor by operation of
law; or one or more joint debtors who were not owners of the property sold;. or
the wife as regards her husband's homestead by reason of the fact that some

portion of her husband's title passes to her. There is no question, therefore, that
plaintiff-appellee Matilda J. Gorospe is a "successor-in-interest" of the debtor
Caridad J. Torrento and as such could exercise the right to redeem the property
at any time within the period provided by law.
Appellant, nevertheless, insists that the redemption was made "at a mere fraction
of the mortgage debt, one day after the expiration of the right to redeem."
Apparently, appellant is of the view that the redemption should have been made
on or before March 10, 1961, or within one year from the date of the Sheriff's
sale. Time and again, this Court has held that in cases of redemption of
registered land, the period should be reckoned from the date the certificate of
sale of the property involved was registered, since it is only from the date of its
registration that a certificate of sale takes effect as a conveyance. 19 The purpose
of the rule is to notify the delinquent registered owners or third parties interested
in the redemption that the property had been sold, and that they have one year
from the time of constructive notice by means of registration within which to
redeem the property, if they wish to do so. 20

In passing, let it be noted that, notwithstanding that in the case at bar, the parties
have, in their respective memoranda, primarily discussed only the issue with
respect to the propriety of the rendition of the summary judgment, this Court has
deemed it necessary to dispose of the substantive legal issues as well, in order
to expeditiously and finally settle the rights of the parties herein. Those questions
were raised in the court a quo and are of record, having some bearing on the
issue submitted. 24 There is no question that this Court is empowered the review
matters which are not specifically assigned as errors on appeal, when their
consideration is necessary in arriving at a just decision of the case. 25
WHEREFORE, the decision of the court a quo is hereby affirmed, and defendantappellant Dolores M. Santos is hereby ordered to deliver to plaintiffs-appellees
the Owner's Duplicate of Transfer Certificate of Title No. 43761. Costs against
defendant-appellant.
G.R. No. L-29130 August 8, 1975

In the case at bar, registration of the certificate of sale in favor of the purchaser at
public auction was e only on October 20, 1960. Appellee Matilda J. Gorospe had,
therefore, a period of one year from that date within which to exercise the right of
redemption assigned to her by Caridad J. Torrento. The redemption having been
made on March 10, 1961, it is evident that the same had been timely made.

DEVELOPMENT BANK OF THE PHILIPPINES, plaintiff-appellee,

vs.
DIONISIO MIRANG, defendant-appellant.

Equally without merit is appellant's contention that appellees should have paid
not only the amount of the purchase price, with interest, but also the amount of
the deficiency which is the subject matter of Civil Case No. 6479. In redeeming
the property from the purchaser, the judgment debtor must pay the amount of the
purchase with one per centum per month interest thereon, up to the time of
redemption and the amount of any assessments or taxes which the purchaser
may have paid thereon after purchase, and interest on the- last named amount at
the same rate. Appellee Matilda J. Gorospe cannot be required to pay a greater
amount than that imposed upon the judgment debtor. The reason is that, this
assignee of such right, the assignee is subrogated to the position of the debtormortgagor and is bound by exactly the same conditions that bound the assignor.
If the mortgagor, Caridad J. Torrento herself, has offered to redeem the property
sold on foreclosure, it would have been untenable for the purchaser at public
auction to have refused to resell to her the property on the ground that the total
amount of the debt had not been completely paid by her part from the fact that
the matter of deficiency is the subject of another case (Civil Case No. 6479), it
should be noted that the portion of Section 30 of Rule 39 invoked by appellant is
not relevant to the case at bar. Certainly, defendant-appellant cannot be
considered a "purchaser who is a creditor having a prior lien to that of the
redemptioner, other than the judgment under which such purchase was made ..."
within the meaning and intendment of the Rule. It is not applicable to defendantappellant because she claims a lien precisely arising from the extra-judicial
foreclosure of the mortgage (which is equivalent to the judgment in case of
execution of judgment) pursuant to which she purchased said
properties. 21 Consequently, Matilda J. Gorospe, as successor-in-interest of the
debtor, was bound to pay to the appellant only the amount of the purchase price
with the corresponding interest. 22

Roque V. Desquitado for defendant-appellant.

The last issue to be disposed of is whether or not the preliminary attachment on

the right of redemption, effected in favor of Dolores M. Santos in Civil Case No.
6479, adversely affected the redemption me by Matilda J. Gorospe. The
preliminary attachment in question was lifted on March 11, 1961, on motion of
Caridad J. Torrento, defendant in Civil Case No. 6479, and upon the filing of a
bond. For all intents and purposes, the bond so filed takes the place of the
property released from attachment, and secures to Dolores M. Santos the
payment of whatever amount may be adjudged in her favor in said case. We do
not decide herein the issue of whether or not a preliminary attachment of the right
to redeem may be validly effected in favor of a mortgagee at whose instance the
foreclosure sale was had, in order to secure the payment of a deficiency. 23 It
would be unnecessary for Us to do so, considering that the preliminary
attachment has been lifted. It is sufficient to say that appellant has no more, right,
if she had any to begin with, over the right of redemption exercised by Matilda J.
Gorospe.
In a last attempt to repudiate the redemption made by plaintiff-appellee Matilda J.
Gorospe, appellant assails the validity of the certificate of redemption issued by
the Sheriff on the ground that the same had not been acknowledged before a
Notary Public or other officer authorized to take acknowledgments of
conveyances of real property. On this point, We agree with the court a quo that
this omission is not sufficient cause for the nullification of the redemption. This
requirement is only necessary for purposes of registering the deed.

Jesus A. Avancea and Lualhati Estrella-Hilario for plaintiff-appellee.

MAKALINTAL, C.J.:
This appeal was originally taken to the Court of Appeals, which certified it here
because it involves purely legal questions. The appealed decision was rendered
by the Court of First Instance of Davao on May 14, 1963 in its Civil Case No.
3762, and modified by its Order of July 1, 1963. It directed the defendant, now
appellant, to pay the plaintiff Development Bank of the Philippines, now appellee,
the sum of P16,013.13 plus 6% interest per annum from July 30, 1957 1 up to the
date of payment, but deducting therefrom the sum of P360.00 representing the
value of an engine, referred to in paragraph 11 of the stipulation of facts. The
defendant was likewise ordered to pay P500.00 as attorney's fees, plus the costs
of the suit.
From the stipulation submitted to the trial court it appears that on September 7,
1950 the appellant obtained approval of a loan of P14,000.00 from the
Rehabilitation Finance Corporation, 2 secured by a first mortgage on defendant's
homestead, for the following purposes:
P1,000 for purchase of work animals and farm
implements;
P1,500 for construction of farmhouse and laborers'
quarters; and
P11,500 for development and maintenance of 18.5
hectares of abaca land.
The loan was released gradually to the appellant up to a total of P13,000.00.
Thereafter the appellee refused to make any further releases because the
plantation which was being financed was attacked by mosaic disease, which
destroyed the abaca plants. The appellant, on his part, failed to pay the yearly
amortizations; so in accordance with the terms of the promissory notes he had
signed and the mortgage contract itself, the provincial sheriff of Davao, upon
request of the appellee, foreclosed the mortgage extrajudicially under the
provisions of Act 3135, as amended, and sold the mortgaged property at public
auction on July 30, 1957. By that time the appellant's indebtedness, including
interest, had reached P19,714.35, besides the expenses of the auction sale and
registration fees, which amounted to P101.00. The appellee, as the highest
bidder for P2,010.00, acquired ownership of the mortgaged property. The
appellant was duly advised of the sale, with the information that the same was
subject to his right of redemption within one year from July 30, 1957. This right he
had not exercised when the complaint was filed by the appellee on May 29,
1962.
In his brief the appellant assigns five (5) errors, which may be condensed into the
following issues:

(1) Whether or not the creditor Development Bank of the

Philippines has a right to recover the balance of the
indebtedness after the mortgaged property was sold for
less than the amount thereof under extrajudicial
foreclosure pursuant to Act 3135, as amended:
(2) Whether or not the debtor, appellant Mirang, may be
exempted from paying the loan on the ground that it had
been granted to him for the purpose of developing his
homestead by planting it to abaca, and that said abaca
was destroyed by mosaic disease; or, failing that, whether
or not his obligation may be reduced by this Court; and
(3) Whether or not the mortgage debtor who wishes to
repurchase his homestead should pay therefor only the
price paid by the purchaser at the auction sale, or the
total obligation incurred by him and still outstanding.
On the first issue, the appellant contends that because the mortgage was
extrajudicially foreclosed and sold at less than the mortgage debt under Act 3135
the appellee is not entitled to recover the deficiency because neither this Act, as
amended, nor the mortgage contract itself, contains any provision giving such
right to the mortgagee.
The same question has been settled by this Court in the case of Philippine Bank
of Commerce vs. Tomas de Vera, 3 where We held:
The sole issue to be resolved in this case is whether the
trial Court acted correctly in holding appellee Bank
entitled to recover from appellant the sum of P99,033.20
as deficiency arising after the extrajudicial foreclosure,
under Act No. 3135, as amended, of the mortgaged
properties in question. It is urged, on appellant's part, that
since Act No. 3135, as amended, is silent as to the
mortgagee's right to recover deficiency arising after an
extrajudicial foreclosure sale of mortgage, he (Mortgagee)
may not recover the same.
A reading of the provisions of Act No. 3135, as amended,
(re extrajudicial foreclosure) discloses nothing, it is true,
as to mortgagee's right to recover such deficiency. But
neither do we find any provision thereunder which
expressly or impliedly prohibits such recovery.
Article 2131 of the new Civil Code, on the contrary,
expressly provides that 'The form, extent and
consequences of a mortgage, both as to its constitution,
modification and extinguishment, and as to other matters
not included in this Chapter, shall be governed by the
provisions of the Mortgage Law and of the Land
Registration Law.' Under the Mortgage Law, which is still
in force, the mortgagee has the right to claim for the
deficiency resulting from the price obtained in the sale of
the real property at public auction and the outstanding
obligation at the time of the foreclosure proceedings. (See
Soriano vs. Enriquez, 24 Phil. 584; Banco de las Islas
Filipinas vs. Concepcion e Hijos, 53 Phil. 806; Banco
Nacional vs. Barreto, 53 Phil. 955.) Under the Rules of
Court (Section 6, Rule 70 * ), 'Upon the sale of property,
under an order for a sale to satisfy a mortgage or other
incumbrance thereon, if there be a balance due to the
plaintiff after applying the proceeds of the sale, the Court,
upon motion, should render a judgment against the
defendant for any such balance for which, by the record
of the case, he may be personally liable to the plaintiff, ....'
It is true that this refers to a judicial foreclosure, but the
underlying principle is the same, that the mortgage is but
a security and not a satisfaction of indebtedness.

The sale of the thing pledged shall extinguish the principal

obligation, whether or not the proceeds of the sale are
equal to the amount of the principal obligation, interest
and expenses in a proper case. ... If the price of the sale
is less, neither shall the creditor be entitled to the
deficiency, notwithstanding any stipulation to the contrary.
as well as to the fact that in chattel mortgage under Art. 1484, paragraph 3, the
creditor shall have no further action to recover any unpaid balance if he has
chosen to foreclose the chattel mortgage. These provisions, far from supporting
the appellant's stand, militate against it, because they show that when the
Legislature intends to bar or occlude a creditor from suing for any deficiency after
foreclosing and selling the security given for the obligation, it makes express
provision to that effect. In the same case of Philippine Bank of Commerce vs. De
Vera, supra, this Court said apropos:
It is then clear that in the absence of a similar provision in
Act 3135, as amended, it cannot be concluded that the
creditor loses his right given him under the Mortgage Law
and recognized in the Rules of Court, to take action for
the recovery of any unpaid balance on the principal
obligation, simply because he has chosen to foreclose his
mortgage extra-judicially, pursuant to a special power of
attorney given him by the mortgagor in the mortgage
contract. As stated by this Court in Medina vs. Philippine
National Bank (56 Phil. 651), a case analogous to the one
at bar, the step taken by the mortgagee-bank in resorting
to extra-judicial foreclosure under Act No. 3135, was
'merely to find a proceeding for the sale, and its action
cannot be taken to mean a waiver of its right to demand
the payment of the whole debt.'
On the second issue the appellant asks that if he cannot be completely absolved
he should at least be given a reduction of his indebtedness because of his
inability to realize any income from the abaca he planted. His predicament may
evoke sympathy, but it does not justify a disregard of the terms of the contract he
entered into. His obligation thereunder is neither conditional nor aleatory its terms
are clear and subject to no exception.
The third issue has likewise been resolved by this Court in a similar case. 4 The
issue posed there involved the price at which the mortgagor should redeem his
property after the same had been sold at public auction whether the amount for
which the property was sold, as contended by the mortgagor, or the balance of
the loan obtained from the banking institution, as contended by the mortgagee
RFC. Cited in that case was Section 31 of Com. Act No. 459, which was the
special law applicable exclusively to properties mortgaged with the RFC, as
follows:
The mortgagor or debtor to the Agricultural and Industrial
Bank * , whose real property has been sold at public
auction, judicially or extra-judicially, for the full or partial
payment of an obligation to said Bank, shall, within one
year from the date of the auction sale, have the right to
redeem the real property by paying to the Bank all the
amount he owed the latter on the date of the sale, with
interest on the total indebtedness at the rate agreed upon
in the obligation from said date, unless the bidder has
taken material possession of the property or unless this
has been delivered to him, in which case the proceeds of
the property shall compensate the interest. ...
The same provision applies in the instant case. The unavoidable conclusion is
that the appellant, in redeeming the foreclosed property, should pay the entire
amount he owed to the Bank on the date of the sale, with interest thereon at the
rate agreed upon.
WHEREFORE, the decision appealed from is affirmed, with costs.
Teehankee, Esguerra and Muoz Palma, JJ., concur.

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

It is well to remember that uncompromising or mechanical application of the letter

of the law has resulted, not infrequently, in the denial of moral justice.
Separate Opinions

MAKASIAR, J., dissenting:

The Courts of the Republic are courts of equity as well as of law.
CASTRO, J., concurring:
If we go by conventional legal wisdom, there can be no debate on the three
conclusions reached by Chief Justice Makalintal in his resolution of the main
issues in the case at bar; they are clearly in accord with statutory law and
jurisprudence.
These conclusions may be restated thus:
(a) The Development Bank of the Philippines as creditor can recover the balance
of the defendant Mirang's indebtedness after the latter's real estate property was
sold for very much less than the amount of his indebtedness by virtue of an
extrajudicial foreclosure under the provisions of Act 3135, as amended;
(b) Mirang is not exempt from paying the balance of his indebtedness even if the
proceeds of the loan he obtained from the DBP which he invested in the planting
of abaca in his homestead went to waste because of the destruction of his abaca
plants by mosaic disease; nor has this Court authority to reduce his net liability to
the DBP; and
(c) To redeem his homestead Mirang must pay not merely the price paid for it by
the DBP at the auction sale but the total of his obligation still due and owing to
the DBP.
But even as I perforce concur in the above-stated conclusions, I cannot ignore
as in fact I here add my own emphasis to the cogent and pointed observations
articulated by Justice Felix V. Makasiar in his dissenting opinion.
I find the following inescapably and at once particularly disturbing:
(a) The DBP, as the highest bidder at the auction sale, bought the property of the
debtor Mirang, which has a quite sizeable area of 18- hectares, for the
minuscule sum of only P2,010, or a miserable P110 per hectare;
(b) The DBP displayed not an ounce of sympathy for Mirang's inability to
amortize his mortgage loan, occasioned by a fortuitous event of course beyond
his control in the form of infestation of his abaca plantation by mosaic disease, a
disease that the Government itself, with all its expertise and resources, has thus
far been unable to eradicate;
(c) The DBP apparently did not attach the least bit of importance to the fact that
the destruction of Mirang's abaca plantation by mosaic disease was not caused
by his negligence nor by his failure to take necessary precautionary measures;
and
(d) Created fundamentally to assist, by extending credit facilities, in the
development and expansion of agriculture and industry and the broadening and
diversification of the national economy, the DBP, in relation to Mirang, has
actually, by the action it has taken, negated its basic mission.
Justice Makasiar makes the pertinent suggestion that the DBP restructure the
account of Mirang. Like Justice Makasiar, I personally know that the DBP and
similar Government financial institutions (the Philippine National Bank, the
Government Service Insurance System, and the Social Security System) have
restructured accounts of debtors. Considering the inordinate appreciation of land
values everywhere, there appears to be no insuperable obstacle to the DBP
restructuring the account of Mirang, not only to enable him to pay his
indebtedness in easy terms over a period of years but as well to make available
additional funds to be utilized by him in the development of his 18--hectare
land. It is not too late in the day in this, our compassionate society for the
DBP to do so.

While as a matter of strict law, the position of appellant is untenable; the admitted
equities of the case should absolve appellant from further liability on the following
grounds:
1. The abaca plantation mortgaged on September 7, 1950 for the original loan of
P14,000.00 to the appellee DBP, has an area of 18.5 hectares. Out of the
approved loan, only the amount of P13,000.00 was gradually released to the
appellant, after which further releases were stopped because the abaca
plantation was attacked by mosaic disease which destroyed the abaca plants.
The outstanding indebtedness however of appellant later amounted to
P19,714.35 including interest. As the highest bidder, the appellee DBP bought
the said property for only P2,010.00 at the auction sale on July 30, 1967.
Obviously, the market value of the plantation must have increased in 1957 after
the lapse of about 7 years, and especially now after about 18 years. Its market
value even in 1957 could not be less than the outstanding indebtedness of the
appellant considering that it merited in 1950 a loan of P14,000.00; and its present
market value must be a lot more.
2. The failure of the appellant to pay the yearly amortizations on the mortgage
was neither malicious nor deliberate. His inability to meet the yearly amortization
was due to the fact that his plantation was attacked by mosaic disease, which not
even the government could successfully eradicate until this date. This is
practically a fortuitous event like epidemic, pestilence, floods or locusts (Vol. IV,
Tolentino, Civil Law, 1973 ed. p. 119, citing 3 Salvat 83-84; Vol. IV, Caguioa, Civil
Law, 1968 ed. pp. 88-89, citing 3 Castan, 8th ed., p. 159). There is no showing
that the disease infected his abaca plantation because of his negligence or
omission to take precautions against it. Considering the unforeseen tragedy that
befell appellant as well as the importance of abaca in the economy of the nation,
the government should not merely view the sad plight of appellant with sympathy,
but must give positive recognition to the appellant's right under the circumstances
to be relieved of further liability. As above intimated, the present market value of
the abaca plantation of about 18.5 hectares could amply cover the unpaid
deficiency of P16,013.13 including interest.
3. As originally conceived on October 29, 1946 in its charter, Republic Act No. 85
as approved by Congress, the main purpose of the RFC was "to provide credit
facilities for the rehabilitation and development of agriculture, commerce and
industry, the reconstruction of property damaged by war, and broadening and
diversification of the national economy ..." (Sec. 1, R.A. No. 85). As amended on
June 15, 1958 by the passage of Republic Act No. 2081, the DBP, the successor
to RFC, was primarily established "to provide credit facilities for rehabilitation and
development and expansion of agriculture and industry, the reconstruction of
property damaged by war and the broadening and diversification of the national
economy ...." It is thus patent that the RFC now the DBP, was created principally
to assist the agricultural producers and industrialists in developing their farms
and industries to accelerate national progress, more than to realize profit for
itself. Appellant is in great need of such assistance as he apparently is not a man
of means. For the DBP to exact its "pound of flesh" would be to play the hated
role of a Shylock, which is at war with the ideals of a compassionate society, to
which the government is dedicated. It would be unjust enrichment on the part of
DBP, which could breed disenchantment and discontent.
The dictum that "the letter of the law killeth; its spirit giveth life" has a special
relevance to the instant case. And to appellant, if he is exempted from liability for
any deficiency, social justice, which guarantees him together with the rest of the
citizenry "dignity, welfare and security" (See. 6, Art. 11, 1973 Constitution),
becomes a living reality, not a myth.
Further assistance could have been extended by the DBP to appellant by
restructuring his account, as the DBP has done and is doing, in favor of some of
its debtors.

It is well to remember that uncompromising or mechanical application of the letter

of the law has resulted, not infrequently, in the denial of moral justice.
Separate Opinions

MAKASIAR, J., dissenting:

CASTRO, J., concurring:
The Courts of the Republic are courts of equity as well as of law.
If we go by conventional legal wisdom, there can be no debate on the three
conclusions reached by Chief Justice Makalintal in his resolution of the main
issues in the case at bar; they are clearly in accord with statutory law and
jurisprudence.
These conclusions may be restated thus:
(a) The Development Bank of the Philippines as creditor can recover the balance
of the defendant Mirang's indebtedness after the latter's real estate property was
sold for very much less than the amount of his indebtedness by virtue of an
extrajudicial foreclosure under the provisions of Act 3135, as amended;
(b) Mirang is not exempt from paying the balance of his indebtedness even if the
proceeds of the loan he obtained from the DBP which he invested in the planting
of abaca in his homestead went to waste because of the destruction of his abaca
plants by mosaic disease; nor has this Court authority to reduce his net liability to
the DBP; and
(c) To redeem his homestead Mirang must pay not merely the price paid for it by
the DBP at the auction sale but the total of his obligation still due and owing to
the DBP.
But even as I perforce concur in the above-stated conclusions, I cannot ignore
as in fact I here add my own emphasis to the cogent and pointed observations
articulated by Justice Felix V. Makasiar in his dissenting opinion.
I find the following inescapably and at once particularly disturbing:
(a) The DBP, as the highest bidder at the auction sale, bought the property of the
debtor Mirang, which has a quite sizeable area of 18- hectares, for the
minuscule sum of only P2,010, or a miserable P110 per hectare;
(b) The DBP displayed not an ounce of sympathy for Mirang's inability to
amortize his mortgage loan, occasioned by a fortuitous event of course beyond
his control in the form of infestation of his abaca plantation by mosaic disease, a
disease that the Government itself, with all its expertise and resources, has thus
far been unable to eradicate;
(c) The DBP apparently did not attach the least bit of importance to the fact that
the destruction of Mirang's abaca plantation by mosaic disease was not caused
by his negligence nor by his failure to take necessary precautionary measures;
and
(d) Created fundamentally to assist, by extending credit facilities, in the
development and expansion of agriculture and industry and the broadening and
diversification of the national economy, the DBP, in relation to Mirang, has
actually, by the action it has taken, negated its basic mission.
Justice Makasiar makes the pertinent suggestion that the DBP restructure the
account of Mirang. Like Justice Makasiar, I personally know that the DBP and
similar Government financial institutions (the Philippine National Bank, the
Government Service Insurance System, and the Social Security System) have
restructured accounts of debtors. Considering the inordinate appreciation of land
values everywhere, there appears to be no insuperable obstacle to the DBP
restructuring the account of Mirang, not only to enable him to pay his
indebtedness in easy terms over a period of years but as well to make available
additional funds to be utilized by him in the development of his 18--hectare
land. It is not too late in the day in this, our compassionate society for the
DBP to do so.

While as a matter of strict law, the position of appellant is untenable; the admitted
equities of the case should absolve appellant from further liability on the following
grounds:
1. The abaca plantation mortgaged on September 7, 1950 for the original loan of
P14,000.00 to the appellee DBP, has an area of 18.5 hectares. Out of the
approved loan, only the amount of P13,000.00 was gradually released to the
appellant, after which further releases were stopped because the abaca
plantation was attacked by mosaic disease which destroyed the abaca plants.
The outstanding indebtedness however of appellant later amounted to
P19,714.35 including interest. As the highest bidder, the appellee DBP bought
the said property for only P2,010.00 at the auction sale on July 30, 1967.
Obviously, the market value of the plantation must have increased in 1957 after
the lapse of about 7 years, and especially now after about 18 years. Its market
value even in 1957 could not be less than the outstanding indebtedness of the
appellant considering that it merited in 1950 a loan of P14,000.00; and its present
market value must be a lot more.
2. The failure of the appellant to pay the yearly amortizations on the mortgage
was neither malicious nor deliberate. His inability to meet the yearly amortization
was due to the fact that his plantation was attacked by mosaic disease, which not
even the government could successfully eradicate until this date. This is
practically a fortuitous event like epidemic, pestilence, floods or locusts (Vol. IV,
Tolentino, Civil Law, 1973 ed. p. 119, citing 3 Salvat 83-84; Vol. IV, Caguioa, Civil
Law, 1968 ed. pp. 88-89, citing 3 Castan, 8th ed., p. 159). There is no showing
that the disease infected his abaca plantation because of his negligence or
omission to take precautions against it. Considering the unforeseen tragedy that
befell appellant as well as the importance of abaca in the economy of the nation,
the government should not merely view the sad plight of appellant with sympathy,
but must give positive recognition to the appellant's right under the circumstances
to be relieved of further liability. As above intimated, the present market value of
the abaca plantation of about 18.5 hectares could amply cover the unpaid
deficiency of P16,013.13 including interest.
3. As originally conceived on October 29, 1946 in its charter, Republic Act No. 85
as approved by Congress, the main purpose of the RFC was "to provide credit
facilities for the rehabilitation and development of agriculture, commerce and
industry, the reconstruction of property damaged by war, and broadening and
diversification of the national economy ..." (Sec. 1, R.A. No. 85). As amended on
June 15, 1958 by the passage of Republic Act No. 2081, the DBP, the successor
to RFC, was primarily established "to provide credit facilities for rehabilitation and
development and expansion of agriculture and industry, the reconstruction of
property damaged by war and the broadening and diversification of the national
economy ...." It is thus patent that the RFC now the DBP, was created principally
to assist the agricultural producers and industrialists in developing their farms
and industries to accelerate national progress, more than to realize profit for
itself. Appellant is in great need of such assistance as he apparently is not a man
of means. For the DBP to exact its "pound of flesh" would be to play the hated
role of a Shylock, which is at war with the ideals of a compassionate society, to
which the government is dedicated. It would be unjust enrichment on the part of
DBP, which could breed disenchantment and discontent.
The dictum that "the letter of the law killeth; its spirit giveth life" has a special
relevance to the instant case. And to appellant, if he is exempted from liability for
any deficiency, social justice, which guarantees him together with the rest of the
citizenry "dignity, welfare and security" (See. 6, Art. 11, 1973 Constitution),
becomes a living reality, not a myth.
Further assistance could have been extended by the DBP to appellant by
restructuring his account, as the DBP has done and is doing, in favor of some of
its debtors.
G.R. No. 119247 February 17, 1997

CESAR SULIT, petitioner,

vs.
COURT OF APPEALS and ILUMINADA CAYCO, respondents.

REGALADO, J.:
The primary issue posed before the Court, in this appeal by certiorari from a
decision 1 of the Court of Appeals, is whether or not the mortgagee or purchaser
in an extrajudicial foreclosure sale is entitled to the issuance of a writ of
possession over the mortgaged property despite his failure to pay the surplus
proceeds of the sale to the mortgagor or the person entitled thereto. Secondarily,
it calls for a resolution of the further consequences of such non-payment of the
full amount for which the property was sold to him pursuant to his bid.
The material facts, as found by respondent court, are not disputed:
It appears from the record that on 9 June 1992 petitioner
(herein private respondent) Iluminada Cayco executed a
Real Estate Mortgage (REM) over Lot 2630 which is
located in Caloocan City and covered by TCT No. (23211)
11591 in favor of private respondent (herein petitioner)
Cesar Sulit, to secure a loan of P4 Million. Upon
petitioner's failure to pay said loan within the stipulated
period, private respondent resorted to extrajudicial
foreclosure of the mortgage as authorized in the contract.
Hence, in a public auction conducted by Notary Public
Felizardo M. Mercado on 28 September 1993 the lot was
sold to the mortgagee, herein private respondent, who
submitted a winning bid of P7 Million. As stated in the
Certificate of Sale executed by the notary public (Annex
B, petition), the mortgaged property was sold at public
auction to satisfy the mortgage indebtedness of P4
Million. The Certificate further states as follows:
IT IS FURTHER CERTIFIED, that
the aforementioned highest
bidder/buyer, CESAR SULIT,
being the petitioner/mortgagee
thereupon did not pay to the
undersigned Notary Public of
Kalookan City the said sum of
SEVEN MILLION PESOS
(P7,000,000.00), Philippine
Currency, the sale price of the
above-described real estate
property together with all
improvements existing thereon,
which amount was properly
credited to the PARTIAL
satisfaction of the mortgage debt
mentioned in the said real estate
mortgage, plus interests,
attorney's fees and all other
incidental expenses of foreclosure
and sale (par. 2, Annex B,
petition).
On 13 December 1993 private respondent petitioned the
Regional Trial Court of Kalookan City for the issuance of a
writ of possession in his favor. The petition was docketed
as LRC Case No. C-3462 and assigned to Branch 131,
presided over by public respondent.
On 17 January 1994 respondent Judge issued a decision
(should have been denominated as order), the dispositive
part of which reads:
WHEREFORE, finding the subject
petition to be meritorious, the
same is hereby GRANTED. As
prayed for, let a Writ of Possession

be issued in favor of herein

petitioner, Cesar Sulit, upon his
posting of an indemnity bond in
the amount of One Hundred
Twenty Thousand (P120,000.00)
Pesos (Annex C, petition).
On 28 March 1994 petitioner filed a Motion to have the
auction sale of the mortgaged property set aside and to
defer the issuance of the writ of possession. She invited
the attention of the court a quoto some procedural
infirmities in the said proceeding and further questioned
the sufficiency of the amount of bond. In the same Motion
petitioner prayed as an alternative relief that private
respondent be directed to pay the sum of P3 Million which
represents the balance of his winning bid of P7 Million
less the mortgage indebtedness of P4 Million (Annex D,
petition). This Motion was opposed by private respondent
who contended that the issuance of a writ of possession
upon his filing of a bond was a ministerial duty on the part
of respondent Judge (Annex E), to which Opposition
petitioner submitted a Reply (Annex F, petition).
On 11 May 1994 respondent Judge denied petitioner's
Motion and directed the issuance of a writ of possession
and its immediate enforcement by deputy sheriff Danilo
Norberte (Annex G, petition)." 2(Emphasis words supplied
for clarity).
From the aforesaid orders of the court a quo, herein private respondent
Iluminada Cayco filed on May 26, 1994 a petition for certiorari with preliminary
injunction and/or temporary restraining order before respondent Court of
Appeals, which immediately issued a status quo order restraining the respondent
judge therein from implementing his order of January 17, 1994 and the writ of
possession issued pursuant thereto. Subsequently, respondent court rendered
judgment on November 11, 1994, as follows:
IN JUDGMENT, We grant the writ of certiorari and the
disputed order of 17 January 1994 which precipitately
directed the issuance of a writ of possession in favor of
private respondent and the subsequent order of 11 May
1994 which denied petitioner's Motion for Reconsideration
are hereby SET ASIDE.
Accordingly, private respondent is ordered to pay unto
petitioner, through the notary public, the balance or
excess of his bid of P7 Million after deducting therefrom
the sum of P4,365,280 which represents the mortgage
debt and interest up to the date of the auction sale
(September 23, 1993), as well as expenses of foreclosure
based on receipts which must be presented to the notary
public.
In the event that private respondent fails or refuses to pay
such excess or balance, then the auction sale of 28
September 1993 is deemed CANCELLED and private
respondent may foreclose the mortgage anew either in a
judicial or extrajudicial proceeding as stipulated in the
mortgage contract.
Corollary to the principal issue earlier stated, petitioner asserts that respondent
Court of Appeals gravely erred when it failed to appreciate and consider the
supposed legal significance of the bouncing checks which private respondent
issued and delivered to petitioner as payment for the agreed or stipulated interest
on the mortgage obligation. He likewise avers that a motion for reconsideration or
an appeal, and not certiorari, is the proper remedy available to herein private
respondent from an order denying her motion to defer issuance of the writ of
possession. Moreover, it is claimed that any question regarding the propriety of
the sale and the issuance of the writ of possession must be threshed out in a
summary proceeding provided for in Section 8 of Act 3135.
There is no merit in petitioner's contention that the dishonored checks amounting
to a total of P1,250,000.00, allegedly representing interest of 5% per month from
June 9, 1992 to December 9, 1992, were correctly considered by the trial court

as the written agreement between the parties. Instead, we find the explanation of
respondent court in rejecting such postulate, on the basis of Article 1956 of the
Civil Code, 3 to be more logical and plausible, to wit:
It is noteworthy that the Deed of Real Estate Mortgage
executed by the parties on 9 June 1992 (Annex A,
Petition) does not contain any stipulation for payment of
interest. Private respondent who maintains that he had an
agreement with petitioner for the payment of 5% monthly
interest did not produce any other writing or instrument
embodying such a stipulation on interest. It appears then
that if any such agreement was reached by the parties, it
was merely a verbal one which does not conform to the
aforequoted statutory provision. Certainly, the dishonored
checks claimed to have been issued by petitioner in
payment of interest could not have been the written
stipulation contemplated in Article 1956 of the Code.
Consequently, in the absence of a written stipulation for
the imposition of interest on the loan obtained by
petitioner, private respondent's assessment thereof has
no legal basis. 4
It is elementary that in the absence of a stipulation as to interest, the loan due will
now earn interest at the legal rate of 12% per annum 5 which, according to
respondent court, is equivalent to P365,280.000.00 computed from December
10, 1992, after private respondent's obligation became due, until September 23,
1993, the date of the auction sale. It is this amount which should further be
deducted from the purchase price of P7,000,000.00, together with any other
expenses incurred in connection with the sale, such as the posting and
publication of notices, notarial and documentary fees, and assessments or taxes
due on the disputed property.
It baffles this Court, therefore, why petitioner has continually failed up to the
present to submit documentary evidence of the alleged expenses of the
foreclosure sale, and this in spite of the express requirement therefor in the
certificate of sale 6 issued by the notary public for the purpose of computing the
actual amount payable by the mortgagor or redemptioner in the event of
redemption. It may thus be safely presumed that such evidence having been
willfully suppressed, it would be adverse if produced. 7
Coming now to the main issue in this case, petitioner argues that it is ministerial
upon the court to issue a writ of possession after the foreclosure sale and during
the period of redemption, invoking in support thereof Sections 7 and 8 of Act
3135 which conjointly provide:
Sec. 7. In any sale made under the provisions of this Act,
the purchaser may petition the Court of First Instance of
the province or place where the property or any part
thereof is situated, to give him possession thereof during
the redemption period, furnishing bond in an amount
equivalent to the use of the property for a period of twelve
months, to indemnify the debtor in case it be shown that
the sale was made without violating the mortgage or
without complying with the requirements of this Act. Such
petition shall be made under oath and filed in form of
an ex parte motion in the registration or cadastral
proceedings if the property is registered, or in special
proceedings in the case of property registered under the
Mortgage Law or under section one hundred and ninetyfour of the Administrative Code, or of any other real
property encumbered with a mortgage duly registered in
the office of any register of deeds in accordance with any
existing law, and in each case the clerk of the court shall,
upon the filing of such petition, collect the fees specified
in paragraph eleven of section one hundred and fourteen
of Act Numbered Twenty-eight hundred and sixty-six, and
the court shall, upon approval of the bond, order that a
writ of possession issue, addressed to the sheriff of the
province in which the property is situated, who shall
execute said order immediately.
Sec. 8. The debtor may, in the proceedings in which
possession was requested, but not later than thirty days
after the purchaser was given possession, petition that
the sale be set aside and the writ of possession

cancelled, specifying the damages suffered by him,

because the mortgage was not violated or the sale was
not made in accordance with the provisions hereof, and
the Court shall take cognizance of this petition in
accordance with the summary procedure provided for in
section one hundred and twelve of Act Number Four
hundred and ninety-six; and if it finds the complaint of the
debtor justified, it shall dispose in his favor of all or part of
the bond furnished by the person who obtained
possession. Either of the parties may appeal from the
order of the judge in accordance with section fourteen of
Act Numbered Four hundred and ninety-six; but the order
of possession shall continue in effect during the pendency
of the appeal.
The governing law thus explicitly authorizes the purchaser in a foreclosure sale
to apply for a writ of possession during the redemption period by filing an ex
parte motion under oath for that purpose in the corresponding registration or
cadastral proceeding in the case of property with Torrens title. Upon the filing of
such motion and the approval of the corresponding bond, the law also in express
terms directs the court to issue the order for a writ of possession.
No discretion appears to be left to the court. Any question regarding the regularity
and validity of the sale, as well as the consequent cancellation of the writ, is to be
determined in a subsequent proceeding as outlined in Section 8, and it cannot be
raised as a justification for opposing the issuance of the writ of possession since,
under the Act, the proceeding for this is ex parte. 8 Such recourse is available to a
mortgagee, who effects the extrajudicial foreclosure of the mortgage, even before
the expiration of the period of redemption provided by law and the Rules of
Court. 9
The rule is, however, not without exception. Under Section 35, Rule 39 of the
Rules of Court, which is made applicable to the extrajudicial foreclosure of real
estate mortgages by Section 6 of Act 3135, the possession of the mortgaged
property may be awarded to a purchaser in the extrajudicial foreclosure "unless a
third party is actually holding the property adversely to the judgment debtor." 10
Thus, in the case of Barican, et al. vs. Intermediate Appellate Court,
et al., 11 this Court took into account the circumstances that long before the
mortgagee bank had sold the disputed property to the respondent therein, it was
no longer the judgment debtor who was in possession but the petitioner spouses
who had assumed the mortgage, and that there was a pending civil case
involving the rights of third parties. Hence, it was ruled therein that under the
circumstances, the obligation of a court to issue a writ of possession in favor of
the purchaser in a foreclosure of mortgage case ceases to be ministerial.
Now, in forced sales low prices are generally offered and the mere inadequacy of
the price obtained at the sheriff's sale, unless shocking to the conscience, has
been held insufficient to set aside a sale. This is because no disadvantage is
caused to the mortgagor. On the contrary, a mortgagor stands to gain with a
reduced price because he possesses the right of redemption. When there is the
right to redeem, inadequacy of price becomes immaterial since the judgment
debtor may reacquire the property or sell his right to redeem, and thus recover
the loss he claims to have suffered by reason of the price obtained at the auction
sale. 12
However, also by way of an exception, in Cometa, et al. vs. Intermediate
Appellate Court, et al. 13 where the properties in question were found to have
been sold at an unusually lower price than their true value, that is, properties
worth at least P500,000.00 were sold for only P57,396.85, this Court, taking into
consideration the factual milieu obtaining therein as well as the peculiar
circumstances attendant thereto, decided to withhold the issuance of the writ of
possession on the ground that it could work injustice because the petitioner might
not be entitled to the same.
The case at bar is quite the reverse, in the sense that instead of an inadequacy
in price, there is due in favor of private respondent, as mortgagor, a surplus from
the proceeds of the sale equivalent to approximately 40% of the total mortgage
debt, which excess is indisputably a substantial amount. Nevertheless, it is our
considered opinion, and we so hold, that equitable considerations demand that a
writ of possession should also not issue in this case.
Rule 68 of the Rules of Court provides:

Sec. 4. Disposition of proceeds of sale. The money

realized from the sale of mortgaged property under the
regulations hereinbefore prescribed shall, after deducting
the costs of the sale, be paid to the person foreclosing the
mortgage, and when there shall be any balance or
residue, after paying off such mortgage or other
incumbrances, the same shall be paid to the junior
incumbrancers in the order of their priority, to be
ascertained by the court, or if there be no such
incumbrancers or there be a balance or residue after
payment of such incumbrancers, then to the mortgagor or
his agent, or to the person entitled to it.
The application of the proceeds from the sale of the mortgaged property to the
mortgagor's obligation is an act of payment, not payment by dation; hence, it is
the mortgagee's duty to return any surplus in the selling price to the
mortgagor. 14 Perforce, a mortgagee who exercises the power of sale contained
in a mortgage is considered a custodian of the fund, and, being bound to apply it
properly, is liable to the persons entitled thereto if he fails to do so. And even
though the mortgagee is not strictly considered a trustee in a purely equitable
sense, but as far as concerns the unconsumed balance, the mortgagee is
deemed a trustee for the mortgagor or owner of the equity of redemption. 15
Commenting on the theory that a mortgagee, when he sells under a power,
cannot be considered otherwise than as a trustee, the vice-chancellor
in Robertson vs. Norris (1 Giff . 421) observed: "That expression is to be
understood in this sense: that with the power being given to enable him to
recover the mortgage money, the court requires that he shall exercise the power
of sale in a provident way, with a due regard to the rights and interests of the
mortgagor in the surplus money to be produced by the sale." 16
The general rule that mere inadequacy of price is not sufficient to set aside a
foreclosure sale is based on the theory that the lesser the price the easier it will
be for the owner to effect the redemption. 17 The same thing cannot be said
where the amount of the bid is in excess of the total mortgage debt. The reason
is that in case the mortgagor decides to exercise his right of redemption, Section
30 of Rule 39 provides that the redemption price should be equivalent to the
amount of the purchase price, plus one per cent monthly interest up to the time of
the redemption, 18 together with the amount of any assessments or taxes which
the purchaser may have paid thereon after purchase, and interest on such lastnamed amount at the same rate. 19
Applying this provision to the present case would be highly iniquitous if the
amount required for redemption is based on P7,000.000.00, because that would
mean exacting payment at a price unjustifiably higher than the real amount of the
mortgage obligation. We need not elucidate on the obvious. Simply put, such a
construction will undeniably be prejudicial to the substantive rights of private
respondent and it could even effectively prevent her from exercising the right of
redemption.
Where the redemptioner chooses to exercise his right of redemption, it is the
policy of the law to aid rather than to defeat his right. It stands to reason,
therefore, that redemption should be looked upon with favor and where no injury
will follow, a liberal construction will be given to our redemption laws, specifically
on the exercise of the right to redeem. Conformably hereto, and taking into
consideration the facts obtaining in this case, it is more in keeping with the spirit
of the rules, particularly Section 30 of Rule 39, that we adopt such interpretation
as may be favorable to the private respondent.
Admittedly, no payment was made by herein petitioner, as the highest bidder, to
the notary public who conducted the extrajudicial foreclosure sale. We are not
unmindful of the rule that it is not necessary for the mortgagee to pay cash to the
sheriff or, in this case, the notary public who conducted the sale. It would
obviously serve no purpose for the sheriff or the notary public to go through the
idle ceremony of receiving the money and paying it back to the creditor, under
the truism that the lawmaking body did not contemplate such a pointless
application of the law in requiring that the creditor must bid under the same
conditions as any other bidder. 20 It bears stressing that the rule holds true only
where the amount of the bid represents the total amount of the mortgage debt.
In case of a surplus in the purchase price, however, there is jurisprudence to the
effect that while the mortgagee ordinarily is liable only for such surplus as
actually comes into his hands, but he sells on credit instead of for cash, he must
still account for the proceeds as if the price were paid in cash, and in an action

against the mortgagee to recover the surplus, the latter cannot raise the defense
that no actual cash was received. 21
We cannot simply ignore the importance of surplus proceeds because by their
very nature, surplus money arising from a sale of land under a decree of
foreclosure stands in the place of the land itself with respect to liens thereon or
vested rights therein. They are constructively, at least, real property and belong
to the mortgagor or his assigns. 22 Inevitably, the right of a mortgagor to the
surplus proceeds is a substantial right which must prevail over rules of
technicality.
Surplus money, in case of a foreclosure sale, gains much significance where
there are junior encumbrancers on the mortgaged property. Jurisprudence has it
that when there are several liens upon the premises, the surplus money must be
applied to their discharge in the order of their priority. 23 A junior mortgagee may
have his rights protected by an appropriate decree as to the application of the
surplus, if there be any, after satisfying the prior mortgage. His lien on the land is
transferred to the surplus fund. 24 And a senior mortgagee, realizing more than
the amount of his debt on a foreclosure sale, is regarded as a trustee for the
benefit of junior encumbrancers. 25
Upon the strength of the foregoing considerations, we cannot countenance the
apparent paltriness that petitioner persistently accords the right of private
respondent over the surplus proceeds. It must be emphasized that petitioner
failed to present the receipts or any other proof of the alleged costs or expenses
incurred by him in the foreclosure sale. Even the trial court failed or refused to
resolve this issue, notwithstanding the fact that this was one of the grounds
raised in the motion filed by private respondent before it to set aside the sale.
Since it has never been denied that the bid price greatly exceeded the mortgage
debt, petitioner cannot be allowed to unjustly enrich himself at the expense of
private respondent.
As regards the issue concerning the alleged defect in the publication of the notice
of the sale, suffice it to state for purposes of this discussion that a question of
non-compliance with the notice and publication requirements of an extrajudicial
foreclosure sale is a factual issue and the resolution thereof by the lower courts
is binding and conclusive upon this Court, 26 absent any showing of grave abuse
of discretion. In the case at bar, both the trial court and respondent Court of
Appeals have found that the sale was conducted in accordance with law. No
compelling reason exists in this case to justify a rejection of their findings or a
reversal of their conclusions.
There is likewise no merit in the argument that if private respondent had wanted
to question the validity of the sale, she should have filed a petition to set the
same aside and to cancel the writ of possession. These, it is argued, should have
been disposed of in accordance with the summary procedure laid down in
Section 112 of the Land Registration Act, provided the petition is filed not later
than thirty days after the purchaser was given possession of the land.
Considering, however, that private respondent has filed a motion to set aside the
sale and to defer the issuance of a writ of possession before the court where
the ex parte petition for issuance of such writ was then pending, we deem the
same to be substantial compliance with the statutory prescription.
We, however, take exception to and reject the last paragraph in the dispositive
portion of the questioned decision of respondent court, which we repeat:
In the event that private respondent fails or refuses to pay
such excess or balance, then the auction sale of 28
September 1993 is deemed CANCELLED and private
respondent (petitioner herein) may foreclose the
mortgage anew either in a judicial or extrajudicial
proceeding as stipulated in the mortgage contract.
for lack of statutory and jurisprudential bases. The quoted phrase "as
stipulated in the mortgage contract" does not, of course, envision
such contingency or warrant the suggested alternative procedure.
Section 4 of Rule 64, hereinbefore quoted, merely provides that where there is a
balance or residue after payment of the mortgage, the same shall be paid to the
mortgagor. While the expedient course desired by respondent court is
commendable, there is nothing in the cited provision from which it can be inferred
that a violation thereof will have the effect of nullifying the sale. The better rule is
that if the mortgagee is retaining more of the proceeds of the sale than he is

entitled to, this fact alone will not affect the validity of the sale but simply gives
the mortgagor a cause of action to recover such surplus. 27 This is likewise in
harmony with the decisional rule that in suing for the return of the surplus
proceeds, the mortgagor is deemed to have affirmed the validity of the sale since
nothing is due if no valid sale has been made. 28
In the early case of Caparas vs. Yatco, etc., et al., 29 it was also held that where
the mortgagee has been ordered by the court to return the surplus to the
mortgagor or the person entitled thereto, and the former fails to do so and
flagrantly disobeys the order, the court can cite the mortgagee for contempt and
mete out the corresponding penalty under Section 3(b) of the former Rule 64
(now Rule 71) of the Rules of Court.
WHEREFORE, the questioned decision of the Court of Appeals is MODIFIED by
deleting the last paragraph of itsfallo, but its disposition of this case in all other
respects is hereby AFFIRMED.
SO ORDERED.
G.R. No. 70623 June 30, 1987
ST. DOMINIC CORPORATION, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT, HON. RICARDO P. TENSUAN,
RTC BRANCH LXXXIII, QUEZON CITY FRANCISCA B. BUSTAMANTE,
FLAVIANO BUSTAMANTE, CARLOS ROBES, ADALIA FRANCISCO and
AURORA FRANCISCO, respondents.
No. L-48630 June 30, 1987
FLAVIANO BUSTAMANTE and FRANCISCA B. BUSTAMANTE, petitioners,
vs.
HON ULPIANO SARMIENTO, as Presiding Judge of the Court of First
Instance of Rizal, Branch IX, sitting in Quezon City, RODOLFO ESPINELI,
personally and as "Special Sheriff" appointed by respondent Judge
Sarmiento, AURORA B. FRANCISCO, and ST. DOMINIC
CORPORATION, respondents.

GUTIERREZ, JR., J.:

Arising from a common set of facts, these petitions are before us for concurrent
disposition.
G.R. No. 70623 entitled "St. Dominic Corporation v. The Intermediate Appellate
Court. et al." is a petition to review on certiorari the decision of the respondent
appellate court, dated January 31, 1985 in AC-G. R. SP No. 00513 entitled
"Francisca B. Bustamante, et al., v. Hon. Ricardo P. Tensuan, et al.," which set
aside the orders of the then Court of First Instance of Rizal at Quezon City, in
Civil Case No. Q-11895, as well as the resolution dated April 16, 1985 denying
the petitioner's motion for reconsideration.
On the other hand, G.R. No. L-48630, is a petition for certiorari assailing the
order of respondent Judge Ulpiano Sarmiento, dated April 27, 1976, directing the
issuance of a writ of possession against the petitioners covering the same
property involved in G.R. No. 70623.
The facts are not disputed.
On February 27, 1968, Civil Case No. Q-11895 entitled Ricardo Castulo and
Juan V. Ebreo v. Carlos Robes and wife Adalia Francisco and People's Homesite
and Housing Corporation" was filed seeking the cancellation of Transfer
Certificate of Title No. 83783 in the name of the spouses Carlos Robes and
Adaha Francisco, covering Lot No. 8, Block 101 of the Malaya Subdivision,
People's Homesite and Housing Corporation (PHHC). The original complaint was
superseded by an amended complaint filed on February 24, 1969.

It appears that sometime in 1961, the PHHC awarded the property in question to
one Cristobal Santiago, Jr., in whose favor a final deed of sale was executed and
Transfer Certificate of Title (TCT) No. 83783 was issued.
Subsequently, the Robes spouses mortgaged the realty to the Manufacturer's
Bank and Trust Company. The mortgage lien was duly annotated on TCT 84387
on February 9, 1965.
Thereafter, on February 2, 1968, Civil Case No. Q- 1 1895 was filed.
Claiming legal interest in the property, the Bustamante spouses were allowed to
intervene in the case.
On March 25, 1968, a notice of lis pendens was annotated on TCT 84387 at the
instance of the Bustamante spouses.
For failure of the Robes' spouses to pay the mortgage obligation, the
Manufacturer's Bank and Trust Company foreclosed the lot and caused the same
to be sold at public auction on December 14, 1974.
The property was purchased by Aurora Francisco in whose favor a certificate of
sale was issued. The levy on execution was annotated on TCT 84387 on March
16, 1974.
No redemption of said property was effected. Thus, on March 5, 1976, TCT
84387 in the name of the Robes spouseswas cancelled and in heu thereof, TCT
217192 was issued to Aurora Francisco on the same date. The notice of lis
pendens on the title of the Robes spouses, however, was not carried over to TCT
217192.
On April 20, 1976, before the sale of the land to St. Dominic, Aurora Francisco
applied for a writ of possession in LRC Case No. 851 (76) before Branch IX of
the then Court of First Instance of Rizal in Quezon City.
On April 27, 1976, said court issued the writ of possession.
The lower court (Branch IX, Court of First Instance of Rizal) having stood firm in
the grant of the writ of possession and having denied the motion to quash the
same, the Bustamante spouses filed with this Court a petition for certiorari,
docketed as G.R. No. L-48630 entitled "Flaviano Bustamante, et al., v. Hon.
Sarmiento, etc., et al.", now before us for resolution.
On September 15, 1976, Aurora Francisco sold the property to petitioner, St.
Dominic Corporation. Consequently, TCT 222337 was issued to petitioner
corporation. As earlier stated, no notice of any lien or encumbrance appears on
the title.
Meanwhile, Civil Case No. Q-11895 proceeded to judgment. The dispositive
portion of the decision reads:
WHEREFORE, all the foregoing premises considered,
judgment is hereby rendered as follows:
(a) declaring null and void the allocation and sale of
PHHC (now NHA) to defendant Cristobal Santiago, Jr., of
Lot 8, Block 101 of subdivision plan Psd-88807, and
cancelling Transfer Certifirate of Title No. 83783 issued
therefor in his name;
(b) declaring null and void and without force and effect the
sale of said lot by Cristobal Santiago, Jr., to spouses
Adalia Francisco and Carlos Robes, and cancelling
Transfer Certificate of Title No. 84387 issued therefor in
their names;
(c) directing defendant PHHC (now NHA), to prgcess the
application to purchase said subject lot filed by intervenor
Francisco Banzon Bustamante and to execute or cause to

be executed the requisite documents for the award of said

lot to her.
The complaint praying that an award of the subject lot be
ordered made in Lavor of plaintiffs Ricardo S. Castulo and
Juan V. Ebreo, is hereby dismissed for lack of showing
that they or either of them ever filed the requisite
application to purchase the same. All other counterclaims
are hereby dismissed for lack of merit. (Annex "A". p. 26,
Rollo G.R. No. 70623).
When the judgment became final, the Bustamante spouses applied for a writ of
execution.
On June 29, 1982, Presiding Judge Tensuan issued an order granting the
application for a writ of execution with the qualification, however, that "said writ
may not be enforced and/or implemented as against the St. Dominic
Corporation."

relationship to another) is conclusive only between the

parties and their successors-ininterest by title subsequent
to the commencement of the action. .... (Annex "H". p. 58,
Rollo-70323)
Indeed, a judgment cannot bind persons who are not parties to the action (Vda.
de Sengbengco v. Arellano, 1 SCRA 711; Hanopol v. Pilapil, 7 SCRA 452; and
Hollero v. Court of Appeals, 1 1 SCRA 3 1 0). It is elementary that strangers to a
case are not bound by the judgment rendered by the court (Bien v. Sunga, 117
SCRA 249) and such judgment is not available as an adjurtication either against
or in favor of such other person. A decision of a court will not operate to divest
the rights of a person who has not and has never been a party to a litigation,
either as plaintiff or defendant (Granados v. Monton, 86 Phil., 42). Verily,
execution of a judgment can only be issued against one who is a party to the
action, and not against one who, not being a party in the case, has not yet had
his day in court (City of Bacolod, et al., v. Hon. Enriquez, et al., 101 Phil., 644;
Tayson v. Angeles v. Icasiano, et al., 83 Phil., 921; Manza v. Hon. Vicente
Santiago, etc., 96 Phil., 938; and Angara v. Gorospe, et al., 101 Phil., 79).

The Bustamante spouses moved for a reconsideration, arguing that the order of
the court dated June 29, 1982 in effect amended a final and executory judgment
in violation of law. In an order dated November 26, 1982, Judge Tensuan denied
the motion. Whereupon, the Bustamante spouses filed a petition for certiorari and
mandamus docketed as AC-G.R. SP No. 00513, before the Intermediate
Appellate Court. Herein petitioner, St. Dominic Corporation and Aurora Francisco
who were not parties to Civil Case No. Q-11895, were made respondents in the
petition questioning the orders of Judge Tensuan exempting the petitioner
corporation from the enforcement of the trial court's judgment and denying
reconsideration thereof.

It is clear from the records that petitioner St. Dominic Corporation had never
been impleaded as a party to Civil Case No. Q-11895 filed by Ricardo Castulo
and Juan V. Ebreo. The complaint had for its purpose the nullification of the
award to Cristobal Santiago, Jr., and the subsequent sale between Santiago and
the spouses Adalia Francisco and Carlos Robes. Such proceedings neither
involved nor affected St. Dominic Corporation. Judgment therein was directed
only against the titles of Cristobal Santiago, Jr., and the Robes spouses. The trial
court could not execute the same against the petitioner as to deprive it of its
property without due process of law. This is what the trial court made explicit in its
order of execution. Its decision could not reach the petitioner's rights. Yet, the
respondent appellate court declined to pass upon this principal issue in a rather
ambiguous ruling.

On January 31, 1985, the Intermediate Appellate Court rendered judgment. The
dispositive portion of the decision reads:

In its decision the Court of Appeals held:

WHEREFORE, the writs of certiorari and mandamus

prayed for are granted; the orders of September 24, 1982
and November 26, 1982 complained of are hereby set
aside; and the respondent Judge is hereby ordered to
cause the issuance of a writ of execution in strict
conformity with the dispositive portion of the final and
executory decision in subject Civil Case No. Q-11895.
Costs against the private respondents. (p. 55, Rollo-G.R.
No. 70623)
On February 18, 1985, the petitioner filed its motion for reconsideration and on
February 18, 1985, Aurora Francisco followed suit. In a minute resolution dated
April 16, 1985, both motions were denied by the respondent appellate court.
Thus, the petition filed by St. Dominic Corporation in G.R. No. 70623.
The appellate court's ruling in AC-G.R. SP No. 00513 is tainted with error.
The trial court's statement exempting from execution one not a party to the case
nor privy to the interests of the parties therein, from the effects of its
pronouncements, cannot be considered an amendment of its final and executory
judgment in Civil Case No. Q- 1 1895.
Justice Lino M. Patajo's dissent in AC-G.R. SP No. 00513 is clear and to the
point elucidating the correct doctrine thus:
I believe that respondent Court cannot be held as having
abused its discretion or exceeded its jurisdiction in issuing
the questioned orders. I find no merit in the contention of
petitioners that in so providing in said orders that its
decision should not be enforced or executed against St.
Dominic, respondent Court had actually amended its
decision which had already become final. Respondent
Court was merely applying the provision of Rule 39,
Section 49(b) which provides that the decision of the
Court in cases other than those provided for in subparagraph (a) of said section (judgment against specific
thing, probate of a will, administration of the estate of a
deceased person, or in respect to the personal, political,
or legal condition or status of a particular person or his

Decidedly, the present certiorari and mandamus

proceedings is not the appropriate forum for the
determination of the legal effect, if any there be, of the
aforesaid final and executory judgment nullifying or
declaring the nullity of the sale of subject property in
question by Cristobal Santiago, Jr., to spouses Adalia
Francisco and Carlos Robes and cancelling TCT No. T83783 in their names, on the alleged subsequent auction
sale to respondent Aurora Francisco and from the latter to
St. Dominic Corporation over the same property involved
in said judgment. ...Whether or not the foreclosure
proceedings, auction sale and subsequent transactions
had on subject property during the pendency of the
litigation thereover in the court below are subject to the
outcome of said case, need not be passed upon in this
disposition. What We are concerned with here are the
assailed orders of the respondent court. ... (Annex "H", p.
55, Rollo 70623).
The determination of whether or not the foreclosure proceedings, auction sale,
and subsequent transactions had on the subject property, during the pendency of
the litigation are subject to the outcome of said case bears heavily on the issues
at hand. The answer is determinative of whether or not the trial court's order of
execution should affect or be issued against the petitioner.
Anent the effect of the trial court's judgment on the mortgagee bank's rights and
on the foreclosure of the property in question, this Court has held that where a
Torrens title was issued as a result of regular land registration proceedings and
was in the name of the mortgagor when given as a security for a bank loan, the
subsequent declaration of said title as null and void is not a ground for nullifying
the mortgage rights of the bank which had acted in good faith (Philippine National
Cooperative Bank v. Carandang-Villalon, 139 SCRA 570). As a matter of fact,
there are instances when even a fraudulent and forged document of sale may
become the root of a valid title if the certificate had already been transferred from
the name of the true owner to the name indicated by the forger (Duran v.
Intermediate Appellate Court, 138 SCRA 489). Here, there is no forgery or fraud
involved.
A mortgagee has the right to rely on what appears on the face of the certificate of
title. In the absence of anything to excite suspicion, it is under no obligation to
look beyond the certificate and investigate the title of the mortgagor appearing on

the face of said certificate. There is no showing in the records that the mortgagee
bank was aware of any shadow affecting the title of the mortgaged property when
it was mortgaged. As will be explained later, the intervenors are only prospective
awardees of the disputed lot. They are not the owners. They have no title to the
land.
The main purpose of the Torrens System is to avoid possible conflicts of title to
real estate, and to facilitate transactions relative thereto by giving the public the
right to rely upon the face of a Torrens certificate of title and to dispense with the
need of inquiring further, except when the party concerned had actual knowledge
of facts and circumstances that should impel a reasonably cautious man to make
such further inquiry (Pascua v. Capuyoc, 77 SCRA 78). Thus, where innocent
third persons relying on the correctness of the certificate of title thus issued,
acquire rights over the property, the court cannot disregard such rights (Director
of Land v. Abache, et al., 73 Phil. 606). The lien of the petitioner, an innocent
mortgagee for value must be respected and protected (Blanco v. Esquierdo, 110
Phil., 494).
The title to the property given as security to the Manufacturer's Bank and Trust
Co., by the spouses Robes was valid, regular, and free from any lien or
encumbrance. The mortgage was executed prior to the institution of Civil Case
No. Q-11895, thus establishing it as a lien superior to whatever claims the
plaintiffs therein may have as a result of the subsequent litigation. An inquiry
beyond the face of the mortgagor's title would certainly have yielded no flaw at
that time. This being so, the adverse claim in Civil Case No. Q-11895 could not
affect the rights of the mortgagee. The fact that the foreclosure of the mortgage
and the subsequent auction sale were effected after the annotation of the
adverse claim is of no moment. The foreclosure sale retroacts to the date of
registration of the mortgage (Bank of the Philippine Islands v. Noblejas, 105 Phil.,
418).
A person who takes a mortgage in good faith and for a valuable consideration,
the record showing a clear title in the mortgagor, will be protected against any
equitable titles to the premises or equitable claims on the title, in favor of third
persons, of which he had no notice, actual or constructive. The protection
extends to a purchaser at a Sheriff's sale under proceedings on the mortgage
although such purchaser had notice of the alleged equity (59 CJS, Sec. 233, pp.
303-304).

of a future unknown person. It cannot disregard the rights already vested in

petitioner St. Dominic. To do so would impair confidence in certificates of titles
and orderly processes of law. Among the guarantees of the Torrens system is
that it renders title indefeasible. Section 31, Presidential Decree 1529, The Land
Registration Act, provides: "The decree of registration shall bind the land and
quiet title thereto, subject only to the exceptions or liens as may be provided by
law. It shall be conclusive upon and against all persons, including the National
Government and all branches thereof whether mentioned by name in the
application or notice, the same being included in the general description "to all of
whom it may concern". " This provision is applicable under the facts of this case.
In its petition in G.R. No. 70623, petitioner St. Dominic "prays most earnestly for
such and any other relief as this Honorable Court, in its far greater wisdom, may
deem just, equitable and proper in the premises, such as the dismissal of the
petition in G.R. No. L-48630."
Petitioners Bustamante in G.R. No. L-48630, assail the grant ex parte by the trial
court of the writ of possession over the property, likewise the subject of G.R. No.
70623, in favor of Aurora Francisco. It is alleged that a court has no jurisdiction,
power, and authority to eject a third person who is not a party to the foreclosure
proceedings or mortgage by a mere writ of possession summarily issued in a
foreclosure suit.
Respondent St. Dominic Corporation moved and was allowed to intervene as
successor-in-interest by purchase to all the rights, title, and interest of
respondent Francisco over the lot in question.
Section 6 of Act No. 3135, as amended by Act 4118, the law that regulates the
methods of affecting extrajudicial foreclosure of mortgage makes applicable
Sections 464 to 466 of the Code of Civil Procedure, now sections 29 to 31 and
35 of Rule 39 of the Revised Rules which provide: "If no redemption be made
within twelve (12) months after the sale, the purchaser, or his assignee, is
entitled to a conveyance and possession of the property ..., " and "The
possession of the property shall be given to the purchaser or last redemptioner
by the officer unless a third person is actually holding the property adversely to
the judgment debtor." Petitioners capitalize on this last proviso of the law.
On this point, the trial court held, and We quote with approval that:

Any subsequent lien or encumbrance annotated at the back of the certificate of

title cannot in any way prejudice the mortgage previously registered and the lots
subject thereto pass to the purchaser at public auction free from any lien or
encumbrance (Gonzalo Puyat & Sons, Inc., v. Philippine National Bank, 4 SCRA
1257). Otherwise, the value of the mortgage could be easily destroyed by a
subsequent record of an adverse claim, for no one would purchase at a
foreclosure sale if found by the posterior claim (Bank of the Philippine Island v.
Noblejas, supra). Aurora Francisco's title, as a purchaser at the auction sale of
the property in question, cannot be bound by the adverse claims of the plaintiffs
in Civil Case No. Q-11895. This is even more true with petitioner St. Dominic
Corporation which had acquired title from Aurora Francisco without any notice or
flaw.
Upon proper foreclosure of a first mortgage, all liens subordinate to the mortgage
are likewise foreclosed. The foreclosure as well as the sale of the property were
annotated on the title to the property, then still in the name of Adalia Francisco
and Carlos Robes. Such annotation serves as constructive notice to the parties
having any claim or nterest in the property to exercise their right of redemption or
to participate in the foreclosure sale. Certainly, there was an opportunity for the
claimants in Civil Case No. Q-1 1895 to acquire the property at issue. St.
Dominic's rights can no longer be disturbed.
It should also be noted that the intervenors in Civil Case Q-11895 possess no
enforceable lien over the property in question. They are merely prospective
awardees of the realty. The right they assert is purely speculative. No vested
rights exist in their favor. The award of the disputed lot to Cristobal Santiago, Jr.
may have been declared improper. As to who should get the lot, according to law,
still lies in the discretion of the PHHC. No assurance is given that the lot would
be awarded to the claimants-intervenors. The decision in Civil Case Q-11895
may be deemed correct insofar as it called for a processing of the Bustamante
claim but erroneous when it assumed that after processing, the award would be
in the spouses' favor.
However, the PHHC is now estopped by circumstances from making any further
award. As earlier stated, the lower court cannot order the execution of the
decision as against the petitioner and, thereby, cancel St. Dominic's title in favor

The Court is aware of the limitation that writ of possession

may not issue when the property is in the possession of a
third party who holds the property adverse to the buyer in
the foreclosure sale. But, by their express admission in
their motion, movants are merely 'occupants-applicants'
for the purchase of the land from the defunct PHHC.
Under such claim which is, at best inchoate, we cannot
refuse to grant the writ of possession prayed for; to do so,
would be to becloud the integrity of the torrens title, and it
would be in derogation of its indefeasibility.
xxx xxx xxx
In the instant case, the property involved is covered by a
certificate of title. It has passed through different owners
until it was bought by petitioner, Aurora Francisco, at a
public auction sale by reason of the foreclosure of the
mortgage in the property and subsequently sold by said
Aurora Francisco to intervenor St. Dominic. And movants
here, would like us to quash the writ of possession we
issued, on the ground that the same was issued upon an
ex parte petition is permitted and allowed by virtue of Act
3135, and on the allegation that movants "have been in
possession of the subject property since 1962 as
occupants-applicants for the purchase thereof from the
defendant PHHC ... " (p. 3, Motion to Quash) which, as
we said above is a matter of expectancy (inchoate) and
should not be allowed to prevail over the clean title of the
petitioner and/or intervenor herein. (pp. 73-74, Rollo-G.R.
No. 48630).
Indeed, the rules contemplate a situation where a third party holds the property
by adverse title or right such as a coowner, tenant or usufructuary. In such cases,
a grant of a writ of possession, would be denial of such third person's rights

without giving them their day in court. Especially, where question of title is
involved, the matter would well be threshed out in a separate action and not in a
motion for a writ of possession. But such is not the state of affairs in the case at
bar.
The right of the respondent to the possession of the property is clearly
unassailable. It is founded on the right of ownership. As the purchaser of the
properties in the foreclosure sale, and to which the respective titles thereto have
already been issued, the petitioner's rights over the property has become
absolute, vesting upon it the right of possession of the property which the court
must aid in affecting its delivery. After such delivery, the purchaser becomes the
absolute owner of the property. As we said in Tan Soo Huat u. Ongwico (63 Phil.,
746), the deed of conveyance entitled the purchaser to have and to hold the
purchased property. This means, that the purchaser is entitled to go immediately
upon the real property, and that it is the sheriff's inescapable duty to place him in
such possession. (Philippine National Bank v. Adil, 118 SCRA 110). With more
reason that the said writ of possession should be granted Aurora Francisco or, in
her stead, St. Dominic Corporation in the light of our pronouncements in G.R. No.
70623. Ownership has been consolidated in St. Dominic's favor. There being no
clear title or right enforceable by the Bustamante spouses, a writ of execution or
a writ of possession, may issue in favor of Aurora Francisco and/or St. Dominic
Corporation.
Be it noted that as the trial court had said "the writ of possession issued by us
has been complied with and satisfied," meaning to say that the movants vacated
the property. But in the hearing held in this case, it has been admitted by the
parties that the movants retumed to the land in question and constructed again
thereon their respective uses. This being so, the movants must vacate and
remove from the disputed premises whatever they have built or constructed
thereon. The writ of possession issued and enforced may no longer be quashed.
WHEREFORE, judgment is hereby rendered in G.R. No. 70623, GRANTING the
petition of ST. DOMINIC CORPORATION. The decision of the Intermediate
Appellate Court, now Court of Appeals, dated January 31, 1985 in ACG.R. SP
No. 00513 and its resolution dated April 16, 1985, are REVERSED and SET
ASIDE. The writ of execution issued by the trial court in Civil Case No. Q-11895,
with the qualification excluding the petitioner, is in accord with the facts and the
applicable law and is accordingly sustained as correct. However, the decision of
the trial court directing the PHHC (now NHA) to process the application of
Francisco Banzon Bustamante to purchase the property in question and to
execute the requisite documents for the award of said lot to her having been
rendered ineffective by circumstances supervening in Civil Case No. Q-11895,
the writ of execution issued by the court a quo therefore is hereby declared
without force and effect.
G.R. No. L-48630 is DISMISSED for lack of merit.
SO ORDERED.
G.R. No. 70987 January 30, 1987
GREGORIO Y. LIMPIN, JR. and ROGELIO SARMIENTO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and GUILLERMO PONCE, respondents.
Danilo A. Basa for petitioners.
Sycip, Salazar, Feliciano & Hernandez Law Office and Eugenio C. Lindo for
private respondent.

NARVASA, J:
Assailed in this petition for review is the decision of the Intermediate Appellate
Court in A.C.-G.R. No. 02516, entitled "Guillermo Ponce, versus Hon. Antonio P.
Solano, etc., et al.," the dispositive portion of which reads
WHEREFORE, the orders dated October 16, 1983 1 and
December 19, 1983 of the respondent court, so far as
they deny the confirmation of the sale of the lots formerly

covered by TCT Nos. 92836 and 92837, are SET ASIDE

and the respondent court is hereby ORDERED to confirm
the sale and issue a writ of possession to the petitioner
with respect to the aforesaid lots, subject to the equity of
redemption of the respondent Rogelio V. Sarmiento.
Without costs.
SO ORDERED.
The conflict in claims resulting from the mortgage and subsequent sale to
different persons of the same real property, and the execution sale thereof at a
still later date at the instance of yet another party, is what is chiefly involved in the
case at bar, as well as the matter of the remedies available to correct errors in
the execution of a final and executory judgment.
On February 28, 1973, four lots covered by TCTs Nos. 92836, 92837, 92839 and
92840 of the Register of Deeds of Quezon City were mortgaged by the spouses
Jose and Marcelina Aquino to Guillermo Ponce and his wife Adela (since
deceased) as security for a loan of P2,200,000.00. The mortgages were
registered on March 1, 1973. Two of the lots, those covered by TCTs Nos. 92836
and 92837, were afterwards sold in 1978 by the Aquinos to the Butuan Bay Wood
Export Corporation, which caused an adverse claim to be annotated on the
certificates of title on February 24, 1978. 2
In 1979, Gregorio Y. Limpin, Jr. obtained a money Judgement against Butuan
Bay Wood Export Corporation in Civil Case No. 10463 of the Court of First
Instance of Davao. To satisfy the judgment, the lots covered by TCTs Nos. 92836
and 92837 were levied upon on September 3, 1980 and sold at public auction to
Limpin as the highest bidder for the sum of P517,485.41 on October 6, 1980. On
order of the trial court, the covering titles were cancelled and in their stead TCTs
Nos. 285450 and 285451 were issued to Limpin. On November 21, 1981, Limpin
sold the two lots to Rogelio M. Sarmiento. By virtue of said sale, TCTs Nos.
285450 and 285451 were cancelled on November 4, 1983, and replaced by TCTs
Nos. 307100 and 397124 in Sarmiento's name. 3
On September 2, 1980 (a day before Limpin's levy on the two lots), Ponce filed
suit against the Aquino spouses for judicial foreclosure of the mortgage over the
Aquinos' four lots. The case was docketed as Civil Case No. Q-30726 of the
former Court of First Instance of Quezon City. On June 8, 1982, judgment was
rendered in favor of Ponce. After the judgment became final, the Trial Court, in an
order dated September 13, 1983, directed the sale at public auction of the four
(4) mortgaged lots to satisfy the judgment. On October 12, 1983, the four lots,
including those formerly covered by TCTs Nos. 92836 and 92837, were sold to
Ponce himself whose bid of P5,200,000.00 was the highest and exactly
correspond to the judgment debt. On the same day, the sheriff's certificate of sale
was registered. 4
Ponce then moved for the confirmation of the sale and the issuance of a writ of
possession in his favor covering an the four lots. But the Trial Court, by order
dated October 26, 1983, confirmed only the sale of the lots covered by TCTs
Nos. 02839 and 92840, refusing to confirm the sale or issue a writ of possession
in regard to the lots covered by TCTs Nos. 92836 and 92837 on the ground that
those titles had already been cancelled and new ones issued to Gregorio F.
Limpin, by order of February 16, 1982 of the Court of First Instance of Davao City
in Civil Case No. 10463, already referred to.
Ponce filed a motion for reconsideration and notified Limpin. Limpin however
refused to participate in the hearings contending that the Court had no
jurisdiction over his person; but he did comment that the mortgage over the lots
covered by TCTs Nos. 92836 and 92837 had been released by Ponce by virtue
of a "Partial Release of Real Estate Mortgage" dated July 20, 1977. The Trial
Court denied Ponce's motion for reconsideration, whereupon he sought
corrective relief by filing a special civil action for certiorari and mandamus in the
Intermediate Appellate Court, impleading Limpin and Rogelio M. Sarmiento,
Limpin's vendee, as private respondents. 5
After hearing and submission by the parties of extensive memoranda as well as
documentary evidence, the respondent Appellate Court rendered the questioned
decision on February 28, 1985, setting aside the judgment of the Trial Court
which denied the confirmation of the sale of the lots formerly covered by TCTs
Nos. 92836 and 92837, and ordering said Court to confirm the same and issue a
writ of possession to Ponce with respect thereto, subject to Sarmiento's equity of
redemption.

Hence, this petition for review, filed by Limpin and Sarmiento.

of error or certiorari, 18 or by a special civil action of certiorari, prohibition, or

mandamus.) 19

The petition should be denied.

The petitioners' contention that the action of certiorari and mandamus (instituted
by Ponce in the Intermediate Appellate Court) was not the proper remedy is not
well taken. The Appellate Court disposed of this preliminary issue as follows:
Nor is there any merit in the argument of the respondents
that petitioner's remedy is to appeal from the orders
denying the motion for confirmation of the sale. The
respondents claim that these orders are final orders and
cite in support of their contention the decision
in Domalante vs. Martinez, 20 SCRA 1136 (1967), where
it was held that "An order of confirmation in court
foreclosure proceedings is a final order, not merely
interlocutory. The right of appeal therefore, has long been
recognized." The Court was there speaking of an
order confirming the sale, as between the parties to a
mortgage, not of an order, such as the ones herein in
question, denying confirmation because a third party, not
a party in the foreclosure proceedings, asserts a right to
the properties sought to be foreclosed. Only a separate
proceeding, such as the present case, could possibly
determine mine the rights of such party. (See Rivero de
Ortega v. Natividad, 71 Phil. 340 (1941).lwphl@it 6
Certain it is that courts have plenary authority and control over the execution of
their final and executory judgments and orders. 7 Indeed, once that authority i
timely and properly in voked, it becomes the court's ministerial and mandatory
function to direct execution. 8
That authority lasts until the judgments are fully satisfied, subject only to the time
limitations prescribed therefor. 9With particular reference to the execution of a
judgment hi a mortgage foreclosure action, the authority to direct and effect the
same exists until the confirmation of the foreclosure sale (and issuance and
implementation of the writ of possession), confirmation being the final act which
disposes of the case. 10
Certain it is too, that execution of final and executory judgments may no longer
be contested and prevented, and no appeal should lie therefrom; otherwise,
cases would be interminable, and there would be negation of the overmastering
need to end litigations. 11
There may, to be sure, be instances when an error may be committed in the
course of execution proceedings prejudicial to the rights of a party. These
instances, rare though they may be, do call for correction by a superior court, as
where
1) the writ of executio nvaries the judgment 12
2) there has been a change in the situation of the parties making execution
inequitable or unjust; 13
3) execution is sought to be enforced against property exempt from execution; 14
4) it appears that the controversy has never been submitted to the judgment of
the court; 15
5) the terms of the judgment are not clear enough and there remains room for
interpretation thereof; 16 or,
6) it appears that the writ of execution has been improvidently issued, or that it is
defective in substance, or is issued against the wrong party, or that the judgment
debt has been paid or otherwise satisfied, or the writ was issued without
authority;17
In these exceptional circumstances, considerations of justice and equity dictate
that there be some mode available to the party aggrieved of elevating the
question to a higher court, That mode of elevation may be either by appeal (writ

The petitioners also question the jurisdiction of the Intermediate Appellate Court
over their persons, alleging that they were not original parties to the action for
judicial foreclosure. It appears, however, that despite awareness of this
ostensible defect, they fully participated without objection in the certiorari and
mandamus proceedings before the respondent Appellate Court. Having thus
voluntarily appeared and seen the case through its final resolution, they cannot
now be permitted to turn about and repudiate the Appellate Court's jurisdiction
over them.
This Court has ruled:
* * * * And as we have previously quoted approvingly "a
party cannot invoke the jurisdiction of a court to secure
affirmative relief against his opponent and, after obtaining
or failing to obtain such relief, repudiate or question that
same jurisdiction." While the jurisdiction of a tribunal may
be challenged at any time, sound public policy bars the
petitioners from so doing after having procured that
jurisdiction themselves, speculating on the fortunes of
litigation.
xxx xxx xxx
The petitioners, to borrow the language of Justice
Bautista Angelo, "cannot adopt a posture of doubledealing without running afoul of the doctrine of estoppel."
The principle of estoppel is in the interest of a sound
administration of the laws. It should deter those who are
disposed to trifle with the courts by taking inconsistent
positions contrary to the elementary principles of right
dealing and good faith. For this reason, this Court closes
the door to the petitioners' challenge against the
jurisdiction of the Court of Appellants' and will not even
honor the question with a pronouncement. 20
Petitioner, however, is estopped, on ground of public
policy, from invoking the plea of lack of jurisdiction after
submitting itself to the jurisdiction of the Court of Appeals
and assailing its jurisdiction only after an adverse
judgment was rendered against the petitioner. ... 21
The petitioners further argue that the Appellate Court erred in according
superiority to the mortgage rights of Ponce over the levy and sale in favor of
petitioner Limpin and the subsequent sale of the property to petitioner Sarmiento.
The Appellate Court correctly ruled that the rights and interests of petitioners
Limpin and Sarmiento to the property in question are subordinate to those of
respondent Ponce, who holds a prior and senior lien. According to said Court:
* * * This case is controlled by the decision in Santiago v.
Dionisio, 92 Phil. 495 (1935). In theSantiago case,
Ramon San Diego mortgaged his land to Eulalia
Resurreccion. Later he sold it to Apolonia Santiago. As
the mortgage debt was not paid, Resurreccion had the
mortgage foreclosed. The Supreme Court upheld the sale
to Dionisio, subject, however, to the equity of redemption
of Santiago. The Court stated:
... [T]he effect of the failure to
implead a subordinate lienholder
or subsequent purchaser or both
is to render the foreclosure
ineffective as against them, with
the result that there remains in
their favor the "unforeclosed equity
of redemption." But the foreclosure
is valid as between the parties to
the suit. (Ibid; 2 Moran's Rules of
Court, 3rd ed., p. 239)

Applied to this case, this means that the sale to Ponce, as

the highest bidder in the foreclosure sale of the two lots in
question should have been confirmed, subject to Limpin's
(and now Sarmiento's equity to redemption. As held in
Santiago v. Dionisio supra, the registration of the lands,
first in the name of Limpin and later of Sarmiento, was
premature. At most what they were entitled to was the
registration of their equity of redemption. 22

accepted on August 31, 1976. However, that donation was never registered, a
fact that the petitioners admit. Even if this Court were inclined to take up that
issue now, though raised only for the first time, it is obvious that no resolution
thereof could possibly improve the petitioners' position as against that of the
private respondent or the latter's transferee.
WHEREFORE, the petition is denied, with costs against petitioners.
SO ORDERED.

Moreover:
The superiority of the mortgagee's lien over that of a
subsequent judgment creditor is now expressly provided
in Rule 39, Section 16 of the Revised Rules of Court,
which states with regard to the effect of levy on execution
that it shall create a lien in favor of a judgment creditor
over the right title and interest of the judgment debtor in
such property at the time of the levy, subject to the liens
or encumbrances then existing. 23
It is well settled that a recorded mortgage is a right in rem, a hen on the property
whoever its owner may be. 24The recordation of the mortgage in this case put the
whole world, petitioners included, on constructive notice of its existence and
warned everyone who thereafter dealt with the property on which it was
constituted that he would have to reckon with that encumbrance. Hence, Limpin's
subsequent purchase of the "interests and participation" of Butuan Bay Wood
Export Corporation in the lots covered by TCTs Nos. 92836 and 92837, as well
as the sale of the same to Sarmiento on November 21, 1981, were both subject
to said mortgage. On the other hand, Ponce's purchase of the lots mortgaged to
him at the foreclosure sale on October 12, 1983, was subject to no prior lien or
encumbrance, and could in no way be affected or prejudiced by a subsequent or
junior lien, such as that of Limpin. 25 Petitioner Sarmiento having acquired no
better right than his predecessor-in-interest, petitioner Limpin, his title must
likewise fail.
The fact that at the time Ponce foreclosed the mortgage on October 21, 1983,
the lots had already been bought by Limpin and subsequently sold to Sarmiento
is of no consequence, since the settled doctrine is that the effects of the
foreclosure sale retroact to the date of registration of the mortgage, i.e., March 1,
1973 in the present case.
* * * It is well to note that the mortgage in favor of the late
Ramon Eugelio was annotated on November 13, 1952 at
the back of the certificates of title in controversy, while the
adverse claim was only annotated on the same certificate
more than one year later, on December 21, 1953. Hence,
the adverse claim could not effect the rights of the
mortgagee; and the fact that the foreclosure of the
mortgage and the consequent public auction sale have
been effected long after the annotation of the adverse
claim is of no moment, because the foreclosure sale
retroacts to the date of registration of the mortgage. 26
Anent the claim that respondent Ponce executed a deed of partial release of his
mortgage on July 20, 1977, the evidence discloses that Ponce and Jose Aquino,
the mortgagor, thereafter executed separate affidavits dated December 1, 1983,
stating that the said partial release was void, not only for want of consideration
but also for lack of the signatures of Ponce's two sons who at the time of the
execution of the document, were co-mortgagees as successors and heirs of Mrs.
Adela Ponce. Moreover, the Deed of Partial Release was not registered but had
simply been attached, together with the Deed of Sale of the lands to Butuan Bay
Wood Export Corporation, to said corporation's affidavit of adverse claim, the last
being the document which was actually registered, on February 4, 1978 as
already stated. Thus the mortgage in favor of Ponce and his late wife was still
subsisting, when the notice of levy in favor of Limpin was annotated on the
original of OCTs Nos. 92836 and 92837, and even when the execution sale in
favor of Limpin pursuant to the levy was registered. Said annotation was
cancelled only on November 25, 1981, after the properties had been sold on
execution to Limpin on October 6, 1981.
The petitioners finally assert that respondent Ponce did not have a right of action
for foreclosure over the lots in question in the Trial Court, much less to pursue
this case, first in the respondent Intermediate Appellate Court and now, before
this Court, because as early as August 18, 1976, he and his wife had donated the
lots to the Doa Josefa Edralin Marcos Foundation and the donation had been

G.R. No. 71832 September 24, 1991

LEON BERNARDEZ and ANICETA BERNARDEZ, petitioners,
vs.
ARSENIO REYES, respondent.
Wenceslao S. Fajardo for petitioners.
Perfecto R. Bautista for private respondent.

PARAS, J.:p
This is a petition for review on certiorari seeking the annulment of the June 26,
1985 decision 1 of the then Intermediate Appellate Court in AC-G.R. CV No.
67344 entitled "Arsenio Reyes v. Leon Bernardez and Aniceta Bernardez"which
affirmed the order 2 of the Court of First Instance of Rizal dated June 23, 1978
declaring that no valid tender of payment was made by petitioners who had lost
their right to redeem the property and ordering the respondent to pay the
petitioners the sum of P6,140.00.
The undisputed facts of the case are as follows:
Petitioner Leon Bernardez mortgaged a parcel of land to the Government Service
Insurance System (GSIS for short) to secure a loan. The said land was, however,
subsequently foreclosed upon. On April 17, 1962, it was sold at public auction to
herein respondent Arsenio Reyes. Inscribed on the certificate of title was the date
of the sale and the provision that the period of redemption expires one year after
the date of the auction sale or on April 17, 1963. Thereafter, GSIS as attorney-infact of the Bernardez spouses, executed a Deed of Sale over the land in favor of
Reyes on November 8, 1962. On April 18, 1963, both the certificate of
foreclosure sale issued by the Provincial Sheriff and the said Deed of Sale were
registered at the Office of the Register of Deeds of Rizal. On even date, a new
Transfer Certificate of Title was likewise issued in the name of Arsenio Reyes. On
October 26, 1963, believing that the period of redemption had already expired,
Reyes, filed an action in the Court of First Instance of Rizal praying that he be
declared the owner of the land and asking the court to order the Bernardez
spouses to pay the attorney's fees as well as the back rentals from April 17, 1962
to April 17, 1963. With leave of court, GSIS intervened as third-party defendant
(Rollo, p. 33). On August 23, 1967, after a trial on the merits, the court ruled as
follows:
WHEREFORE, premises considered, judgment is hereby
rendered in favor of the defendants and against the
plaintiff and the third-party defendant Government Service
Insurance System giving defendant Leon Bernardez 173
days from and after receipt of a copy of this decision
within which to redeem the property from the plaintiff by
paying P1,315.00, the balance of the redemption price to
be furnished by third-party defendant Government
Service Insurance System. However, defendant Leon
Bernardez shall shoulder the legal interest of the
redemption price from the date of registration of the Deed
of Sale executed by the Provincial Sheriff, plus all the
other expenses incidental to said redemption. The
complaint is dismissed in so far as Ligaya Ramos and
Dominador Vicente are concerned. The plaintiff is,
likewise, ordered to pay the defendants Leon Bernardez
and Aniceta Bernardez the sum of P5,000.00
representing moral damages due to anguish, anxiety
besmirched reputation caused the defendants by the filing

of this case; to pay the further sum of P1,000.00 as

attorney's fees; and to pay the costs.
SO ORDERED.
(Rollo, pp. 27-28).
Reyes appealed to the Court of Appeals which, in turn, rendered its decision
dated June 20, 1977, in this wise:
WHEREFORE, the decision appealed from is affirmed in
all respects with the modification that the third-party
plaintiffs-appellees (Bernardez) should pay to appellant
Arsenic Reyes as redemption price the amount of
P6,510.00 with interest thereon at 1 per cent a month
from the date of the auction sale on April 17, 1962 up to
the time of redemption which the third-party plaintiffsappellees should exercise within thirty (30) days from the
time the present decision has become final and executory.
The Government Service Insurance System must refund
the amount of P704.99 to Bernardez which is the excess
of the auction sale and the further amount of P851.46
which was the amount deducted from the salary of
Bernardez after the foreclosure, with costs against the
appellant, Arsenio Reyes.
SO ORDERED.
(Record on Appeal, pp. 27-28; Rollo, p. 33).
On January 31, 1978, the Bernardez spouses offered the sum of P18,000.00 to
Reyes apparently to redeem the property, but the latter refused (Petition, Rollo p.
11). Such prompted the spouses to consign the sum to the same lower court
which ruled in their favor and at the same time, they filed a manifestation and a
motion for modification of judgment praying that the court fix the redemption price
including interest in the amount of P18,944.10 and to allow deduction therefrom
of the sum of P6,114.00 representing the award of damages due them by Reyes
and finally to order Reyes to accept the balance of P12,831.00 (Rollo, pp. 55,
13). Reyes accordingly filed an opposition and a motion for clarification thereto.
The court a quo on June 23, 1978, laid down the following verdict, presently in
dispute:
WHEREFORE, in view of the foregoing, the court
declares that there was no valid tender of payment on the
part of the defendants who had lost their right to redeem
the property upon the failure to exercise such right within
the period provided in the Decision of the Court of
Appeals. The plaintiff, on the other hand, is liable to the
defendants in the amount of P6,140.00 as decided by this
Court and affirmed by the Court of Appeals.
SO ORDERED.

619; Gregorio Limpin v. Intermediate Appellate Court, et al., G.R. No. 70987,
September 29, 1988, 166 SCRA 87; Philippine National Bank v. Court of Appeals,
G.R. Nos. L-30831 & L-31176, November 21, 1979, 94 SCRA 357; Matilde
Gorospe v. Dolores Santos, G.R. No. L-30079, January 30, 1976, 69 SCRA 191;
Ernesto Salazar v. Flor de Lis Meneses, G.R. No. L-15378 July 31, 1963, 8
SCRA 495; Leon Santos v. Rehabilitation Finance Corporation, et al., G.R. No. L9796, July 31, 1957, 101 Phil. 980). Considering then that in the case at bar, the
certificate of foreclosure sale issued by the Sheriff was registered on April 18,
1963, the right of redemption may be exercised only until April 18, 1964. The
Bernardez spouses have clearly lost their right to redeem the property beyond
the said date. Their much belated attempt to do so, notwithstanding their offer of
considerable interest added to the redemption price, can no longer revive such
right rendered inutile more than fourteen years before. The statutory period of
redemption counted from the registration of the Certificate of Sale remains fixed
at one year from the date of registration of the certificate of foreclosure sale
(Eastman Chemical Industries, Inc. v. Court of Appeals, supra). Even the thirtyday 'grace period' to redeem the property granted by the Court of Appeals from
the time its decision has become final and executory has no basis in law. In fact,
this Court has ruled that if no redemption is made within the said period, the
purchaser has the absolute right to a writ of possession which is the final process
to carry out or consummate the extrajudicial foreclosure. Henceforth the debtors
lose their right over the property (Malonzo, et al. v. Mariano, G.R. No. 53998,
May 31, 1989, 173 SCRA 667).
Turning now to respondent Reyes claim for back rentals covering the period of
redemption, Section 34, Rule 39 of the Rules of Court explicitly provides that a
purchaser, from the time of the sale until a redemption is made, is entitled to
receive the rents of the property if such property is in the possession of a
tenant. (Quintin v. Espe, G.R. No. L-16777 April 20, 1961, 1 SCRA 1004)
(Emphasis supplied). The Bernardez spouses, being judgment debtors and not
tenants, may then possess the property without having to pay rents for the use
thereof (Velasco v. Rosenberg's Inc., 32 Phil. 72 [1951]). Reyes, therefore,
cannot claim back rentals from the spouses during the period of redemption.
PREMISES CONSIDERED, the decision appealed from is AFFIRMED with the
modification that there was no valid tender of payment as the period of
redemption had lapsed on April 18, 1964 as provided by law, and not because of
the 30-day period given by the respondent Court of Appeals.
SO ORDERED.
[G.R. No. 121413. January 29, 2001]
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR
BANK OF ASIA AND AMERICA), petitioner, vs. COURT OF
APPEALS and FORD PHILIPPINES, INC. and CITIBANK,
N.A., respondents.
[G.R. No. 121479. January 29, 2001]
FORD PHILIPPINES, INC., petitioner-plaintiff, vs. COURT OF APPEALS and
CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, respondents.
[G.R. No. 128604. January 29, 2001]

(Record on Appeal, pp. 49-50; Rollo, p. 33).

The Bernardez spouses moved to reconsider but the motion was denied by the
court in its order dated November 3, 1978 (Rollo, p. 33). The case was then
elevated to the Intermediate Appellate Court (now renamed Court of Appeals)
which simply affirmed the decision of the lower court in all respects. Hence, this
petition.

FORD PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A., PHILIPPINE

COMMERCIAL INTERNATIONAL BANK and THE COURT OF
APPEALS, respondents.

The issue in this case is whether or not the right of redemption was exercised in
time.

QUISUMBING, J.:

The petition is devoid of merit.

These consolidated petitions involve several fraudulently negotiated

checks.

Well-settled is the rule that where a mortgage is foreclosed extrajudicially, Act

3135 grants to the mortgagor the right of redemption within one (1) year from the
registration of the sheriffs certificate of foreclosure sale. (Eastman Chemical
Industries, Inc. v. Court of Appeals, G.R. No. 76733, June 30, 1989, 174 SCRA

The original actions a quo were instituted by Ford Philippines to recover

from the drawee bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine
Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and

DECISION

America], the value of several checks payable to the Commissioner of Internal

Revenue, which were embezzled allegedly by an organized syndicate.
G.R. Nos. 121413 and 121479 are twin petitions for review of the March
27, 1995 Decision[1] of the Court of Appeals in CA-G.R. CV No. 25017, entitled
Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America
(now Philippine Commercial International Bank), and the August 8, 1995
Resolution,[2] ordering the collecting bank, Philippine Commercial International
Bank, to pay the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15,
1996 Decision[3] of the Court of Appeals and its March 5, 1997 Resolution [4] in
CA-G.R. No. 28430 entitled Ford Philippines, Inc. vs. Citibank, N.A. and
Philippine Commercial International Bank, affirming in toto the judgment of the
trial court holding the defendant drawee bank, Citibank, N.A., solely liable to pay
the amount of P12,163,298.10 as damages for the misapplied proceeds of the
plaintiffs Citibank Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479

The stipulated facts submitted by the parties as accepted by the Court of

Appeals are as follows:
On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No.
SN-04867 in the amount of P4,746,114.41, in favor of the Commissioner of
Internal Revenue as payment of plaintiffs percentage or manufacturers sales
taxes for the third quarter of 1977.
The aforesaid check was deposited with the defendant IBAA (now PCIBank) and
was subsequently cleared at the Central Bank. Upon presentment with the
defendant Citibank, the proceeds of the check was paid to IBAA as collecting or
depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or
received by the payee thereof, the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal
Revenue, the plaintiff was compelled to make a second payment to the Bureau of
Internal Revenue of its percentage/manufacturers sales taxes for the third
quarter of 1977 and that said second payment of plaintiff in the amount of
P4,746,114.41 was duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the
transactions in question, plaintiff had been maintaining a checking account with
defendant Citibank; that Citibank Check No. SN-04867 which was drawn and
issued by the plaintiff in favor of the Commissioner of Internal Revenue was a
crossed check in that, on its face were two parallel lines and written in between
said lines was the phrase Payees Account Only; and that defendant Citibank paid
the full face value of the check in the amount of P4,746,114.41 to the defendant
IBAA.

BIR for the payment of the taxes covered by the said checks, then plaintiff shall
hold the defendants liable for reimbursement of the face value of the same. Both
defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal
Revenue addressed to the plaintiff - supposed to be Exhibit D, the latter was
officially informed, among others, that its check in the amount of P4,746,114.41
was not paid to the government or its authorized agent and instead encashed by
unauthorized persons, hence, plaintiff has to pay the said amount within fifteen
days from receipt of the letter. Upon advice of the plaintiffs lawyers, plaintiff on
March 11, 1982, paid to the Bureau of Internal Revenue, the amount of
P4,746,114.41, representing payment of plaintiffs percentage tax for the third
quarter of 1977.
As a consequence of defendants refusal to reimburse plaintiff of the payment it
had made for the second time to the BIR of its percentage taxes, plaintiff filed on
January 20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine
Commercial International Bank (PCI Bank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiffs Citibank
Check No. SN-04867 in the amount of P4,746,114.41 was in due course; it
merely relied on the clearing stamp of the depository/collecting bank, the
defendant IBAA that all prior indorsements and/or lack of indorsements
guaranteed; and the proximate cause of plaintiffs injury is the gross negligence of
defendant IBAA in indorsing the plaintiffs Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiffs Citibank
Check No. SN-04867 was paid to defendant IBAA as collecting bank, plaintiff was
maintaining a checking account with defendant Citibank. [5]
Although it was not among the stipulated facts, an investigation by the National
Bureau of Investigation (NBI) revealed that Citibank Check No. SN-04867 was
recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He
purportedly needed to hold back the check because there was an error in the
computation of the tax due to the Bureau of Internal Revenue (BIR). With Riveras
instruction, PCIBank replaced the check with two of its own Managers Checks
(MCs).Alleged members of a syndicate later deposited the two MCs with the
Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court
impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as third
party defendants. But the court dismissed the complaint against PBC for lack of
cause of action. The court likewise dismissed the third-party complaint against
Godofredo Rivera because he could not be served with summons as the NBI
declared him as a fugitive from justice.
On June 15, 1989, the trial court rendered its decision, as follows:
Premises considered, judgment is hereby rendered as follows:

It has been duly established that for the payment of plaintiffs percentage tax for
the last quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax
Receipt No. 18747002, dated October 20, 1977, designating therein in
Muntinlupa, Metro Manila, as the authorized agent bank of Metrobank, Alabang
Branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiffs Citibank Check No. SN-04867, together with
the Revenue Tax Receipt No. 18747002, was deposited with defendant IBAA,
through its Ermita Branch. The latter accepted the check and sent it to the
Central Clearing House for clearing on the same day, with the indorsement at the
back all prior indorsements and/or lack of indorsements guaranteed. Thereafter,
defendant IBAA presented the check for payment to defendant Citibank on same
date, December 19, 1977, and the latter paid the face value of the check in the
amount of P4,746,114.41. Consequently, the amount of P4,746,114.41 was
debited in plaintiffs account with the defendant Citibank and the check was
returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the
amount of P4,746,114.41 was not paid to the Commissioner of Internal
Revenue. Hence, in separate letters dated October 26, 1979, addressed to the
defendants, the plaintiff notified the latter that in case it will be re-assessed by the

1. Ordering the defendants Citibank and IBAA (now PCI Bank),

jointly and severally, to pay the plaintiff the amount of
P4,746,114.41 representing the face value of plaintiffs Citibank
Check No. SN-04867, with interest thereon at the legal rate
starting January 20, 1983, the date when the original
complaint was filed until the amount is fully paid, plus costs;
2. On defendant Citibanks cross-claim: ordering the crossdefendant IBAA (now PCI BANK) to reimburse defendant
Citibank for whatever amount the latter has paid or may pay to
the plaintiff in accordance with the next preceding paragraph;
3. The counterclaims asserted by the defendants against the
plaintiff, as well as that asserted by the cross-defendant
against the cross-claimant are dismissed, for lack of merits;
and
4. With costs against the defendants.

SO ORDERED.[6]
Not satisfied with the said decision, both defendants, Citibank and
PCIBank, elevated their respective petitions for review on certiorari to the Court
of Appeals. On March 27, 1995, the appellate court issued its judgment as
follows:
WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed
decision with modifications.

2. Respondent Citibank failed to observe its duty as banker with

respect to the subject check, which was crossed and payable
to Payees Account Only.
3. Respondent Citibank raises an issue for the first time on appeal;
thus the same should not be considered by the Honorable
Court.
4. As correctly held by the trial court, there is no evidence of gross
negligence on the part of petitioner Ford. [9]

The court hereby renders judgment:

II. PCIBank is liable to petitioner Ford considering that:
1. Dismissing the complaint in Civil Case No. 49287 insofar as
defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff
the amount of P4,746,114.41 representing the face value of
plaintiffs Citibank Check No. SN-04867, with interest thereon
at the legal rate starting January 20, 1983. the date when the
original complaint was filed until the amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants
against the plaintiff as well as that asserted by the crossdefendant against the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED.[7]

1. There were no instructions from petitioner Ford to deliver the

proceeds of the subject check to a person other than the
payee named therein, the Commissioner of the Bureau of
Internal Revenue; thus, PCIBanks only obligation is to deliver
the proceeds to the Commissioner of the Bureau of Internal
Revenue.[10]
2. PCIBank which affixed its indorsement on the subject check (All
prior indorsement and/or lack of indorsement guaranteed), is
liable as collecting bank.[11]
3. PCIBank is barred from raising issues of fact in the instant
proceedings.[12]
4. Petitioner Fords cause of action had not prescribed. [13]
II. G.R. No. 128604

PCIBank moved to reconsider the above-quoted decision of the Court of

Appeals, while Ford filed a Motion for Partial Reconsideration. Both motions were
denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review
by certiorari under Rule 45.

The same syndicate apparently embezzled the proceeds of checks

intended, this time, to settle Fords percentage taxes appertaining to the second
quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:

In G.R. No. 121413, PCIBank seeks the reversal of the decision and
resolution of the Twelfth Division of the Court of Appeals contending that it merely
acted on the instruction of Ford and such cause of action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner
acted on the check drawn by respondent Ford on the said
respondents instructions, it nevertheless found the petitioner
liable to the said respondent for the full amount of the said
check.
II. Did the respondent court err when it did not find prescription in
favor of the petitioner.[8]
In a counter move, Ford filed its petition docketed as G.R. No. 121479,
questioning the same decision and resolution of the Court of Appeals, and
praying for the reinstatement in toto of the decision of the trial court which found
both PCIBank and Citibank jointly and severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for
consideration:

Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount
of P5,851,706.37 representing the percentage tax due for the second quarter of
1978 payable to the Commissioner of Internal Revenue. A BIR Revenue Tax
Receipt No. 28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the
amount of P6,311,591.73, representing the payment of percentage tax for the
first quarter of 1979 and payable to the Commissioner of Internal Revenue. Again
a BIR Revenue Tax Receipt No. A-1697160 was issued for the said purpose.
Both checks were crossed checks and contain two diagonal lines on its
upper left corner between which were written the words payable to the payees
account only.
The checks never reached the payee, CIR. Thus, in a letter dated
February 28, 1980, the BIR, Region 4-B, demanded for the said tax payments
the corresponding periods above-mentioned.
As far as the BIR is concerned, the said two BIR Revenue Tax Receipts
were considered fake and spurious. This anomaly was confirmed by the NBI
upon the initiative of the BIR. The findings forced Ford to pay the BIR anew, while
an action was filed against Citibank and PCIBank for the recovery of the amount
of Citibank Check Numbers SN-10597 and 16508.

I. Respondent Citibank is liable to petitioner Ford considering that:

1. As drawee bank, respondent Citibank owes to petitioner Ford, as
the drawer of the subject check and a depositor of respondent
Citibank, an absolute and contractual duty to pay the proceeds
of the subject check only to the payee thereof, the
Commissioner of Internal Revenue.

The Regional Trial Court of Makati, Branch 57, which tried the case, made
its findings on the modus operandi of the syndicate, as follows:
A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its
General Ledger Accountant. As such, he prepared the plaintiffs check marked
Ex. A [Citibank Check No. SN-10597] for payment to the BIR. Instead, however,
of delivering the same to the payee, he passed on the check to a co-conspirator

named Remberto Castro who was a pro-manager of the San Andres Branch of
PCIB.* In connivance with one Winston Dulay, Castro himself subsequently
opened a Checking Account in the name of a fictitious person denominated as
Reynaldo Reyes in the Meralco Branch of PCIBank where Dulay works as
Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a
worthless Bank of America Check in exactly the same amount as the first FORD
check (Exh. A, P5,851,706.37) while this worthless check was coursed through
PCIBs main office enroute to the Central Bank for clearing, replaced this
worthless check with FORDs Exhibit A and accordingly tampered the
accompanying documents to cover the replacement. As a result, Exhibit A was
cleared by defendant CITIBANK, and the fictitious deposit account of Reynaldo
Reyes was credited at the PCIB Meralco Branch with the total amount of the
FORD check Exhibit A. The same method was again utilized by the syndicate in
profiting from Exh. B [Citibank Check No. SN-16508] which was subsequently
pilfered by Alexis Marindo, Riveras Assistant at FORD.
From this Reynaldo Reyes account, Castro drew various checks distributing the
shares of the other participating conspirators namely (1) CRISANTO BERNABE,
the mastermind who formulated the method for the embezzlement; (2)
RODOLFO R. DE LEON a customs broker who negotiated the initial contact
between Bernabe, FORDs Godofredo Rivera and PCIBs Remberto Castro; (3)
JUAN CASTILLO who assisted de Leon in the initial arrangements; (4)
GODOFREDO RIVERA, FORDs accountant who passed on the first check
(Exhibit A) to Castro; (5) REMBERTO CASTRO, PCIBs pro-manager at San
Andres who performed the switching of checks in the clearing process and
opened the fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6)
WINSTON DULAY, PCIBs Assistant Manager at its Meralco Branch, who
assisted Castro in switching the checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes bank account; (7) ALEXIS MARINDO,
Riveras Assistant at FORD, who gave the second check (Exh. B) to Castro;
(8)ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and
spurious revenue tax receipts to make it appear that the BIR had received
FORDs tax payments.
Several other persons and entities were utilized by the syndicate as conduits in
the disbursements of the proceeds of the two checks, but like the aforementioned
participants in the conspiracy, have not been impleaded in the present case. The
manner by which the said funds were distributed among them are traceable from
the record of checks drawn against the original Reynaldo Reyes account and
indubitably identify the parties who illegally benefited therefrom and readily
indicate in what amounts they did so.[14]
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held
drawee-bank, Citibank, liable for the value of the two checks while absolving
PCIBank from any liability, disposing as follows:
WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to
reimburse plaintiff FORD the total amount of P12,163,298.10 prayed for in its
complaint, with 6% interest thereon from date of first written demand until full
payment, plus P300,000.00 attorneys fees and expenses of litigation, and to pay
the defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00
as attorneys fees and costs of litigation, and pay the costs.
SO ORDERED.[15]
Both Ford and Citibank appealed to the Court of Appeals which
affirmed, in toto, the decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion
of the Court of Appeals decision and its resolution dated March 5, 1997, with
respect to the dismissal of the complaint against PCIBank and holding Citibank
solely responsible for the proceeds of Citibank Check Numbers SN-10597 and
16508 for P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint
against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to
exercise the diligence required to be exercised by it as a
banking institution.

II. Defendant PCIBank clearly failed to observe the diligence

required in the selection and supervision of its officers and
employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for
the loss or damage resulting to the plaintiff Ford as a
consequence of the substitution of the check consistent with
Section 5 of Central Bank Circular No. 580 series of 1977.
IV. Assuming arguendo that defendant PCIBank did not accept,
endorse or negotiate in due course the subject checks, it is
liable, under Article 2154 of the Civil Code, to return the
money which it admits having received, and which was
credited to it in its Central Bank account. [16]
The main issue presented for our consideration by these petitions could
be simplified as follows: Has petitioner Ford the right to recover from the
collecting bank (PCIBank) and the drawee bank (Citibank) the value of the
checks intended as payment to the Commissioner of Internal Revenue? Or has
Fords cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee
bank, but the title of the person negotiating the same was allegedly defective
because the instrument was obtained by fraud and unlawful means, and the
proceeds of the checks were not remitted to the payee. It was established that
instead of paying the checks to the CIR, for the settlement of the appropriate
quarterly percentage taxes of Ford, the checks were diverted and encashed for
the eventual distribution among the members of the syndicate. As to the unlawful
negotiation of the check the applicable law is Section 55 of the Negotiable
Instruments Law (NIL), which provides:
When title defective -- The title of a person who negotiates an instrument is
defective within the meaning of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or force and fear, or other unlawful means, or
for an illegal consideration, or when he negotiates it in breach of faith or under
such circumstances as amount to a fraud.
Pursuant to this provision, it is vital to show that the negotiation is made
by the perpetrator in breach of faith amounting to fraud. The person negotiating
the checks must have gone beyond the authority given by his principal. If the
principal could prove that there was no negligence in the performance of his
duties, he may set up the personal defense to escape liability and recover from
other parties who, through their own negligence, allowed the commission of the
crime.
In this case, we note that the direct perpetrators of the offense, namely the
embezzlers belonging to a syndicate, are now fugitives from justice. They have,
even if temporarily, escaped liability for the embezzlement of millions of
pesos. We are thus left only with the task of determining who of the present
parties before us must bear the burden of loss of these millions. It all boils down
to the question of liability based on the degree of negligence among the parties
concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the
imputed contributory negligence that would defeat its claim for reimbursement,
bearing in mind that its employees, Godofredo Rivera and Alexis Marindo, were
among the members of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo
Rivera, to negotiate the checks to his co-conspirators, instead of delivering them
to the designated authorized collecting bank (Metrobank-Alabang) of the payee,
CIR. Citibank bewails the fact that Ford was remiss in the supervision and control
of its own employees, inasmuch as it only discovered the syndicates activities
through the information given by the payee of the checks after an unreasonable
period of time.
PCIBank also blames Ford of negligence when it allegedly authorized
Godofredo Rivera to divert the proceeds of Citibank Check No. SN-04867,
instead of using it to pay the BIR. As to the subsequent run-around of funds of
Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the proximate
cause of the damage to Ford lies in its own officers and employees who carried
out the fraudulent schemes and the transactions. These circumstances were not
checked by other officers of the company, including its comptroller or internal

auditor. PCIBank contends that the inaction of Ford despite the enormity of the
amount involved was a sheer negligence and stated that, as between two
innocent persons, one of whom must suffer the consequences of a breach of
trust, the one who made it possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It
avers that there was no evidence presented before the trial court showing lack of
diligence on the part of Ford. And, citing the case of Gempesaw vs. Court of
Appeals,[17] Ford argues that even if there was a finding therein that the drawer
was negligent, the drawee bank was still ordered to pay damages.
Furthermore, Ford contends that Godofredo Rivera was not authorized to
make any representation in its behalf, specifically, to divert the proceeds of the
checks. It adds that Citibank raised the issue of imputed negligence against Ford
for the first time on appeal. Thus, it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer
in a master-servant relationship is instructive. Since a master may be held for his
servants wrongful act, the law imputes to the master the act of the servant, and if
that act is negligent or wrongful and proximately results in injury to a third person,
the negligence or wrongful conduct is the negligence or wrongful conduct of the
master, for which he is liable. [18] The general rule is that if the master is injured by
the negligence of a third person and by the concurring contributory negligence of
his own servant or agent, the latters negligence is imputed to his superior and will
defeat the superiors action against the third person, assuming, of course that the
contributory negligence was the proximate cause of the injury of which
complaint is made.[19]

payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR,

prepared two of its Managers checks and enabled the syndicate to encash the
same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate
the checks. The neglect of PCIBank employees to verify whether his letter
requesting for the replacement of the Citibank Check No. SN-04867 was duly
authorized, showed lack of care and prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the
payment of taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is duty
bound to consult its principal regarding the unwarranted instructions given by the
payor or its agent. As aptly stated by the trial court, to wit:
x x x. Since the questioned crossed check was deposited with IBAA [now
PCIBank], which claimed to be a depository/collecting bank of the BIR, it has the
responsibility to make sure that the check in question is deposited in Payees
account only.
xxxxxxxxx
As agent of the BIR (the payee of the check), defendant IBAA should receive
instructions only from its principal BIR and not from any other person especially
so when that person is not known to the defendant. It is very imprudent on the
part of the defendant IBAA to just rely on the alleged telephone call of one
Godofredo Rivera and in his signature to the authenticity of such signature
considering that the plaintiff is not a client of the defendant IBAA.

Accordingly, we need to determine whether or not the action of Godofredo

Rivera, Fords General Ledger Accountant, and/or Alexis Marindo, his assistant,
was the proximate cause of the loss or damage. As defined, proximate cause is
that which, in the natural and continuous sequence, unbroken by any efficient,
intervening cause produces the injury, and without which the result would not
have occurred.[20]

It is a well-settled rule that the relationship between the payee or holder of

commercial paper and the bank to which it is sent for collection is, in the absence
of an agreement to the contrary, that of principal and agent. [22] A bank which
receives such paper for collection is the agent of the payee or holder.[23]

It appears that although the employees of Ford initiated the transactions

attributable to an organized syndicate, in our view, their actions were not the
proximate cause of encashing the checks payable to the CIR. The degree of
Fords negligence, if any, could not be characterized as the proximate cause of
the injury to the parties.

Even considering arguendo, that the diversion of the amount of a check

payable to the collecting bank in behalf of the designated payee may be allowed,
still such diversion must be properly authorized by the payor. Otherwise stated,
the diversion can be justified only by proof of authority from the drawer, or that
the drawer has clothed his agent with apparent authority to receive the proceeds
of such check.

The Board of Directors of Ford, we note, did not confirm the request of
Godofredo Rivera to recall Citibank Check No. SN-04867. Riveras instruction to
replace the said check with PCIBanks Managers Check was not in the ordinary
course of business which could have prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it
was established that these checks were made payable to the CIR. Both were
crossed checks. These checks were apparently turned around by Fords
employees, who were acting on their own personal capacity.

Citibank further argues that PCI Banks clearing stamp appearing at the
back of the questioned checks stating that ALL PRIOR INDORSEMENTS
AND/OR LACK OF INDORSEMENTS GUARANTEED should render PCIBank
liable because it made it pass through the clearing house and therefore Citibank
had no other option but to pay it. Thus, Citibank asserts that the proximate cause
of Fords injury is the gross negligence of PCIBank. Since the questioned crossed
check was deposited with PCIBank, which claimed to be a depository/collecting
bank of the BIR, it had the responsibility to make sure that the check in question
is deposited in Payees account only.

Given these circumstances, the mere fact that the forgery was committed
by a drawer-payors confidential employee or agent, who by virtue of his position
had unusual facilities for perpetrating the fraud and imposing the forged paper
upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in
the absence of some circumstance raising estoppel against the drawer.[21] This
rule likewise applies to the checks fraudulently negotiated or diverted by the
confidential employees who hold them in their possession.

Indeed, the crossing of the check with the phrase Payees Account Only, is
a warning that the check should be deposited only in the account of the
CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the
check be deposited in payees account only. Therefore, it is the collecting bank
(PCIBank) which is bound to scrutinize the check and to know its depositors
before it could make the clearing indorsement all prior indorsements and/or lack
of indorsement guaranteed.

With respect to the negligence of PCIBank in the payment of the three

checks involved, separately, the trial courts found variations between the
negotiation of Citibank Check No. SN-04867 and the misapplication of total
proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize,
separately, PCIBanks share of negligence when the syndicate achieved its
ultimate agenda of stealing the proceeds of these checks.

In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking

Corporation,[24] we ruled:

G.R. Nos. 121413 and 121479

Citibank Check No. SN-04867 was deposited at PCIBank through its

Ermita Branch. It was coursed through the ordinary banking transaction, sent to
Central Clearing with the indorsement at the back all prior indorsements and/or
lack of indorsements guaranteed, and was presented to Citibank for

Anent petitioners liability on said instruments, this court is in full accord with the
ruling of the PCHCs Board of Directors that:
In presenting the checks for clearing and for payment, the defendant made an
express guarantee on the validity of all prior endorsements. Thus, stamped at the
back of the checks are the defendants clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, plaintiff would not have paid on the
checks.

No amount of legal jargon can reverse the clear meaning of defendants

warranty. As the warranty has proven to be false and inaccurate, the defendant is
liable for any damage arising out of the falsity of its representation. [25]
Lastly, banking business requires that the one who first cashes and
negotiates the check must take some precautions to learn whether or not it is
genuine. And if the one cashing the check through indifference or other
circumstance assists the forger in committing the fraud, he should not be
permitted to retain the proceeds of the check from the drawee whose sole fault
was that it did not discover the forgery or the defect in the title of the person
negotiating the instrument before paying the check. For this reason, a bank
which cashes a check drawn upon another bank, without requiring proof as to the
identity of persons presenting it, or making inquiries with regard to them, cannot
hold the proceeds against the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party. In such cases the drawee bank
has a right to believe that the cashing bank (or the collecting bank) had, by the
usual proper investigation, satisfied itself of the authenticity of the negotiation of
the checks. Thus, one who encashed a check which had been forged or diverted
and in turn received payment thereon from the drawee, is guilty of negligence
which proximately contributed to the success of the fraud practiced on the
drawee bank. The latter may recover from the holder the money paid on the
check.[26]
Having established that the collecting banks negligence is the proximate
cause of the loss, we conclude that PCIBank is liable in the amount
corresponding to the proceeds of Citibank Check No. SN-04867.
G.R. No. 128604

The trial court and the Court of Appeals found that PCIBank had no official
act in the ordinary course of business that would attribute to it the case of the
embezzlement of Citibank Check Numbers SN-10597 and 16508, because
PCIBank did not actually receive nor hold the two Ford checks at all. The trial
court held, thus:
Neither is there any proof that defendant PCIBank contributed any official or
conscious participation in the process of the embezzlement. This Court is
convinced that the switching operation (involving the checks while in transit for
clearing) were the clandestine or hidden actuations performed by the members of
the syndicate in their own personal, covert and private capacity and done without
the knowledge of the defendant PCIBank. [27]
In this case, there was no evidence presented confirming the conscious
participation of PCIBank in the embezzlement.As a general rule, however, a
banking corporation is liable for the wrongful or tortuous acts and declarations of
its officers or agents within the course and scope of their employment. [28] A bank
will be held liable for the negligence of its officers or agents when acting within
the course and scope of their employment. It may be liable for the tortuous acts
of its officers even as regards that species of tort of which malice is an essential
element. In this case, we find a situation where the PCIBank appears also to be
the victim of the scheme hatched by a syndicate in which its own management
employees had participated.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro,
received Citibank Check Numbers SN 10597 and 16508. He passed the checks
to a co-conspirator, an Assistant Manager of PCIBanks Meralco Branch, who
helped Castro open a Checking account of a fictitious person named Reynaldo
Reyes. Castro deposited a worthless Bank of America Check in exactly the same
amount of Ford checks. The syndicate tampered with the checks and succeeded
in replacing the worthless checks and the eventual encashment of Citibank
Check Nos. SN 10597 and 16508. The PCIBank Pro-manager, Castro, and his
co-conspirator Assistant Manager apparently performed their activities using
facilities in their official capacity or authority but for their personal and private gain
or benefit.
A bank holding out its officers and agents as worthy of confidence will not
be permitted to profit by the frauds these officers or agents were enabled to
perpetrate in the apparent course of their employment; nor will it be permitted to
shirk its responsibility for such frauds, even though no benefit may accrue to the
bank therefrom. For the general rule is that a bank is liable for the fraudulent acts
or representations of an officer or agent acting within the course and apparent
scope of his employment or authority.[29] And if an officer or employee of a bank,
in his official capacity, receives money to satisfy an evidence of indebtedness

lodged with his bank for collection, the bank is liable for his misappropriation of
such sum.[30]
Moreover, as correctly pointed out by Ford, Section 5 [31] of Central Bank
Circular No. 580, Series of 1977 provides that any theft affecting items in transit
for clearing, shall be for the account of sending bank, which in this case is
PCIBank.
But in this case, responsibility for negligence does not lie on PCIBanks
shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise
negligent in the performance of its duties.Citibank failed to establish that its
payment of Fords checks were made in due course and legally in order. In its
defense, Citibank claims the genuineness and due execution of said checks,
considering that Citibank (1) has no knowledge of any infirmity in the issuance of
the checks in question (2) coupled by the fact that said checks were sufficiently
funded and (3) the endorsement of the Payee or lack thereof was guaranteed by
PCI Bank (formerly IBAA), thus, it has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford
an absolute and contractual duty to pay the proceeds of the subject check only to
the payee thereof, the CIR. Citing Section 62[32] of the Negotiable Instruments
Law, Ford argues that by accepting the instrument, the acceptor which is Citibank
engages that it will pay according to the tenor of its acceptance, and that it will
pay only to the payee, (the CIR), considering the fact that here the check was
crossed with annotation Payees Account Only.
As ruled by the Court of Appeals, Citibank must likewise answer for the
damages incurred by Ford on Citibank Checks Numbers SN 10597 and 16508,
because of the contractual relationship existing between the two. Citibank, as the
drawee bank breached its contractual obligation with Ford and such degree of
culpability contributed to the damage caused to the latter. On this score, we
agree with the respondent courts ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and
16508 before paying the amount of the proceeds thereof to the collecting bank of
the BIR. One thing is clear from the record: the clearing stamps at the back of
Citibank Check Nos. SN 10597 and 16508 do not bear any initials. Citibank failed
to notice and verify the absence of the clearing stamps. Had this been duly
examined, the switching of the worthless checks to Citibank Check Nos. 10597
and 16508 would have been discovered in time. For this reason, Citibank had
indeed failed to perform what was incumbent upon it, which is to ensure that the
amount of the checks should be paid only to its designated payee. The fact that
the drawee bank did not discover the irregularity seasonably, in our view,
constitutes negligence in carrying out the banks duty to its depositors. The point
is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship.
[33]

Thus, invoking the doctrine of comparative negligence, we are of the view

that both PCIBank and Citibank failed in their respective obligations and both
were negligent in the selection and supervision of their employees resulting in the
encashment of Citibank Check Nos. SN 10597 and 16508. Thus, we are
constrained to hold them equally liable for the loss of the proceeds of said checks
issued by Ford in favor of the CIR.
Time and again, we have stressed that banking business is so impressed
with public interest where the trust and confidence of the public in general is of
paramount importance such that the appropriate standard of diligence must be
very high, if not the highest, degree of diligence. [34] A banks liability as obligor is
not merely vicarious but primary, wherein the defense of exercise of due
diligence in the selection and supervision of its employees is of no moment. [35]
Banks handle daily transactions involving millions of pesos. [36] By the very
nature of their work the degree of responsibility, care and trustworthiness
expected of their employees and officials is far greater than those of ordinary
clerks and employees.[37] Banks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees. [38]
On the issue of prescription, PCIBank claims that the action of Ford had
prescribed because of its inability to seek judicial relief seasonably, considering

that the alleged negligent act took place prior to December 19, 1977 but the relief
was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor
notice of the payment, which is ordinarily when the check is returned to the
alleged drawer as a voucher with a statement of his account, [39] and an action
upon a check is ordinarily governed by the statutory period applicable to
instruments in writing.[40]
Our laws on the matter provide that the action upon a written contract
must be brought within ten years from the time the right of action accrues.
[41]
Hence, the reckoning time for the prescriptive period begins when the
instrument was issued and the corresponding check was returned by the bank to
its depositor (normally a month thereafter). Applying the same rule, the cause of
action for the recovery of the proceeds of Citibank Check No. SN 04867 would
normally be a month after December 19, 1977, when Citibank paid the face value
of the check in the amount of P4,746,114.41. Since the original complaint for the
cause of action was filed on January 20, 1983, barely six years had
lapsed. Thus, we conclude that Fords cause of action to recover the amount of
Citibank Check No. SN 04867 was seasonably filed within the period provided by
law.
Finally, we also find that Ford is not completely blameless in its failure to
detect the fraud. Failure on the part of the depositor to examine its passbook,
statements of account, and cancelled checks and to give notice within a
reasonable time (or as required by statute) of any discrepancy which it may in the
exercise of due care and diligence find therein, serves to mitigate the banks
liability by reducing the award of interest from twelve percent (12%) to six percent
(6%) per annum. As provided in Article 1172 of the Civil Code of the Philippines,
responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the courts,
according to the circumstances. In quasi-delicts, the contributory negligence of
the plaintiff shall reduce the damages that he may recover.[42]
WHEREFORE, the assailed Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 25017, are AFFIRMED. PCIBank, known formerly as
Insular Bank of Asia and America, is declared solely responsible for the loss of
the proceeds of Citibank Check No. SN 04867 in the amount P4,746,114.41,
which shall be paid together with six percent (6%) interest thereon to Ford
Philippines Inc. from the date when the original complaint was filed until said
amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R.
No. 28430 are MODIFIED as follows: PCIBank and Citibank are adjudged liable
for and must share the loss, (concerning the proceeds of Citibank Check
Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and
each bank is ORDERED to pay Ford Philippines Inc. P6,081,649.05, with six
percent (6%) interest thereon, from the date the complaint was filed until full
payment of said amount.
Costs against Philippine Commercial International Bank and Citibank,
N.A.
SO ORDERED.
G.R. No. 74768 August 11, 1989
JUANA DE LOS REYES, petitioner,
vs.
HON. INTERMEDIATE APPELLATE COURT and SPOUSES CLARO C.
YLAGAN and NATIVIDAD P. YLAGAN,respondents.

The petitioner obtained a loan in the amount of P3,000.00 from the Rural Bank of
Bauan and secured the payment thereof with a real estate mortgage on a piece
of land belonging to her. For her failure to pay the debt, the mortgage was
extrajudicially foreclosed and the land was sold at public auction to the private
respondents for P4,925.00 on April 29, 1976. 1 The certificate of sale was
registered with the Register of Deeds of Batangas on May 4,1977. 2
On August 26, 1977, the private respondents filed a complaint with the Court of
First Instance of Batangas asking the petitioner to vacate the property and
remove her improvements thereon. The petitioner countered that the auction sale
was irregular and void and asked that the complaint be dismissed.
While this case was pending, the petitioner wrote a letter dated April , 1978, to
the Provincial Sheriff of Batangas tendering the amount of P4,925.00 plus
interest as the redemption price for the subject land. In a reply dated April 26,
1978, the said officer refused to accept the tender on the ground that the period
of redemption had already expired. He added, though, that the petitioner's
request was "being seriously considered."
The petitioner's letter 3 is reproduced as follows:
MENDOZA, PANGANIBAN & MACARANDANG LAW OFFICE
Cor. Rizal Avenue & P. Zamora St., Batangas City
Manghinao, Bauan Batangas
April , 1978
The Provincial Sheriff
Province of Batangas
Capitol Site, Batangas City
Dear Sir:
I hereby tender to your good office the redemption price of FOUR THOUSAND
NINE HUNDRED TWENTY FIVE (P4,925.00) PESOS, plus the interest of 1 %
per month for the said principal amount for the land your Office allegedly sold at
auction sale on April 29, 1976 at Bauan, Batangas. The land subject of said sale
is more particularly described as follows:
A residential and horticultural land under Tax Declaration
No. 20729 in the names of plaintiffs, located at
Manghinao, Bauan, Batangas with a total area of 1,608
square meters, more or less and a total assessed value of
P 3,640.00 bounded on the North by Manghinao Bridge,
on the East by Manghinao River, on the South by Basilia
de los Reyes and on the West by Provincial Road.
I wish to inform your good office that while the alleged sale of afore-described
property was made on April 29, 1976, the registration of the sale was made on
May 4, 1977.
Please acknowledge receipt hereof.
Truly yours,

Raul A. Mora for petitioner.

(Sgd.) JUANA DE LOS REYES
Pelagia Abreu Suyo for respondents.
The reply 4 of the Provincial Sheriff ran thus:
REPUBLIC OF THE PHILIPPINES
CRUZ, J.:
OFFICE OF THE PROVINCIAL SHERIFF

BATANGAS CITY

First, the private respondents argue that the tender of payment made by the
petitioner was inefficacious because it was made to the sheriff and not the
purchaser as required by Rule 39, Section 30, of the Rules of Court. However,
while it is admittedly stated therein that the judgment debtor or redemptioner
"may redeem the property from the purchaser," it is also provided in Section 31 of
the same rule that:

April 26, 1978

Mrs. Juana de los Reyes

... The payments mentioned in this and the last preceding

sections may be made to the purchaser or redemptioner,
or for him to the officer who made the sale.

Manghinao, Bauan, Batangas

Madam:
Replying your letter dated April 1978, much to our desire to accommodate your
request, we regret to inform you that we could not for the meantime accept the
redemption amount you are tendering to this Office for as per Certificate of Sale
dated April 29, 1976, the period of redemption of the property described in your
said letter had already expired. Nevertheless, your request is being seriously
considered by this office.

... It is expressly provided that the tender of the

redemption money may be made either to the purchaser
or redemptioner, or to the sheriff who made the sale, and,
in the last instance, it is the duty of the sheriff to accept
the tender and execute the certificate of redemption. 8
xxx

Very truly yours,

The sheriff to whom payment may be made, is not

necessarily the same sheriff who conducted the sale, if
the latter is no longer in office, in which case payment
may be made to his successor. And when the sale was
made by a deputy sheriff, the redemption money may be
paid to the provincial sheriff. 9

(Sgd.) EUSTACIO C. CUEVAS

Provincial Sheriff
On May 9, 1978, the trial court issued the following order:

And as observed by Chief Justice Moran in his definitive work on the Rules of
Court:

It appearing from the pleadings that the question involved

here is whether the redemption period, as alleged in the
complaint, begins from the date of the extrajudicial sale of
the property in question on April 29, 1976, and not on May
4, 1977, the date on which the sale was registered with
the Register of Deeds as contended by the defendant,
and that the defendant is ready to pay the redemption
price but which was refused by the plaintiffs; that, in fact,
the defendant tendered payment to the Provincial Sheriff
of Batangas on April 25, 1978, which tender is still under
consideration by said officer;
Wherefore, the defendant is hereby allowed to deposit the
amount for the redemption of the property with this Court.
SO ORDERED.
On February 8, 1982, the trial court, after holding that there was no genuine
issue on the material facts and that the only question of law to be resolved was
the timeliness of the redemption, rendered a summary judgment in favor of the
private respondents. 6 The petitioner appealed. Judge Romeo R. Silva's decision
was affirmed in toto 7 by the respondent court, which is now sought to be
reversed in this petition for review.
This petition was originally denied by the Court in a resolution dated October 6,
1986, for lack of merit. Thereafter, the petitioner filed a motion for reconsideration
in which he complained that his reply to the private respondents' comment had
not been taken into account when the said resolution was issued.
Filing of a reply is not a matter of right and may be done only if required or
allowed by the Court; otherwise, it need not be considered at all (especially if, as
in this case, it was hardly legible).lwph1.t Even so, in view of the serious
issues raised in the said motion, the Court resolved to direct the private
respondents to comment thereon (to which a reply was submitted, followed by a
rejoinder and then a sur-rejoinder all without being required or permitted by the
Court). Finally, in our resolution dated September 22, 1987, we decided to give
due course to this petition and to require the parties to submit simultaneous
memoranda.
We find that several of the issue raised in this litigation can be resolved at the
outset as they pose no serious controversy.

Second, on the sufficiency of the amount tendered, Section 30 clearly states that
it should be equivalent to the amount of the purchase price plus one per cent
monthly interest up to the time of the redemption. In the petitioner's letter to the
provincial sheriff, she tendered the amount of P4,925.00 with interest. This was
refused by the said officer on the ground that the redemption period had expired.
The trial and respondent courts, for their part, later considered the tender
insufficient.
It must be recalled that pursuant to the order of the trial judge on May 9, 1978,
the petitioner deposited on that date the amount of P6,107.00. This was exactly
equivalent to the purchase price plus the accrued 1% monthly interest thereon as
of that date.
Finally, there is the question of the starting point of the redemption period which,
the petitioner argues, started on May 4, 1977, and ended on May 4, 1978. This
means that the tender she made to the Provincial Sheriff on April 26,1978, was
within the one-year period prescribed by the Rules of Court.
While agreeing that the period did end on May 4, 1978, the trial and respondent
courts held nevertheless that this was exceeded by the petitioner because the
original amount tendered on April 26, 1978 was insufficient. As the discrepancy
was corrected only on May 9, 1978, the redemption was in their view made four
days late.
We have already observed that the amount tendered on April 26, 1978, was not
insufficient as the petitioner offered the sum of P 4,925.00 "plus the interest of
1% per month for the said principal amount." In fact, the deposit made on May 9,
1978, was merely an affirmation of the earlier offer and was not even necessary
at all. According to Chief Justice Moran again:
Where the judgment debtor or a redemptioner validly
tenders the necessary payment for the redemption and
the tender is refused, it is not necessary that it be
followed by the deposit of the money in court or
elsewhere, and no interest after such tender is
demandable on the redemption money. 10
The basic question in this case is whether or not the petitioner's letter tendering
the redemption price to the sheriff and the latter's reply thereto may be taken into
account in determining the timeliness of the redemption.

The private respondents question the admissibility of these documents, stressing

that they have not at any time been formally offered. The petitioner contends
otherwise. She maintains that they were part of the record of the case and that
the trial judge had a right and duty to consider them in arriving at his summary
judgment.
The private respondents insist that the two letters had never been offered in
evidence as required by Section 35, Rule 132 of the Rules of Court. This
provides that:
Offer of evidence. The court shall consider no evidence which has not been
formally offered. The purpose for which the evidence is offered must be specified.
We find, however, that the letters were formally submitted during the hearing of
the petitioner's motion to dismiss on May 9,1978, at which counsel for both
parties were present. 11 Judge Benjamin Relova took cognizance of the
correspondence and even noted in his order of the same date that "the defendant
tendered payment to the Provincial Sheriff of Batangas on April 25, 1978, which
tender is still under consideration by said officer. 12 The same posture was taken
by the respondent court, which observed from the petitioner's letter that "what
was tendered to the sheriff was only the amount of the bid, P4, 925, 13 and held
this to be insufficient.

of 1 % per month on the amount of as purchase up to the

time of redemption. 15
The rule on redemption is liberally interpreted in favor of the original owner of the
property. The fact alone that he is allowed the right to redeem clearly
demonstrates the tenderness of the law toward him in giving him another
opportunity, should his fortunes improve, to recover his lost property. This benign
motivation would be frustrated by a too literal reading that would subordinate the
warm spirit of the rule to its cold language.
WHEREFORE, the decision of the trial court dated February 8, 1982, is SET
ASIDE. The decision of the respondent court dated April 3,1986, is also
REVERSED insofar as it denies the petitioner the right of redemption. The private
respondents are hereby directed to allow the petitioner to redeem the disputed
property for the amount of P6,107.00, now on deposit with the Regional Trial
Court of Batangas. It is so ordered.
G.R. No. 114418 September 21, 1995
ESTANISLAO BODIONGAN, petitioner,
vs.
COURT OF APPEALS and LEA SIMEON, respondents.

In other words, both courts found as established facts the tender made by the
petitioner and the rejection thereof by the sheriff as manifested in their respective
letters.
PUNO, J.:
While the above-cited provision must be strictly interpreted in ordinary trials, such
a policy is hardly applicable in summary proceedings where no full-blown trial is
held in the interest of a speedy administration of justice. It is noted that when the
two letters were presented at the hearing on May 9, 1978, the private
respondents did not object to their admission. They did so only when the case
was already on appeal. Furthermore, the rule on summary judgments is that the
judge must base his decision on the pleadings, depositions, admissions affidavits
and documents on file with the court. This is what the trial judge did, presumably
after examining the authenticity and credibility of the evidence before him.
We hold therefore that the lower court did not err when it took into account
Exhibits A and A-1, without objection from the private respondents, as evidence
of the petitioner's timely offer of redemption and its erroneous rejection by the
sheriff.
At this point, it is well to recall the following pronouncements from this Court:
Finally, the appellant bank objects to the redemption on
the ground that the amount tendered is inadequate to
meet the redemption price. Considering, however, that the
sum tendered was the amount of the purchase price paid
at the auction sale and that the tender was timely made
and in good faith, we believe that the ends of justice
would be better served by affording the appellees the
opportunity to redeem the property by paying the bank the
auction purchase price plus 1% interest per month
thereon up to the time of redemption. 14
xxx
Considering that appellee tendered payment only of the
sum of P317.44, whereas the three parcels of land she
was seeking to redeem were sold for the sums of
Pl,240.00, P21,000.00, and P30,000.00, respectively, the
aforementioned amount of P 317.44 is insufficient to
effectively release the properties. However, the tender of
payment was timely made and in good faith; in the
interest of justice we incline to give the appellee
opportunity to complete the redemption purchase of the
three parcels, as provided in Section 26, Rule 39 of the
Rules of Court, within fifteen (15) days from the time this
decision becomes final and executory. In this wise, justice
is done to the appellee who had been made to pay more
than her share in the judgment, without doing all injustice
to the purchaser who shall get the corresponding interest

This petition for review on certiorari seeks to annul and set aside the Decision
dated October 25, 1993 and the Resolution dated March 3, 1994 of the Court of
Appeals in CA-G.R. CV No. 36314.
The antecedent facts are as follows:
On October 4, 1982, respondent Lea Simeon obtained from petitioner Estanislao
Bodiongan and his wife a loan of P219,11739 secured by a mortgage on three
(3) parcels of land with a four-storey hotel building and personal properties
located at Gango, Ozamiz City. The three (3) lots were covered by Transfer
Certificates of Title Nos. T-6530, T-6531 and T-6532 in the name of private
respondent.
Private respondent failed to pay the loan. Petitioner thus instituted against her
Civil Case No. OZ-1177 with the Regional Trial Court, Branch 15, Ozamiz City for
collection of sum of money or foreclosure of mortgage. Judgment was rendered
by the trial court on October 11, 1984 ordering private respondent to pay
petitioner, P220,459.71, at the legal rate of interest and P5,000.00 as attorney's
fees, and in case of non-payment, to foreclose the mortgage on the properties.
The dispositive portion of the decision reads as follows:
WHEREFORE, judgment is hereby rendered in favor of
the plaintiff and against defendant LEA SIMEON ordering
the defendant LEA SIMEON to pay the plaintiff the
following:
1. P220,459.71 with legal rate of interest starting March
30, 1983, until fully paid;
2. P5,000.00 as reimbursement of plaintiff's attorney's
fees;
3. In case of non-payment of the above amounts, the
equitable mortgage (Exhibit "C") be ordered foreclosed
and sold at public auction to settle the obligation; and
4. To pay the costs. 1
This decision was affirmed on March 21, 1986 by the Court of Appeals in ACG.R. CV No. 05367 and later became final and executory.

Private respondent again failed to pay the judgment debt, hence, the mortgaged
properties were foreclosed and sold on execution on January 12, 1987. At the
auction sale, petitioner submitted to the sheriff a written bid of P309,000.00 and
at the same time reserved in said bid a deficiency claim of P439,710.57. 2 The
properties were awarded to petitioner as sole bidder and a certificate of sale was
issued in his name and registered with the Register of Deeds of Ozamiz City.
Petitioner then took possession of the properties after filing, per order of the trial
court, a guaranty bond of P350,000.00 to answer for any damage thereon during
the redemption period.
On January 8, 1988, private respondent offered to redeem her properties and
tendered to the Provincial Sheriff a check in the amount of P337,580.00. This
amount was based on a tentative computation by the sheriff. 3 The check was
received by petitioner on the same day after which the sheriff issued a certificate
of redemption to private respondent also on the same day. 4
On January 11, 1988, petitioner, claiming additional interest at 38% per annum,
moved to correct the computation of the redemption price and to suspend the
issuance of a writ of possession pending computation. The motion was denied by
the trial court. On July 8, 1988, the trial court issued the said writ and private
respondent took possession of her properties.
On October 4, 1988, petitioner instituted against private respondent Civil Case
No. OZ-1480-R with the Regional Trial Court, Branch 15, Ozamiz City for
annulment of redemption and confirmation of the foreclosure sale on the ground
of insufficiency of the redemption price. On October 7, 1988, petitioner consigned
the redemption money with the court. 5
On November 25, 1991, the trial court dismissed the complaint but reduced the
12% interest rate on the purchase price to 6%, and thus, on the counterclaim,
ordered petitioner to refund private respondent the excess 6% plus P10,000.00
and P5,000.00 for moral damages and attorney's fees, as follows:
WHEREFORE, premises considered, plaintiff's complaint
is hereby dismissed, with costs against him.
On the counterclaim, plaintiff Engr. Estanislao Bodiongan
is ordered to refund the 6% interest in excess of the 12%
granted him in the computation which is not the legal rate
allowed in the Civil Code, to pay defendant Lea Simeon
the further sum of P10,000.00 as moral damages and the
sum of P5,000.00 as attorney's fees. 6
The Court of Appeals in CA-G.R. CV No. 36314 affirmed the trial court's decision
except for the refund of the 6% interest, to wit:
WHEREFORE premises considered, the judgment
appealed from is hereby AFFIRMED subject to the
modification on the amount of interest due, such that, the
legal rate of interest due is 1% per month or 12% for 12
months in the case at bar and not 6% as ruled by the trial
court. Costs against appellant. 7
Hence, this petition.
Petitioner claims before us that under the Revised Rules of Court, the
redemption price for the mortgaged properties should be P351,080.00. Since
private respondent actually tendered P337,580.00 which is short by P13,500.00,
this price was inadequate thereby rendering redemption ineffectual.
The price for the redemption of properties at an extrajudicial foreclosure sale 8 is,
according to Section 6 of Act 3135, fixed by Section 30 of Rule 39 of the Revised
Rules of Court 9 which reads as follows:
Sec. 30. Time and manner of, and amounts payable on,
successive redemptions. Notice to be given and filed.
The judgment debtor, or redemptioner, may redeem
the property from the purchaser, at any time within twelve
(12) months after the sale, on paying the purchaser the
amount of his purchase, with 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. Property so
redeemed may again be redeemed within sixty (60) days
after the last redemption upon payment of the sum paid
on the last redemption, with two per centum thereon in
addition, and the amount of any assessments or taxes
which the last redemptioner may have paid thereon after
redemption by him, with interest on such last-named
amount, and in addition, the amount of any liens held by
said last redemptioner prior to his own, with interest. The
property may be again, and as often as a redemptioner is
so disposed, redeemed from any previous redemptioner
within sixty (60) days after the last redemption, on paying
the sum paid on the last previous redemption, with
two per centum thereon in addition, and the amounts of
any assessments or taxes which the last previous
redemptioner paid after the redemption thereon, interest
thereon, and the amount of any liens held by the last
redemptioner prior to his own, with interest.
Written notice of any redemption must be given to the
officer who made the sale and a duplicate filed with the
registrar of deeds of the province, and if any assessments
or taxes are paid by the redemptioner or if he has or
acquires any lien other than that upon which the
redemption was made, notice thereof must in like manner
be given to the officer and filed with the registrar of deeds;
if such notice be not filed, the property may be redeemed
without paying such assessments, taxes, or liens.
In order to effect a redemption, the judgment debtor must pay the purchaser the
redemption price composed of the following: (1) the price which the purchaser
paid for the property; (2) interest of 1% per month on the purchase price; (3) the
amount of any assessments or taxes which the purchaser may have paid on the
property after the purchase; and (4) interest of 1% per month on such
assessments and taxes. The redemption price must be for the full amount,
otherwise the offer to redeem will be ineffectual. 10 And if the tender is for less
than the entire amount, the purchaser may justly refuse acceptance thereof. 11 In
the instant case, the redemption price covers the purchase price of P309,000.00
plus 1% interest thereon per month for twelve months at P37,080.00. Petitioner
does not claim any taxes or assessments he may have paid on the property after
his purchase. He, however, adds P5,000.00 to the price to cover the attorney's
fees awarded him by the trial court in Civil Case No. OZ-1177.
In the redemption of property sold at an extrajudicial foreclosure sale, the amount
payable is no longer the judgment debt but the purchase price at the auction
sale. 12 In other words, the attorney's fees awarded by the trial court should not
have been added to the redemption price because the amount payable is no
longer the judgment debt, but that which is stated in Section 30 of Rule 39. The
redemption price for the mortgaged properties in this case should therefore be
P346,080.00, not P351,080.00.
Private respondent's tender was P337,580.00 which is still short by P8,500.00.
The Provincial Sheriff declared that private respondent ordered him to deduct
from the redemption price the value of certain personal properties in the hotel.
During petitioner's possession of the lots, he sold some of the furniture, water
pump and electrical installations in the hotel and appropriated the proceeds to
himself without private respondent's knowledge and approval.
Petitioner does not deny the fact that he sold the personal properties and
appropriated the proceeds of P13,500.00 to himself. He has expressly admitted
this in his written bid to the sheriff. He, however, cannot be considered in
estoppel because the deduction for the loss of the personal properties was not
authorized under Section 30 of Rule 39. In the first place, the sheriff should not
have issued the certificate of redemption without a final determination of the
amount of the redemption price. 13 This unauthorized deduction of the value of
private respondent's personal properties and the sheriff's overzealousness in
issuing the certificate of redemption are aggravated by the fact that private
respondent later sought for and was actually compensated for the said loss.

After taking possession of the lots and hotel, private respondent moved in Civil
Case No. OZ-1177 to charge the loss of her personal properties to the guaranty
bond posted by petitioner. The trial court awarded her P108,246.00 with
P23,246.00 for the "loss of her properties" and P85,000.00 for "unrealized
income of the hotel." 14 The order of the trial court was affirmed by the Court of
Appeals in CA-G.R. CV No. 31384 and this became final and executory after the
Supreme Court dismissed petitioner's petition for review in G.R. No. 112344. 15
Indeed, if we were to allow the deduction of the value of private respondent's
personal properties from the redemption price, this will amount to double
compensation and unjust enrichment at the expense of petitioner. 16On the other
hand, it would be highly unjust to deprive private respondent of her right to
redeem by a strict application of the Rules of Court. It must be remembered that
the policy of the law is to aid rather than defeat the right of
redemption. 17Inasmuch as in the instant case tender of the redemption price was
timely made and in good faith, and the deficiency in said price is not substantial,
we incline to give private respondent the opportunity to complete the redemption
of her properties within fifteen days from the time this decision becomes final. It is
well to recall our earlier pronouncements on this matter:
Considering that appellee tendered payment only of the
sum of P317.44, whereas the three parcels of land she
was seeking to redeem were sold for the sums of
P1,240.00, P21,000.00 and P30,000.00, respectively, the
aforementioned amount of P317.44 is insufficient to
effectively release the properties. However, the tender of
payment was timely made and in good faith, in the
interest of justice we incline to give the appellee
opportunity to complete the redemption purchase of the
three parcels, as provided in Section 26, Rule 39 of the
Rules of court, within fifteen (15) days from the time this
decision becomes final and executory. In this wise, justice
is done to the appellee who had been made to pay more
than her share in the judgment, without doing an injustice
to the purchaser who shall get the corresponding interest
of 1% per month on the amount of his purchase up to the
time of redemption. 18
The rule on redemption is liberally interpreted in favor of
the original owner of the property. The fact alone that he
is allowed the right to redeem clearly demonstrates the
tenderness of the law toward him in giving him another
opportunity, should his fortunes improve, to recover his
lost property. This benign motivation would be frustrated
by a too-literal reading that would subordinate the warm
spirit of the rule to its cold language. 19
IN VIEW WHEREOF, the petition is DENIED and the Decision in CA-G.R. CV No.
36314 is affirmed with the modification that private respondent be allowed to
complete the redemption price by paying to petitioner the difference of P8,500.00
at 1% interest per month 20 from January 8, 1988 until full payment thereof within
fifteen (15) days from the time this decision becomes final and executory.
SO ORDERED.
G.R. No. L-59952 August 31, 1984
RUBY H. GARDNER and FRANK GARDNER, JR., petitioners,
vs.
COURT OF APPEALS, DEOGRACIAS R. NATIVIDAD and JUANITA A.
SANCHEZ, respondents.
Mayor, Manalang, Reyes & Associates for petitioners.
Joanes Caacbay for private respondents.

52729-R entitled "Ruby H. Gardner, et al. versus Deogracias R. Natividad, et

al," whereby the original Decision of said Court, promulgated on January 11,
1979, affirming in toto the judgment of the Court of First Instance of Laguna,
Branch I, Bian in Civil Case No. B-774, was reconsidered and the appealed
judgment reversed in so far as private respondents herein are concerned.
A chain of successive transfers of real property, five in all, is involved.
Petitioner Ruby H. GARDNER, married to Frank Gardner, Jr. an American (the
GARDNERS, for short), was the registered owner of two adjoining parcels of
agricultural land situated at Calamba, Laguna, designated as Lot No. 1426-new
and Lot No. 4748- new, with an aggregate area of 93,688 square meters more or
less, and covered by TCT Nos. T-20571 and T-20573, respectively, of the
Registry of Property of Laguna (Exhibits "A" & "B", Folio of Exhibits).
On November 27, 1961, the GARDNERS and the spouses Ariosto C. SANTOS
and Cirila Serrano (the SANTOSES) entered into an agreement for the
subdivision of the two parcels, with the SANTOSES binding themselves to
advance to the GARDNERS the amount of P93,000.00 in installments. For the
protection of both parties they executed the following documents all on the same
date and referring to the same parcels of land: (1) Absolute Deed of Sale in favor
of the SANTOSES (the First Transfer, considering the nature of the document);
(2) Subdivision Joint Venture Agreement; and (3) Supplemental Agreement
(Exhibits "C", "D" and "E", Ibid.). Despite the "sale,", the GARDNERS were still
denominated in the Subdivision Joint Venture Agreement and in the
Supplemental Agreement as "owners" and Ariosto SANTOS merely as "broker". It
appears from the evidence that the sale to the SANTOSES was one "in trust" for
the protection of the SANTOSES who had obligated themselves to give cash
advances to the GARDNERS from time to time (Exhibits "E-2" to "E-88" incl.) On
December 5, 1961, new titles were issued in favor of the SANTOSES ( Exhibits "
F " & " G ", Ibid.).
Unknown to the GARDNERS, on June 10, 1964, the SANTOSES transferred Lot
No. 1426-New to Jose Cuenca, married to Amanda Relova (the JOSE
CUENCAS) (Exhibit "H", Ibid.), and on June 15, 1964, Lot No. 4748-New to Juan
Cuenca, married to Soledad Advincula (the JUAN CUENCAS) (Exhibit "I", Ibid.)
(jointly, the Second Transfer). Titles were thereafter issued in their respective
names (Exhibits "L" & "M", Ibid.).
Upon learning of the Transfer of the properties to the CUENCAS, petitioner 'Ruby
GARDNER, caused the inscription of an Adverse Claim on the titles of the
CUENCAS with the Register of Deeds of Laguna on December 2, 1965, Her
Affidavit stated in part:
2. My adverse claim arose from the facts that sometime in
the middle part of 1961, I and Mr. Ariosto Santos of 2162
Apolinario, Bangkal St., Makati, Rizal had an
understanding and have agreed that we would subdivide
my aforedescribed properties then covered by TCT Nos.
T-20571 and T-20573 for Lot No. 1426-New and 4748New, respectively, under the condition that he would
advance to me a total amount of P93,000.00, which I
could withdraw little by little and from time to time; that he
would improve the aforesaid land by constructing paved
roads sewers, water, other facilities that may be required
by the authorities concerned and other requirements of
the subdivision laws until he shall have invested for these
purposes the sum of P234,220.00; that he assured me
that the construction of these paved roads, etc. would
commence immediately;
3. We (I and Mr. Ariosto Santos) have agreed that in order
to protect his (Mr. Santos) interest to the sum of
P93,000.00, to be withdrawn by me little by little and from
time to time, I would transfer to his name my
aforementioned titles in trust;
xxx xxx xxx

MELENCIO-HERRERA, J.:
This is a Petition for the review of the Resolutions, dated April 24, 1980 and
December 24, 1980, respectively, of the then Court of Appeals in CA-G.R. No.

5. In the absolute Deed of Sale it was stated that I

received from Mr. Santos the sum of P70,266.00 and in
consideration of said amount, I have sold, transferred and
conveyed my aforedescribed parcels of land to Mr.

Santos; but these statements were and are not true, that
is why we have the other two more documents the
Subdivision Joint Venture Agreement and the
Supplemental Agreement. It is stated in the Subdivision
Joint Venture Agreement, which contains our true
agreement that Mr. Ariosto Santos is only my Broker, so
far as the aforedescribed parcels of land are concerned,
as can be gleaned from Page 2, paragraphs 2 and 3 of
the said Subdivision Joint Venture Agreement, ...
On October 19, 1966 and November 4, 1966, the JUAN CUENCAS and the
JOSE CUENCAS, respectively, transferred the lots to Michael C. VERROYA
(Exhibits "P" & Ibid.) an office assistant of Ariosto SANTOS (the Third transfer).
Titles were issued in VERROYA's name with the adverse Claim carried over.
On March 29, 1967, VERROYA constituted a mortgage on both lots in favor of
Anita Nolasco and Rosario Dalina, which encumbrance was registered on the
existing titles.
On June 29, 1967, VERROYA ARROYA executed a deed of transfer of the
properties to respondent Deogracias Natividad, married to Juanita Sanchez (the
NATIVIDADS) (Exhibits "V", "V-4", Ibid.) (the Fourth Transfer).
On September 30, 1967, the NATIVIDADS transferred the lots to Ignacio Bautista
and Encarnacion de los Santos (the BAUTISTAS) (Exhibits "14", "15" [Natividad],
"JJ-2", Ibid.) (the Fifth Transfer). No titles were issued to the BAUTISTAS.
It should be noted that from the titles of the CUENCAS (the Second Transferees)
to the titles of the NATIVIDADS (the Fourth Transferee), the Adverse Claim of the
GARDNERS continued to be carried, and that throughout the successive
transfers, or over a span of approximately six years, the GARDNERS continued
to remain in possession, cultivation and occupation of the disputed properties.
Aggrieved by the series of transfers, the GARDNERS filed suit on July 8, 1969
for "Declaration of Nullity, Rescission and Damages" against the Five
Transferees, including the mortgagees, Anita Nolasco and Rosario Dalina, before
the Court of First Instance of Laguna, Branch I (Civil Case No. B-774), praying
for the declaration of nullity of all the Five Transfers and the cancellation of all
titles issued pursuant thereto on the ground that they were all simulated,
fictitious, and without consideration.
In their Answer, the SANTOSES claimed, in brief, that the sale to them was
conditional in the sense that the properties were to be considered as the
investment of the GARDNERS in the subdivision venture and that in the event
that this did not materialize they were to reconvey the lots to the GARDNERS
upon reimbursement by the latter of all sums advanced to them; and that the
deed of sale was to be registered for the protection of the SANTOSES
considering the moneys that the latter would be advancing.
For their part, respondents NATIVIDADS contended that they were purchasers in
good faith notwithstanding the adverse claim as the titles were not shown to them
by VERROYA at the time of the sale, and that they had paid good and valuable
consideration.
The mortgagees, Anita Nolasco and Rosario Dalima, denied the allegations in
the Complaint and counterclaimed for damages, which the GARDNERS
answered.
After the lifting of the Order of default against them, the CUENCAS filed their
Answer contending that their transfer to VERROYA of the properties in question
was not simulated and was supported by valuable consideration.
VERROYA, Juanita Sanchez (wife of Deogracias Natividad), and the
BAUTISTAS were declared in default for their failure to seasonably file their
responsive pleadings. 1
The GARDNERS, aside from their documentary evidence, adduced in their favor
the testimonies of Ruby GARDNER herself, Jose Infante, an employee of the
Register of Deeds of Laguna, and defendant Ariosto SANTOS who was
presented as an adverse witness.

Of the eight answering defendants, only respondent Deogracias NATIVIDAD

testified on his behalf. Defendant Ariosto SANTOS merely adopted as his own
evidence the declaration he had given as an adverse witness. The JOSE
CUENCAS and the JUAN CUENCAS neither presented any testimonial evidence
but just adopted the testimony of Ariosto SANTOS. Defendants Anita Nolasco
and Rosario Dalima, the mortgagees, submitted their case after the genuineness
of the deed of mortgage executed in their favor by VERROYA was admitted by
the parties. 2
On January 15, 1972, the Trial Court rendered judgment in favor of the
GARDNERS declaring as null and void the five Transfers; rescinding the
Subdivision Joint Venture Agreement (Exhibit "D") as well as the Supplemental
Agreement (Exhibits "E"; ordering the GARDNERS to reimburse the SANTOSES
the total cash advances of P36,712.80 which theGARDNERS had received;
authorizing the cancellation of the corresponding titles issued pursuant to the
deeds of sale and the issuance of new ones in favor of the GARDNERS; ordering
the deletion from the titles of the mortgage executed by VERROYA; and requiring
the Five Transferees but not mortgagees, Anita Nolasco and Rosario Dalima, to
pay the GARDNERS P90,000.00 actual damages, P5,000.00 exemplary
damages, and to pay the costs.
The respondents NATIVIDADS appealed (notwithstanding that the wife was
declared in default) to the then Court of Appeals, which, on January 11, 1979
affirmed in toto the judgment of the Trial Court. 3 The NATIVIDADS received the
Decision of affirmance on January 16, 1979. On January 29, 1979, the
NATIVIDADS asked for a 30-day extension from January 31, 1979 or up to
March 2, 1979, within which to file a Motion for Reconsideration, which was
granted by respondent Court. 4 On March 2, 1979, the NATIVIDADS filed their
Motion for Reconsideration but the same was denied on November 7, 1979. 5
On December 4, 1979, a "Very Urgent Manifestation and Motion for Leave to File
a Second Motion for Reconsideration" was filed by the NATIVIDADS. The
pleading was signed by Deogracias NATIVIDAD himself. Respondent Court
denied leave on December 28, 1979. 6 However, on the same date of December
28, 1979, the NATIVIDADS filed their Second Motion for Reconsideration.
On April 24, 1980, respondent Court reconsidered its Resolution of "January 7,
1980" denying respondents' "Motion for Leave to File Second Motion for
Reconsideration', and admitted said second Motion 7 (The resolution of January
7,1980 refers to the resolution of December 28, 1979 which was released on
January 7, 1980). On December 24, 1980, respondent Court 8 issued the
questioned Resolution reversing its Decision of January 11, 1979 insofar as the
NATIVIDADS are concerned, declaring as valid the sale of the land to them as
well as the titles issued pursuant thereto. On January 20, 1981, the GARDNERS
sought to set aside the questioned Resolution and moved for entry of judgment
averring that said Resolution was null and void for having been issued without
jurisdiction as the Decision of January 11, 1979 had already become final and
executory. The Motion was denied for lack of merit on March 4, 1982. 9
Petitioners now seek to set aside the Appellate Court's Resolutions of April 24,
1980 (granting leave to file a 2nd Motion for Reconsideration) and December 24,
1980 (reversing the original judgment), and assigning to respondent Court the
following errors:
I
The Court of Appeals erred in promulgating its resolution
of April 24, 1980, because it has already lost jurisdiction
to act on the case since the decision of January 11, 1979
had already become then final and executory.
II
The Court of Appeals erred in promulgating its resolution
of December 24, 1980, because it had already then lost
jurisdiction to act on the case, much more so, to reverse
through its resolution of December 24, 1980 its decision
of January 11, 1979 that has already become final and
executory.
III

Assuming arguendo that it has still jurisdiction to

promulgate its resolution of December 24, 1980, the
Court of Appeals erred in not holding that the defendantappellant Deogracias Natividad's second motion for
reconsideration, just like the first motion for
reconsideration, is unquestionably pro-forma, hence did
not suspend the running of the reglementary period of
time.

Mar. 2, 1979 Motion for Reconsideration filed (on the last

day).

IV

Nov. 19, 1979 Receipt by private respondents of above

resolution.

Assuming arguendo that it has still jurisdiction to

promulgate its resolution of December 24, 1980, the
Court of Appeals erred in holding that the testimonies of
Ariosto Santos under oath on the witness stand cannot
prevail over the allegations in Santos' answer (not verified
and only signed by Ariosto Santos' counsel) and,
regarding which there is no substantial conflict or
variance.

Due Mar. 2, 1979.

Nov. 7, 1979 Reconsideration was denied.

Dec. 28, 1979 Motion for Leave to file Second Motion for
Reconsideration denied.
Dec. 28, 1979 Second Motion for Reconsideration filed by
private respondent.
Jan. 8, 1980 Motion for Reconsideration of Resolution of
Dec. 28, 1979 filed by private respondents.

V
Assuming arguendo, it has still jurisdiction to promulgate
its resolution of December 24, 1980, the Court of Appeals
erred in reversing absolutely without valid justification, its
findings in its decision of January 11, 1979 and resolution
of November 7, 1979, both holding that defendantappellant Deogracias Natividad was not a buyer in good
faith and for value.

April 24, 1980 Resolution reconsidering denial of Motion

for Leave, and Second Motion for Reconsideration
admitted. This is one of the admitted. This is one of the
disputed Resolutions.
Dec. 24, 1980 Resolution reversing Decision of January
11, 1979. This is other Resolution assailed.
Section 1, Rule 52 of the Rules of Court, provides:

VI
Assuming arguendo that it has still jurisdiction to
promulgate its resolution of December 24, 1980, the
Court of Appeals erred in reversing, absolutely without
valid justification, its findings in its decision of January 11,
1979 and resolution of November 7, 1979 both holding
that the sales of the questioned properties from Ruby
Gardner and spouse Frank Gardner, Jr., to Ariosto Santos
and spouse Cirila Serrano, to Jose Cuenca and Juan
Cuenca and their spouses Amanda Relova and Soledad
Advincula, respectively, to Michael Verroya, to Deogracias
Natividad and spouse Juanita Sanchez, to Ignacio
Bautista and spouse Encarnacion delos Santos are null
and void ab initio.
VII
The Court of Appeals erred in holding that it will not
hesitate to consider and hear defendant-appellant
Deogracias Natividad's second motion for reconsideration
(even if it was received when the decision of January 11,
1979 was already final and executory) upon the
groundless claim that Deogracias Natividad was
abandoned by his counsel, who received the resolution
denying Natividad's first motion for reconsideration.
Upon the facts and the evidence, we rule that respondent Court had lost
jurisdiction to entertain the second Motion for Reconsideration because its
Decision of January 11, 1979 had already become final and executory as the
following chronological data before respondent Court will show:
Jan 16, 1979 Receipt by respondents of CA Decision
dated Jan. 11, 1979.
Jan. 29, 1979 Private respondents filed motion for
extension of 30 days from Jan, 31, 1979 to file motion for
reconsideration.
This was granted.

Section 1. Motion for re-hearing. A motion for re- hearing

or reconsideration shall be made ex-parteand filed within
fifteen (15) days from notice of final order or judgment. No
more than one motion for re-hearing or reconsideration
shall be filed without express leave of court. A second
motion for reconsideration may be presented within fifteen
(15) days from notice of the order or judgment deducting
the time in which the first motion has been pending.
Evidently, the Second Motion for Reconsideration was filed beyond the
reglementary, period. The NATIVIDADS erroneously thought that they had
another 15-day period from the date of receipt of denial of the first Motion for
Reconsideration on November 7, 1979 within which to file a second Motion for
Reconsideration. That would be the rule for appeals by certiorari to the Supreme
Court from an Appellate Court judgment pursuant to Section 1 of Rule 45.10
However, under the aforequoted provision, which is the applicable rule, the time
in which the first Motion has been pending has to be deducted. As it was, all of
the fifteen days had been used up when the first Motion for Reconsideration was
filed on March 2, 1979. The Decision of January 11, 1979, therefore, had already
attained finality on March 3, 1979 so that respondent Court no longer had
jurisdiction to act on the "Very Urgent Motion for Leave to File Second Motion for
Reconsideration" submitted by the NATIVIDADS on November 28, 1979, much
less to grant the same.
It is well settled that once a Decision has become final and executory, it is
removed from the power and jurisdiction of the Court which rendered it to further
alter or amend it, much less to revoke it. The subsequent filing of a motion for
reconsideration cannot disturb the finality of the judgment, nor restore jurisdiction
to the court. 11
Although the granting or denial of a motion for reconsideration involves the
exercise of discretion, 12 the same should not be exercise whimsically,
capriciously or arbitrarily, but prudently in conformity with law, justice, reason and
equity.
We likewise find reversible error in the reversal of respondent Court's original
Decision of January 11, 1979. In its Resolution of reversal, dated December 24,
1980, respondent Court had stated in part:
The presence of the adverse claim in appellant's
(Deogracias Natividad) title does not make him a buyer in

bad faith The validity of the adverse claim has to be

determined by the Court. Until the validity of such claim is
determined judicially, the same cannot be considered as a
flaw in his vendor's title. The adverse claim first
appearance in the titles of the Cuencas, the second
buyers. It was carried on to the titles of subsequent
transferees. The title of Santos appeared clean This
makes the title of Santos' vendee clean. The subsequent
annotation of the adverse claim therein would not make
the Cuencas buyers in bad faith. If the Cuencas were
buyers in good faith, we do not see any reason why
subsequent buyers could not enjoy the same status.
Good faith is presumed while bad faith must be
proved. ... 13
However, as set forth in the original Decision of the Appellate Court, upholding
the findings of the Trial Court, the evidence preponderantly shows that all Five
Transfer were null and void for having been simulated and fictitious.
The First Transfer in favor of the SANTOSES was "indubitably established" to
have been without consideration and is, therefore, void and inexistent. 14 That
sale was executed merely as a means of protection to the SANTOSES for their
promised cash advances to the GARDNERS in one year in the sum of
P93,000.00. Added to this is the admission against his own interest by Ariosto
SANTOS that the GARDNERS did not receive from him any
consideration, 15 thereby corroborating the declarations of the GARDNERS. The
Subdivision Joint Venture Agreement (Exhibit "D") and the Supplemental
Agreement (Exhibit "E") eloquently express that the true and real nature of the
agreement between the GARDNERS and the SANTOSES was for a subdivision
and not a sale transaction.
The evidence also establishes that the Second Transfer to the CUENCAS was
fictitious and simulated for not having been supported with any consideration. By
his own admission, Ariosto SANTOS transferred to the CUENCAS, who are his
"compadres", the disputed properties, together with others that he owned, merely
to conceal his ownership and "to protect them from persons who had filed suits
against him and were running after the properties registered in his name." It was
SANTOS who had caused the execution of those deeds of sale (Exhibits "H" &
"I") and had them notarized by his own counsel. 16 No wonder then that the
CUENCAS did not even dispute the validity of the adverse claim pursuant to
Section 110 of the Land Registration Act, and during the trial they merely adopted
SANTOS' testimony. Under the circumstances surrounding their transaction they
knew that their title was flawed and they were not, and cannot be considered,
buyers in good faith, having paid no consideration for the sale. The subsequent
registration of the adverse claim on their titles, therefore, could not but serve as
notice and warning to all subsequent buyers that someone was claiming an
interest in the properties or a better right than the registered owners.
The Third Transfer in favor of VERROYA was similarly without consideration and,
therefore, void ab initio. The evidence on record shows that Ariosto SANTOS
himself caused the execution of the deeds of sale (Exhibits "P" & "Q") in favor of
VERROYA, who is SANTOS' office manager in his brokerage business. The only
purpose of the transfer was to enable VERROYA to secure for SANTOS a loan
with the Veterans Bank so much so that when the documents of sale were signed
by the CUENCAS in their respective houses in favor of VERROYA, the latter was
not even present. 17 Also significant is the ' fact that Verroya was declared in
default and had not even bothered to resist the suit, which he would have done if
the sale transaction were genuine.
On equal footing is the Fourth Transfer from VERROYA VERROYA to private
respondents NATIVIDADS. It was SANTOS who had caused the preparation of
the deed of sale in favor of the NATIVIDADS after sensing that VERROYA was
not inclined to return the title to the properties. Deogracias NATIVIDAD was
SANTOS' close and trusted I 6 compadre who agreed to put the titles in his
(NATIVIDAD's) name because of the pending cases against SANTOS. The
amount of P 80,000.00 stated in the document of sale was not actually paid by
the NATIVIDADS to VERROYA, according to SANTOS' own testimony. The latter
further declared that VERROYA was only coerced to sign the deeds (Exhibits "V"
& ("V-4") after he was boxed by NATIVIDAD in SANTOS' office at the Escolta.
That coercion did exist is shown by VERROYA's telegram to the Register of
Deeds of Laguna to dishonor any transaction involving the subject properties. 18

They too, were declared in default and made no attempt to answer or dispute the
allegations in the Complaint against them.
The mortgage of the properties by VERROYA in favor of Anita Nolasco and
Rosario Dalima was executed after the inscription of the adverse claim on the
titles so that they can neither be considered as innocent mortgagees for value.
Added proof of the fictitiousness of the chain of transfers is that fact that,
notwithstanding the same, the GARDNERS remained in actual possession,
cultivation and occupation of the disputed lots throughout the entire series of
transactions.
As concluded in the original Decision of respondent Court, all Five Transfers
starting from that of the SANTOSES down to the NATIVIDADS, were absolutely
simulated and fictitious and were, therefore, void ab initio and
inexistent. 19 Contracts of sale are void and produce no effect whatsoever where
the price, which appears therein as paid, has, in fact, never been paid by the
purchaser to the vendor. 20 Such sales are inexistent and cannot be considered
consummated. 21
In its Resolution reversing the original Decision, respondent Court discredited the
testimony of Ariosto SANTOS for being at variance with the allegations in his
Answer. The fact, however, that the allegations made by Ariosto SANTOS in his
pleadings and in his declarations in open Court differed win not militate against
the findings herein made nor support the reversal by respondent Court. As a
general rule, facts alleged in a party's pleading are deemed admissions of that
party and binding upon it, but this is not an absolute and inflexible rule. 22 An
Answer is a mere statement of fact which the party filing it expects to prove, but it
is not evidence. 23 As Ariosto SANTOS himself, in open Court, had repudiated the
defenses he had raised in his Answer and against his own interest, his testimony
is deserving of weight and credence. Both the Trial Court and the Appellate Court
believed in his credibility and we find no reason to overturn their findings thereon.
Lastly, the statement of respondent Court in its Resolution of reversal that "until
the validity of an adverse claim is determined judicially it cannot be considered a
flaw in the vendor's title, contradicts the very essence of adverse claims. The
annotation of an adverse claim is a measure designed to protect the interest of a
person over a piece of real property, and serves as a notice and warning to third
parties dealing with said property that someone is claiming an interest on the
same or has a better right than the registered owner thereof.24 A subsequent
sale of the property cannot prevail over the adverse claim which was previously
annotated in the certificate of title of the property. 25
While one who buys from the registered owner need not have to look behind the
certificate of title, 26 he is nevertheless bound by the liens and encumbrances
annotated thereon. 27 One who buys without checking the vendor's title takes all
the risks and losses consequent to such failure. 28
WHEREFORE, the assailed Resolutions of respondent Court of Appeals (now
the Intermediate Appellate Court), dated April 24, 1980 and December 24, 1980,
respectively, are hereby REVERSED and SET ASIDE, and its Decision of
January 11, 1979 affirming in toto the judgment of the then Court of First Instance
of Laguna, Branch 1, in Civil Case No. B-774, is hereby reinstated. Costs against
private respondents.
SO ORDERED.
G.R. No. 80739 August 20, 1992
GRACIA R. JOVEN, petitioner,
vs.
COURT OF APPEALS, HON. MANUEL A. PATRON, in his capacity as
Presiding Judge of the RTC, Branch 59, Lucena City, Roberto Paguia &
Fernando Lasala, respondents.
De Castro & Cagampang Law Offices for petitioner.
Castillo, Laman, Tan & Pantaleon for private respondents.

The Fifth Transfer to the BAUTISTAS partook of the same nature a simulated and
fictitious transaction, for being without consideration, as shown by the evidence.

CRUZ, J.:

ownership is made by either or both of the parties is not

material

The petitioner was the registered owner of three parcels of land which she
mortgaged in favor of the Development Bank of the Philippines. Upon the
extrajudicial foreclosure of the mortgage due to her failure to pay her loan, the
properties were sold at public auction to DBP as the biggest bidder. A certificate
of sale was issued and annotated on the certificate of title on November 17,
1982.
After the expiration of the redemption period, no redemption having been made
by the petitioner, DBP sold the subject properties to Roberto Paguia, one of the
herein private respondents, through a deed of sale executed on December 17,
1985. On January 30, 1986, Paguia took possession of the properties through his
representative, Fernando Lasala, the other private respondent.
Earlier, the petitioner had filed on December 3, 1985, an action before the
Regional Trial Court of Lucena City (raffled later to Branch 55) for the annulment
of the mortgage and its foreclosure. Named as defendants were DBP and the
private respondents. Later, when her application for preliminary injunction and
restraining order was denied, she lodged with the Municipal Circuit Trial Court of
Lucban-Sampaloc complaint against the private respondents for forcible entry
with a prayer for writ of mandatory injunction. This was docketed as Civil Case
No. 155.
In a decision dated May 14, 1986, the case was dismissed for lack of jurisdiction.
But on May 29, 1986, the petitioner filed a motion for reconsideration, which was
granted. In a resolution dated July 11, 1986, 1 the private respondents were
ordered to: 1) immediately restore and deliver possession of the subject
properties to the petitioner; 2) render to the petitioner an accounting of all the
fruits and products gathered from said property from the time they took
possession thereof until they vacate the same; and 3) reimburse the petitioner
the total cost of such accounting.
This resolution was reversed on appeal by the Regional Trial Court of Lucena
City, Branch 59, 2 which held that the court a quo had no jurisdiction over the
ejectment case because of the issue of ownership raised therein and that,
assuming such jurisdiction, the decision had already become final and executory
when the resolution dated July 11, 1986, was rendered. The petitioner elevated
the case to the respondent Court of Appeals, which sustained the assailed
decision in toto. 3
She is now before us in this petition for review on certiorari, contending that the
Municipal Circuit Trial Court had jurisdiction over the ejectment case and that the
private respondents were guilty of forcible entry on the subject premises for
occupying the same without judicial authorization.
The petition has merit:
The respondents argue that the Municipal Circuit Trial Court had no jurisdiction
over the action for forcible entry on the principal ground that a question of
ownership was involved therein. This view does not jibe with the following
observations from Chief Justice Moran based on a consistent line of decisions
from this Court: 4
It would be a mistake to suppose that an action involves a
question of title merely because the plaintiff may allege in
his complaint that he is the owner of the land. Just as the
plaintiff may introduce proof of his title in order to show
the character of his (sic) prior possession, so be may
allege ownership in himself as a material and relevant fact
in the case, and the insertion of such an allegation in the
complaint cannot by any possibility place the cause
beyond the jurisdiction of the magistrate's court, provided
it otherwise sufficiently appears that what the plaintiff
really seeks is the restoration of possession as against an
intruder who has seized the property within the period of
one year. Much less can the defendant in such an action
defeat the jurisdiction of the magistrate's court by setting
up title in himself. In this connection it should be borne in
mind that the factor which defeats the jurisdiction of the
court of the justice of the peace is the necessity to
adjudicate the question of title. The circumstance that
proof of title is introduced at the hearing or that a claim of

This ruling is embodied in Sec. 33, (2), Batas Pambansa Blg. 129, which vests
municipal courts with:
Exclusive original jurisdiction over cases of forcible entry
and unlawful detainer; Provided, that when, in such
cases, the defendant raises the question of ownership in
his pleadings and the question of possession cannot be
resolved without deciding the issue of ownership, the
issue of ownership should be resolved only to determine
the issue of possession.
It is true that before the petitioner instituted the action for forcible entry in the
Municipal Circuit Trial Court of Lucban-Sampaloc, the case for annulment of the
mortgage and foreclosure sale, which necessarily involves recovery of
ownership, was already being litigated in the Regional Trial Court of Lucena City.
Even so, the municipal court could, pending final adjudication of that case,
exercise its jurisdiction to determine the right of possession (only) over the
subject properties in the ejectment case.
The private respondents also contend that the Municipal Circuit Trial Court had
no jurisdiction over the complaint for forcible entry because; a) under Section 19
par. (2) of BP 129, as amended, the Regional Trial Court has exclusive original
jurisdiction over all civil actions which involve the title to, or possession of, real
property or any interest therein; and b) under Section 1, par. A (1) of the Rule on
Summary Procedure, cases of forcible entry and detainer involving the question
of ownership are expressly excluded from the summary jurisdiction of the
municipal court.
Curiously, however, they also insist that an action for forcible entry and unlawful
detainer shall be governed by the Rule on Summary Procedure pursuant to
Section 36 of BP 129 and that the petitioner is now estopped from assailing the
applicability of that Rule.
There is no question that under Section 1, par. A (1), of the said Rule, the
Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial
Courts have jurisdiction over cases of forcible entry and unlawful detainer except
where the question of ownership is involved or where the damages or unpaid
rentals sought to be recovered by the plaintiff exceed P20,000.00 at the time of
the filing of the complaint. *
However, it is incorrect to say that the question of ownership was involved in the
ejectment case filed by the petitioner simply because she alleged in her
complaint that she was the original owner of the subject properties. That the
petitioner instituted a separate action for the annulment of the mortgage is not a
valid reason either for defeating the summary remedy of ejectment. On the
contrary, it only bolsters the conclusion that the ejectment case did not involve
the question of title as this was the subject of the annulment case before the
Regional Trial Court of Lucena City. The Rule on Summary Procedure was
clearly applicable because the ejectment case involved only the restoration of
possession of the subject land and not its ownership.
The respondent court also sustained the ruling of the Regional Trial Court that
the motion for reconsideration filed by the petitioner with the Municipal Circuit
Trial Court did not stop the running of the reglementary period to appeal because
such motion was a prohibited pleading under Section 15 (c) ** of the Rule on
Summary Procedure. Its conclusion was that the Municipal Circuit Trial Court had
already lost jurisdiction to issue the resolution dated July 11, 1986, because the
decision sought to be reconsidered had then become already final and executory.
We do not agree. The Municipal Circuit Trial Court did not err in holding that the
motion for reconsideration was not covered by the prohibition under Section 15
(c). The motion prohibited by this section is that which seeks reconsideration of
the judgment rendered by the court after trial on the merits of the case. 5 The
decision dismissing the petitioner's ejectment case for lack of jurisdiction was not
an adjudication on the merits. Review thereof could therefore be sought by the
petitioner through her motion for reconsideration and this motion, which was
not pro forma, had the effect of suspending the running of the period to appeal.
Now, on the issue of possession:

Section 7 of Act No. 3135, as amended by Act No. 4118, provides that in case of
extrajudicial foreclosure of mortgage, the court *** may issue as a matter of
course a writ of possession in favor of the purchaser even during the redemption
period, provided that a proper motion has been filed, a bond is approved, and no
third person is involved.
Section 6 of the Act provides that where an extrajudicial sale is made,
"redemption shall be governed by the provisions of sections four hundred and
sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure,
in so far as these are not inconsistent with the provisions of this Act."
Sections 464-466 of the Code of Civil Procedure were superseded by Sections
25-27 and Section 31 of Rule 39 of the Rules of Court, which in turn were
replaced by Sections 29 to 31 and Section 35 of Rule 39 of the Revised Rules of
Court.
Section 35 provides that "if no redemption be made within twelve (12) months
after the sale, the purchaser, or his assignee, is entitled to a conveyance and the
possession of property, . . . The possession of the property shall be given to the
purchaser or last redemptioner by the same officer unless a third party is actually
holding the property adversely to the judgment debtor."
To give effect to his right of possession, the purchaser must invoke the aid of the
courts and ask for a writ of possession. He cannot simply take the law into his
own hands and enter the property without judicial authorization. 6 We have
consistently held that he need not bring a separate and independent suit for this
purpose. 7Nevertheless, it is essential that he ask for and be granted a writ of
possession in order that he may be legally installed in the property he has
bought.
Section 63 (b) of P.D. 1529, otherwise known as the Property Registration
Decree, requires that in case of non-redemption, the purchaser at a foreclosure
sale shall file with the Register of Deeds either a final deed of sale executed by
the person authorized by virtue of the power of attorney embodied in the deed of
mortgage or his sworn statement attesting to the fact of non-redemption. The
Register of Deeds shall thereupon issue a new certificate in favor of the
purchaser after the owner's duplicate certificate shall have been previously
delivered and canceled.
In F. David Enterprises vs. Insular Bank of Asia and America, 8 this Court held:
It is settled that the buyer in a foreclosure sale becomes
the absolute owner of the property purchased if it is not
redeemed during the period of one year after the
registration of the sale. As such, he is entitled to the
possession of the said property and can demand it at any
time following the consolidation ownership in his name
and the issuance to him of a new transfer certificate of
title. The buyer can in fact demand possession of the land
even during the redemption period except that he has to
post a bond in accordance with Section 7 of Act No. 3135
as amended. No such bond is required after the
redemption period if the property is not redeemed.
Possession of the land then becomes an absolute right of
the purchaser as confirmed owner. Upon proper
application and proof of title, the issuance of the writ of
possession becomes a ministerial duty of the
court. (Emphasis supplied).
In the case at bar, there is no showing that after the lapse of the redemption
period without the petitioner having redeemed the lands, DBP executed an
affidavit of consolidation of ownership of the subject properties. Neither has it
filed with the Register of deeds a final deed of sale or a sworn statement
attesting to the fact of non-redemption. The circumstance that the properties are
still in the name of the petitioner shows that DBP has also not yet obtained a new
certificate of title in its name. And neither does it appear that DBP, on the basis of
its purchase of the lands at the foreclosure sale, ever secured a writ of
possession to authorize its entry into the said lands.
Not having done any of these, DBP had as yet not acquired any perfected right of
possession that it could transfer to the private respondents. And as the petitioner
continued in actual possession of the subject premises, she could undoubtedly
maintain an action for forcible entry against the private respondents when, not

being armed with a court order or a writ of possession, they simply entered and
took possession of the subject lands.
The only issue in an action for forcible entry is the physical or material
possession of real property, that is, possession de facto and not possession de
jure. The philosophy underlying this remedy is that irrespective of the actual
condition of the title to the property, the party in peaceable quiet possession shall
not be turned out by strong hand, violence or terror. In affording this remedy of
restitution, the statute seeks to prevent breaches of the peace and criminal
disorder which might ensue from the withdrawal of the remedy. Another purpose
is to discourage those persons who, believing themselves entitled to the
possession of the property, resort to force rather than to some appropriate action
in the courts to assert their claims. 9
Under Section 1, Rule 70, of the Rules of Court, there is forcible entry when one
in physical possession of a land or building is deprived of that possession by
another through force, intimidation, threat, strategy or stealth. The words "by
force, intimidation, threat, strategy or stealth" include every situation or condition
under which one person can wrongfully enter upon real property and exclude
another, who has had prior possession thereof. To constitute the use of "force" as
contemplated in the above-mentioned provision, the trespasser does not have to
institute a state of war. Nor is it even necessary that he use violence against the
person of the party in possession. The act of going on the property and excluding
the lawful possessor therefrom necessarily implies the exertion of force over the
property, and this is all that is necessary. 10
It is noted that the petitioner instituted the action for annulment of mortgage on
December 3, 1985, while the deed of sale in favor of the private respondent was
executed on December 17, 1985. Paguia cannot say that when he took
possession of the subject land on January 30, 1986, he was acting in good faith.
Neither can be claim that he had no knowledge of the pendency of that litigation
because he was in fact one of the defendants in that case. In any event, the fact
that the titles were still in the name of the petitioner should have warned him of
the need to ascertain the status of the properties before he took possession of
them.
The private respondents also assert that the institution of the ejectment case
resulted in the splitting of a single cause of action into two, one for the recovery
of ownership and possession and the other for recovery of possession de facto.
In Drilon vs. Gaurana, 11 this Court held:
It is true that a party may not institute more than one suit
for a single cause of action (Rule 2, Sec. 3, Revised
Rules of Court) and if two or more complaints are brought
for different parts of a single cause of action, the filing of
the first may be pleaded in abatement of the other (Rule
2, Sec. 4 Revised Rules of Court). However, a forcible
entry or unlawful detainer action has an entirely different
subject from that of an action for reconveyance of title.
What is involved in a forcible entry case is merely the
issue of material possession or possession de facto;
whereas in an action for reconveyance, ownership is the
issue. So much so that the pendency of an action for
reconveyance of title over the same property does not
divest the city or municipal court of its jurisdiction to try
the forcible entry or unlawful detainer case, nor will it
preclude or bar execution of judgment in the ejectment
case where the only issue involved is material possession
or possession de facto (De la Cruz v. Court of Appeals,
133 SCRA 520 [1984]).
While there may be identity of parties and subject matter in the two actions, the
issues involved and the reliefs prayed for are not the same. In the annulment
suit, the issue is the validity of the mortgage and the subsequent foreclosure sale
whereas the issue in the ejectment case is whether, assuming the mortgage and
foreclosure sale to be valid, the private respondents have the right to take
possession of the property. In the former case, the relief prayed for is recovery of
ownership of the subject land while in the latter it is restoration of possession
thereof to the petitioner. Hence, the municipal court had jurisdiction to try the
ejectment case while the annulment suit was being litigated in the regional trial
court.

The contention that the petitioner was forum-shopping must also be rejected. As
an injunction cannot be a substitute for the other suits for recovery of
possession, 12 such as an action for forcible entry or unlawful detainer andaccion
publiciana, denial of the injunction did not bar the petitioner from availing herself
of the more appropriate remedy, to wit, the action for forcible entry. 13
In sum, the respondent court erred when it affirmed the decision of the Regional
Trial Court declaring that the Municipal Circuit Trial Court had no jurisdiction over
the ejectment case filed by the petitioner. We find that it had.
ACCORDINGLY, the petition is GRANTED and the resolution of the Municipal
Circuit Trial Court of Lucban, Sampaloc dated July 11, 1986, in Civil Case No.
155 is REINSTATED. Costs against the private respondents.
SO ORDERED.

ACT NO. 1956 * - AN ACT PROVIDING FOR THE SUSPENSION OF PAYMENTS, THE RELIEF OF INSOLVENT DEBTORS, THE PROTECTION OF CREDITORS, AND
THE PUNISHMENT OF FRAUDULENT DEBTORS
ACT
NO. 1956

CHAPTER I
TITLE AND GENERAL SUBJECT OF THE ACT

Section 1. This Act shall be known and may be cited as The Insolvency Law, and
in accordance with its provisions every insolvent debtor may be permitted to
suspend payments or be discharged from his debts and liabilities.
CHAPTER II
SUSPENSION OF PAYMENTS
Sec. 2. Petition. The debtor who, possessing sufficient property to cover all his
debts, be it an individual person, be it a sociedad or corporation, foresees the
impossibility of meeting them when they respectively fall due, may petition that
he be declared in the state of suspension of payments by the court, or the judge
thereof in vacation, of the province or of the city in which he has resided for six
months next preceding the filing of his petition.
He shall necessarily annex to his petition a schedule and inventory in the form
provided in sections fifteen, sixteen, and seventeen of this Act, in addition to the
statement of his assets and liabilities and the proposed agreement he requests of
his creditors.
Sec. 3. Meeting of Creditors; Injunction. Upon receiving and filing the petition
with the schedule and documents mentioned in the next preceding section, the
court, or the judge thereof in vacation, shall make an order calling a meeting of
creditors to take place in not less than two weeks nor more than eight weeks from
the date of such order. Said order shall designate the day, hour, and place of
meeting of said creditors as well as a newspaper of general circulation published
in the province or city in which the petition is filed, if there be one, and if there be
none, in a newspaper which, in the judgment of the judge, will best give notice to
the creditors of the said debtor, and in the newspaper so designated said order
shall be published as often as may be prescribed by the court or the judge
thereof.
Said order shall further contain an absolute injunction forbidding the petitioning
debtor from disposing in any manner of his property, except in so far as concerns
the ordinary operations of commerce or of industry in which the petitioner is
engaged, and, furthermore, from making any payments outside of the necessary
or legitimate expenses of his business or industry, so long as the proceedings
relative to the suspension of payments are pending, and said proceedings for the
purposes of this Act shall be considered to have been instituted from the date of
the filing of the petition.
Sec. 4. Publication order; Deposit. A copy of said order shall immediately be
published 1 by the clerk of said court, in the newspaper designated therein, for
the number of times and in the form prescribed by the court or the judge thereof,
and the clerk of said court shall cause a copy of said order to be delivered
personally or to be sent forthwith by registered mail, postage prepaid, to all
creditors named in the schedule. There shall be deposited in addition to the sum
of twenty-four Philippine pesos, which shall be paid to the clerk for the filing and
registration of the petition, including all proceedings until the expediente is
completed, an amount sufficient to defray all expense of publication ordered by
the court, necessary postage, and ten centavos for each copy, to be delivered
personally or mailed to the creditors, which last-named sum is hereby constituted
the legal fee of the clerk for the personal delivery or mailing required by this
section.
Sec. 5. Creditors cited to appear. Only creditors included in the schedule filed
by the debtor shall be cited to appear and take part in the meeting mentioned in
section three, and they shall be notified upon delivery or transmission to them of
a copy of the order calling the meeting to appear at same with the written
evidences of their respective claims, without which they shall not be admitted.
Sec. 6. Pending Execution. If any execution be pending against the debtor it
shall not be consolidated with this proceeding, but the course thereof shall be
suspended before sale of property is made thereunder, provided the debtor
makes a request therefor to the court before which the proceeding for suspension
of payments is pending, unless the execution be against property especially
mortgaged which is hereby exempted from the least the provisions of this
section. The suspension ordered by virtue of this section shall lapse when three
months shall have passed without the proposed agreement being accepted by the
creditors or as soon as it is denied. No creditor and the other than those
mentioned in section nine shall sue or institute proceedings to collect his claim
from the debtor from the moment that suspension of payments is applied for and
while the proceedings are pending.
Sec. 7. Creditors may be represented at the meeting by one or more lawyers or by
any person authorized by power of attorney, which document shall be presented
and be attached to the record.

Persons appearing for more than one creditor shall have only one personal vote,
but the claims presented by them shall be taken into consideration for the
purpose of arriving at the majority of the amount represented.
Sec. 8. Creditors necessary to hold a meeting; Meeting; Minutes of the meeting.
The presence of the creditors representing at least three-fifths the liabilities
shall be necessary for holding a meeting. The meeting shall be held on the day
and at the hour and place designated, the judge, or commissioner deputized by
him when he is absent from the province where the meeting is held, acting as
president and the clerk as secretary thereof, subject to the following rules:
(a) The clerk shall prepare for insertion in the minutes of the meeting a statement
of the persons present and their claims; the judge, or, in default thereof, the
commissioner, shall examine the written evidences of the claims and the powers
of attorney, if any. If the persons present who have complied with the foregoing
rules represent at least three-fifths of the liabilities, the judge or commissioner
shall declare the meeting open for business.
(b) The petition of the debtor, the schedule of debts and of property, the statement
of assets and liabilities, and the proposed agreement filed there- with shall be
read forthwith by the clerk, and the discussion shall be opened.
(c) The debtor may modify his proposition or propositions in view of the result of
the debate, or insist upon the ones already made, and the judge or commissioner,
without further discussion, shall clearly and succinctly place these several
propositions before the meeting for a vote thereupon.
(d) The vote shall be taken by a call of names and shall be inserted in and the
minutes; a majority vote shall rule.
(e) To form a majority it is necessary
1. That two-thirds of the creditors voting unite upon the same position.
2. That the claims represented by said majority vote amount to at least three-fifths
of the total liabilities of the debtor mentioned in the petition.
(f) After the result of the voting has been announced, all protests made against
the majority vote shall be drawn up, and there shall be inserted therein the
proposition or propositions voted upon, which, after having been read and
approved, shall be signed by the judge or commissioner together with all persons
taking part in the voting; if any such persons shall be unable to write, any person
present shall sign, at their request, and the clerk shall certify to all of the above.
Sec. 9. Persons who may refrain from voting. Persons having claims for
personal labor, maintenance, expenses of last illness and funeral of the wife or
children of the debtor, incurred in the sixty days immediately preceding the filing
of the petition, and persons having legal or contractual mortgages, may refrain
from attending the meeting and from voting therein. Such persons shall not be
bound by any agreement determined upon at such meeting, but if they should
join in the voting they shall be bound in the same manner as are the other
creditors.
Sec. 10. Rejection of agreement. The proposed agreement shall be deemed
rejected if the number of creditors required for holding a meeting do not attend
thereat, or if the two majorities mentioned in rule (e) of section eight are not in
favor thereof, even if the negative vote itself does not receive such majorities.
Sec. 11. Termination of proceedings without recourse; Court hearing. If the
decision of the meeting be negative as regards the proposed agreement or if no
decision is had in default of such number or of such majorities, the proceeding
shall be terminated without recourse and the parties concerned shall be at liberty
to enforce the rights which may correspond to them. If the decision is favorable
to the debtor it may be objected to within ten days following the date of the
meeting by any creditor who attended the meeting and who dissented from and
protested against the vote of the majority. The opposition or objection to the
decision of the majority favorable to the debtor shall be proceeded with as in any
other incidental motion, the debtor and the creditors who shall appear declaring
their purpose to sustain the decision of the meeting being the defendants. The
court shall hear and pass upon such objection as soon as possible in a summary
manner, and in its order, which shall be final, it shall declare whether or not the
decision of the meeting is valid. In case that the decision of the meeting is held to
be null, the court shall declare the proceeding terminated and the parties
concerned at liberty to exercise the rights which may correspond to them; and in
case the decision of the meeting is declared valid, or when no opposition or
objection to said decision has been presented, the court shall order that the
agreement be carried out and the persons concerned shall be bound by the
decision of the meeting. The court may also issue all orders which may be proper
to enforce the agreement on motion of any of the parties litigant. The order

directing the agreement to be made effective shall be binding upon all creditors
included in the schedule of the debtor who may have been properly summoned,
but not upon creditors mentioned in section nine who failed to attend the meeting
or refrained from voting therein, and their rights shall not be affected by the
agreement unless they may have expressly or impliedly consented thereto.
Sec. 12. The causes for which objection may be made to the decision of the
meeting shall be
(a) Defects in the call for the meeting, in the holding thereof, and in and the
deliberations had thereat which prejudice the rights of the creditors;
(b) Fraudulent connivance between one or more creditors and in debtor to vote in
favor of the proposed agreement;
(c) Fraudulent conveyance of claims for the purpose of obtaining a majority.
Sec. 13. Failure of debtor to perform agreement. If the debtor fails wholly or in
part to perform the agreement decided upon at the meeting of the creditors, all
the rights which the creditors had against the debtor before the agreement shall
revest in them. In such case the debtor may be made subject to the bankruptcy
and insolvency proceedings in the manner established by the following chapters
of this Act:
CHAPTER III
VOLUNTARY INSOLVENCY
Sec. 14. Application. An insolvent debtor, owing debts exceeding in amount the
sum of one thousand pesos, may apply to be discharged from his debts and
liabilities by petition to the Court of First Instance of province or city in which he
has resided for six months next preceding the filing of such petition. In his
petition he shall set forth his of residence, the period of his residence therein
immediately prior to filing said petition, his inability to pay all his debts in full, his
willingness to surrender all his property, estate, and effects not exempt from
execution for the benefit of his creditors, and an application to be adjudged an
insolvent. He shall annex to his petition a schedule and inventory in the form
herein-after provided. The filing of such petition shall be an act of insolvency.
Sec. 15. Statement of debts and liabilities. Said schedule must contain a full
and true statement of all his debts and liabilities, together with a list of all those to
whom, to the best of his knowledge and belief, said debts or liabilities are due,
the place of residence of his creditors and the sum due each the nature of the
indebtedness or liability and whether founded on written security, obligation,
contract or otherwise, the true cause and consideration thereof, the time and
place when and where such indebtedness or liability accrued, a declaration of any
existing pledge, lien, mortgage, judgment, or other security for the payment of the
debt or liability, and an outline of the facts giving rise or which might give rise to
a cause of action against such insolvent debtor.
Sec. 16. Description of real and personal property. Said inventory must
contain, besides the creditors, an accurate description of all the real and personal
property, estate, and effects of the petitioner, including his homestead, if any,
together with a statement of the value of each item of said property, estate, and
effects and its location, and a statement of the incumbrances thereon. All
property exempt by law from execution 2 shall be set out in said inventory with a
statement of its valuation, location, and the incumbrances thereon, if any. The
inventory shall contain an outline of the facts giving rise, or which might give
rise, to a right of action in favor of the insolvent debtor.
Sec. 17. Verification, form of . The petition, schedule, and inventory must be
verified by the affidavit of the petitioner, annexed thereto, and shall be in form
substantially as follows: "I, _______________., do solemnly swear that the
schedule and inventory now delivered by me contain a full, correct, and true
discovery of all my debts and liabilities and of all goods, effects, estate, and
property of whatever kind or class to me in any way belonging. The inventory also
contains a full, true and correct statement of all debts owing or due to me, or to
any person or persons in trust for me and of all securities and contracts whereby
any money may hereafter become due or payable to me or by or through which
any benefit or advantage whatever may accrue to me or to my use, or to any other
person or persons in trust for me. The schedule contains a clear outline of the
facts giving rise, or which might give rise, to a cause of action against me, and
the inventory contains an outline of the facts giving rise, or which might give rise,
to any cause of action in my favor. I had no lands, money, stock, or estate,
reversion, or expectancy, or property of any kind, except that set forth in said
inventory. I have no instance created or acknowledged a debt for a greater sum
than I honestly and truly owe. I have not, directly or indirectly, concealed,
fraudulently sold, or otherwise fraudulently disposed of, any part of my real or
personal property, estate, effects, or rights of action, and I have not in any way

compounded with any of my creditors in order to secure such creditors, or to

receive or to accept any profit or advantage therefrom, or to defraud or deceive in
any manner any creditor to whom I am indebted. So help me God."
Sec. 18. Order of court declaring petitioner insolvent; Publication notice. Upon
receiving and filing said petition, schedule, and inventory, the court, or the judge
thereof in vacation, shall make an order declaring the petitioner insolvent, and
directing the sheriff of the province or city in which the petition is filed to take
possession of, and safely keep, until the appointment of a receiver or assignee,
all the deeds, vouchers, books of account, papers, notes, bonds, bills, and
securities of the debtor, and all his real and personal property, estate, and effects,
except such as may be by law exempt from execution. 3 Said order shall further
forbid the payment to the debtor of any debts due to him and the delivery to the
debtor, or to any person for him, and the transfer of any property by him, and
shall further appoint a time and place for a meeting of the creditors to choose an
assignee of the estate. Said order shall designate a newspaper of general
circulation published in the province or city in which the petition is filed, if there
be one, and if there be none, in a newspaper which, in the opinion of the judge,
will best give notice to the creditors of the said insolvent, and in the newspaper
so designated said order shall be published 4 as often as may be prescribed by
the court or the judge The time appointed for the election of an assignee shall not
be less than two, nor more than eight, weeks from the date of the order of
adjudication. Upon the granting of said order all civil proceedings pending
against said insolvent shall be stayed. When a receiver is appointed, or an
assignee chosen, as provided in this Act, the sheriff shall thereupon deliver to
such receiver or assignee chosen, as provided in this Act, the sheriff shall
thereupon deliver to such receiver or assignee, as the case may be, all the
property, assets, and belongings of the insolvent which have come into his
possession, and he shall be allowed and paid as compensation for his services
the same expenses and fees as would by law be collectible if the property had
been levied upon and safely kept under attachment.
Sec. 19. Publication of order. A copy of said order shall immediately be
published 5 by the clerk of said court, in the newspaper designated therein, for
the number of times and as prescribed by the court or the judge thereof, and a
copy of said order shall be delivered personally or sent by the clerk forthwith by
registered mail, postage prepaid, to all creditors named in the schedule. There
shall be deposited, in addition to twenty-four pesos, which shall be received by
the clerk on commencing such proceedings, a sum of money sufficient to defray
the expense of the publication ordered by the court, necessary postage, and ten
centavos for each copy, to be delivered personally or mailed to the creditors,
which last-named sum is hereby constituted the legal fee of the clerk for the
personal delivery or mailing required by this section.
CHAPTER IV
INVOLUNTARY INSOLVENCY
Sec. 20. Petition; Acts of insolvency. An adjudication of insolvency may be
made on the petition of three or more creditors, residents of the Philippine
Islands whose credits or demands accrued in the Philippine Islands, and the
amount of which credits or demands are in the aggregate not less than one
thousand pesos: Provided, That none of said creditors has become a creditor by
assignments, however made, within thirty days prior to the filing of said petition.
Such petition must be filed in the Court of First Instance of the province or city in
which the debtor resides or has his principal place of business, and must be
verified by at least three of the petitioners. The following shall be considered acts
of insolvency, and the petition for insolvency shall set forth one or more of
insolvency such acts: (1) That such person is about to depart or has departed
from the Philippine Islands, with intent to defraud his creditors; (2) that being
absent from the Philippine Islands, with intent to defraud his creditors, he
remains absent; (3) that he conceals himself to avoid the service of legal process
for purpose of hindering or delaying or defrauding his creditors; (4) that he
conceals, or is removing, any of his property to avoid its being attached or taken
on legal process; (5) that he has suffered his property to remain under attachment
or legal process for three days for the purpose of hindering or delaying or
defrauding his creditors; (6) that he has confessed or offered to allow judgment in
favor of any creditor or claimant for the purpose of hindering or delaying or
defrauding any creditor or claimant; (7) that he has willfully suffered judgment to
be taken against him by default for the purpose of hindering or delaying or
defrauding his creditors; (8) that he has suffered or procured his property to be
taken on legal process with intent to give a preference to one or more of his
creditors and thereby hinder, delay, or defraud any one of his creditors; (9) that he
has made any assignment, gift, sale, conveyance, or transfer of his estate,
property, rights, or credits with intent to delay, defraud, or hinder his creditors;
(10) that he has, in contemplation of insolvency, made any payment, gift, grant,
sale conveyance, or transfer of his estate, property, rights, or credits; (11) that
being a merchant or tradesman he has generally defaulted in the payment of his
current obligations for a period of thirty days; (12) that for a period of thirty days

he has failed, after demand, to pay any moneys deposited with him or received by
him in a fiduciary capacity; and (13) that an execution having been issued against
him on final judgment for money, he shall have been found to be without
sufficient property subject to execution to satisfy the judgment. The petitioners
may, from time to time, by leave of the court, amend and or amendments to relate
back to and be received as embraced in the original petition. The said petition
shall be accompanied by a bond, 6 approved by the court, with at least two
sureties, in such penal sum as the court shall direct, conditioned that if the
petition in insolvency be dismissed by the court, or withdrawn by the petitioner,
or if the debtor shall not be declared an insolvent, the petitioners will pay to the
debtor alleged in the petition to be insolvent all costs, expenses, and damages
occasioned by the proceedings dent, the in insolvency, together with a
reasonable counsel fee to be fixed by the court. The court may, upon motion,
direct the filing of an additional bond, with different sureties, when deemed
necessary.
Sec. 21. Order to debtor to show cause. Upon the filing of such creditors'
petition, the court or a judge shall issue an order requiring such debtor to show
cause, at a time and place to be fixed by said court or judge, why he should not
be adjudged an insolvent debtor; and at the same time, or thereafter, upon good
cause shown therefor, said court or judge may make an order forbidding the
payment of any debts, and the delivery of any the court property belonging to
such debtor to him or to any other person for his benefit or the transfer of any
property by him.
Sec. 22. Copies served on debtor. A copy of said petition, with a copy of the
order to show shall be served on the debtor, in the same manner as is provided
by law for the service of summons in civil actions, 7 but such shall be made at
least five days before the time fixed for the hearing: Provided, That if, for any
reason, the service is not made, the order may be renewed, and the time and
place of hearing changed by supplemental order of the court. Whenever the
debtor on whom service is to be made resides out of the Philippine Islands; or
has departed from the Philippine Islands; or can not, after due diligence, be found
within the Philippine Islands; or conceals himself to avoid the service of the order
to show cause, or any other process or orders in the matter; or is a foreign
corporation having no managing or business agent, cashier, or secretary within
the Philippine Islands upon whom service can be made, and such facts are shown
to the court or a judge thereof, shall make an order that the service of such order,
or other process, be made by publication, in the same manner, and with the same
effect, as service of summons by publication in ordinary civil actions.
Sec. 23. Answer to petition. At the time fixed for the hearing of said order to
show cause, or at another time to which such hearing may be adjourned, the
debtor must answer the petition, or may demur for the same causes as are
provided for demurrer in other cases by the Code of Civil Procedure. 9 If he
demur and the demurrer be overruled, the debtor shall immediately answer the
petition. Such answer shall contain a specific denial of the material allegations of
the petition controverter by him, and shall be sworn to; and the issues raised
thereon shall be promptly tried and disposed of. If, upon such trial, the issues are
found in favor of the respondent, the proceedings shall be dismissed, and the
respondent shall be allowed all costs, counsel fees, expenses, and damages
sustained by reason of the proceedings therein. Counsel fees, costs, expenses,
and damages shall be fixed and allowed by the court.
Sec. 24. Default; Payments to debtor. If the respondent shall make default, or if,
after trial, the issues are found in favor of the petitioners, the court shall make an
order adjudging that said respondent is and was, at the time of filing the petition,
an insolvent debtor and that the debtor was guilty of the acts and things charged
in the petition, or such of them as the court may find to be true; and shall require
said debtor, within such time as the court may designate, not to exceed three
days, to file in court the schedule and inventory provided for in sections fifteen
and sixteen of this Act, duly verified as required of a petitioning debtor: 10
Provided, That in the affidavit of the insolvent, touching his property and its
disposition, he shall not be required to swear that he has not made any fraudulent
preference or committed any other act in conflict with the provisions of this Act;
but he may do so if he desires. Said order shall further direct the sheriff of the
province or city where the insolvency petition is filed, or the receiver, if one has
been theretofore appointed, to take possession of and safely keep, until the
appointment of an assignee, all the deeds, vouchers, books of account, papers,
notes, bills, bonds and securities of the debtor, and all his real and personal
property, estate and effects, except such as may be by law exempt from
execution. 11 Said order shall further forbid the payment to the debtor of any
debts due to him, and the delivery to the debtor, or to any person for him, of any
property belonging to him, and the transfer of any property by him, and shall
further appoint a time and place for a meeting of the creditors to choose an
assignee of the estate. Said order shall designate a newspaper of general
circulation published in the province or city in which the petition is filed, if there
be one, and if there be none, in a newspaper which, in the opinion of the judge,
will best give notice to the creditors of the said insolvent, and in the newspaper

so designated said order shall be published 12 as often as may be prescribed by

the court or the judge thereof. The time appointed for the election of an assignee
shall not be less than two nor more than eight weeks from the date of the order of
adjudication. Upon the granting of said order, all civil proceedings pending
against the said insolvent shall be stayed. When an assignee is chosen as
provided in this Act, the sheriff or receiver, if there be one, shall thereupon deliver
to such assignee all the property, estate, and belongings of the insolvent, which
have come into his possession, and he shall be allowed and paid as
compensation for his services the same expenses and fees as would by law be
collectible if the property had been levied upon and safely kept under attachment.
Sec. 25. Publication and service of order. A copy of the order provided for in
the last preceding section of this Act shall immediately be published by the clerk
of said court in the newspaper designated therein for the number of times and as
prescribed by the court or the judge thereof, and upon the filing, at any time
before the date set for such meeting, of the schedule required by said last
preceding section, a copy of said order shall be delivered personally or sent by
the clerk forthwith by registered mail, postage prepaid, to all creditors named in
said schedule. If said schedule is not filed prior to the day fixed for the election of
an assignee, publication of said order as herein required shall be of itself
sufficient notice to the creditors of the time and place appointed for the election
of an assignee. No order of adjudication upon creditor's petition shall be entered
unless there be first deposited, in addition to the cost of commencing said
proceedings, a sum of money sufficient to defray the expense of the publication
ordered by the court, necessary postage, and ten centavos for each copy to be
delivered personally or mailed to the creditors, which last-named sum is hereby
constituted the legal fee of the clerk for the personal delivery or mailing required
by this section.
Sec. 26. Absentee debtors; Sheriff to take possession. In all cases where the
debtor resides out of the Philippine Islands; or has departed from the Philippine
Islands; or can not, after due diligence, be found within the Philippine Islands; or
conceals himself to avoid service of the order to show cause, or any other
preliminary process or orders in the matter; or is a foreign corporation having no
managing or business agent, cashier, or secretary within the Philippine Islands
upon whom service or orders and process can be made, and it therefore becomes
necessary to obtain service of process and order to show cause, as provided in
section twenty-two of this Act, then the petitioning creditors, upon submitting the
affidavits requisite to procure an order of publication, and presenting a bond in
double the amount of the aggregate sum of their claims against the debtor, shall
be entitled to an order of the court directing the sheriff of the province or city in
which the matter is pending to take into his custody a sufficient amount of
property of the debtor to satisfy the demands of the petitioning creditors and the
costs of the proceedings. Upon receiving such order of the court to take into
custody property of the debtor, it shall be the duty of the sheriff to take
possession of the property and effects of the debtor, not exempt from execution,
13 to an extent sufficient to cover the amount provided for, and to prepare, within
three days from the time of taking such possession, a complete inventory of all
the property so taken, and to return it to the court as soon as completed. The time
for taking the inventory and making return thereof may be extended for good
cause shown to the court or a judge thereof. The sheriff shall also prepare a
schedule of the names and residences of the creditors, and the amount due each,
from the books of the debtor, or from such other papers or data of the debtor
available as may come to his possession, and shall file such schedule list of
creditors and inventory with the clerk of the court.
Sec. 27. All property taken to be held for all creditors; Appeal bonds; Exceptions
to sureties. In all cases where property is taken into custody by the sheriff, as
provided in the preceding section, if it does not embrace all the property and
effects of the debtor not exempt from execution, 14 any other creditor or creditors
of the debtor, upon giving bond to be approved by the court in double the amount
of their claims, singly or jointly, shall be entitled to similar orders, and to like
action, by the sheriff, until all claims be provided for, if there be sufficient
property or effects. All property taken into custody by the sheriff by virtue of the
giving of any such bonds shall be held by him for the benefit of all creditors of the
debtor whose claims shall be duly proved, and as provided, in this Act. The
bonds provided for in this and the preceding section to procure the order for
custody of the property and effects of the debtor, shall be conditioned that if,
upon final hearing of the petition in insolvency, the court shall find in favor of the
petitioners, such bonds and all of them shall be void; if the decision be in favor of
the debtor, the proceedings shall be dismissed, and the debtor, his heirs,
administrators, executors, or assigns, shall be entitled to recover such sum of
money as shall be sufficient to cover the damages sustained by him, not to
exceed the amount of the respective bonds. Such damages shall be fixed and
allowed by the court. If either the petitioners or the debtor shall appeal from the
decision of the court, upon final hearing of the petition the appellant shall be
required to give bond to the successful party in a sum double the amount of the
value of the property in controversy, and for the costs of the proceedings. Such
bond shall be approved by the court.

Any person interested in the estate may except to the sufficiency of the sureties
on such bond or bonds. When excepted to, the petitioner's sureties, upon notice
to the person excepting of not less than two nor more than five days, must justify
as to their sufficiency; and upon failure to justify, or if others in their place fail to
justify at the time and place appointed, the judge shall issue an order vacating the
order to take the property of the debtor into the custody of the sheriff, or denying
the appeal, as the case may be.
Sec. 28. Sale under execution. If, in any case, proper affidavits and bonds are
presented to the court or a judge thereof, asking for and obtaining an order of
publication and an order for the custody of the property of the debtor, as provided
in sections twenty-six and twenty-seven of this Act, and thereafter the petitioners
shall make it appear satisfactorily to the court or a judge thereof that the interest
of the parties to the proceedings will be subserved by a sale thereof, the court
may order such property to be sold in the same manner as property is sold under
execution, 15 the proceeds to be deposited in the court to abide the result of the
proceedings.
CHAPTER V
ASSIGNEES
Sec. 29. Election; Creditors holding security. No creditor shall be entitled to
vote for the election of an assignee unless he shall have filed his claim in the
office of the clerk of the court in which the proceedings are pending at least two
days prior to the time appointed for such election. All claims shall contain a
statement showing the amount and nature of the claim and security, if any. The
claim shall be verified by the claimant, or his duly authorized agent or attorney.
No claim barred by the statute of limitations 16 shall be proved or allowed against
the estate of an insolvent debtor for any purpose. Any person interested in the
estate of the insolvent may file exceptions to the legality of good faith of any
claim, by setting forth specifically in writing his interest in the estate, and the
grounds of his objection to such claim. Such exceptions shall be verified by the
affidavit of the party objecting, or his duly authorized agent or attorney, and the
affidavit shall set out that such exceptions are not made for the purpose of delay
and are made in good faith in the best interests of said estate. Exceptions to any
claim must be filed with the clerk of the court at least one day before the time
appointed for the election of an assignee, and such exceptions shall be heard and
disposed of by the court, on affidavit or other evidence, in a summary manner,
before the election of an assignee. No creditor or claimant who holds any
mortgage, pledge, or lien of any kind whatever as security for the payment of his
claim or attachment or execution on property of the debtor duly recorded and not
dissolved under this Act shall be permitted to vote at the election of the assignee
any part of his secured claim unless he shall first have the value of such security
fixed as provided section fifty-nine of this Act, or shall surrender to the sheriff or
receiver of the estate of the insolvent, if there be a receiver, all such property, or
assign such lien to such sheriff or receiver. The surrender or assignment of such
security or lien shall be for the benefit of all creditors of the estate of the
insolvent. The value of such security, if fixed by the court, shall be so fixed at
least one day before the day appointed for the election of an assignee, in which
event the claimant may prove his demand as provided in this section for any
unsecured balance, subject to the filing of exceptions as in all other claims.
Sec. 30. Election of assignee in open court. At a meeting of the creditors in
open court or, if the court is not in session, in the presence of the judge or the
clerk of the court, those being entitled to vote, as provided by section twentynine, shall proceed to the election of an assignee. The majority of the creditors
who have proven their claims, such majority being both in number and amount,
must concur for the election of an assignee. The clerk of the court shall keep a
minute of the deliberations of said creditors, and of the election and appointment
of the assignee, and enter the same upon the records of the court, and, in the
absence of the judge, shall send a copy of such record to him at the place where
he may be found. The assignee shall file, within five days, unless the time be
extended by the court, with the clerk, a bond, in an amount to be fixed by the
court, to the Government of the Philippine Islands, with two or more sufficient
sureties, approved by the court, and conditioned upon the faithful performance of
the duties devolving upon him. The bond shall not be void upon the first recovery,
but may be sued upon from time to time by any person aggrieved, in his own
name, until the whole penalty be exhausted. The sureties on such bond may be
required to justify as to their sufficiency upon the application of any party
interested.
Sec. 31. Appointment of assignee by court. If, on the day appointed for the
meeting, creditors do not attend, or fail or refuse to elect an assignee, or if, after
election, the assignee shall fail to qualify within the proper time, or if a vacancy
occurs by death or otherwise, the court shall appoint an assignee and fix the
amount of his bond.

Sec. 32. Transfer of property to assignee. As soon as an assignee is elected or

appointed and qualified, the clerk of the court shall, by an instrument under his
hand and seal of the court, assign and convey to the assignee all the real and
personal property, estate, and effects of the debtor with all his deeds, books, and
papers relating thereto, and such assignment shall relate back to the
commencement of the proceedings in insolvency, and shall relate back to the
acts upon which the adjudication was founded, and by operation of law shall vest
the title to all such property, estate, and effects in the assignee, although the
same is then attached on mesne process, as the property of the debtor. Such
assignment shall operate to vest in the assignee all of the estate of the insolvent
debtor not exempt by law from execution. 17 It shall also dissolve any attachment
levied within one month next preceding the commencement of the insolvency
proceedings and vacate and set aside any judgment entered in any action
commenced within thirty days immediately prior to the commencement of
insolvency proceedings and shall vacate and set aside any execution issued
thereon and shall vacate and set aside any judgment entered by default or
consent of the debtor within thirty days immediately prior to the commencement
of the insolvency proceedings.
Sec. 33. Recovery and action of assignee. The assignee shall have the right to
recover all the state debts, and effects of said insolvent. If, at the time of the
commencement of proceedings in insolvency, an action is pending in the name of
the debtor, for the recovery of a debtor other thing which might or ought to pass
to the assignee by the assignment, the assignee shall be allowed and admitted to
prosecute the action, in like manner and with like effect as if it had been originally
commenced by him. If there are any rights of action in favor of the insolvent for
damages, on any account, for which an action is not pending, the assignee shall
have the right to prosecute the same with the same effect as the insolvent might
have done himself if no proceedings in insolvency had been instituted. If any
action or proceeding in which the insolvent is defendant is pending at the time of
the adjudication, the assignee may defend the same in the same manner and with
like effect as it might have been defended by the insolvent. In a suit prosecuted or
defended by the assignee, a certified copy of the assignment made to him shall
be conclusive evidence of his authority to sue or defend.
Sec. 34. Registration of assignment to assignee. The assignee shall, within one
month after the making of the assignment to him, cause the same to be recorded
in every province or city within the Philippine Islands where any real estate
owned by the debtor is situated, and the record of such assignment, or a duly
certified copy thereof, shall be conclusive evidence thereof in all courts. If the
schedule and inventory required by this Act have not been filed by the debtor the
assignee shall, within one month after his election, prepare and file such
schedule and inventory from the best information he can obtain, and shall
thereupon personally deliver notice or send same by registered mail, postage
prepaid, to all creditors named in such schedule, whose claims have not been
filed, to forthwith prove their demands.
Sec. 35. Resignation of assignee. Any assignee may at any time, by writing
filed in court, resign his appointment, having first settled his accounts and
delivered up all the deeds, vouchers, books of account, notes, bills, bonds, and
securities of the debtor and all his real and personal property, estate, and effects
to such successor as the court shall appoint: Provided, That if, in the discretion
of the court, the circumstances of the case require it, upon good cause being
shown, the court may, at any time before such settlement of account and delivery
of the estate shall have been completed, revoke the appointment of such
assignee and appoint another in his stead. The liability of the outgoing assignee,
or of the sureties on his bond, shall not be in any manner discharged, released, or
affected by such appointment of another in his stead.
Sec. 36. The said assignee shall have power:
1. To sue and recover all the estate, assets, debts, and claims, belonging to or
due to such debtor; and no set-off or counterclaim shall be allowed in any such
for debts contracted by the insolvent within thirty days immediately preceding the
filing of the petition of insolvency except in case of creditors specified in section
fifty of this Act.
2. To take in to his possession all the estate of such debtor except property
exempt by law from execution, 18 whether attached or delivered to him, or
afterwards discovered, and all books, vouchers, evidence of indebtedness, and
securities belonging to the same.
3. In case of a nonresident or absconding or concealed debtor, to demand and
receive of every sheriff who shall have attached any of the property of such
debtor, or who shall have in his possession any moneys arising from the sale of
such property, all such property and moneys, on paying him his lawful costs and
charges for attaching and keeping the same.
4. From time to time to sell at public auction after advertisement in the manner

provided by subsections (1), (2), and (3) of section four hundred and fifty-four of
the Code of Civil Procedure, 19 upon order of the court, any of the estate, real and
personal, which has come into his possession, and which is vested in him as
such assignee, and on such sales to execute the necessary conveyances and
bills of sale.
5. To redeem all valid mortgages and conditional contracts, and all valid pledges
of personal property, and to satisfy any judgments which may be an incumbrance
on any property sold by him; or to sell such property, subject to such mortgage,
contracts, pledges, judgments, or liens.
6. To settle all matters and accounts between such debtor and his creditors
subject to the approval of the court.
7. Under the order of the court or judge appointing him, to compound with any
person indebted to such debtor, and thereupon discharge all demands against
such person.
8. To recover from any person receiving a conveyance, gift transfer, payment, or
assignment, made contrary to any provision of this Act, the property thereby
transferred or assigned; or in case a redelivery of the property can not be had, to
recover the value thereof with damages for the detention.
Sec. 37. Embezzlement, etc. If any person, before the assignment is made,
having notice of the commencement of the proceedings in insolvency, or having
reason to believe that insolvency proceedings are about to be commenced,
embezzles or disposes of any of the moneys, goods, chattels, or effects of the
insolvent, he is chargeable therewith, and liable to an action by the assignee for
double the value of the property so embezzled or disposed of, to be recovered for
the benefit of the insolvent's estate.
Sec. 38. Penalties and forfeitures. The same penalties, forfeitures, and
proceedings by citation, examination, and commitment shall apply on behalf of an
assignee against persons suspected of having concealed, embezzled, conveyed
away, or disposed of any property of the debtor, or of having possession or
knowledge of any deeds, conveyances, bonds, contracts, or other writings which
relate to any interest of the debtor in any real or personal estate as provided in
the case of estates of deceased persons in sections seven hundred and nine to
seven hundred and thirteen, inclusive, of the Code of Civil Procedure. 20
Sec. 39. Conversion of property into money. The assignee shall as speedily as
possible convert the estate, real and personal, into money. He shall keep a regular
account of all moneys received by him as assignee, to which every creditor or
other person interested therein may, at all reasonable times, have access. No
private sale of any property of the estate of an insolvent debtor shall be valid
unless made under the order of the court, upon a petition in writing, which shall
set forth the facts showing the sale to be necessary. Upon filing the petition,
notice of the hearing thereof of at least ten days shall be given by publication and
mailing, in the same manner as is provided in section nineteen of this Act. If it
appears that a private sale is for the best interests of the estate, the court shall
order it to be made.
Sec. 40. Perishable property. In all cases when it appears to the satisfaction of
the court that the estate of the debtor, or any part thereof, is of a perishable
nature, or is liable to deteriorate in value, or is disproportionately expensive to
keep, and that the insolvent's estate will suffer if sufficient time elapses for the
giving of notice, the court may order the same to be sold in such manner and at
such time as may be deemed most expedient, under the direction of the sheriff,
receiver, or assignee, as the case may be, who shall hold the funds received in
place of the property sold until further order of the court.

would be entitled as such assignee: And provided further, further That if there
should be two or more assignees the court shall order an equitable division of the
compensation herein provided, and if for any reason an assignee's term is
completed before the final settlement of the estate and a successor is appointed
the court shall not allow to any such assignee prior to the settlement of the estate
an amount exceeding four per centum of the sums of money coming into his
hands. Upon the final settlement of the estate an equitable distribution of the
compensation of the assignees shall be made.
Sec. 43. Filing of accounts with vouchers, statements, etc.; Decisions of court
upon claims; Additional accounts. At the expiration of three months from the
appointment of the assignee in any case, or as much earlier as the court may
direct, a time and place shall be fixed by the court at which the assignee shall file
just and true accounts of all his receipts and payments with proper vouchers,
verified by his oath and a statement of the property outstanding, specifying the
causes of its outstanding, also what debts or claims are yet undetermined, and
stating what sum remains in his possession, and shall accompany the same with
an affidavit that notice by registered mail has been given to all creditors named in
the schedule filed by the debtor or the assignee that said accounts will be heard
at a time specified in such notice, which time shall not be less than two nor more
than eight weeks from the filing of such accounts. At the hearing the court shall
audit the accounts of the assignee, and any person interested may appear and file
exceptions thereto and contest the same. The court shall thereupon confirm said
accounts if they shall be found to be correct, or order the same corrected if errors
shall be found therein. The court shall also, in such hearing, determine the
property which must be deducted from the estate as another's, under the
provisions of section forty-eight of this Act, and the right of the claimants to
participate in the dividend, and may order a dividend paid to those creditors
whose claims have been proven and allowed. The decision of the court
theretofore rendered as to whether any claimant was entitled to vote for an
assignee shall not be conclusive upon the right of the claimant to share in such
dividend; but all claimants who were so allowed to vote shall participate in such
dividend unless objections were filed to the same prior to such hearing. If any
such objections have been filed against any claim, or if any claimant was refused
the right to vote, the court shall determine said objections and the rights of all
such claimants in such hearing and refuse or allow the same before the
declaration of a dividend. Thereafter, further accounts, statements, and dividends
shall be made in like manner as often as occasion requires: Provided, however,
That it shall be the duty of the assignee to file his final account within one year
from the date of the order of adjudication, unless the court, after notice to
creditors, shall grant further time, upon a satisfactory showing that great loss and
waste would result to the estate by reason of the conversion of the property into
money within said time, or that it has been impossible to do so by reason of
litigation.
Sec. 44. Motion to require accounts, filing of . The court may at any time, upon
the motion of any two or more creditors, require the assignee to file his account
in the manner and upon giving the notice specified in the preceding section, and
if he has funds subject to distribution he may be required to distribute them
without delay.
Sec. 45. Rights of creditors late in proving claims. Whenever any dividend has
been duly declared, the distribution of it shall not be stayed or affected by reason
of debts being subsequently proved, but any creditor proving such a debt shall
be entitled to a dividend equal to those already received by the other creditors
before any further dividend is made to the latter, if the failure to prove such claim
shall not have resulted from his own neglect.

Sec. 41. Outstanding debts, etc. due estate. Outstanding debts, or other
property due or belonging to the estate, which can not be collected and received
by the assignee without unreasonable or inconvenient delay or expense, may be
sold and assigned in like manner as the remainder of the estate. If there are any
rights of action for damages in favor of the insolvent prior to the commencement
of the insolvency proceedings, the same may, with the approval of the court, be
compromised.

Sec. 46. Failure, neglect or refusal by assignee. Should the assignee refuse or
neglect to render his accounts as required by sections forty-three and forty-four
of this Act, or refuse or neglect to pay over a dividend when he shall have, in the
opinion of the court, sufficient funds for that purpose, or shall neglect or
mismanage the estate in any manner whatever or violate any of the provisions of
this Act, the court shall immediately discharge such assignee from his trust, and
shall appoint another in his place. The assignee so discharged shall forthwith
deliver over to the assignee appointed by the court all the funds, property, books,
vouchers, or securities belonging to the insolvent, and he shall not be entitled for
his services to the compensation provided in section forty-two.

Sec. 42. Expenses and commissions; Division of compensation. Assignees

shall be allowed all necessary expenses in the care, management, and settlement
of the estate, and shall be entitled to charge and receive for their services
commissions upon all sums of money coming to their hands and accounted for
by them, as follows: For the first thousand pesos, at the rate of seven per centum;
for all above that sum and not exceeding ten thousand pesos, at the rate of five
per centum; and for all above that sum, at the rate of four per centum: Provided,
however, That if the person acting as assignee was receiver of the property of the
estate pending the election of an assignee, any compensation allowed him as
such receiver shall be deducted from the compensation to which he otherwise

Sec. 47. Final account. Preparatory to the settlement of the estate, the assignee
shall file his final account in the court, accompanying the same with an affidavit
that a notice by registered mail has been given to all creditors who have proved
their claims, that he will apply for a settlement of his account and for a discharge
from all liability as assignee at a time specified in such notice, which time shall
not be less than two nor more than eight weeks from such filing. At the hearing
the court shall audit the account, and any person interested may appear and file
exceptions in writing and contest the same. The court thereupon shall settle the
account, and order a dividend of any portion of the estate, if any, remaining
undistributed, and shall discharge the assignee, subject to compliance with the

order of the court, from all liability as assignee to any creditor of the insolvent.

court may direct.

CHAPTER VI
CLASSIFICATION AND PREFERENCE OF CREDITORS

Sec. 50. The following are the preferred claims which shall be paid in the order
named:

Sec. 48. Property not belonging to insolvent; Dowry; Paraphernalia property.

Merchandise, effects, and any other kind of property found among the property of
the insolvent, the ownership of which has not been conveyed to him by a legal
and irrevocable title, shall be considered to be the property of other persons and
shall be placed at the disposal of its lawful owners on order of the court made at
the hearing mentioned in section forty-three or at any ordinary hearing, if the
assignee or any creditor whose right in the estate of the insolvent has been
established shall petition in writing for such hearing and the court in its
discretion shall so order, the creditors, however, retaining such rights in said
property as belong to the insolvent, and subrogating him whenever they shall
have complied with all obligations concerning said property.
The following shall be included in this section:
1. Dowry property 21 inestimado and such property estimado which may remain
in the possession of the husband where the receipt thereof is a matter of record
in a public instrument registered under the provisions of sections twenty-one and
twenty-seven of the Code of Commerce in force.
2. Paraphernalia property which the wife may have acquired by inheritance,
legacy, or donation whether remaining in the form in which it was received or
subrogated or invested in other property, provided that such investment or
subrogation has been registered in the registro mercantile in accordance with the
provisions of the sections of the Code of Commerce mentioned in the next
preceding paragraph.
3. Property and effects deposited with the bankrupt, or administered, leased,
rented, or held in usufruct by him.
4. Merchandise in the possession of the bankrupt, on commission, for purchase,
sale, forwarding, or delivery.
5. Bills of exchange or promissory notes without endorsement or other
expression transferring ownership remitted to the insolvent for collection
6. Money remitted to the insolvent, otherwise than on current account, and which
is in his possession for delivery to a definite person in the name and for the
account of the remitter or for the settlement of claims which are to be met at the
unsolvent's domicile.
7. Amounts due the insolvent for sales of merchandise on commission, and bills
of exchange and promissory notes derived therefrom in his possession, even
when the same are not made payable to the owner of the merchandise sold,
provided it is proven that for the obligation to the insolvent is derived therefrom
and that said bills of exchange and promissory notes were in the possession of
the insolvent for account of the owner of the merchandise to be cashed and
remitted, in due time, to the said owner; all of which shall be a legal presumption
when the amount involved in any such sale shall not have been credited on the
books of both the owner of the merchandise and of the insolvent.
8. Merchandise bought on credit by the insolvent so long as the actual delivery
thereof has not been made to him at his store or at any other place stipulated for
such delivery, and merchandise the bills of lading or shipping receipts of which
have been sent him after the same has been loaded by order of the purchaser and
for his account and risk.
In all cases arising under this paragraph assignees may retain the merchandise
so purchased or claim it for the creditors by paying the price thereof to the
vendor.
9. Goods or chattels wrongfully taken, converted, or withheld by the insolvent if
still existing in his possession or the amount of the value thereof.
Sec. 49. Creditors sharing pro rata. All creditors, except those whose claims
are mentioned in the next following section, whose debts are duly proved and
allowed shall be entitled to share in the property and estate pro rata, after the
property belonging to other persons referred to in the last in preceding section
has been deducted therefrom, without priority or preference whatever: Provided,
That any debt proved by any person liable as bail, surety, guarantor, or otherwise,
for the debtor, shall not be paid to the person so proving the same until
satisfactory evidence shall be produced of the payment of such debt by such
person so liable, and the share to which such debt would be entitled may be paid
into court, or otherwise held, for the benefit of the party entitled thereto, as the

(a) Necessary funeral expenses of the debtor, or of his wife, or children who are
under their parental authority and have no property of their own, when approved
by the court;
(b) Debts due for personal services rendered the insolvent by employees,
laborers, or domestic servants immediately preceding the commencement of
proceedings in insolvency;
(c) Compensation due the laborers or their dependents under the provisions of
Act Numbered Thirty-four hundred and twenty-eight, known as the Workmen's
Compensation Act, 22 as amended by Act Numbered Thirty-eight hundred and
twelve, and under the provisions of Act Numbered Eighteen hundred and
seventy-four, known as the Employees' Liability Act 23 and of other laws
providing for payment of indemnity for damages in cases of labor accidents;
(d) Legal expenses, and expenses incurred in the administration of the
insolvent's estate for the common interest of the creditors, when properly
authorized and approved by the court;
(e) Debts, taxes, and assessments due the Insular Government; 24
(f) Debts, taxes, and assessments due to any province or provinces of the
Philippine Islands;
(g) Debts, taxes, and assessments due to any municipality or municipalities of the
Philippine Islands;
All other creditors shall be paid pro rata 25
CHAPTER VII
PARTNERSHIPS & CORPORATIONS
Sec. 51. Partnerships. A partnership, during the continuation of the partnership
business, or after its dissolution and before the final settlement thereof, may be
adjudged insolvent, either on the petition of the partners or any one of them, or
on the petition of three or more creditors of the partnership, qualified as provided
in section twenty of this Act, in either of which cases the court shall issue an
order in the manner provided by this Act, upon which all the property of the
partnership, and also all the separate property of each of the partners, if they are
liable, shall be taken, excepting such parts thereof as may be exempt by law; and
all creditors of the partnership, and the separate creditors of each partner, shall
be allowed to prove their respective claims; and the assignee shall be chosen by
the creditors of the partnership, and shall also keep separate accounts of the
property of the partnership, and of the separate estate of each member thereof.
The expenses of the proceedings shall be paid from the partnership property and
the individual property of the partners in such proportions as the court shall
determine. The net proceeds of the partnership property shall be appropriated to
the payment of the partnership debts and the net proceeds of the individual
estate of each partner to the payment of his individual debts. Should any surplus
remain of the property of any partner after paying his individual debts, such
surplus shall be added to the partnership assets and be applied to the payment of
the partnership debts. Should any surplus of the partnership property remain
after paying the partnership debts, such surplus shall be added to the assets of
the individual partners in the proportion of their respective interests in the
partnership. Certificate of discharge shall be granted or refused to each partner
as the same would or ought to be if the proceedings had been by or against him
alone under this Act; and in all other respects the proceedings as to the partners
shall be conducted in like manner as if they had been commenced and
prosecuted by or against one person alone. If such partners reside in different
provinces, the court in which the petition is first filed shall retain exclusive
jurisdiction over the case. If the petition to be filed by less than all the partners of
a partnership those partners who do not join in the petition shall be ordered to
show cause why they, as individuals, and said partnership, should not be
adjudged to be insolvent, in the same manner as other debtors are required to
show cause upon a creditor's petition, as in this Act provided; and no order of
adjudication shall be made in said proceedings until after the hearing of said
order to show cause.
Sec. 52. Corporations and sociedades anonimas; Banking. The provisions of
this Act shall apply to corporations and sociedades anonimas, and upon the
petition of any officer of any corporation or sociedad anonima, duly authorized by
the vote of the board of directors or trustees, at a meeting specially called for that
purpose, or by the assent in writing of a majority of the directors or trustees as

the case may be, or upon a creditor's petition made and presented in the manner
provided in respect to debtors, of the like proceedings shall be had and taken as
are provided in the case of debtors: Provided, That in case the articles of
association or by-laws of any corporation the or sociedad anonima provide a
method for such proceedings, such method shall be followed. All the provisions
of this Act which apply to the debtor, or set forth his duties, examination, and
liabilities, or prescribe penalties, or relate to fraudulent conveyances, payments,
and assignments, apply to each and every officer of any corporation or sociedad
anonima in relation to the same matters concerning the corporation. Whenever
any corporation is declared insolvent, its property and assets shall be distributed
to the creditors; due at but no discharge shall be granted to any corporation. The
provisions of this Act shall not apply to corporations engaged principally in the
banking business, 26 or to any other corporation as to which there is any special
provision of law for its liquidation in case of insolvency.
CHAPTER VIII
PROOF OF DEBTS
Sec. 53. Class of debts. All debts due and payable from the debtor at the time
of the adjudication of insolvency, and all debts then existing but not payable until
a future time, a discount being made if no interest is payable by the terms of the
contract, may be proved against the estate of the debtor.
Sec. 54. Commercial paper. If the debtor is bound as indorser, surety, bail, or
guarantor, upon any bill, bond, note, or other specialty or contract, or for any debt
any person, and his liability shall not have become absolute until after the
adjudication of insolvency, the creditor may prove the same after such liability
shall have become fixed, and before the final dividend shall have been declared.
Sec. 55. Contingent debts. In all cases of contingent debts and contingent
liabilities, contracted by the debtor, and not herein otherwise provided for, the
creditor may make claim therefor and have his claim allowed, with the right to
share in the dividends, if the contingency shall happen before the order of the
final dividend; or he may, at any time, apply to the court to have the present value
of the debt or liability ascertained and liquidated, which shall be done in such
manner as the court shall order, and it shall be allowed for the amount so
ascertained.
Sec. 56. Bail, surety, etc., for the debtor. Any person liable as bail, surety, or
guarantor, or otherwise, for the debtor, who shall have paid the debt, or any part
thereof, in discharge of the whole, shall be entitled to prove such debt, or to stand
in the place of the creditor, if he shall have proved the same, although such
payments shall have been made after the proceedings in insolvency were
commenced; and any person so liable for the debtor, and who has not paid the
whole of said debt, but is still liable for the same, or any part thereof, may, if the
creditor shall fail or omit to prove such debt, prove the same in the name of the
creditor.
Sec. 57. Rents and periodical payments. Where the debtor is liable to pay rent,
or other debt falling due at fixed and stated periods, the creditor may prove, for a
proportionate part thereof up to the time of the insolvency, as if the same became
due from day to day, and not at such fixed and stated periods.
Sec. 58. Mutual debts and credits. In all cases of mutual debts and mutual
credits between the parties, the account between them shall be stated, and one
debt set off against the other, and the balance only shall be allowed of a claim in
its nature not provable against the estate: Provided, That no set-off or
counterclaim shall be allowed in favor of any debtor to the insolvent of a claim
purchased by or transferred to such debtor within thirty days immediately
preceding the filing, or after the filing of the petition by or against the insolvent.
Sec. 59. Mortgages, pledges, liens, etc.; Release or sale by assignee. When a
creditor has a mortgage, or pledge of real or personal property of the debtor, or a
lien thereon, for securing the payment of a debt owing to him from the debtor, or
an attachment or execution on property of the debt or duly recorded and not
dissolved under this Act, he shall be admitted as a creditor for the balance of the
debt only, after deducting the value of such property, such value to be
ascertained by agreement between him and the receiver, if any, and if no receiver,
then upon such sum as the court or a judge thereof may decide to be fair and
reasonable, before the election of an assignee, or by a sale thereof, to be made in
such manner as the court or judge thereof shall direct; or the creditor may release
or convey his claim to the receiver, if any, or if no receiver then to the sheriff,
before the election of an assignee, or to the assignee if an assignee has been
elected, upon such property, and be admitted to prove his whole debt. If the value
of the property exceeds the sum for which it is so held as security, the assignee
may release to the creditor the debtor's right of redemption thereon on receiving
such excess; or he may sell the property, subject to the claim of the creditor
thereon, and in either case the assignee and creditor, respectively, shall execute

all deeds and writings necessary or proper to consummate the transaction. If the
property is not sold or released, and delivered up, or its value fixed, the creditor
shall not be allowed to prove any part of his debt, but the assignee shall deliver to
the creditor all such property upon which the creditor holds a mortgage, pledge,
or lien, or upon which he has an attachment or execution.
Sec. 60. Creditors proving claims cannot use; Stay of action. No creditor,
proving his debt or claim, shall be allowed to maintain any suit therefor against
the debtor, but shall be deemed to have waived all right of action and suit against
him, and all proceedings already commenced, or any unsatisfied judgment
already obtained thereon, shall be deemed to be discharged and surrendered
thereby; and after the debtor's discharge, upon proper application and proof to
the court having jurisdiction, all such proceedings shall be, dismissed, and such
unsatisfied judgments satisfied of record: Provided, That no valid lien existing in
good faith thereunder shall be thereby affected. A creditor proving his debt or
claim shall not be held to have waived his right of action or suit against the
debtor when a discharge has have been refused or the proceedings have been
determined to the without a discharge. No creditor whose debt is provable under
this Act shall be allowed, after the commencement of proceedings in insolvency,
to prosecute to final judgment any action therefor against the debtor until the
question of the debtor's discharge shall have been determined, and any such suit
proceeding shall, upon the application of the debtor or of any creditor, or the
assignee, be stayed to await the determination of the court on the question of
discharge: Provided, That if the amount due the creditor is in dispute, the suit, by
leave of the court in insolvency, may proceed to judgment for purpose of
ascertaining the amount due, which amount, when adjudged, may be allowed in
the insolvency proceedings, but execution shall be stayed aforesaid.
Sec. 61. Preferences knowingly accepted contrary to this Act. Any person who
shall have accepted any preference, having reasonable cause to believe that the
same was made or given by the debtor contrary to any provision of this Act, shall
not be allowed to prove the debt or claim on account of which the preference was
made or given, nor shall he receive any dividend thereon, until he shall have
surrendered to the assignee all property, money, benefit, or advantage received
by him under such preference.
Sec. 62. Examinations under oath by court. The court may, upon the
application of the assignee, or of any creditor, or without any application, before
or after adjudication in insolvency, examine upon oath the debtor in relation to his
property and his estate and may examine any other person tending or making
proof of claims, and may subpoena witnesses to give evidence relating to such
matters. All examinations of witnesses shall be had and depositions shall be
taken in accordance with and in the same manner as is provided by the Code of
Civil Procedure. 27
CHAPTER IX
COMPOSITIONS
Sec. 63. When confirmation filed. An insolvent may offer terms of composition
to his creditors after, but not before, he has filed in court a schedule of his
property and list of his creditors as provided in this Act. An application for the
confirmation of a composition may be filed in the insolvency court after, but not
before, it has been accepted in writing by a majority in number of all creditors
whose claims have been allowed, which number must represent a majority in
amount of such claims and after the consideration to be paid by the insolvent to
his creditors and the money necessary to pay all debts which have priority and
the costs of proceedings have been deposited in such place as shall be
designated by and subject to the order of the court. A time shall be fixed by the
court for the hearing upon an application for the confirmation of a composition,
and for the hearing of such objections as may be made to its confirmation. The
court shall confirm a composition if satisfied that (1) it is for the best interest of
the creditors; (2) that the insolvent has not been guilty of any of the acts, or of a
failure to perform any of the duties, which would create a bar to his discharge;
and (3) that the offer and its acceptance are in good faith, and have not been
made or procured except as herein provided, or by any means, promises, or acts
herein forbidden. Upon the confirmation of a composition the consideration shall
be distributed as the judge shall direct, and the case dismissed, and the title to
the insolvent's property shall revest in him. Whenever a composition is not
confirmed, the estate in insolvency shall be administered as herein provided. The
court may, upon application of a party in interest, filed at any time within six
months after the composition has been confirmed, set the same aside, and
reinstate the case if it shall be made to appear upon a trial that fraud was
practiced in the procuring of such composition, and that the knowledge thereof
has come to the petitioner since the confirmation of such composition.
CHAPTER X
DISCHARGE

Sec. 64. Discharge. At any time after the expiration of three months from the
adjudication of insolvency, but not later than one year from such adjudication,
unless the property of the insolvent has not been converted unto money, the
debtor may apply to the court for a discharge from his debts, and the court shall
thereupon order notice to be given to all creditors who have proved their debts to
appear on a day appointed for that purpose and show cause why a discharge
should not be granted to the debtor; said notice shall be given by registered mail
and by publication 28 at least once a week, for six weeks, in a newspaper
published in the province or city, or, if there be none, in a newspaper which, in the
opinion of the judge, will best give notice to the creditors of the said insolvent:
Provided, That if no debts have been proven, such notice shall not be required.
Sec. 65. Invalid discharge. No discharge shall be granted, or if granted shall be
valid, (1) if the debtor shall have sworn falsely in his affidavit annexed to his
petition, schedule, or inventory, or upon any examination in the course of the
proceedings in insolvency, in relation to any material fact concerning his estate
or his debts or to any other material fact; or (2) if he has concealed any part of his
estate or effects, or any books or writing relating thereto; or (3) if he has been
guilty of fraud or willful neglect in the care or custody of his property or in the
delivery to the assignee of the property belonging to him at the time of the
presentation of his petition and inventory, excepting such property as he is
permitted to retain under the provisions of this Act; or (4) if, within one month
before the commencement of such proceedings, he has procured his real estate,
goods, moneys, or chattels to be attached or seized on execution; or (5) if he has
destroyed, mutilated, altered, or falsified any of his books, documents, papers,
writings, or securities, or has made, or been privy to the making of, any false or
fraudulent entry in any book of account or other document with intent to defraud
his creditors; or (6) if he has given any fraudulent preference, contrary to the
provisions of this Act, or has made any fraudulent payment, gift, transfer,
conveyance, or assignment of any part of his property, or has admitted a false or
fictitious debt against his estate; or (7) if, having knowledge that any person has
proven such false or fictitious debt, he has not disclosed the same to his
assignee within one month after such knowledge; or (8) if, being a merchant or
tradesman, he has not kept proper books of account in Arabic numerals and in
accordance with the provisions of the Code of Commerce; or (9) if he, or any
other person on his account, or in his behalf, has influenced the action of any
creditor, at any stage of the proceedings, by any pecuniary consideration or
obligation; or (10) if he has, in contemplation of becoming insolvent, made any
pledge, payment, transfer, assignment, or conveyance of any part of his property,
directly or indirectly, absolutely or conditionally, for the purpose of preferring any
creditor or person having a claim against him, or who is, or may be, under liability
for him, or for the purpose of preventing the property from coming into the hands
of the assignee, or of being distributed under this Act in satisfaction of his debts;
or (11) if he has been convicted of any misdemeanor under this Act, or has been
guilty of fraud contrary to the true intent of this Act; or (12) in case of voluntary
insolvency, has received the benefit of this or any other Act of insolvency or
bankruptcy within six years next preceding his application for discharge; or (13) if
insolvency proceedings in which he could have applied for a discharge are
pending by or against him in the Court of First Instance of any other province or
city in the Philippine Islands. Before any discharge is granted, the debtor shall
take and subscribe an oath to the effect that he has not done, suffered, or been
privy to any act, matter, or thing specified in this Act as grounds for withholding
such discharge or as invalidating such discharge, if granted.
Sec. 66. Any creditor opposing the discharge of a debtor shall file his objections
thereto, specifying the grounds of his opposition, and after the debtor has filed
and served his answer thereto which pleadings shall be verified, the court shall
try the issue or issues raised, according to the practice provided by law in civil
actions.
Sec. 67. Discharge of debtor by court. If it shall appear to the court that the
debtor has in all things conformed to his duty under this Act, and that he is
entitled under the provisions thereof to receive a discharge, the court shall grant
him a discharge from all his debts, except as hereinafter provided, and shall give
him a certificate thereof, under the seal of the court, in substance as follows: "In
the Court of First Instance of the _____________, Philippine Islands. Whereas,
______________, has been duly adjudged an insolvent under the Insolvency Law
of the Philippine Islands, and appears to have conformed to all the requirements
of law in that behalf, it is therefore ordered by the court that said
_______________ be forever discharged from all debts and claims, which by said
Insolvency Law are made provable against his estate, and which existed on the
_______ day of _________, on which the petition of adjudication was filed by (or
against) him, excepting such debts, if any, as are by said Insolvency Law
excepted from the operation of a discharge in insolvency. Given under my hand,
and the seal of the court, this ____ day of ______________, anno Domini
______________ Attest: ____________, clerk. (Seal) _____________, judge."
Sec. 68. Debts not released under this Act No tax or assessment due the

Insular Government 29 or any provincial or municipal government, whether

proved or not as provided for in this Act, shall be discharged. Nor shall any debt
created by the fraud or embezzlement of the debtor, or by his defalcation as a
public officer or while acting in a fiduciary capacity, be discharged under this Act,
but the debt may be proved, and the dividend thereon shall be a payment on
account of said debt. No discharge solvent granted under this Act shall release,
discharge, or affect any person liable for the same debt, for or with the debtor,
either as partner, joint contractor, indorser, surety, or otherwise. 30
Sec. 69. Effect of discharge under this Act A discharge, duly granted under this
Act, shall, with the exceptions aforesaid, release the debtor from all claims, debts,
liabilities, and demands set forth in his schedule, or which were or might have
been proved against his estate in insolvency, and may be pleaded by a simple
averment that on the day of its date such discharge was granted to him, setting
forth the same in full, and the same shall be a complete bar to all suits brought on
any such debts, claims, liabilities, or demands, and the certificate shall be prima
facie evidence in favor of such fact and of the regularity of such discharge:
Provided, however, That any creditor whose debt was proved or provable against
the estate in insolvency who shall see fit to contest the validity of such discharge
on the ground that it was fraudulently obtained and who has discovered the facts
constituting the fraud subsequent to the discharge, may, at any time within one
year after the date thereof, apply to the court which granted it to set it aside and
annul the same.
CHAPTER XI
FRAUDULENT PREFERENCES AND TRANSFERS
Sec. 70. If any debtor, being insolvent, or in contemplation of insolvency, within
thirty days before the filing of a petition by or against him, with a view to giving a
preference to any creditor or person having a claim against him or who is under
any liability for him, procures any part of his property to be attached,
sequestered, or seized on execution, or makes any payment, pledge, mortgage,
assignment, transfer, sale, or conveyance of any part of his property, either
directly or indirectly, absolutely or conditionally, to anyone, the person receiving
such payment, pledge, mortgage, assignment, transfer, sale, or conveyance, or to
be benefited thereby, or by such attachment or seizure, having reasonable cause
to believe that such debtor is insolvent, and that such attachment, sequestration,
seizure, payment, pledge, mortgage, conveyance, transfer, sale, or assignment is
made with a view to prevent his property from coming to his assignee in
insolvency, or to prevent the same from being distributed ratably among his
creditors, or to defeat the object of, or in any way hinder, impede, or delay the
operation of or to evade any of the provisions of this Act, such attachment,
sequestration, seizure, payment, pledge, mortgage, transfer, sale, assignment, or
conveyance is void, and the assignee, or the receiver, may recover the property,
or the value thereof, as assets of such insolvent debtor. If such payment, pledge,
mortgage, conveyance, sale, assignment, or transfer is not made in the usual and
ordinary course of business of the debtor, or if such seizure is made under a
judgment which the debtor has confessed or offered to allow, that fact shall be
prima facie evidence of fraud. Any payment, pledge, mortgage, conveyance, sale,
assignment, or transfer of property of whatever character made by the insolvent
within one month before the filing of a petition in insolvency by or against him,
except for a valuable pecuniary consideration made in good faith, shall be void.
All assignments, transfers, conveyances, mortgages, or incumbrances of real
estate shall be deemed, under this section, to have been made at the time the
instrument conveying or affecting such realty was filed for record in the office of
the register of deeds of the province or city where the same is situated.
CHAPTER XII
PENAL PROVISIONS
Sec. 71. Acts of debtors punishable under this Act. From and after the taking
effect of this Act, a debtor who commits any one of the following acts shall, upon
conviction thereof, be punished by imprisonment for not less than three months
nor more than five years for each offense:
1. If he shall, after the commencement of proceedings in insolvency, secrete or
conceal any property belonging to his estate or part with, conceal, destroy, alter,
mutilate, or falsify or cause to be concealed, destroyed, altered, mutilated, or
falsified, any book, deed, document, or writing relating thereto, or remove, or
cause to be removed, the same or any part thereof, with the intent to prevent it
from coming into the possession of the assignee in insolvency, or to hinder,
impede, or delay his assignee in recovering or receiving the same, or if he shall
make any payment, gift, sale, assignment, transfer, or conveyance of any
property belonging to his estate, with like intent, or shall spend any part thereof
in gaming; or if he shall, with intent to defraud willfully and fraudulently conceal
from his assignee, or fraudulently or designedly omit from his schedule any
property or effects whatsoever; or if, in any case of any person having, to his

knowledge or belief, proved a false or fictitious debt against his estate he shall
fail to disclose the same to his assignee within one month after coming to the
knowledge or belief thereof; or if he shall attempt to account for any of his
property by fictitious losses or expenses;
2. If he shall, within three months before commencement of proceedings in
insolvency under the false pretense of carrying on business and dealing in the
ordinary course of trade, obtain on credit from any person any goods or chattels
or shall pawn, pledge, or dispose of, otherwise than by bona fide transactions in
the ordinary course of his trade, any of his goods and chattels which have been
obtained on credit and remain unpaid for, or shall have suffered loss in any kind
of gaming when such loss is one of the causes determining the commencement
of proceedings, in insolvency, or shall have sold at a loss or for less than the
current price any goods bought on credit and still unpaid for, or shall have
advanced payments to the prejudice of his creditors. 31
3. If he shall, from and after the taking effect of this Act, during the proceedings
for the suspension of payments, secrete or conceal, or destroy or cause to be
destroyed or secreted any property belonging to his estate; or if he shall secrete,
destroy, alter, mutilate, or falsify, or cause to be secreted, destroyed, altered,
mutilated, or falsified, any book, deed, document, or writing relating thereto, or if
he shall, with intent to defraud his creditors, make any payment, sale,
assignment, transfer, or conveyance of any property belonging to his estate; or if
he shall spend any part thereof in gaming; or if he shall falsely swear to the
schedule and inventory exacted by paragraph two of section two as required by
sections fifteen, sixteen and seventeen of this Act, with intent to defraud his
creditors; or if he shall violate or break in any manner whatsoever the injunction
issued by the court under section three of this Act.
CHAPTER XIII
MISCELLANEOUS
Sec. 72. If any debtor shall die after the order of adjudication, the proceedings
shall be continued and concluded in like manner and with like validity and effect
as if he had lived.
Sec. 73. Pending insolvency proceedings by or against any person, partnership,
corporation, or sociedad anonima, no statute of limitations shall run upon a claim
of or against the estate of the debtor.
Sec. 74. Any creditor, at any stage of the proceedings, may be represented by his
attorney or duly authorized agent, and the attorney or agent, properly authorized,
shall be entitled to vote at any creditors' meeting as and for his principal.
Sec. 75. Exempt property to be set apart. It shall be the duty of the court having
jurisdiction of the proceedings, upon petition and after hearing, to exempt and set
apart, for the use and benefit of said insolvent, such real and personal property
as is by law exempt from execution, and also a homestead, as provided in section
four hundred and fifty-two of the Code of Civil Procedure; 32 but no such petition
shall be heard as aforesaid until it is first proved that notice of the hearing of the
application therefor has been duly given by the clerk, by causing such notice to
be posted in at least three public places in the province or city at least ten days
prior to the time of such hearing, which notice shall set forth the name of said
insolvent debtor, and the time and place appointed for the hearing of such
application, and shall briefly indicate the homestead sought to be exempted or
the property sought to be set aside; and the decree must show that such proof
was made to the satisfaction of the court, and shall be conclusive evidence of
that fact.
Sec. 76. Proceedings, how commenced. The filing of a petition by or against a
debtor upon which, or upon an amendment of which, an order of adjudication in
insolvency may be made, shall be deemed to be the commencement of the
proceedings in insolvency under this Act.
Sec. 77. Words used in this Act in the singular include the plural, and in the plural,
the singular, and the word "debtor" includes partnerships, corporations and
sociedades anonimas.
Sec. 78. Appointment of receiver; Election and qualification of assignee. Upon
the filing of either a voluntary or involuntary petition in insolvency, a receiver may
be appointed by the court in which the proceeding is pending, or by a judge
thereof, at any time before the election of an assignee, when it appears by the
verified petition of a creditor that the assets of the insolvent, or a considerable
portion thereof, have been pledged, mortgaged, transferred, assigned, conveyed,
or seized, on legal process, in contravention or violation of the provisions of
section seventy of this Act, and that it is necessary to commence an action to
recover the same. The appointment, oath, undertaking, and powers of such
receiver shall in all respects be regulated by the general laws of the Philippine

Islands applicable to receivers. When an assignee is chosen, and has qualified,

the receiver shall forthwith return to court an account of the assets and property
which have come into his possession, and of his disbursements, and a report of
all actions or proceedings commenced by him for the recovery of any property
belonging to the estate, and the court shall thereupon summarily hear and settle
the receiver's account, and shall allow him a just compensation for his services
and his expenses, including a reasonable attorney's fee, whereupon the receiver
shall deliver all property, assets, or effects remaining in his hands, to the
assignee who shall be substituted for the receiver in all pending actions or
proceedings.
Sec. 79. Attachments. When an attachment has been made and is not
dissolved before the commencement of proceedings in insolvency, or is
dissolved by an undertaking given by the defendant, if the claim upon which the
attachment suit was commenced is proved against the estate of the debtor, the
plaintiff may prove the legal costs and disbursements of the suit, and of the
keeping of the property, and the amount thereof shall be a preferred debt.
Sec. 80. Costs. In all contested matters in insolvency the court may, in its
discretion, award costs to either party to be paid by the other, or to either or both
parties to be paid out of the estate, as justice and equity may require. In awarding
costs, the court may issue execution therefor. In all involuntary cases under this
Act, the court shall allow the petitioning creditors out of the estate of the debtor, if
any adjudication of insolvency be made, as a preferred claim, all legal costs and
disbursements incurred by them in that behalf.
Sec. 81. Dismissal or discontinuance. If no creditor files written objections, the
court may, upon the application of the debtor, if it be voluntary petition, or of the
petitioning creditors, if a creditor's petition, dismiss the petition and the
discontinue the proceedings at any time before the appointment of an assignee,
upon giving not less than two nor more than eight weeks' notice to the creditors,
in the same manner that notice of the time and place of election of an assignee is
given: Provided, however, That by written consent of all creditors filed in the
court the proceedings may be dismissed at any time. After the appointment of an
assignee, no dismissal shall be made without the consent of all parties interested
in or affected thereby.
Sec. 82. Law governing appeal. An appeal may be taken to the Supreme Court
in the following cases: 33
1. From an order granting or refusing an adjudication of insolvency and, in the
latter case, from the order fixing the amount of costs, expenses, damages, and
attorney's fees allowed the debtor.
2. From an order made at the hearing of any account of an assignee, allowing or
rejecting a creditor's claim, in whole or in part, when the amount in dispute
exceeds three hundred pesos.
3. From an order allowing or denying a claim for property not belonging to the
insolvent, presented under section forty-eight of this Act.
4. From an order settling an account of an assignee.
5. From an order against or in favor of setting apart homestead or other property
claimed as exempt from execution.
6. From an order granting or refusing a discharge to the debtor.
Chapter forty-two of the Code of Civil Procedure, 34 so far as applicable, shall
govern appeals under this Act, except that when an assignee has given an official
undertaking and appeals from a judgment or order of insolvency, his official
undertaking stands in the place of an undertaking on appeal, and the sureties
thereon are liable on such undertaking: Provided, however, That an interlocutory
appeal shall not stay proceedings unless written be entered into on the part of the
appellant, with at least two sureties, in such an amount as the court, or a judge
thereof, may direct, but not less than double the value of the property involved, to
the effect that if the order appealed from be affirmed, or the appeal dismissed,
appellant will pay all costs and damages which the adverse party may sustain by
reason of the appeal and the stay of proceedings.
Sec. 83. All Acts and parts of Acts inconsistent with the provisions of this Act are
hereby repealed.
Sec. 84. This Act shall take effect on its passage.
Enacted, May 20, 1909.
Fourteenth Congress
Third Regular Session

(d) Commencement date shall refer to the date on which the court issues the
Commencement Order, which shall be retroactive to the date of filing of the
petition for voluntary or involuntary proceedings.
Begun and held in Metro Manila, on Monday, the twenty-seventh day of July, two
thousand nine.

(e) Commencement Order shall refer to the order issued by the court under
Section 16 of this Act.

REPUBLIC ACT No. 10142

(f) Control shall refer to the power of a parent corporation to direct or govern the
financial and operating policies of an enterprise so as to obtain benefits from its
activities. Control is presumed to exist when the parent owns, directly or indirectly
through subsidiaries or affiliates, more than one-half (1/2) of the voting power of
an enterprise unless, in exceptional circumstances, it can clearly be
demonstrated that such ownership does not constitute control. Control also exists
even when the parent owns one-half (1/2) or less of the voting power of an
enterprise when there is power:

AN ACT PROVIDING FOR THE REHABILITATION OR LIQUIDATION OF

FINANCIALLY DISTRESSED ENTERPRISES AND INDIVIDUALS
Be it enacted by the Senate and House of Representatives of the Philippines in
Congress assembled:
CHAPTER I
GENERAL PROVISIONS
Section 1. Title. - This Act shall be known as the "Financial Rehabilitation and
Insolvency Act (FRIA) of 2010".
Section 2. Declaration of Policy. - It is the policy of the State to encourage
debtors, both juridical and natural persons, and their creditors to collectively and
realistically resolve and adjust competing claims and property rights. In
furtherance thereof, the State shall ensure a timely, fair, transparent, effective
and efficient rehabilitation or liquidation of debtors. The rehabilitation or
liquidation shall be made with a view to ensure or maintain certainly and
predictability in commercial affairs, preserve and maximize the value of the
assets of these debtors, recognize creditor rights and respect priority of claims,
and ensure equitable treatment of creditors who are similarly situated. When
rehabilitation is not feasible, it is in the interest of the State to facilities a speedy
and orderly liquidation of these debtor's assets and the settlement of their
obligations.
Section 3. Nature of Proceedings. - The proceedings under this Act shall be in
rem. Jurisdiction over all persons affected by the proceedings shall be
considered as acquired upon publication of the notice of the commencement of
the proceedings in any newspaper of general circulation in the Philippines in the
manner prescribed by the rules of procedure to be promulgated by the Supreme
Court.
The proceedings shall be conducted in a summary and non-adversarial manner
consistent with the declared policies of this Act and in accordance with the rules
of procedure that the Supreme Court may promulgate.
Section 4. Definition of Terms. - As used in this Act, the term:
(a) Administrative expenses shall refer to those reasonable and necessary
expenses:
(1) incurred or arising from the filing of a petition under the provisions of this Act;
(2) arising from, or in connection with, the conduct of the proceedings under this
Act, including those incurred for the rehabilitation or liquidation of the debtor;
(3) incurred in the ordinary course of business of the debtor after the
commencement date;
(4) for the payment of new obligations obtained after the commencement date to
finance the rehabilitation of the debtor;
(5) incurred for the fees of the rehabilitation receiver or liquidator and of the
professionals engaged by them; and
(6) that are otherwise authorized or mandated under this Act or such other
expenses as may be allowed by the Supreme Court in its rules.
(b) Affiliate shall refer to a corporation that directly or indirectly, through one or
more intermediaries, is controlled by, or is under the common control of another
corporation.
(c) Claim shall refer to all claims or demands of whatever nature or character
against the debtor or its property, whether for money or otherwise, liquidated or
unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed,
including, but not limited to; (1) all claims of the government, whether national or
local, including taxes, tariffs and customs duties; and (2) claims against directors
and officers of the debtor arising from acts done in the discharge of their
functions falling within the scope of their authority: Provided, That, this inclusion
does not prohibit the creditors or third parties from filing cases against the
directors and officers acting in their personal capacities.

(1) over more than one-half (1/2) of the voting rights by virtue of an agreement
with investors;
(2) to direct or govern the financial and operating policies of the enterprise under
a statute or an agreement;
(3) to appoint or remove the majority of the members of the board of directors or
equivalent governing body; or
(4) to cast the majority votes at meetings of the board of directors or equivalent
governing body.
(g) Court shall refer to the court designated by the Supreme Court to hear and
determine, at the first instance, the cases brought under this Act.
(h) Creditor shall refer to a natural or juridical person which has a claim against
the debtor that arose on or before the commencement date.
(i) Date of liquidation shall refer to the date on which the court issues the
Liquidation Order.
(j) Days shall refer to calendar days unless otherwise specifically stated in this
Act.
(k) Debtor shall refer to, unless specifically excluded by a provision of this Act, a
sole proprietorship duly registered with the Department of Trade and Industry
(DTI), a partnership duly registered with the Securities and Exchange
Commission (SEC), a corporation duly organized and existing under Philippine
laws, or an individual debtor who has become insolvent as defined herein.
(l) Encumbered property shall refer to real or personal property of the debtor
upon which a lien attaches.
(m) General unsecured creditor shall refer to a creditor whose claim or a portion
thereof its neither secured, preferred nor subordinated under this Act.
(n) Group of debtors shall refer to and can cover only: (1) corporations that are
financially related to one another as parent corporations, subsidiaries or affiliates;
(2) partnerships that are owned more than fifty percent (50%) by the same
person; and (3) single proprietorships that are owned by the same person. When
the petition covers a group of debtors, all reference under these rules to debtor
shall include and apply to the group of debtors.
(o) Individual debtor shall refer to a natural person who is a resident and citizen
of the Philippines that has become insolvent as defined herein.
(p) Insolvent shall refer to the financial condition of a debtor that is generally
unable to pay its or his liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or his assets.
(q) Insolvent debtor's estate shall refer to the estate of the insolvent debtor, which
includes all the property and assets of the debtor as of commencement date,
plus the property and assets acquired by the rehabilitation receiver or liquidator
after that date, as well as all other property and assets in which the debtor has an
ownership interest, whether or not these property and assets are in the debtor's
possession as of commencement date: Provided, That trust assets and bailment,
and other property and assets of a third party that are in the possession of the
debtor as of commencement date, are excluded therefrom.
(r) Involuntary proceedings shall refer to proceedings initiated by creditors.
(s) Liabilities shall refer to monetary claims against the debtor, including
stockholder's advances that have been recorded in the debtor's audited financial
statements as advances for future subscriptions.

(t) Lien shall refer to a statutory or contractual claim or judicial charge on real or
personal property that legality entities a creditor to resort to said property for
payment of the claim or debt secured by such lien.

(mm) Securities market participant shall refer to a broker dealer, underwriter,

transfer agent or other juridical persons transacting securities in the capital
market.

(u) Liquidation shall refer to the proceedings under Chapter V of this Act.

(nn) Stakeholder shall refer, in addition to a holder of shares of a corporation, to a

member of a nonstock corporation or association or a partner in a partnership.

(v) Liquidation Order shall refer to the Order issued by the court under Section
112 of this Act.
(w) Liquidator shall refer to the natural person or juridical entity appointed as
such by the court and entrusted with such powers and duties as set forth in this
Act: Provided, That, if the liquidator is a juridical entity, it must designated a
natural person who possesses all the qualifications and none of the
disqualifications as its representative, it being understood that the juridical entity
and the representative are solidarity liable for all obligations and responsibilities
of the liquidator.

(oo) Subsidiary shall refer to a corporation more than fifty percent (50%) of the
voting stock of which is owned or controlled directly or indirectly through one or
more intermediaries by another corporation, which thereby becomes its parent
corporation.
(pp) Unsecured claim shall refer to a claim that is not secured by a lien.
(qq) Unsecured creditor shall refer to a creditor with an unsecured claim.
(rr) Voluntary proceedings shall refer to proceedings initiated by the debtor.

(x) Officer shall refer to a natural person holding a management position

described in or contemplated by a juridical entity's articles of incorporation,
bylaws or equivalent documents, except for the corporate secretary, the assistant
corporate secretary and the external auditor.

(ss) Voting creditor shall refer to a creditor that is a member of a class of

creditors, the consent of which is necessary for the approval of a Rehabilitation
Plan under this Act.

(y) Ordinary course of business shall refer to transactions in the pursuit of the
individual debtor's or debtor's business operations prior to rehabilitation or
insolvency proceedings and on ordinary business terms.

Section 5. Exclusions. - The term debtor does not include banks, insurance
companies, pre-need companies, and national and local government agencies or
units.

(z) Ownership interest shall refer to the ownership interest of third parties in
property held by the debtor, including those covered by trust receipts or
assignments of receivables.

For purposes of this section:

(aa) Parent shall refer to a corporation which has control over another
corporation either directly or indirectly through one or more intermediaries.
(bb) Party to the proceedings shall refer to the debtor, a creditor, the unsecured
creditors' committee, a stakeholder, a party with an ownership interest in property
held by the debtor, a secured creditor, the rehabilitation receiver, liquidator or any
other juridical or natural person who stands to be benefited or injured by the
outcome of the proceedings and whose notice of appearance is accepted by the
court.
(cc) Possessory lien shall refer to a lien on property, the possession of which has
been transferred to a creditor or a representative or agent thereof.
(dd) Proceedings shall refer to judicial proceedings commenced by the court's
acceptance of a petition filed under this Act.
(ee) Property of others shall refer to property held by the debtor in which other
persons have an ownership interest.
(ff) Publication notice shall refer to notice through publication in a newspaper of
general circulation in the Philippines on a business day for two (2) consecutive
weeks.
(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of
successful operation and solvency, if it is shown that its continuance of operation
is economically feasible and its creditors can recover by way of the present value
of payments projected in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated.
(hh) Rehabilitation receiver shall refer to the person or persons, natural or
juridical, appointed as such by the court pursuant to this Act and which shall be
entrusted with such powers and duties as set forth herein.
(ii) Rehabilitation Plan shall refer to a plan by which the financial well-being and
viability of an insolvent debtor can be restored using various means including, but
not limited to, debt forgiveness, debt rescheduling, reorganization or quasireorganization, dacion en pago, debt-equity conversion and sale of the business
(or parts of it) as a going concern, or setting-up of new business entity as
prescribed in Section 62 hereof, or other similar arrangements as may be
approved by the court or creditors.
(jj) Secured claim shall refer to a claim that is secured by a lien.
(kk) Secured creditor shall refer to a creditor with a secured claim.
(ll) Secured party shall refer to a secured creditor or the agent or representative
of such secured creditor.

(a) Bank shall refer to any duly licensed bank or quasi-bank that is potentially or
actually subject to conservatorship, receivership or liquidation proceedings under
the New Central Bank Act (Republic Act No. 7653) or successor legislation;
(b) Insurance company shall refer to those companies that are potentially or
actually subject to insolvency proceedings under the Insurance Code
(Presidential Decree No. 1460) or successor legislation; and
(c) Pre-need company shall refer to any corporation authorized/licensed to sell or
offer to sell pre-need plans.
Provided, That government financial institutions other than banks and
government-owned or controlled corporations shall be covered by this Act, unless
their specific charter provides otherwise.
Section 6. Designation of Courts and Promulgation of Procedural Rules. - The
Supreme Court shall designate the court or courts that will hear and resolve
cases brought under this Act and shall promulgate the rules of pleading, practice
and procedure to govern the proceedings brought under this Act.
Section 7. Substantive and Procedural Consolidation. - Each juridical entity shall
be considered as a separate entity under the proceedings in this Act. Under
these proceedings, the assets and liabilities of a debtor may not be commingled
or aggregated with those of another, unless the latter is a related enterprise that
is owned or controlled directly or indirectly by the same interests: Provided,
however, That the commingling or aggregation of assets and liabilities of the
debtor with those of a related enterprise may only be allowed where:
(a) there was commingling in fact of assets and liabilities of the debtor and the
related enterprise prior to the commencement of the proceedings;
(b) the debtor and the related enterprise have common creditors and it will be
more convenient to treat them together rather than separately;
(c) the related enterprise voluntarily accedes to join the debtor as party petitioner
and to commingle its assets and liabilities with the debtor's; and
(d) The consolidation of assets and liabilities of the debtor and the related
enterprise is beneficial to all concerned and promotes the objectives of
rehabilitation.
Provided, finally, That nothing in this section shall prevent the court from joining
other entities affiliated with the debtor as parties pursuant to the rules of
procedure as may be promulgated by the Supreme Court.
Section 8. Decisions of Creditors. - Decisions of creditors shall be made
according to the relevant provisions of the Corporation Code in the case of stock
or nonstock corporations or the Civil Code in the case of partnerships that are not
inconsistent with this Act.
Section 9. Creditors Representatives. - Creditors may designate representatives
to vote or otherwise act on their behalf by filing notice of such representation with
the court and serving a copy on the rehabilitation receiver or liquidator.

Section 10. Liability of Individual Debtor, Owner of a Sole Proprietorship,

Partners in a Partnership, or Directors and Officers. - Individual debtor, owner of
a sole proprietorship, partners in a partnership, or directors and officers of a
debtor shall be liable for double the value of the property sold, embezzled or
disposed of or double the amount of the transaction involved, whichever is higher
to be recovered for benefit of the debtor and the creditors, if they, having notice of
the commencement of the proceedings, or having reason to believe that
proceedings are about to be commenced, or in contemplation of the proceedings,
willfully commit the following acts:

(j) Other documents required to be filed with the petition pursuant to this Act and
the rules of procedure as may be promulgated by the Supreme Court.

(a) Dispose or cause to be disposed of any property of the debtor other than in
the ordinary course of business or authorize or approve any transaction in fraud
of creditors or in a manner grossly disadvantageous to the debtor and/or
creditors; or

(2) Involuntary Proceedings.

(b) Conceal or authorize or approve the concealment, from the creditors, or

embezzles or misappropriates, any property of the debtor.
The court shall determine the extent of the liability of an owner, partner, director
or officer under this section. In this connection, in case of partnerships and
corporations, the court shall consider the amount of the shareholding or
partnership or equity interest of such partner, director or officer, the degree of
control of such partner, director or officer over the debtor, and the extent of the
involvement of such partner, director or debtor in the actual management of the
operations of the debtor.
Section 11. Authorization to Exchange Debt for Equity. - Notwithstanding
applicable banking legislation to the contrary, any bank, whether universal or not,
may acquire and hold an equity interest or investment in a debtor or its
subsidiaries when conveyed to such bank in satisfaction of debts pursuant to a
Rehabilitation or Liquidation Plan approved by the court: Provided, That such
ownership shall be subject to the ownership limits applicable to universal banks
for equity investments and: Provided, further, That any equity investment or
interest acquired or held pursuant to this section shall be disposed by the bank
within a period of five (5) years or as may be prescribed by the Monetary Board.

A group of debtors may jointly file a petition for rehabilitation under this Act when
one or more of its members foresee the impossibility of meeting debts when they
respectively fall due, and the financial distress would likely adversely affect the
financial condition and/or operations of the other members of the group and/or
the participation of the other members of the group is essential under the terms
and conditions of the proposed Rehabilitation Plan.

Section 13. Circumstances Necessary to Initiate Involuntary Proceedings. - Any

creditor or group of creditors with a claim of, or the aggregate of whose claims is,
at least One Million Pesos (Php1,000,000.00) or at least twenty-five percent
(25%) of the subscribed capital stock or partners' contributions, whichever is
higher, may initiate involuntary proceedings against the debtor by filing a petition
for rehabilitation with the court if:
(a) there is no genuine issue of fact on law on the claim/s of the petitioner/s, and
that the due and demandable payments thereon have not been made for at least
sixty (60) days or that the debtor has failed generally to meet its liabilities as they
fall due; or
(b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings
against the debtor that will prevent the debtor from paying its debts as they
become due or will render it insolvent.
Section 14. Petition to Initiate Involuntary Proceedings. - The creditor/s' petition
for rehabilitation shall be verified to establish the substantial likelihood that the
debtor may be rehabilitated, and include:
(a) identification of the debtor its principal activities and its address;
(b) the circumstances sufficient to support a petition to initiate involuntary
rehabilitation proceedings under Section 13 of this Act;

CHAPTER II
COURT-SUPERVISED REHABILITATION

(c) the specific relief sought under this Act;

(A) Initiation Proceedings.

(d) a Rehabilitation Plan;

(1) Voluntary Proceedings.

(e) the names of at least three (3) nominees to the position of rehabilitation
receiver;

Section 12. Petition to Initiate Voluntary Proceedings by Debtor. - When

approved by the owner in case of a sole proprietorship, or by a majority of the
partners in case of a partnership, or in case of a corporation, by a majority vote of
the board of directors or trustees and authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or in case
of nonstock corporation, by the vote of at least two-thirds (2/3) of the members, in
a stockholder's or member's meeting duly called for the purpose, an insolvent
debtor may initiate voluntary proceedings under this Act by filing a petition for
rehabilitation with the court and on the grounds hereinafter specifically provided.
The petition shall be verified to establish the insolvency of the debtor and the
viability of its rehabilitation, and include, whether as an attachment or as part of
the body of the petition, as a minimum the following:
(a) Identification of the debtor, its principal activities and its addresses;
(b) Statement of the fact of and the cause of the debtor's insolvency or inability to
pay its obligations as they become due;
(c) The specific relief sought pursuant to this Act;
(d) The grounds upon which the petition is based;
(e) Other information that may be required under this Act depending on the form
of relief requested;
(f) Schedule of the debtor's debts and liabilities including a list of creditors with
their addresses, amounts of claims and collaterals, or securities, if any;
(g) An inventory of all its assets including receivables and claims against third
parties;
(h) A Rehabilitation Plan;
(i) The names of at least three (3) nominees to the position of rehabilitation
receiver; and

(f) other information that may be required under this Act depending on the form of
relief requested; and
(g) other documents required to be filed with the petition pursuant to this Act and
the rules of procedure as may be promulgated by the Supreme Court.
(B) Action on the Petition and Commencement of Proceedings.
Section 15. Action on the Petition. - If the court finds the petition for rehabilitation
to be sufficient in form and substance, it shall, within five (5) working days from
the filing of the petition, issue a Commencement Order. If, within the same
period, the court finds the petition deficient in form or substance, the court may, in
its discretion, give the petitioner/s a reasonable period of time within which to
amend or supplement the petition, or to submit such documents as may be
necessary or proper to put the petition in proper order. In such case, the five (5)
working days provided above for the issuance of the Commencement Order shall
be reckoned from the date of the filing of the amended or supplemental petition
or the submission of such documents.
Section 16. Commencement of Proceedings and Issuance of a Commencement
Order. - The rehabilitation proceedings shall commence upon the issuance of the
Commencement Order, which shall:
(a) identify the debtor, its principal business or activity/ies and its principal place
of business;
(b) summarize the ground/s for initiating the proceedings;
(c) state the relief sought under this Act and any requirement or procedure
particular to the relief sought;
(d) state the legal effects of the Commencement Order, including those
mentioned in Section 17 hereof;
(e) declare that the debtor is under rehabilitation;

(f) direct the publication of the Commencement Order in a newspaper of general

circulation in the Philippines once a week for at least two (2) consecutive weeks,
with the first publication to be made within seven (7) days from the time of its
issuance;
(g) If the petitioner is the debtor direct the service by personal delivery of a copy
of the petition on each creditor holding at least ten percent (10%) of the total
liabilities of the debtor as determined from the schedule attached to the petition
within five (5) days; if the petitioner/s is/are creditor/s, direct the service by
personal delivery of a copy of the petition on the debtor within five (5) days;
(h) appoint a rehabilitation receiver who may or not be from among the nominees
of the petitioner/s and who shall exercise such powers and duties defined in this
Act as well as the procedural rules that the Supreme Court will promulgate;
(i) summarize the requirements and deadlines for creditors to establish their
claims against the debtor and direct all creditors to their claims with the court at
least five (5) days before the initial hearing;
(j) direct Bureau of internal Revenue (BIR) to file and serve on the debtor its
comment on or opposition to the petition or its claim/s against the debtor under
such procedures as the Supreme Court provide;
(k) prohibit the debtor's suppliers of goods or services from withholding the
supply of goods and services in the ordinary course of business for as long as
the debtor makes payments for the services or goods supplied after the issuance
of the Commencement Order;
(l) authorize the payment of administrative expenses as they become due;
(m) set the case for initial hearing, which shall not be more than forty (40) days
from the date of filing of the petition for the purpose of determining whether there
is substantial likelihood for the debtor to be rehabilitated;
(n) make available copies of the petition and rehabilitation plan for examination
and copying by any interested party;
(o) indicate the location or locations at which documents regarding the debtor
and the proceedings under Act may be reviewed and copied;
(p) state that any creditor or debtor who is not the petitioner, may submit the
name or nominate any other qualified person to the position of rehabilitation
receiver at least five (5) days before the initial hearing;
(q) include s Stay or Suspension Order which shall:
(1) suspend all actions or proceedings, in court or otherwise, for the enforcement
of claims against the debtor;
(2) suspend all actions to enforce any judgment, attachment or other provisional
remedies against the debtor;
(3) prohibit the debtor from selling, encumbering, transferring or disposing in any
manner any of its properties except in the ordinary course of business; and
(4) prohibit the debtor from making any payment of its liabilities outstanding as of
the commencement date except as may be provided herein.
Section 17. Effects of the Commencement Order. - Unless otherwise provided
for in this Act, the court's issuance of a Commencement Order shall, in addition
to the effects of a Stay or Suspension Order described in Section 16 hereof:
(a) vest the rehabilitation with all the powers and functions provided for this Act,
such as the right to review and obtain records to which the debtor's management
and directors have access, including bank accounts or whatever nature of the
debtor subject to the approval by the court of the performance bond filed by the
rehabilitation receiver;
(b) prohibit or otherwise serve as the legal basis rendering null and void the
results of any extrajudicial activity or process to seize property, sell encumbered
property, or otherwise attempt to collection or enforce a claim against the debtor
after commencement date unless otherwise allowed in this Act, subject to the
provisions of Section 50 hereof;
(c) serve as the legal basis for rendering null and void any setoff after the
commencement date of any debt owed to the debtor by any of the debtor's
creditors;
(d) serve as the legal basis for rendering null and void the perfection of any lien
against the debtor's property after the commencement date; and

(e) consolidate the resolution of all legal proceedings by and against the debtor
to the court Provided. However, That the court may allow the continuation of
cases on other courts where the debtor had initiated the suit.
Attempts to seek legal of other resource against the debtor outside these
proceedings shall be sufficient to support a finding of indirect contempt of court.
Section 18. Exceptions to the Stay or Suspension Order. - The Stay or
Suspension Order shall not apply:
(a) to cases already pending appeal in the Supreme Court as of commencement
date Provided, That any final and executory judgment arising from such appeal
shall be referred to the court for appropriate action;
(b) subject to the discretion of the court, to cases pending or filed at a specialized
court or quasi-judicial agency which, upon determination by the court is capable
of resolving the claim more quickly, fairly and efficiently than the
court: Provided, That any final and executory judgment of such court or agency
shall be referred to the court and shall be treated as a non-disputed claim;
(c) to the enforcement of claims against sureties and other persons solidarily
liable with the debtor, and third party or accommodation mortgagors as well as
issuers of letters of credit, unless the property subject of the third party or
accommodation mortgage is necessary for the rehabilitation of the debtor as
determined by the court upon recommendation by the rehabilitation receiver;
(d) to any form of action of customers or clients of a securities market participant
to recover or otherwise claim moneys and securities entrusted to the latter in the
ordinary course of the latter's business as well as any action of such securities
market participant or the appropriate regulatory agency or self-regulatory
organization to pay or settle such claims or liabilities;
(e) to the actions of a licensed broker or dealer to sell pledged securities of a
debtor pursuant to a securities pledge or margin agreement for the settlement of
securities transactions in accordance with the provisions of the Securities
Regulation Code and its implementing rules and regulations;
(f) the clearing and settlement of financial transactions through the facilities of a
clearing agency or similar entities duly authorized, registered and/or recognized
by the appropriate regulatory agency like the Bangko Sentral ng Pilipinas (BSP)
and the SEC as well as any form of actions of such agencies or entities to
reimburse themselves for any transactions settled for the debtor; and
(g) any criminal action against individual debtor or owner, partner, director or
officer of a debtor shall not be affected by any proceeding commend under this
Act.
Section 19. Waiver of taxes and Fees Due to the National Government and to
Local Government Units (LGUs). - Upon issuance of the Commencement Order
by the court, and until the approval of the Rehabilitation Plan or dismissal of the
petition, whichever is earlier, the imposition of all taxes and fees including
penalties, interests and charges thereof due to the national government or to
LGUs shall be considered waived, in furtherance of the objectives of
rehabilitation.
Section 20. Application of Stay or Suspension Order to Government Financial
Institutions. - The provisions of this Act concerning the effects of the
Commencement Order and the Stay or Suspension Order on the suspension of
rights to foreclose or otherwise pursue legal remedies shall apply to government
financial institutions, notwithstanding provisions in their charters or other laws to
the contrary.
Section 21. Effectivity and Duration of Commencement Order. - Unless lifted by
the court, the Commencement Order shall be for the effective for the duration of
the rehabilitation proceedings for as long as there is a substantial likelihood that
the debtor will be successfully rehabilitated. In determining whether there is
substantial likelihood for the debtor to be successfully rehabilitated, the court
shall ensure that the following minimum requirements are met:
(a) The proposed Rehabilitation Plan submitted complies with the minimum
contents prescribed by this Act;
(b) There is sufficient monitoring by the rehabilitation receiver of the debtor's
business for the protection of creditors;
(c) The debtor has met with its creditors to the extent reasonably possible in
attempts to reach consensus on the proposed Rehabilitation Plan;
(d) The rehabilitation receiver submits a report, based on preliminary evaluation,
stating that the underlying assumptions and the goals stated in the petitioner's

Rehabilitation Plan are realistic reasonable and reasonable or if not, there is, in
any case, a substantial likelihood for the debtor to be successfully rehabilitated
because, among others:

(2) there is a substantial likelihood for the debtor to be successfully rehabilitated;

(1) there are sufficient assets with/which to rehabilitate the debtor;

(1)debtor is not insolvent;

(2) there is sufficient cash flow to maintain the operations of the debtor;

(2) the petition i8 a sham filing intended only to delay the enforcement of the
rights of the creditor/s or of any group of creditors;

(3) the debtor's, partners, stockholders, directors and officers have been acting in
good faith and which due diligence;
(4) the petition is not s sham filing intended only to delay the enforcement of the
rights of the creditor's or of any group of creditors; and

(b) dismiss the petition upon a finding that:

(3)the petition, the Rehabilitation Plan and the attachments thereto contain any
materially false or misleading statements; or
(4)the debtor has committed acts of misrepresentation or in fraud of its creditor/s
or a group of creditors;

(5) the debtor would likely be able to pursue a viable Rehabilitation Plan;
(e) The petition, the Rehabilitation Plan and the attachments thereto do not
contain any materially false or misleading statement;

(c)convert the proceedings into one for the liquidation of the debtor upon a
finding that:
(1)the debtor is insolvent; and

(f) If the petitioner is the debtor, that the debtor has met with its creditor/s
representing at least three-fourths (3/4) of its total obligations to the extent
reasonably possible and made a good faith effort to reach a consensus on the
proposed Rehabilitation Plan if the petitioner/s is/are a creditor or group of
creditors, that/ the petitioner/s has/have met with the debtor and made a good
faith effort to reach a consensus on the proposed Rehabilitation Plan; and
(g) The debtor has not committed acts misrepresentation or in fraud of its
creditor/s or a group of creditors.
Section 22. Action at the Initial Hearing. - At the initial hearing, the court shall:
(a) determine the creditors who have made timely and proper filing of their notice
of claims;
(b) hear and determine any objection to the qualifications of the appointment of
the rehabilitation receiver and, if necessary appoint a new one in accordance
with this Act;
(c) direct the creditors to comment on the petition and the Rehabilitation Plan,
and to submit the same to the court and to the rehabilitation receiver within a
period of not more than twenty (20) days; and
(d) direct the rehabilitation receiver to evaluate the financial condition of the
debtor and to prepare and submit to the court within forty (40) days from initial
hearing the report provided in Section 24 hereof.
Section 23. Effect of Failure to File Notice of Claim. - A creditor whose claim is
not listed in the schedule of debts and liabilities and who fails to file a notice of
claim in accordance with the Commencement Order but subsequently files a
belated claim shall not be entitled to participate in the rehabilitation proceedings
but shall be entitled to receive distributions arising therefrom.
Section 24. Report of the Rehabilitation Receiver. - Within forty (40) days from
the initial hearing and with or without the comments of the creditors or any of
them, the rehabilitation receiver shall submit a report to the court stating his
preliminary findings and recommendations on whether:
(a) the debtor is insolvent and if so, the causes thereof and any unlawful or
irregular act or acts committed by the owner/s of a sole proprietorship partners of
a partnership or directors or officers of a corporation in contemplation of the
insolvency of the debtor or which may have contributed to the insolvency of the
debtor;
(b) the underlying assumptions, the financial goals and the procedures to
accomplish such goals as stated in the petitioner's Rehabilitation Plan are
realistic, feasible and reasonable;
(c) there is a substantial likelihood for the debtor to be successfully rehabilitated;
(d) the petition should be dismissed; and
(e) the debtor should be dissolved and/or liquidated.
Section 25. Giving Due Course to or Dismissal of Petition, or Conversion of
Proceedings. - Within ten (10) days from receipt of the report of the rehabilitation
receiver mentioned in Section 24 hereof the court may:
(a) give due course to the petition upon a finding that:
(1) the debtor is insolvent; and

(2)there is no substantial likelihood for the debtor to be successfully rehabilitated

as determined in accordance with the rules to be promulgated by the Supreme
Court.
Section 26.Petition Given Due Course. - If the petition is given due course, the
court shall direct the rehabilitation receiver to review, revise and/or recommend
action on the Rehabilitation Plan and submit the same or a new one to the court
within a period of not more than ninety (90) days.
The court may refer any dispute relating to the Rehabilitation Plan or the
rehabilitation proceedings pending before it to arbitration or other modes of
dispute resolution, as provided for under Republic Act No. 9285, Or the
Alternative Dispute Resolution Act of 2004, should it determine that such mode
will resolve the dispute more quickly, fairly and efficiently than the court.
Section 27.Dismissal of Petition. - If the petition is dismissed pursuant to
paragraph (b) of Section 25 hereof, then the court may, in its discretion, order the
petitioner to pay damages to any creditor or to the debtor, as the case may be,
who may have been injured by the filing of the petition, to the extent of any such
injury.
(C) The Rehabilitation Receiver, Management Committee and Creditors'
Committee.
Section 28.Who May Serve as a Rehabilitation Receiver. - Any qualified natural
or juridical person may serve as a rehabilitation receiver: Provided, That if the
rehabilitation receiver is a juridical entity, it must designate a natural person/s
who possess/es all the qualifications and none of the disqualifications as its
representative, it being understood that the juridical entity and the
representative/s are solidarily liable for all obligations and responsibilities of the
rehabilitation receiver.
Section 29.Qualifications of a Rehabilitation Receiver. - The rehabilitation
receiver shall have the following minimum qualifications:
(a)A citizen of the Philippines or a resident of the Philippines in the six (6) months
immediately preceding his nomination;
(b)Of good moral character and with acknowledged integrity, impartiality and
independence;
(c)Has the requisite knowledge of insolvency and other relevant commercial
laws, rules and procedures, as well as the relevant training and/or experience
that may be necessary to enable him to properly discharge the duties and
obligations of a rehabilitation receiver; and
(d)Has no conflict of interest: Provided, That such conflict of interest may be
waived, expressly or impliedly, by a party who may be prejudiced thereby.
Other qualifications and disqualifications of the rehabilitation receiver shall be set
forth in procedural rules, taking into consideration the nature of the business of
the debtor and the need to protect the interest of all stakeholders concerned.
Section 30.Initial Appointment of the Rehabilitation Receiver. - The court shall
initially appoint the rehabilitation receiver, who mayor may not be from among the
nominees of the petitioner, However, at the initial hearing of the petition, the
creditors and the debtor who are not petitioners may nominate other persons to
the position. The court may retain the rehabilitation receiver initially appointed or
appoint another who mayor may not be from among those nominated.

In case the debtor is a securities market participant, the court shall give priority to
the nominee of the appropriate securities or investor protection fund.

(c) Illegal acts or conduct in the performance of his duties and powers;
(d) Lack of qualification or presence of any disqualification;

If a qualified natural person or entity is nominated by more than fifty percent

(50%) of the secured creditors and the general unsecured creditors, and
satisfactory evidence is submitted, the court shall appoint the creditors' nominee
as rehabilitation receiver.
Section 31.Powers, Duties and Responsibilities of the Rehabilitation Receiver. The rehabilitation receiver shall be deemed an officer of the court with the
principal duty of preserving and maximizing the value of the assets of the debtor
during the rehabilitation proceedings, determining the viability of the rehabilitation
of the debtor, preparing and recommending a Rehabilitation Plan to the court,
and implementing the approved Rehabilitation Plan, To this end, and without
limiting the generality of the foregoing, the rehabilitation receiver shall have the
following powers, duties and responsibilities:
(a)To verify the accuracy of the factual allegations in the petition and its annexes;
(b)To verify and correct, if necessary, the inventory of all of the assets of the
debtor, and their valuation;
(c)To verify and correct, if necessary, the schedule of debts and liabilities of the
debtor;
(d)To evaluate the validity, genuineness and true amount of all the claims against
the debtor;

(e) Conflict of interest that arises after his appointment; and

(f) Manifest lack of independence that is detrimental to the general body of the
stakeholders.
Section 33.Compensation and Terms of Service. The rehabilitation receiver and
his direct employees or independent contractors shall be entitled to
compensation for reasonable fees and expenses from the debtor according to
the terms approved by the court after notice and hearing. Prior to such hearing,
the rehabilitation receiver and his direct employees shall be entitled to
reasonable compensation based on quantum meruit. Such costs shall be
considered administrative expenses.
Section 34.Oath and Bond of the Rehabilitation Receiver. Prior to entering upon
his powers, duties and responsibilities, the rehabilitation receiver shall take an
oath and file a bond, in such amount to be fixed by the court, conditioned upon
the faithful and proper discharge of his powers, duties and responsibilities.
Section 35.Vacancy. - Incase the position of rehabilitation receiver is vacated for
any reason whatsoever. the court shall direct the debtor and the creditors to
submit the name/s of their nominee/s to the position. The court may appoint any
of the qualified nominees. or any other person qualified for the position.

(f)To sue and recover, with the approval of the court, all amounts owed to, and all
properties pertaining to the debtor;

Section 36.Displacement of Existing Management by the Rehabilitation

Receiver or Management Committee. Upon motion of any interested party, the
court may appoint and direct the rehabilitation receiver to assume the powers of
management of the debtor, or appoint a management committee that will
undertake the management of the debtor. upon clear and convincing evidence of
any of the following circumstances:

(g)To have access to all information necessary, proper or relevant to the

operations and business of the debtor and for its rehabilitation;

(a) Actual or imminent danger of dissipation, loss, wastage or destruction of the

debtors assets or other properties;

(h) To sue and recover, with the. approval of the court, all property or money of
the debtor paid, transferred or disbursed in fraud of the debtor or its creditors, or
which constitute undue preference of creditor/s;

(b) Paralyzation of the business operations of the debtor; or

(e)To take possession, custody and control, and to preserve the value of all the
property of the debtor;

(i) To monitor the operations and the business of the debtor to ensure that no
payments or transfers of property are made other than in the ordinary course of
business;
(j) With the court's approval, to engage the services of or to employ persons or
entities to assist him in the discharge of his functions;

(c) Gross mismanagement of the debtor. or fraud or other wrongful conduct on

the part of, or gross or willful violation of this Act by. existing management of the
debtor Or the owner, partner, director, officer or representative/s in management
of the debtor.
In case the court appoints the rehabilitation receiver to assume the powers of
management of the debtor. the court may:
(1) require the rehabilitation receiver to post an additional bond;

(k) To determine the manner by which the debtor may be best rehabilitated, to
review) revise and/or recommend action on the Rehabilitation Plan and submit
the same or a new one to the court for approval;
(1) To implement the Rehabilitation Plan as approved by the court, if 80 provided
under the Rehabilitation Plan;
(m) To assume and exercise the powers of management of the debtor, if directed
by the court pursuant to Section 36 hereof;
(n) To exercise such other powers as may, from time to time, be conferred upon
him by the court; and
To submit a status report on the rehabilitation proceedings every quarter or as
may be required by the court motu proprio. or upon motion of any creditor. or as
may be provided, in the Rehabilitation Plan.
Unless appointed by the court, pursuant to Section 36 hereof, the rehabilitation
receiver shall not take over the management and control of the debtor but may
recommend the appointment of a management committee over the debtor in the
cases provided by this Act.
Section 32.Removal of the Rehabilitation Receiver. The rehabilitation receiver
may be removed at any time by the court either motu proprio or upon motion by
any creditor/s holding more than fifty percent (50%) of the total obligations of the
debtor, on such grounds as the rules of procedure may provide which shall
include, but are not limited to, the following:
(a) Incompetence, gross negligence, failure to perform or failure to exercise the
proper degree of care in the performance of his duties and powers;
(b) Lack of a particular or specialized competency required by the specific case;

(2) authorize him to engage the services or to employ persona or entities to

assist him in the discharge of his managerial functions; and
(3) authorize a commensurate increase in his compensation.
Section 37.Role of the Management Committee. When appointed pursuant to
the foregoing section, the management committee shall take the place of the
management and the governing body of the debtor and assume their rights and
responsibilities.
The specific powers and duties of the management committee, whose members
shall be considered as officers of the court, shall be prescribed by the procedural
rules.
Section 38.Qualifications of Members of the Management Committee. - The
qualifications and disqualifications of the members of the management
committee shall be set forth in the procedural rules, taking into consideration the
nature of the business of the debtor and the need to protect the interest of all
stakeholders concerned.
Section 39.Employment of Professionals. - Upon approval of the court, and after
notice and hearing, the rehabilitation receiver or the management committee may
employ specialized professionals and other experts to assist each in the
performance of their duties. Such professionals and other experts shall be
considered either employees or independent contractors of the rehabilitation
receiver or the management committee, as the case may be. The qualifications
and disqualifications of the professionals and experts may be set forth in
procedural rules, taking into consideration the nature of the business of the
debtor and the need to protect the interest of all stakeholders concerned.

Section 40.Conflict of Interest. - No person may be appointed as a rehabilitation

receiver, member of a_ management committee, or be employed by the
rehabilitation receiver or the management committee if he has a conflict of
interest.

Section 44.Registry of Claims. - Within twenty (20) days from his assumption
into office, the rehabilitation receiver shall establish a preliminary registry of
claims. The rehabilitation receiver shall make the registry available for public
inspection and provide

An individual shall be deemed to have a conflict of interest if he is so situated as

to be materially influenced in the exercise of his judgment for or against any party
to the proceedings. Without limiting the generality of the foregoing, an individual
shall be deemed to have a conflict of interest if:

publication notice to the debtor, creditors and stakeholders on where and when
they may inspect it. All claims included in the registry of claims must be duly
supported by sufficient evidence.

(a) he is a creditor, owner, partner or stockholder of the debtor;

(b) he is engaged in a line of business which competes with that of the debtor;
(c) he is, or was, within five (5) years from the filing of the petition, a director,
officer, owner, partner or employee of the debtor or any of the creditors, or the
auditor or accountant of the debtor;
(d) he is, or was, within two (2) years from the filing of the petition, an underwriter
of the outstanding securities of the debtor;
(e) he is related by consanguinity or affinity within the fourth civil degree to any
individual creditor, owners of a sale proprietorship-debtor, partners of a
partnership- debtor or to any stockholder, director, officer, employee or
underwriter of a corporation-debtor; or
(f) he has any other direct or indirect material interest in the debtor or any of the
creditors.
Any rehabilitation receiver, member of the management committee or persons
employed or contracted by them possessing any conflict of interest shall make
the appropriate disclosure either to the court or to the creditors in case of out-ofcourt rehabilitation proceedings. Any party to the proceeding adversely affected
by the appointment of any person with a conflict of interest to any of the positions
enumerated above may however waive his right to object to such appointment
and, if the waiver is unreasonably withheld, the court may disregard the conflict
of interest, taking into account the general interest of the stakeholders.
Section 41.Immunity. - The rehabilitation receiver and all persons employed by
him, and the members of the management committee and all persons employed
by it, shall not be subject to any action. claim or demand in connection with any
act done or omitted to be done by them in good faith in connection with the
exercise of their powers and functions under this Act or other actions duly
approved by the court.1awp++il
Section 42.Creditors' Committee. - After the creditors' meeting called pursuant to
Section 63 hereof, the creditors belonging to a class may formally organize a
committee among
themselves. In addition, the creditors may, as a body, agree to form a creditors'
committee composed of a representative from each class of creditors, such as
the following:
(a) Secured creditors;
(b) Unsecured creditors;
(c) Trade creditors and suppliers; and
(d) Employees of the debtor.
In the . election of the creditors' representatives, the rehabilitation receiver or his
representative shall attend such meeting and extend the appropriate assistance
as may be defined in the procedural rules.
Section 43.Role of Creditors' Committee. - The creditors' committee when
constituted pursuant to Section 42 of this Act shall assist the rehabilitation
receiver in communicating with the creditors and shall be the primary liaison
between the rehabilitation receiver and the creditors. The creditors' committee
cannot exercise or waive any right or give any consent on behalf of any creditor
unless specifically authorized in writing by such creditor. The creditors' committee
may be authorized by the court or by the rehabilitation receiver to perform such
other tasks and functions as may be defined by the procedural rules in order to
facilitate the rehabilitation process.
(D) Determination of Claims.

Section 45.Opposition or Challenge of Claims. Within thirty (30) days from the
expiration of the period stated in the immediately preceding section, the debtor,
creditors, stakeholders and other interested parties may submit a challenge to
claim/s to the court, serving a certified copy on the rehabilitation receiver and the
creditor holding the challenged claim/so Upon the expiration of the thirty (30)-day
period, the rehabilitation receiver shall submit to the court the registry of claims
which shall include undisputed claims that have not been subject to challenge.
Section 46.Appeal. - Any decision of the rehabilitation receiver regarding a claim
may be appealed to the court.
(E) Governance.
Section 47.Management. - Unless otherwise provided herein, the management
of the juridical debtor shall remain with the existing management subject to the
applicable law/s and agreement/s, if any, on the election or appointment of
directors, managers Or managing partner. However, all disbursements, payments
or sale, disposal, assignment, transfer or encumbrance of property , or any other
act affecting title or interest in property, shall be subject to the approval of the
rehabilitation receiver and/or the court, as provided in the following subchapter.
(F) Use, Preservation and Disposal of Assets and Treatment of Assets and
Claims after Commencement Date.
Section 48.Use or Disposition of Assets. - Except as otherwise provided herein,
no funds or property of the debtor shall he used or disposed of except in the
ordinary course of business of the debtor, or unless necessary to finance the
administrative expenses of the rehabilitation proceedings.
Section 49.Sale of Assets. - The court, upon application of the rehabilitation
receiver, may authorize the sale of unencumbered property of the debtor outside
the ordinary course of business upon a showing that the property, by its nature or
because of other circumstance, is perishable, costly to maintain, susceptible to
devaluation or otherwise injeopardy.
Section 50.Sale or Disposal of Encumbered Property of the Debtor and Assets
of Third Parties Held by Debtor.The court may authorize the sale, transfer,
conveyance or disposal of encumbered property of the debtor, or property of
others held by the debtor where there is a security interest pertaining to third
parties under a financial, credit or other similar transactions if, upon application of
the rehabilitation receiver and with the consent of the affected owners of the
property, or secured creditor/s in the case of encumbered property of the debtor
and, after notice and hearing, the court determines that:
(a) such sale, transfer, conveyance or disposal is necessary for the continued
operation of the debtor's business; and
(b) the debtor has made arrangements to provide a substitute lien or ownership
right that provides an equal level of security for the counter-party's claim or right.
Provided, That properties held by the debtor where the debtor has authority to
sell such as trust receipt or consignment arrangements may be sold or disposed
of by the .debtor, if such sale or disposal is necessary for the operation of the
debtor's business, and the debtor has made arrangements to provide a substitute
lien or ownership right that provides an equal level of security for the counterparty's claim or right.
Sale or disposal of property under this section shall not give rise to any criminal
liability under applicable laws.
Section 51.Assets of Debtor Held by Third Parties. In the case of possessory
pledges, mechanic's liens or similar claims, third parties who have in their
possession or control property of the debtor shall not transfer, conveyor
otherwise dispose of the same to persons other than the debtor, unless upon
prior approval of the rehabilitation receiver. The rehabilitation receiver may also:
(a) demand the surrender or the transfer of the possession or control of such
property to the rehabilitation receiver or any other person, subject to payment of
the claims secured by any possessory Iien/s thereon;

(b) allow said third parties to retain possession or control, if such an arrangement
would more likely preserve or increase the value of the property in question or
the total value of the assets of the debtor; or
(c) undertake any otI1er disposition of the said property as may be beneficial for
the rehabilitation of the debtor, after notice and hearing, and approval of the
court.
Section 52.Rescission or Nullity of Sale, Payment, Transfer or Conveyance of
Assets. - The court may rescind or declare as null and void any sale, payment,
transfer or conveyance of the debtor's unencumbered property or any
encumbering thereof by the debtor or its agents or representatives after the
commencement date which are not in the ordinary course of the business of the
debtor: Provided, however, That the unencumbered property may be sold,
encumbered or otherwise disposed of upon order of the court after notice and
hearing:
(a) if such are in the interest of administering the debtor and facilitating the
preparation and implementation of a Rehabilitation Plan;
(b) in order to provide a substitute lien, mortgage or pledge of property under this
Act;
(c) for payments made to meet administrative expenses as they arise;
(d) for payments to victims of quasi delicts upon a showing that the claim is valid
and the debtor has insurance to reimburse the debtor for the payments made;
(e) for payments made to repurchase property of the debtor that is auctioned off
in a judicial or extrajudicial sale under. This Act; or
(f) for payments made to reclaim property of the debtor held pursuant to a
possessory lien.
Section 53.Assets Subject to Rapid Obsolescence, Depreciation and Diminution
of Value. - Upon the application of a secured creditor holding a lien against or
holder of an ownership interest in property held by the debtor that is subject to
potentially rapid obsolescence, depreciation or diminution in value, the court
shall, after notice and hearing, order the debtor or rehabilitation receiver to take
reasonable steps necessary to prevent the depreciation. If depreciation cannot
be avoided and such depreciation is jeopardizing the security or property interest
of the secured creditor or owner, the court shall:
(a) allow the encumbered property to be foreclosed upon by the secured creditor
according to the relevant agreement between the debtor and the secured
creditor, applicable rules of procedure and relevant legislation: Provided. That the
proceeds of the sale will be distributed in accordance with the order prescribed
under the rules of concurrence and preference of credits; or
(b) upon motion of, or with the consent of the affected secured creditor or interest
owner. order the conveyance of a lien against or ownership interest in substitute
property of the debtor to the secured creditor: Provided. That other creditors
holding liens on such property, if any, do not object thereto, or, if such property is
not available;
(c) order the conveyance to the secured creditor or holder . of an ownership
interest of a lien on the residual funds from the sale of encumbered property
during the proceedings; or
(d) allow the sale or disposition of the property: Provided. That the sale or
disposition will maximize the value of the property for the benefit of the secured
creditor and the debtor, and the proceeds of the sale will be distributed in
accordance with the order prescribed under the rules of concurrence and
preference of credits.
Section 54.Post-commencement Interest. - The rate and term of interest, if any,
on secured and unsecured claims shall be determined and provided for in the
approved Rehabilitation Plan.
Section 55.Post-commencement Loans and Obligations. - With the approval of
the court upon the recommendation of the rehabilitation receiver, the debtor, in
order to enhance its
rehabilitation. may:
(a) enter into credit arrangements; or
(b) enter into credit arrangements, secured by mortgages of its unencumbered
property or secondary mortgages of encumbered property with the approval of
senior secured parties with regard to the encumbered property; or

(c) incur other obligations as may be essential for its rehabilitation.

The payment of the foregoing obligations shall be considered administrative
expenses under this Act.
Section 56.Treatment of Employees, Claims. Compensation of employees
required to carry on the business shall be considered an administrative expense.
Claims of separation pay for months worked prior to the commencement date
shall be considered a pre- ommencement claim. Claims for salary and separation
pay for work performed after the commencement date shall be an administrative
expense.
Section 57.Treatment of Contracts. - Unless cancelled by virtue of a final
judgment of a court of competent jurisdiction issued prior to the issuance of the
Commencement Order, or at anytime thereafter by the court before which the
rehabilitation proceedings are pending, all valid and subbsisting contracts of the
debtor with creditors and other third parties as at the commencement date shall
continue in force: Provided, That within ninety (90)days following the
commencement of proceedings, the debtor, with the consent of the rehabilitation
receiver, shall notify each contractual counter-party of whether it is confirming the
particular contract. Contractual obligations of the debtor arising or performed
during this period, and afterwards for confirmed contracts, shall be considered
administrative expenses. Contracts not confirmed within the required deadline
shall be considered terminated. Claims for actual damages, if any, arising as a
result of the election to terminate a contract shall be considered a precommencement claim against the debtor. Nothing contained herein shall prevent
the cancellation or termination of any contract of the debtor for any ground
provided by law.
(G) Avoidance Proceedings.
Section 58.Rescission or Nullity of Certain Precommencement Transactions. Any transaction occurring prior to commencement
date entered into by the debtor or involving its funds or assets may be rescinded
or declared null and void on the ground that the same was executed with intent to
defraud a creditor or creditors or which constitute undue preference of creditors.
Without limiting the generality of the foregoing, a disputable presumption of such
design shall arise if the transaction:
(a) provides unreasonably inadequate consideration to the debtor and is
executed within ninety (90) days prior to the commencement date;
(b) involves an accelerated payment of a claim to a creditor within ninety (90)
days prior to the commencement date;
(c) provides security or additional security executed within ninety (90) days prior
to the commencement date;
(d) involves creditors, where a creditor obtained, or received the benefit of, more
than its pro rata share in the assets of the debtor, executed at a time when the
debtor was insolvent; or
(e) is intended to defeat, delay or hinder the ability of the creditors to collect
claims where the effect of the transaction is to put assets of the debtor beyond
the reach of creditors or to otherwise prejudice the interests of creditors.
Provided, however, That nothing in this section shall prevent the court from
rescinding or declaring as null and void a transaction on other grounds provided
by relevant legislation and jurisprudence: Provided, further, That the provisions of
the Civil Code on rescission shall in any case apply to these transactions.
Section 59.Actions for Rescission or Nullity. - (a) The rehabilitation receiver or,
with his conformity, any creditor may initiate and prosecute any action to rescind,
or declare null and void any transaction described in Section 58 hereof. If the
rehabilitation receiver does not consent to the filing or prosecution of such action,
(b) If leave of court is granted under subsection (a), the rehabilitation receiver
shall assign and transfer to the creditor all rights, title and interest in the chose in
action or subject matter of the proceeding, including any document in support
thereof.
(c) Any benefit derived from a proceeding taken pursuant to subsection (a), to the
extent of his claim and the costs, belongs exclusively to the creditor instituting the
proceeding, and the surplus, if any, belongs to the estate.
(d) Where, before an order is made under subsection (a), the rehabilitation
receiver (or liquidator) signifies to the court his readiness to institute the
proceeding for the benefit of the creditors, the order shall fix the time within which
he shall do so and, m that case, the benefit derived from the proceeding, if
instituted within the time limits so fixed, belongs to the estate.

(H) Treatment of Secured Creditors.

Section 60.No Diminution of Secured Creditor Rights. The issuance of the
Commencement Order and the Suspension or Stay Order, and any other
provision of this Act, shall not be
deemed in any way to diminish or impair the security or lien of a secured creditor,
or the value of his lien or security, except that his right to enforce said security or
lien may be suspended during the term of the Stay Order.
The court, upon motion or recommendation of the rehabilitation receiver, may
allow a secured creditor to enforce his security or lien, or foreclose upon property
of the debtor
securing his/its claim, if the said property is not necessary for the rehabilitation of
the debtor. The secured creditor and/or the other lien holders shall be admitted to
the rehabilitation proceedings only for the balance of his claim, if any.
Section 61.Lack of Adequate Protection. - The court, on motion or motu
proprio, may terminate, modify or set conditions for the continuance of
suspension of payment, or relieve a claim from the coverage thereof, upon
showing that: (a) a creditor does not have adequate protection over property
securing its claim; or
(b) the value of a claim secured by a lien on property which is not necessary for
rehabilitation of the debtor exceeds the fair market value of the said property.
For purposes of this section, a creditor shall be deemed to lack adequate
protection if it can be shown that:
(a) the debtor fails or refuses to honor a pre-existing agreement with the creditor
to keep the property insured;
(b) the debtor fails or refuses to take commercially reasonable steps to maintain
the property; or
(c) the property has depreciated to an extent that the creditor is under secured.
Upon showing of a lack of protection, the court shall order the debtor or the
rehabilitation receiver to make arrangements to provide for the insurance or
maintenance of the property; or to make payments or otherwise provide
additional or replacement security such that the obligation is fully secured. If such
arrangements are not feasible, the court may modify the Stay Order to allow the
secured creditor lacking adequate protection to enforce its security claim against
the debtor: Provided, however, That the court may deny the creditor the remedies
in this paragraph if the property subject of the enforcement is required for the
rehabilitation of the debtor.
(i) Administration of Proceedings.
Section 62.Contents of a Rehabilitation Plan. The Rehabilitation Plan shall, as
a minimum:
(a) specify the underlying assumptions, the financial goals and the procedures
proposed to accomplish such goals;
(b) compare the amounts expected to be received by the creditors under the
Rehabilitation Plan with those that they will receive if liquidation ensues within the
next one hundred twenty (120) days;
(c) contain information sufficient to give the various classes of creditors a
reasonable basis for determining whether supporting the Plan is in their financial
interest when compared to the immediate liquidation of the debtor, including any
reduction of principal interest and penalties payable to the creditors;
(d) establish classes of voting creditors;
(e) establish subclasses of voting creditors if prior approval has been granted by
the court;
(f) indicate how the insolvent debtor will be rehabilitated including, but not limited
to, debt forgiveness, debt rescheduling, reorganization or quasireorganization. dacion en pago, debt-equity conversion and sale of the business
(or parts of it) as a going concern, or setting-up of a new business entity or other
similar arrangements as may be necessary to restore the financial well-being and
visibility of the insolvent debtor;
(g) specify the treatment of each class or subclass described in subsections (d)
and (e);

(h) provide for equal treatment of all claims within the same class or subclass,
unless a particular creditor voluntarily agrees to less favorable treatment;
(i) ensure that the payments made under the plan follow the priority established
under the provisions of the Civil Code on concurrence and preference of credits
and other applicable laws;
(j) maintain the security interest of secured creditors and preserve the liquidation
value of the security unless such has been waived or modified voluntarily;
(k) disclose all payments to creditors for pre-commencement debts made during
the proceedings and the justifications thereof;
(1) describe the disputed claims and the provisioning of funds to account for
appropriate payments should the claim be ruled valid or its amount adjusted;
(m) identify the debtor's role in the implementation of the Plan;
(n) state any rehabilitation covenants of the debtor, the breach of which shall be
considered a material breach of the Plan;
(o) identify those responsible for the future management of the debtor and the
supervision and implementation of the Plan, their affiliation with the debtor and
their remuneration;
(p) address the treatment of claims arising after the confirmation of the
Rehabilitation Plan;
(q) require the debtor and its counter-parties to adhere to the terms of all
contracts that the debtor has chosen to confirm;
(r) arrange for the payment of all outstanding administrative expenses as a
condition to the Plan's approval unless such condition has been waived in writing
by the creditors concerned;
(s) arrange for the payment" of all outstanding taxes and assessments, or an
adjusted amount pursuant to a compromise settlement with the BlR Or other
applicable tax authorities;
(t) include a certified copy of a certificate of tax clearance or evidence of a
compromise settlement with the BIR;
(u) include a valid and binding r(,solution of a meeting of the debtor's
stockholders to increase the shares by the required amount in cases where the
Plan contemplates an additional issuance of shares by the debtor;
(v) state the compensation and status, if any, of the rehabilitation receiver after
the approval of the Plan; and
(w) contain provisions for conciliation and/or mediation as a prerequisite to court
assistance or intervention in the event of any disagreement in the interpretation
or implementation of the Rehabilitation Plan.
Section 63.Consultation with Debtor and Creditors. if the court gives due
course to the petition, the rehabilitation receiver shall confer with the debtor and
all the classes of creditors, and may consider their views and proposals ill the
review, revision or preparation of a new Rehabilitation Plan.
Section 64.Creditor Approval of Rehabilitation Plan. The rehabilitation receiver
shall notify the creditors and stakeholders that the Plan is ready for their
examination. Within twenty (2Q) days from the said notification, the rehabilitation
receiver shall convene the creditors, either as a whole or per class, for purposes
of voting on the approval of the Plan. The Plan shall be deemed rejected unless
approved by all classes of creditors w hose rights are adversely modified or
affected by the Plan. For purposes of this section, the Plan is deemed to have
been approved by a class of creditors if members of the said class holding more
than fifty percent (50%) of the total claims of the said class vote in favor of the
Plan. The votes of the creditors shall be based solely on the amount of their
respective claims based on the registry of claims submitted by the rehabilitation
receiver pursuant to Section 44 hereof.
Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm
the Rehabilitation Plan if all of the following circumstances are present:
(a)The Rehabilitation Plan complies with the requirements specified in this Act.
(b) The rehabilitation receiver recommends the confirmation of the Rehabilitation
Plan;
(c) The shareholders, owners or partners of the juridical debtor lose at least their
controlling interest as a result of the Rehabilitation Plan; and

(d) The Rehabilitation Plan would likely provide the objecting class of creditors
with compensation which has a net present value greater than that which they
would have received if the debtor were under liquidation.
Section 65.Submission of Rehabilitation Plan to the Court. - 1fthe Rehabilitation
Plan is approved, the rehabilitation receiver shall submit the same to the court for
confirmation. Within five (5) days from receipt of the Rehabilitation Plan, the court
shall notify the creditors that the Rehabilitation Plan has been submitted for
confirmation, that any creditor may obtain copies of the Rehabilitation Plan and
that any creditor may file an objection thereto.
Section 66.Filing of Objections to Rehabilitation Plan. A creditor may file an
objection to the Rehabilitation Plan within twenty (20) days from receipt of notice
from the court that the Rehabilitation Plan has been submitted for confirmation.
Objections to a Rehabilitation Plan shall be limited to the following:
(a) The creditors' support was induced by fraud;
(b)The documents or data relied upon in the Rehabilitation Plan are materially
false or misleading; or
(c)The Rehabilitation Plan is in fact not supported by the voting creditors.
Section 67.Hearing on the Objections. - If objections have been submitted during
the relevant period, the court shall issue an order setting the time and date for
the hearing or hearings on the objections.
If the court finds merit in the objection, it shall order the rehabilitation receiver or
other party to cure the defect, whenever feasible. If the court determines that the
debtor acted in bad faith, or that it is not feasible to cure the defect, the court
shall convert the proceedings into one for the liquidation of the debtor under
Chapter V of this Act.

Section 70. Liability of General Partners of a Partnership for Unpaid Balances

Under an Approved Plan. - The approval of the Plan shall not affect the rights of
creditors to pursue actions against the general partners of a partnership to the
extent they are liable under relevant legislation for the debts thereof.
Section 71. Treatment of Amounts of Indebtedness or Obligations Forgiven or
Reduced. - Amounts of any indebtedness or obligations reduced or forgiven in
connection with a Plan's approval shall not be subject to any tax in furtherance of
the purposes of this Act.
Section 72. Period for Confirmation of the Rehabilitation Plan. - The court shall
have a maximum period of one (1) year from the date of the filing of the petition
to confirm a Rehabilitation Plan.
If no Rehabilitation Plan is confirmed within the said period, the proceedings may
upon motion or motu propio, be converted into one for the liquidation of the
debtor .
Section 73. Accounting Discharge of Rehabilitation Receiver. - Upon the
confirmation of the Rehabilitation Plan, the rehabilitation receiver shall provide a
final report and accounting to the court. Unless the Rehabilitation Plan
specifically requires and describes the role of the rehabilitation receiver after the
approval of the Rehabilitation Plan, the court shall discharge the rehabilitation
receiver of his duties.
(j) Termination of Proceedings
Section 74. Termination of Proceedings. - The rehabilitation proceedings under
Chapter II shall, upon motion by any stakeholder or the rehabilitation receiver be
terminated by order of the court either declaring a successful implementation of
the Rehabilitation Plan or a failure of rehabilitation.
There is failure of rehabilitation in the following cases:

Section 68.Confirmation of the Rehabilitation Plan. If no objections are filed

within the relevant period or, if objections are filed, the court finds them lacking in
merit, or determines that the basis for the objection has been cured, or
determines that the debtor has complied with an order to cure the objection, the
court shall issue an order confirming the Rehabilitation Plan.
The court may confirm the Rehabilitation Plan notwithstanding unresolved
disputes over claims if the Rehabilitation Plan has made adequate provisions for
paying such claims.
For the avoidance of doubt, the provisions of other laws to the contrary
notwithstanding, the court shall have the power to approve or implement the
Rehabilitation Plan despite the lack of approval, or objection from the owners,
partners or stockholders of the insolvent debtor: Provided, That the terms thereof
are necessary to restore the financial well-being and viability of the insolvent
debtor.
Section 69.Effect of Confirmation of the Rehabilitation Plan, - The confirmation of
the Rehabilitation Plan by the court shall result in the following:
(a) The Rehabilitation Plan and its provisions shall be binding upon the debtor
and all persons who may be affected by . it, including the creditors, whether or
not such persons have participated in the proceedings or opposed the
Rehabilitation Plan or whether or not their claims have been scheduled;
(b) The debtor shall comply with the provisions of the Rehabilitation Plan and
shall take all actions necessary to carry out the Plan;
(c) Payments shall be made to the creditors in accordance with the provisions of
the Rehabilitation Plan;
(d) Contracts and other arrangements between the debtor and its creditors shall
be interpreted as continuing to apply to the extent that they do not conflict with
the provisions of the Rehabilitation Plan;
(e) Any compromises on amounts or rescheduling of timing of payments by the
debtor shall be binding on creditors regardless of whether or not the Plan is
successfully implement; and
(f) Claims arising after approval of the Plan that are otherwise not treated by the
Plan are not subject to any Suspension Order.
The Order confirming the Plan shall comply with Rules 36 of the Rules of
Court: Provided, however, That the court may maintain jurisdiction over the case
in order to resolve claims against the debtor that remain contested and
allegations that the debtor has breached the Plan.

(a) Dismissal of the petition by the court;

(b) The debtor fails to submit a Rehabilitation Plan;
(c) Under the Rehabilitation Plan submitted by the debtor, there is no substantial
likelihood that the debtor can be rehabilitated within a reasonable period;
(d) The Rehabilitation Plan or its amendment is approved by the court but in the
implementation thereof, the debtor fails to perform its obligations thereunder or
there is a failure to realize the objectives, targets or goals set forth therein,
including the timelines and conditions for the settlement of the obligations due to
the creditors and other claimants;
(e) The commission of fraud in securing the approval of the Rehabilitation Plan or
its amendment; and
(f) Other analogous circumstances as may be defined by the rules of procedure.
Upon a breach of, or upon a failure of the Rehabilitation Plan the court, upon
motion by an affected party may:
(1) Issue an order directing that the breach be cured within a specified period of
time, falling which the proceedings may be converted to a liquidation;
(2) Issue an order converting the proceedings to a liquidation;
(3) Allow the debtor or rehabilitation receiver to submit amendments to the
Rehabilitation Plan, the approval of which shall be governed by the same
requirements for the approval of a Rehabilitation Plan under this subchapter;
(4) Issue any other order to remedy the breach consistent with the present
regulation, other applicable law and the best interests of the creditors; or
(5) Enforce the applicable provisions of the Rehabilitation Plan through a writ of
execution.
Section 75. Effects of Termination. - Termination of the proceedings shall result
in the following:
(a) The discharge of the rehabilitation receiver subject to his submission of a final
accounting; and
(b) The lifting of the Stay Order and any other court order holding in abeyance
any action for the enforcement of a claim against the debtor.
Provided, however, That if the termination of proceedings is due to failure of
rehabilitation or dismissal of the petition for reasons other than technical grounds,

the proceedings shall be immediately converted to liquidation as provided in

Section 92 of this Act.

the largest claim and who supports the Rehabilitation Plan, and the unsecured
creditor with the largest claim and who supports the Rehabilitation Plan.

CHAPTER III
PRE-NEGOTIATED REHABILITATION

Section 80. Hearing on the Objections. - After receipt of an objection, the court
shall set the same for hearing. The date of the hearing shall be no earlier than
twenty (20) days and no later than thirty (30) days from the date of the second
publication of the Order mentioned in Section 77 hereof. If the court finds merit in
the objection, it shall direct the debtor, when feasible to cure the detect within a
reasonable period. If the court determines that the debtor or creditors supporting
the Rehabilitation Plan acted in bad faith, or that the objection is non-curable, the
court may order the conversion of the proceedings into liquidation. A finding by
the court that the objection has no substantial merit, or that the same has been
cured shall be deemed an approval of the Rehabilitation Plan.

Section 76. Petition by Debtor. - An insolvent debtor, by itself or jointly with any
of its creditors, may file a verified petition with the court for the approval of a prenegotiated Rehabilitation Plan which has been endorsed or approved by
creditors holding at least two-thirds (2/3) of the total liabilities of the debtor,
including secured creditors holding more than fifty percent (50%) of the total
secured claims of the debtor and unsecured creditors holding more than fifty
percent (50%) of the total unsecured claims of the debtor. The petition shall
include as a minimum:

(b) an inventory of the debtor's assets;

Section 81. Period for Approval of Rehabilitation Plan. - The court shall have a
maximum period of one hundred twenty (120) days from the date of the filing of
the petition to approve the Rehabilitation Plan. If the court fails to act within the
said period, the Rehabilitation Plan shall be deemed approved.

(c) the pre-negotiated Rehabilitation Plan, including the names of at least three
(3) qualified nominees for rehabilitation receiver; and

Section 82. Effect of Approval. - Approval of a Plan under this chapter shall have
the same legal effect as confirmation of a Plan under Chapter II of this Act.

(d) a summary of disputed claims against the debtor and a report on the
provisioning of funds to account for appropriate payments should any such
claims be ruled valid or their amounts adjusted.

CHAPTER IV
OUT-OF-COURT OR INFORMAL RESTRUCTURING AGREEMENTS OR
REHABILITATION PLANS

Section 77. Issuance of Order. - Within five (5) working days, and after
determination that the petition is sufficient in form and substance, the court shall
issue an Order which shall;

Section 83. Out-of-Court or Informal Restructuring Agreements and

Rehabilitation Plans. - An out-of-curt or informal restructuring agreement or
Rehabilitation Plan that meets the minimum requirements prescribed in this
chapter is hereby recognized as consistent with the objectives of this Act.

(a) a schedule of the debtor's debts and liabilities;

(a) identify the debtor, its principal business of activity/ies and its principal place
of business;
(b) declare that the debtor is under rehabilitation;
(c) summarize the ground./s for the filling of the petition;
(d) direct the publication of the Order in a newspaper of general circulation in the
Philippines once a week for at least two (2) consecutive weeks, with the first
publication to be made within seven (7) days from the time of its issuance;
(e) direct the service by personal delivery of a copy of the petition on each
creditor who is not a petitioner holding at least ten percent (10%) of the total
liabilities of the debtor, as determined in the schedule attached to the petition,
within three (3) days;
(f) state that copies of the petition and the Rehabilitation Plan are available for
examination and copying by any interested party;
(g) state that creditors and other interested parties opposing the petition or
Rehabilitation Plan may file their objections or comments thereto within a period
of not later than twenty (20) days from the second publication of the Order;
(h) appoint a rehabilitation receiver, if provided for in the Plan; and
(i) include a Suspension or Stay Order as described in this Act.
Section 78. Approval of the Plan. - Within ten (10) days from the date of the
second publication of the Order, the court shall approve the Rehabilitation Plan
unless a creditor or other interested party submits an objection to it in
accordance with the next succeeding section.
Section 79. Objection to the Petition or Rehabilitation Plan. - Any creditor or
other interested party may submit to the court a verified objection to the petition
or the Rehabilitation Plan not later than eight (8) days from the date of the
second publication of the Order mentioned in Section 77 hereof. The objections
shall be limited to the following:
(a) The allegations in the petition or the Rehabilitation Plan or the attachments
thereto are materially false or misleading;
(b) The majority of any class of creditors do not in fact support the Rehabilitation
Plan;
(c) The Rehabilitation Plan fails to accurately account for a claim against the
debtor and the claim in not categorically declared as a contested claim; or
(d) The support of the creditors, or any of them was induced by fraud.
Copies of any objection to the petition of the Rehabilitation Plan shall be served
on the debtor, the rehabilitation receiver (if applicable), the secured creditor with

Section 84. Minimum Requirements of Out-of-Court or Informal Restructuring

Agreements and Rehabilitation Plans. - For an out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan to qualify under this
chapter, it must meet the following minimum requirements:
(a) The debtor must agree to the out-of-court or informal restructuring/workout
agreement or Rehabilitation Plan;
(b) It must be approved by creditors representing at least sixty-seven (67%) of
the secured obligations of the debtor;
(c) It must be approved by creditors representing at least seventy-five percent
(75%) of the unsecured obligations of the debtor; and
(d) It must be approved by creditors holding at least eighty-five percent (85%) of
the total liabilities, secured and unsecured, of the debtor.
Section 85. Standstill Period. - A standstill period that may be agreed upon by
the parties pending negotiation and finalization of the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan contemplated herein shall
be effective and enforceable not only against the contracting parties but also
against the other creditors: Provided, That (a) such agreement is approved by
creditors representing more than fifty percent (50%) of the total liabilities of the
debtor; (b) notice thereof is publishing in a newspaper of general circulation in
the Philippines once a week for two (2) consecutive weeks; and (c) the standstill
period does not exceed one hundred twenty (120) days from the date of
effectivity. The notice must invite creditors to participate in the negotiation for outof-court rehabilitation or restructuring agreement and notify them that said
agreement will be binding on all creditors if the required majority votes prescribed
in Section 84 of this Act are met.
Section 86. Cram Down Effect. - A restructuring/workout agreement or
Rehabilitation Plan that is approved pursuant to an informal workout framework
referred to in this chapter shall have the same legal effect as confirmation of a
Plan under Section 69 hereof. The notice of the Rehabilitation Plan or
restructuring agreement or Plan shall be published once a week for at least three
(3) consecutive weeks in a newspaper of general circulation in the Philippines.
The Rehabilitation Plan or restructuring agreement shall take effect upon the
lapse of fifteen (15) days from the date of the last publication of the notice
thereof.
Section 87. Amendment or Modification. - Any amendment of an out-of-court
restructuring/workout agreement or Rehabilitation Plan must be made in
accordance with the terms of the agreement and with due notice on all creditors.
Section 88. Effect of Court Action or Other Proceedings. - Any court action or
other proceedings arising from, or relating to, the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan shall not stay its

implementation, unless the relevant party is able to secure a temporary

restraining order or injunctive relief from the Court of Appeals.
Section 89. Court Assistance. - The insolvent debtor and/or creditor may seek
court assistance for the execution or implementation of a Rehabilitation Plan
under this Chapter, under such rules of procedure as may be promulgated by the
Supreme Court.
CHAPTER V
LIQUIDATION OF INSOLVENT JURIDICAL DEBTORS
Section 90. Voluntary Liquidation. - An insolvent debtor may apply for liquidation
by filing a petition for liquidation with the court. The petition shall be verified, shall
establish the insolvency of the debtor and shall contain, whether as an
attachment or as part of the body of the petition;
(a) a schedule of the debtor's debts and liabilities including a list of creditors with
their addresses, amounts of claims and collaterals, or securities, if any;
(b) an inventory of all its assets including receivables and claims against third
parties; and
(c) the names of at least three (3) nominees to the position of liquidator.
At any time during the pendency of court-supervised or pre-negotiated
rehabilitation proceedings, the debtor may also initiate liquidation proceedings by
filing a motion in the same court where the rehabilitation proceedings are
pending to convert the rehabilitation proceedings into liquidation proceedings.
The motion shall be verified, shall contain or set forth the same matters required
in the preceding paragraph, and state that the debtor is seeking immediate
dissolution and termination of its corporate existence.
If the petition or the motion, as the case may be, is sufficient in form and
substance, the court shall issue a Liquidation Order mentioned in Section 112
hereof.
Section 91. Involuntary Liquidation. - Three (3) or more creditors the aggregate
of whose claims is at least either One million pesos (Php1,000,000,00) or at least
twenty-five percent (25%0 of the subscribed capital stock or partner's
contributions of the debtor, whichever is higher, may apply for and seek the
liquidation of an insolvent debtor by filing a petition for liquidation of the debtor
with the court. The petition shall show that:
(a) there is no genuine issue of fact or law on the claims/s of the petitioner/s, and
that the due and demandable payments thereon have not been made for at least
one hundred eighty (180) days or that the debtor has failed generally to meet its
liabilities as they fall due; and

upon the recommendation of the rehabilitation receiver that the rehabilitation of

the debtor is not feasible. Thereupon, the court shall issue the Liquidation Order
mentioned in Section 112 hereof.
Section 93. Powers of the Securities and Exchange Commission (SEC). - The
provisions of this chapter shall not affect the regulatory powers of the SEC under
Section 6 of Presidential Decree No. 902-A, as amended, with respect to any
dissolution and liquidation proceeding initiated and heard before it.
CHAPTER VI
INSOLVENCY OF INDIVIDUAL DEBTORS
(A) Suspension of Payments.
Section 94. Petition. - An individual debtor who, possessing sufficient property to
cover all his debts but foreseeing the impossibility of meeting them when they
respectively fall due, may file a verified petition that he be declared in the state of
suspension of payments by the court of the province or city in which he has
resides for six (6) months prior to the filing of his petition. He shall attach to his
petition, as a minimum: (a) a schedule of debts and liabilities; (b) an inventory of
assess; and (c) a proposed agreement with his creditors.
Section 95. Action on the Petition. - If the court finds the petition sufficient in form
and substance, it shall, within five (5) working days from the filing of the petition,
issue an Order:
(a) calling a meeting of all the creditors named in the schedule of debts and
liabilities at such time not less than fifteen (15) days nor more than forty (40)
days from the date of such Order and designating the date, time and place of the
meeting;
(b) directing such creditors to prepare and present written evidence of their
claims before the scheduled creditors' meeting;
(c) directing the publication of the said order in a newspaper of general
circulation published in the province or city in which the petition is filed once a
week for two (2) consecutive weeks, with the first publication to be made within
seven (7) days from the time of the issuance of the Order;
(d) directing the clerk of court to cause the sending of a copy of the Order by
registered mail, postage prepaid, to all creditors named in the schedule of debts
and liabilities;
(e) forbidding the individual debtor from selling, transferring, encumbering or
disposing in any manner of his property, except those used in the ordinary
operations of commerce or of industry in which the petitioning individual debtor is
engaged so long as the proceedings relative to the suspension of payments are
pending;

(b) there is no substantial likelihood that the debtor may be rehabilitated.

At any time during the pendency of or after a rehabilitation court-supervised or
pre-negotiated rehabilitation proceedings, three (3) or more creditors whose
claims is at least either One million pesos (Php1,000,000.00) or at least twentyfive percent (25%) of the subscribed capital or partner's contributions of the
debtor, whichever is higher, may also initiate liquidation proceedings by filing a
motion in the same court where the rehabilitation proceedings are pending to
convert the rehabilitation proceedings into liquidation proceedings. The motion
shall be verified, shall contain or set forth the same matters required in the
preceding paragraph, and state that the movants are seeking the immediate
liquidation of the debtor.
If the petition or motion is sufficient in form and substance, the court shall issue
an Order:
(1) directing the publication of the petition or motion in a newspaper of general
circulation once a week for two (2) consecutive weeks; and
(2) directing the debtor and all creditors who are not the petitioners to file their
comment on the petition or motion within fifteen (15) days from the date of last
publication.

(f) prohibiting the individual debtor from making any payment outside of the
necessary or legitimate expenses of his business or industry, so long as the
proceedings relative to the suspension of payments are pending; and
(g) appointing a commissioner to preside over the creditors' meeting.
Section 96. Actions Suspended. - Upon motion filed by the individual debtor, the
court may issue an order suspending any pending execution against the
individual debtor. Provide, That properties held as security by secured creditors
shall not be the subject of such suspension order. The suspension order shall
lapse when three (3) months shall have passed without the proposed agreement
being accepted by the creditors or as soon as such agreement is denied.
No creditor shall sue or institute proceedings to collect his claim from the debtor
from the time of the filing of the petition for suspension of payments and for as
long as proceedings remain pending except:
(a) those creditors having claims for personal labor, maintenance, expense of last
illness and funeral of the wife or children of the debtor incurred in the sixty (60)
days immediately prior to the filing of the petition; and
(b) secured creditors.

If, after considering the comments filed, the court determines that the petition or
motion is meritorious, it shall issue the Liquidation Order mentioned in Section
112 hereof.
Section 92. Conversion by the Court into Liquidation Proceedings. - During the
pendency of court-supervised or pre-negotiated rehabilitation proceedings, the
court may order the conversion of rehabilitation proceedings to liquidation
proceedings pursuant to (a) Section 25(c) of this Act; or (b) Section 72 of this Act;
or (c) Section 75 of this Act; or (d) Section 90 of this Act; or at any other time

Section 97. Creditors' Meeting. - The presence of creditors holding claims

amounting to at least three-fifths (3/5) of the liabilities shall be necessary for
holding a meeting. The commissioner appointed by the court shall preside over
the meeting and the clerk of court shall act as the secretary thereof, subject to
the following rules:
(a) The clerk shall record the creditors present and amount of their respective
claims;

(b) The commissioner shall examine the written evidence of the claims. If the
creditors present hold at least three-fifths (3/5) of the liabilities of the individual
debtor, the commissioner shall declare the meeting open for business;
(c) The creditors and individual debtor shall discuss the propositions in the
proposed agreement and put them to a vote;
(d) To form a majority, it is necessary:
(1) that two-thirds (2/3) of the creditors voting unite upon the same proposition;
and
(2) that the claims represented by said majority vote amount to at least threefifths (3/5) of the total liabilities of the debtor mentioned in the petition; and
(e) After the result of the voting has been announced, all protests made against
the majority vote shall be drawn up, and the commissioner and the individual
debtor together with all creditors taking part in the voting shall sign the affirmed
propositions.
No creditor who incurred his credit within ninety (90) days prior to the filing of the
petition shall be entitled to vote.
Section 98. Persons Who May Refrain From Voting. - Creditors who are
unaffected by the Suspension Order may refrain from attending the meeting and
from voting therein. Such persons shall not be bound by any agreement
determined upon at such meeting, but if they should join in the voting they shall
be bound in the same manner as are the other creditors.
Section 99. Rejection of the Proposed Agreement. - The proposed agreement
shall be deemed rejected if the number of creditors required for holding a
meeting do not attend thereat, or if the two (2) majorities mentioned in Section 97
hereof are not in favor thereof. In such instances, the proceeding shall be
terminated without recourse and the parties concerned shall be at liberty to
enforce the rights which may correspond to them.
Section 100. Objections. - If the proposal of the individual debtor, or any
amendment thereof made during the creditors' meeting, is approved by the
majority of creditors in accordance with Section 97 hereof, any creditor who
attended the meeting and who dissented from and protested against the vote of
the majority may file an objection with the court within ten (10) days from the date
of the last creditors' meeting. The causes for which objection may be made to the
decision made by the majority during the meeting shall be: (a) defects in the call
for the meeting, in the holding thereof and in the deliberations had thereat which
prejudice the rights of the creditors; (b) fraudulent connivance between one or
more creditors and the individual debtor to vote in favor of the proposed
agreement; or (c) fraudulent conveyance of claims for the purpose of obtaining a
majority. The court shall hear and pass upon such objection as soon as possible
and in a summary manner.
In case the decision of the majority of creditors to approve the individual debtor's
proposal or any amendment thereof made during the creditors' meeting is
annulled by the court, the court shall declare the proceedings terminated and the
creditors shall be at liberty to exercise the rights which may correspond to them.
Section 101. Effects of Approval of Proposed Agreement. - If the decision of the
majority of the creditors to approve the proposed agreement or any amendment
thereof made during the creditors' meeting is uphold by the court, or when no
opposition or objection to said decision has been presented, the court shall order
that the agreement be carried out and all parties bound thereby to comply with its
terms.
The court may also issue all orders which may be necessary or proper to enforce
the agreement on motion of any affected party. The Order confirming the
approval of the proposed agreement or any amendment thereof made during the
creditors' meeting shall be binding upon all creditors whose claims are included
in the schedule of debts and liabilities submitted by the individual debtor and who
were properly summoned, but not upon: (a) those creditors having claims for
personal labor, maintenance, expenses of last illness and funeral of the wife or
children of the debtor incurred in the sixty (60) days immediately prior to the filing
of the petition; and (b) secured creditors who failed to attend the meeting or
refrained from voting therein.
Section 102. Failure of Individual Debtor to Perform Agreement. - If the individual
debtor fails, wholly or in part, to perform the agreement decided upon at the
meeting of the creditors, all the rights which the creditors had against the
individual debtor before the agreement shall revest in them. In such case the
individual debtor may be made subject to the insolvency proceedings in the
manner established by this Act.

(B) Voluntary Liquidation.

Section 103. Application. - An individual debtor whose properties are not
sufficient to cover his liabilities, and owing debts exceeding Five hundred
thousand pesos (Php500,000.00), may apply to be discharged from his debts
and liabilities by filing a verified petition with the court of the province or city in
which he has resided for six (6) months prior to the filing of such petition. He shall
attach to his petition a schedule of debts and liabilities and an inventory of
assets. The filing of such petition shall be an act of insolvency.
Section 104. Liquidation Order. - If the court finds the petition sufficient in form
and substance it shall, within five (5) working days issue the Liquidation Order
mentioned in Section 112 hereof.
(C) In voluntary Liquidation.
Section 105. Petition; Acts of Insolvency. - Any creditor or group of creditors with
a claim of, or with claims aggregating at least Five hundred thousand pesos
(Php500, 000.00) may file a verified petition for liquidation with the court of the
province or city in which the individual debtor resides.
The following shall be considered acts of insolvency, and the petition for
liquidation shall set forth or allege at least one of such acts:
(a) That such person is about to depart or has departed from the Republic of the
Philippines, with intent to defraud his creditors;
(b) That being absent from the Republic of the Philippines, with intent to defraud
his creditors, he remains absent;
(c) That he conceals himself to avoid the service of legal process for the purpose
of hindering or delaying the liquidation or of defrauding his creditors;
(d) That he conceals, or is removing, any of his property to avoid its being
attached or taken on legal process;
(e) That he has suffered his property to remain under attachment or legal process
for three (3) days for the purpose of hindering or delaying the liquidation or of
defrauding his creditors;
(f) That he has confessed or offered to allow judgment in favor of any creditor or
claimant for the purpose of hindering or delaying the liquidation or of defrauding
any creditors or claimant;
(g) That he has willfully suffered judgment to be taken against him by default for
the purpose of hindering or delaying the liquidation or of defrauding his creditors;
(h) That he has suffered or procured his property to be taken on legal process
with intent to give a preference to one or more of his creditors and thereby hinder
or delay the liquidation or defraud any one of his creditors;
(i) That he has made any assignment, gift, sale, conveyance or transfer of his
estate, property, rights or credits with intent to hinder or delay the liquidation or
defraud his creditors;
(j) That he has, in contemplation of insolvency, made any payment, gift, grant,
sale, conveyance or transfer of his estate, property, rights or credits;
(k) That being a merchant or tradesman, he has generally defaulted in the
payment of his current obligations for a period of thirty (30) days;
(l) That for a period of thirty (30) days, he has failed, after demand, to pay any
moneys deposited with him or received by him in a fiduciary; and
(m) That an execution having been issued against him on final judgment for
money, he shall have been found to be without sufficient property subject to
execution to satisfy the judgment.
The petitioning creditor/s shall post a bond in such as the court shall direct,
conditioned that if the petition for liquidation is dismissed by the court, or
withdrawn by the petitioner, or if the debtor shall not be declared an insolvent the
petitioners will pay to the debtor all costs, expenses, damages occasioned by the
proceedings and attorney's fees.
Section 106. Order to Individual Debtor to Show Cause. - Upon the filing of such
creditors' petition, the court shall issue an Order requiring the individual debtor to
show cause, at a time and place to be fixed by the said court, why he should not
be adjudged an insolvent. Upon good cause shown, the court may issue an
Order forbidding the individual debtor from making payments of any of his debts,
and transferring any property belonging to him. However, nothing contained

herein shall affect or impair the rights of a secured creditor to enforce his lien in
accordance with its terms.

Section 112. Liquidation Order. - The Liquidation Order shall:

(a) declare the debtor insolvent;

Section 107. Default. - If the individual debtor shall default or if, after trial, the
issues are found in favor of the petitioning creditors the court shall issue the
Liquidation Order mentioned in Section 112 hereof.
Section 108. Absent Individual Debtor. - In all cases where the individual debtor
resides out of the Republic of the Philippines; or has departed therefrom; or
cannot, after due diligence, be found therein; or conceals himself to avoid service
of the Order to show cause, or any other preliminary process or orders in the
matter, then the petitioning creditors, upon submitting the affidavits requisite to
procedure an Order of publication, and presenting a bond in double the amount
of the aggregate sum of their claims against the individual debtor, shall be
entitled to an Order of the court directing the sheriff of the province or city in
which the matter is pending to take into his custody a sufficient amount of
property of the individual debtor to satisfy the demands of the petitioning
creditors and the costs of the proceedings. Upon receiving such Order of the
court to take into custody of the property of the individual debtor, it shall be the
duty of the sheriff to take possession of the property and effects of the individual
debtor, not exempt from execution, to an extent sufficient to cover the amount
provided for and to prepare within three (3) days from the time of taking such
possession, a complete inventory of all the property so taken, and to return it to
the court as soon as completed. The time for taking the inventory and making
return thereof may be extended for good cause shown to the court. The sheriff
shall also prepare a schedule of the names and residences of the creditors, and
the amount due each, from the books of the debtor, or from such other papers or
data of the individual debtor available as may come to his possession, and shall
file such schedule or list of creditors and inventory with the clerk of court.
Section 109. All Property Taken to be Held for All Creditors; Appeal Bonds;
Exemptions to Sureties. - In all cases where property is taken into custody by the
sheriff, if it does not embrace all the property and effects of the debtor not exempt
from execution, any other creditor or creditors of the individual debtor, upon
giving bond to be approved by the court in double the amount of their claims,
singly or jointly, shall be entitled to similar orders and to like action, by the sheriff;
until all claims be provided for, if there be sufficient property or effects. All
property taken into custody by the sheriff by virtue of the giving of any such
bonds shall be held by him for the benefit of all creditors of the individual debtor
whose claims shall be duly proved as provided in this Act. The bonds provided for
in this section and the preceding section to procure the order for custody of the
property and effects of the individual debtor shall be conditioned that if, upon final
hearing of the petition in insolvency, the court shall find in favor of the petitioners,
such bonds and all of them shall be void; if the decision be in favor of the
individual debtor, the proceedings shall be dismissed, and the individual debtor,
his heirs, administrators, executors or assigns shall be entitled to recover such
sum of money as shall be sufficient to cover the damages sustained by him, not
to exceed the amount of the respective bonds. Such damages shall be fixed and
allowed by the court. If either the petitioners or the debtor shall appeal from the
decision of the court, upon final hearing of the petition, the appellant shall be
required to give bond to the successful party in a sum double the amount of the
value of the property in controversy, and for the costs of the proceedings.
Any person interested in the estate may take exception to the sufficiency of the
sureties on such bond or bonds. When excepted to the petitioner's sureties, upon
notice to the person excepting of not less than two (2) nor more than five (5)
days, must justify as to their sufficiency; and upon failure to justify, or of others in
their place fail to justify at the time and place appointed the judge shall issue an
Order vacating the order to take the property of the individual debtor into the
custody of the sheriff, or denying the appeal, as the case may be.
Section 110. Sale Under Execution. - If, in any case, proper affidavits and bonds
are presented to the court or a judge thereof, asking for and obtaining an Order
of publication and an Order for the custody of the property of the individual debtor
and thereafter the petitioners shall make it appear satisfactorily to the court or a
judge thereof that the interest of the parties to the proceedings will be subserved
by a sale thereof, the court may order such property to be sold in the same
manner as property is sold under execution, the proceeds to de deposited in the
court to abide by the result of the proceedings.
CHAPTER VII
PROVISIONS COMMON TO LIQUIDATION IN INSOLVENCY OF INDIVIDUAL
AND JURIDICAL DEBTORS
Section 111. Use of Term Debtor. - For purposes of this chapter, the term debtor
shall include both individual debtor as defined in Section 4(o) and debtor as
defined in Section 4(k) of this Act.
(A) The Liquidation Order.

(b) order the liquidation of the debtor and, in the case of a juridical debtor,
declare it as dissolved;
(c) order the sheriff to take possession and control of all the property of the
debtor, except those that may be exempt from execution;
(d) order the publication of the petition or motion in a newspaper of general
circulation once a week for two (2) consecutive weeks;
(e) direct payments of any claims and conveyance of any property due the debtor
to the liquidator;
(f) prohibit payments by the debtor and the transfer of any property by the debtor;
(g) direct all creditors to file their claims with the liquidator within the period set by
the rules of procedure;
(h) authorize the payment of administrative expenses as they become due;
(i) state that the debtor and creditors who are not petitioner/s may submit the
names of other nominees to the position of liquidator; and
(j) set the case for hearing for the election and appointment of the liquidator,
which date shall not be less than thirty (30) days nor more than forty-five (45)
days from the date of the last publication.
Section 113. Effects of the Liquidation Order. - Upon the issuance of the
Liquidation Order:
(a) the juridical debtor shall be deemed dissolved and its corporate or juridical
existence terminated;
(b) legal title to and control of all the assets of the debtor, except those that may
be exempt from execution, shall be deemed vested in the liquidator or, pending
his election or appointment, with the court;
(c) all contracts of the debtor shall be deemed terminated and/or breached,
unless the liquidator, within ninety (90) days from the date of his assumption of
office, declares otherwise and the contracting party agrees;
(d) no separate action for the collection of an unsecured claim shall be allowed.
Such actions already pending will be transferred to the Liquidator for him to
accept and settle or contest. If the liquidator contests or disputes the claim, the
court shall allow, hear and resolve such contest except when the case is already
on appeal. In such a case, the suit may proceed to judgment, and any final and
executor judgment therein for a claim against the debtor shall be filed and
allowed in court; and
(e) no foreclosure proceeding shall be allowed for a period of one hundred eighty
(180) days.
Section 114. Rights of Secured Creditors. - The Liquidation Order shall not affect
the right of a secured creditor to enforce his lien in accordance with the
applicable contract or law. A secured creditor may:
(a) waive his right under the security or lien, prove his claim in the liquidation
proceedings and share in the distribution of the assets of the debtor; or
(b) maintain his rights under the security or lien:
If the secured creditor maintains his rights under the security or lien:
(1) the value of the property may be fixed in a manner agreed upon by the
creditor and the liquidator. When the value of the property is less than the claim it
secures, the liquidator may convey the property to the secured creditor and the
latter will be admitted in the liquidation proceedings as a creditor for the balance.
If its value exceeds the claim secured, the liquidator may convey the property to
the creditor and waive the debtor's right of redemption upon receiving the excess
from the creditor;
(2) the liquidator may sell the property and satisfy the secured creditor's entire
claim from the proceeds of the sale; or
(3) the secure creditor may enforce the lien or foreclose on the property pursuant
to applicable laws.
(B) The Liquidator.

Section 115. Election of Liquidator. - Only creditors who have filed their claims
within the period set by the court, and whose claims are not barred by the statute
of limitations, will be allowed to vote in the election of the liquidator. A secured
creditor will not be allowed to vote, unless: (a) he waives his security or lien; or
(b) has the value of the property subject of his security or lien fixed by agreement
with the liquidator, and is admitted for the balance of his claim.
The creditors entitled to vote will elect the liquidator in open court. The nominee
receiving the highest number of votes cast in terms of amount of claims, ad who
is qualified pursuant to Section 118 hereof, shall be appointed as the liquidator.
Section 116. Court-Appointed Liquidator. - The court may appoint the liquidator
if:
(a) on the date set for the election of the liquidator, the creditors do not attend;
(b) the creditors who attend, fail or refuse to elect a liquidator;
(c) after being elected, the liquidator fails to qualify; or
(d) a vacancy occurs for any reason whatsoever, In any of the cases provided
herein, the court may instead set another hearing of the election of the liquidator.
Provided further, That nothing in this section shall be construed to prevent a
rehabilitation receiver, who was administering the debtor prior to the
commencement of the liquidation, from being appointed as a liquidator.
Section 117. Oath and Bond of the Liquidator. -Prior to entering upon his
powers, duties and responsibilities, the liquidator shall take an oath and file a
bond, In such amount to be fixed by the court, conditioned upon the proper and
faithful discharge of his powers, duties and responsibilities.
Section 118. Qualifications of the Liquidator. - The liquidator shall have the
qualifications enumerated in Section 29 hereof. He may be removed at any time
by the court for cause, either motu propio or upon motion of any creditor entitled
to vote for the election of the liquidator.
Section 119. Powers, Duties and Responsibilities of the Liquidator. - The
liquidator shall be deemed an officer of the court with the principal duly of
preserving and maximizing the value and recovering the assets of the debtor,
with the end of liquidating them and discharging to the extent possible all the
claims against the debtor. The powers, duties and responsibilities of the liquidator
shall include, but not limited to:
(a) to sue and recover all the assets, debts and claims, belonging or due to the
debtor;
(b) to take possession of all the property of the debtor except property exempt by
law from execution;

by the liquidation court, which shall not exceed the maximum amount as may be
prescribed by the Supreme Court.
Section 121. Reporting Requiremen5ts. - The liquidator shall make and keep a
record of all moneys received and all disbursements mad by him or under his
authority as liquidator. He shall render a quarterly report thereof to the court ,
which report shall be made available to all interested parties. The liquidator shall
also submit such reports as may be required by the court from time to time as
well as a final report at the end of the liquidation proceedings.
Section 122. Discharge of Liquidator. - In preparation for the final settlement of
all the claims against the debtor , the liquidator will notify all the creditors, either
by publication in a newspaper of general circulation or such other mode as the
court may direct or allow, that will apply with the court for the settlement of his
account and his discharge from liability as liquidator. The liquidator will file a final
accounting with the court, with proof of notice to all creditors. The accounting will
be set for hearing. If the court finds the same in order, the court will discharge the
liquidator.
(C) Determination of Claims
Section 123. Registry of Claims. - Within twenty (20) days from his assumption
into office the liquidator shall prepare a preliminary registry of claims of secured
and unsecured creditors. Secured creditors who have waived their security or
lien, or have fixed the value of the property subject of their security or lien by
agreement with the liquidator and is admitted as a creditor for the balance , shall
be considered as unsecured creditors. The liquidator shall make the registry
available for public inspection and provide publication notice to creditors,
individual debtors owner/s of the sole proprietorship-debtor, the partners of the
partnership-debtor and shareholders or members of the corporation-debtor, on
where and when they may inspect it. All claims must be duly proven before being
paid.
Section 124. Right of Set-off. - If the debtor and creditor are mutually debtor and
creditor of each other one debt shall be set off against the other, and only the
balance, if any shall be allowed in the liquidation proceedings.
Section 125. - Opposition or Challenge to Claims. - Within thirty (30 ) days from
the expiration of the period for filing of applications for recognition of claims,
creditors, individual debtors, owner/s of the sole proprietorship-debtor, partners of
the partnership-debtor and shareholders or members of the corporation -debtor
and other interested parties may submit a challenge to claim or claims to the
court, serving a certified copy on the liquidator and the creditor holding the
challenged claim. Upon the expiration of the (30) day period, the rehabilitation
receiver shall submit to the court the registry of claims containing the undisputed
claims that have not been subject to challenge. Such claims shall become final
upon the filling of the register and may be subsequently set aside only on
grounds or fraud, accident, mistake or inexcusable neglect.

(c) to sell, with the approval of the court, any property of the debtor which has
come into his possession or control;

Section 126. Submission of Disputed to the Court. - The liquidator shall resolve
disputed claims and submit his findings thereon to the court for final approval.
The liquidator may disallow claims.

(d) to redeem all mortgages and pledges, and so satisfy any judgement which
may be an encumbrance on any property sold by him;

(D) Avoidance Proceedings.

(e) to settle all accounts between the debtor and his creditors, subject to the
approval of the court;
(f) to recover any property or its value, fraudulently conveyed by the debtor;
(g) to recommend to the court the creation of a creditors' committee which will
assist him in the discharge of the functions and which shall have powers as the
court deems just, reasonable and necessary; and
(h) upon approval of the court, to engage such professional as may be necessary
and reasonable to assist him in the discharge of his duties.
In addition to the rights and duties of a rehabilitation receiver, the liquidator, shall
have the right and duty to take all reasonable steps to manage and dispose of
the debtor's assets with a view towards maximizing the proceedings therefrom, to
pay creditors and stockholders, and to terminate the debtor's legal existence.
Other duties of the liquidator in accordance with this section may be established
by procedural rules.

Section 127. Rescission or Nullity of Certain Transactions. - Any transaction

occurring prior to the issuance of the Liquidation Order or, in case of the
conversion of the rehabilitation proceedings prior to the commencement date,
entered into by the debtor or involving its assets, may be rescinded or declared
null and void on the ground that the same was executed with intent to defraud a
creditor or creditors or which constitute undue preference of creditors. The
presumptions set forth in Section 58 hereof shall apply.
Section 128. Actions for Rescission or Nullity. - (a) The liquidator or, with his
conformity, a creditor may initiate and prosecute any action to rescind, or declare
null and void any transaction described in the immediately preceding paragraph.
If the liquidator does not consent to the filling or prosecution of such action, any
creditor may seek leave of the court to commence said action.
(b) if leave of court is granted under subsection (a) hereof, the liquidator shall
assign and transfer to the creditor all rights, title and interest in the chose in
action or subject matter of the proceeding, including any document in support
thereof.

A liquidator shall be subject to removal pursuant to procedures for removing a

rehabilitation receiver.

(c) Any benefit derived from a proceeding taken pursuant to subsection (a)
hereof, to the extent of his claim and the costs, belongs exclusively to the creditor
instituting the proceeding, and the surplus, if any, belongs to the estate.

Section 120. Compensation of the Liquidator. - The liquidator and the persons
and entities engaged or employed by him to assist in the discharge of his powers
and duties shall be entitled to such reasonable compensation as may determined

(d) Where, before an orders is made under subsection (a) hereof, the liquidator
signifies to the court his readiness to the institute the proceeding for the benefit of

the creditors, the order shall fix the time within which he shall do so and, in that
case the benefit derived from the proceedings, if instituted within the time limits
so fixed, belongs to the estate.

Section 137. Provision of Assistance. - The court shall issue orders, adjudicate
claims and provide other relief necessary to assist in the liquidation of a financial
under rehabilitation receivership established by a state-funded or state-mandated
insurance system.

(E) The Liquidation Plan.

Section 129. The Liquidation Plan. - Within three (3) months from his
assumption into office, the Liquidator shall submit a Liquidation Plan to the court.
The Liquidation Plan shall, as a minimum enumerate all the assets of the debtor
and a schedule of liquidation of the assets and payment of the claims.

Section 138. Application of Relevant Legislation. - The liquidation of bank,

financial institutions, insurance companies and pre-need companies shall be
determined by relevant legislation. The provisions in this Act shall apply in a
suppletory manner.
(B) Cross-Border Insolvency Proceedings.

Section 130. Exempt Property to be Set Apart. - It shall be the duty of the court,
upon petition and after hearing, to exempt and set apart, for the use and benefit
of the said insolvent, such real and personal property as is by law exempt from
execution, and also a homestead; but no such petition shall be heard as
aforesaid until it is first proved that notice of the hearing of the application
therefor has been duly given by the clerk, by causing such notice to be posted it
at least three (3) public places in the province or city at least ten (10) days prior
to the time of such hearing, which notice shall set forth the name of the said
insolvent debtor, and the time and place appointed for the hearing of such
application, and shall briefly indicate the homestead sought to be exempted or
the property sought to be set aside; and the decree must show that such proof
was made to the satisfaction of the court, and shall be conclusive evidence of
that fact.

Section 139. Adoption of Uncitral Model Law on Cross-Border Insolvency. Subject to the provision of Section 136 hereof and the rules of procedure that
may be adopted by the Supreme Court, the Model Law on Cross-Border
Insolvency of the United Nations Center for International Trade and Development
is hereby adopted as part of this Act.
Section 140. Initiation of Proceedings. - The court shall set a hearing in
connection with an insolvency or rehabilitation proceeding taking place in a
foreign jurisdiction, upon the submission of a petition by the representative of the
foreign entity that is the subject of the foreign proceeding.
Section 141. Provision of Relief. - The court may issue orders:

Section 131. Sale of Assets in Liquidation. - The liquidator may sell the
unencumbered assets of the debtor and convert the same into money. The sale
shall be made at public auction. However, a private sale may be allowed with the
approval of the court if; (a) the goods to be sold are of a perishable nature, or are
liable to quickly deteriorate in value, or are disproportionately expensive to keep
or maintain; or (b) the private sale is for the best interest of the debtor and his
creditors.

(a) suspending any action to enforce claims against the entity or otherwise seize
or foreclose on property of the foreign entity located in the Philippines;

With the approval of the court, unencumbered property of the debtor may also be
conveyed to a creditor in satisfaction of his claim or part thereof.

Section 142. Factors in Granting Relief. - In determining whether to grant relief

under this subchapter, the court shall consider;

Section 132. manner of Implementing the Liquidation Plan. - The Liquidator shall
implement the Liquidation Plan as approved by the court. Payments shall be
made to the creditors only in accordance with the provisions of the Plan.

(a) the protection of creditors in the Philippines and the inconvenience in

pursuing their claim in a foreign proceeding;

Section 133. Concurrence and Preference of Credits. - The Liquidation Plan and
its Implementation shall ensure that the concurrence and preference of credits as
enumerated in the Civil Code of the Philippines and other relevant laws shall be
observed, unless a preferred creditor voluntarily waives his preferred right. For
purposes of this chapter, credits for services rendered by employees or laborers
to the debtor shall enjoy first preference under Article 2244 of the Civil Code,
unless the claims constitute legal liens under Article 2241 and 2242 thereof.
Section 134. Order Removing the Debtor from the List of Registered Entitles at
the Securities and Exchange Commission. - Upon determining that the liquidation
has been completed according to this Act and applicable law, the court shall
issue an Order approving the report and ordering the SEC to remove the debtor
from the registry of legal entities.
Section 135. Termination of Proceedings. - Upon receipt of evidence showing
that the debtor has been removed from the registry of legal entities at the SEC.
The court shall issue an Order terminating the proceedings.
(F) Liquidation of a Securities Market Participant.
Section 136. Liquidation of a Securities Market Participant. - The foregoing
provisions of this chapter shall be without prejudice to the power of a regulatory
agency or self- regulatory organization to liquidate trade-related claims of clients
or customers of a securities market participant which, for purposes of investor
protection, are hereby deemed to have absolute priority over other claims of
whatever nature or kind insofar as trade-related assets are concerned.
For purposes of this section, trade -related assets include cash, securities,
trading right and other owned and used by the securities market participant in the
ordinary course of this business.
CHAPTER VIII
PROCEEDINGS ANCILLARY TO OTHER INSOLVENCY OR REHABILITAION
PROCEEDINGS
(A) Banks and Other Financial Institutions Under Rehabilitation
Receivership Pursuant to a State-funded or State-mandated Insurance
System.

(b) requiring the surrender property of the foreign entity to the foreign
representative; or
(c) providing other necessary relief.

(b) the just treatment of all creditors through resort to a unified insolvency or
rehabilitation proceedings;
(c) whether other jurisdictions have given recognition to the foreign proceeding;
(d) the extent that the foreign proceeding recognizes the rights of creditors and
other interested parties in a manner substantially in accordance with the manner
prescribed in this Act; and
(e) the extent that the foreign proceeding has recognized and shown deference
to proceedings under this Act and previous legislation.
CHAPTER IX
FUNDS FOR REHABILITATION OF GOVERNMENT-OWNED AND
CONTROLLED CORPORATIONS
Section 143. Funds for Rehabilitation of Government -owned and Controlled
Corporations. - Public funds for the rehabilitation of government-owned and
controlled corporations shall be released only pursuant to an appropriation by
Congress and shall be supported by funds actually available as certified by the
National Treasurer.
The Department of Finance, in collaboration with the Department of Budget and
Management, shall promulgate the rules for the use and release of said funds.
CHAPTER X
MISCELLANEOUS PROVISIOS
Section 144. Applicability of Provisions. - The provisions in Chapter II, insofar as
they are applicable, shall likewise apply to proceedings in Chapters II and IV.
Section 145. Penalties. - An owner, partner, director, officer or other employee of
the debtor who commits any one of the following acts shall, upon conviction
thereof, be punished by a fine of not more than One million pesos (Php 1,
000,000.00) and imprisonment for not less than three(3) months nor more than
five (5) years for each offense;
(a) if he shall, having notice of the commencement of the proceedings, or having
reason to believe that proceedings are about to be commented, or in
contemplation of the proceedings hide or conceal, or destroy or cause to be
destroyed or hidden any property belonging to the debtor or if he shall hide,
destroy, after mutilate or falsify, or cause to be hidden, destroyed, altered,

mutilated or falsified, any book, deed, document or writing relating thereto; if he

shall, with intent to defraud the creditors of the debtor, make any payment sale,
assignment, transfer or conveyance of any property belongings to the debtor
(b) if he shall, having knowledge belief of any person having proved a false or
fictitious claim against the debtor, fail to disclose the same to the rehabilitation
receiver of liquidator within one (1) month after coming to said knowledge or
belief; or if he shall attempt to account for any of the debtors property by fictitious
losses or expense; or
(c) if he shall knowingly violate a prohibition or knowingly fail to undertake an
obligation established by this Act.
Section 146. Application to Pending Insolvency, Suspension of Payments and
Rehabilitation Cases. - This Act shall govern all petitions filed after it has taken
effect. All further proceedings in insolvency, suspension of payments and
rehabilitation cases then pending, except to the extent that in opinion of the court
their application would not be feasible or would work injustice, in which event the
procedures set forth in prior laws and regulations shall apply.
Section 147. Application to Pending Contracts. - This Act shall apply to all
contracts of the debtor regardless of the date of perfection.
Section 148. Repeating Clause. - The Insolvency Law (Act No. 1956). As
amended is hereby repealed. All other laws, orders, rules and regulations or

parts thereof inconsistent with any provision of this Act are hereby repealed or
modified accordingly.
Section 149. Separability Clause. - If any provision of this Act shall be held
invalid, the remainder of this Act not otherwise affected shall remain in full force
effect
Section 150. Effectivity Clause. - This Act shall take effect fifteen (15) days after
its complete publication in the Official Gazette or in at least two (2) national
newspaper of general circulation.
Approved,

(Sgd.) JUAN PONCE ENRILE

President of the Senate

(Sgd.) PROSPERO C.
NOGRALES
Speaker of the House of
Representatives

This Act which is a consolidation of House Bill No. 7090 and Senate Bill No. 61
was finally passed by the House of Representatives and the Senate on February
1. 2010 and February 2, 2010, respectively.