Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

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 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:

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.

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.

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.
SO ORDERED.

Narvasa, Melencio-Herrera, * Paras and Feliciano, concur.

Cruz, J., is on leave.

Footnotes

* Justice Cruz is on leave. Justice Paras was designated to sit in the First Division.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DivISION

G.R. No. 77465 May 21, 1988

SPOUSES UY TONG & KHO PO GIOK, petitioners,

vs.
HONORABLE COURT OF APPEALS, HONORABLE BIENVENIDO C. EJERCITO, Judge of the
Court of First Instance of Manila, Branch XXXVII and BAYANIHAN AUTOMOTIVE
CORPORATION, respondents.

Platon A. Baysa for petitioner.

Manuel T. Ybarra for respondents.

CORTES, J.:

In the present petition, petitioners assail the validity of a deed of assignment over an apartment unit
and the leasehold rights over the land on which the building housing the said apartment stands for
allegedly being in the nature of a pactum commissorium.

The facts are not disputed.

Petitioners Uy Tong (also known as Henry Uy) and Kho Po Giok (SPOUSES) used to be the owners
of Apartment No. 307 of the Ligaya Building, together with the leasehold right for ninety- nine (99)
years over the land on which the building stands. The land is registered in the name of Ligaya
Investments, Inc. as evidenced by Transfer Certificate of Title No. 79420 of the Registry of Deeds of
the City of Manila. It appears that Ligaya Investments, Inc. owned the building which houses the
apartment units but sold Apartment No. 307 and leased a portion of the land in which the building
stands to the SPOUSES.

In February, 1969, the SPOUSES purchased from private respondent Bayanihan Automotive, Inc.
(BAYANIHAN) seven (7) units of motor vehicles for a total amount of P47,700.00 payable in three
(3) installments. The transaction was evidenced by a written "Agreement" wherein the terms of
payment had been specified as follows:

That immediately upon signing of this Agreement, the VENDEE shall pay unto the
VENDOR the amount of Seven Thousand Seven Hundred (P7,000.00) Pesos,
Philippine Currency, and the amount of Fifteen Thousand (P15,000.00) Pesos shah
be paid on or before March 30, 1969 and the balance of Twenty Five Thousand
(P25,000.00) Pesos shall be paid on or before April 30, 1969, the said amount again
to be secured by another postdated check with maturity on April 30, 1969 to be
drawn by the VENDEE;
 That it is fully understood that should the two (2) aforementioned checks be not
honored on their respective maturity dates, herein VENDOR will give VENDEE
another sixty (60) days from maturity dates, within which to pay or redeem the value
of the said checks;

That if for any reason the VENDEE should fail to pay her aforementioned obligation
to the VENDOR, the latter shall become automatically the owner of the former's
apartment which is located at No. 307, Ligaya Building, Alvarado St., Binondo,
Manila, with the only obligation on its part to pay unto the VENDEE the amount of
Three Thousand Five Hundred Thirty Five (P3,535.00) Pesos, Philippine Currency;
and in such event the VENDEE shall execute the corresponding Deed of absolute
Sale in favor of the VENDOR and or the Assignment of Leasehold Rights. [emphasis
supplied]. (Quoted in Decision in Civil Case No. 80420, Exhibit "A" of Civil Case No.
1315321].

After making a downpayment of P7,700.00, the SPOUSES failed to pay the balance of P40,000.00.
Due to these unpaid balances, BAYANIHAN filed an action for specific performance against the
SPOUSES docketed as Civil Case No. 80420 with the Court of First Instance of Manila.

On October 28, 1978, after hearing, judgment was rendered in favor of BAYANIHAN in a decision
the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered, ordering the defendants, jointly and

severally, to pay the plaintiffs, the sum of P40,000.00, with interest at the legal rate
from July 1, 1970 until full payment. In the event of their failure to do so within thirty
(30) days from notice of this judgment, they are hereby ordered to execute the
corresponding deed of absolute sale in favor of the plaintiff and/or the assignment of
leasehold rights over the defendant's apartment located at 307 Ligaya Building,
Alvarado Street, Binondo, Manila, upon the payment by the plaintiff to the
defendants of the sum of P3,535.00. [emphasis supplied].

Pursuant to said judgment, an order for execution pending appeal was issued by the trial court and a
deed of assignment dated May 27, 1972, was executed by the SPOUSES [Exhibit "B", CFI Records,
p. 127] over Apartment No. 307 of the Ligaya Building together with the leasehold right over the land
on which the building stands. The SPOUSES acknowledged receipt of the sum of P3,000.00 more or
less, paid by BAYANIHAN pursuant to the said judgment.

Notwithstanding the execution of the deed of assignment the SPOUSES remained in possession of
the premises. Subsequently, they were allowed to remain in the premises as lessees for a stipulated
monthly rental until November 30,1972.

Despite the expiration of the said period, the SPOUSES failed to surrender possession of the
premises in favor of BAYANIHAN. This prompted BAYANIHAN to file an ejectment case against
them in the City Court of Manila docketed as Civil Case No. 240019. This action was however
dismissed on the ground that BAYANIHAN was not the real party in interest, not being the owner of
the building.

On February 7, 1979, after demands to vacate the subject apartment made by BAYANIHAN's
counsel was again ignored by the SPOUSES, an action for recovery of possession with damages
was filed with the Court of First Instance of Manila, docketed as Civil Case No. 121532 against the
SPOUSES and impleading Ligaya Investments, Inc. as party defendant. On March 17, 1981,
decision in said case was rendered in favor of BAYANIHAN ordering the following:
 WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants spouses UY TONG and KHO GIOK and defendant Ligaya Investment,
Inc., dismissing defendants' counterclaim and ordering:

1. The defendants spouses UY TONG and KHO PO GIOK and any andlor persons
claiming right under them, to vacate, surrender and deliver possession of Apartment
307, Ligaya Building, located at 64 Alvarado Street, Binondo, Manila to the plaintiff;

2. Ordering defendant Ligaya Investment, Inc. to recognize the right of ownership

and possession of the plaintiff over Apartment No. 307, Ligaya Building;

3. Ordering Ligaya Investment, Inc. to acknowledge plaintiff as assignee-lessee in

liue of defendants spouses Uy Tong and Kho Po Giok over the lot on which the
building was constructed;

4. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay to the plaintiff
the sum of P200.00 commencing from June, 1971 to November 30, 1972, or a total
amount of P3,400.00 as rental for the apartment, and the sum of P200.00 from
December 1, 1972 until the premises are finally vacated and surrendered to the
plaintiff, as reasonable compensation for the use of the apartment; and

5. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay P3,000.00 as
and for attorney's fees to the plaintiff, and the costs of this suit.

Not satisfied with this decision, the SPOUSES appealed to the Court of Appeals. On October
2,1984, the respondent Court of Appeals affirmed in toto the decision appealed from [Petition, Annex
"A", Rollo, pp. 15-20]. A motion for reconsideration of the said decision was denied by the
respondent Court in a resolution dated February 11, 1987 [Petition, Annex "C", Rollo, pp. 31- 34].

Petitioners-SPOUSES in seeking a reversal of the decision of the Court of Appeals rely on the
following reasons:

I. The deed of assignment is null and void because it is in the nature of a pactum
commissorium and/or was borne out of the same.

II. The genuineness and due Prosecution of the deed of assignment was not deemed
admitted by petitioner.

III. The deed of assignment is unenforceable because the condition for its execution
was not complied with.

IV. The refusal of petitioners to vacate and surrender the premises in question to
private respondent is justified and warranted by the circumstances obtaining in the
instant case.

I. In support of the first argument, petitioners bring to the fore the contract entered into by the parties
whereby petitioner Kho Po Giok agreed that the apartment in question will automatically become the
property of private respondent BAYANIHAN upon her mere failure to pay her obligation. This
agreement, according to the petitioners is in the nature of a pactum commissorium which is null and
void, hence, the deed of assignment which was borne out of the same agreement suffers the same
fate.
The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil
Code:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of the same. Any stipulation to the contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that
there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security
for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic
appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the
principal obligation within the stipulated period.

A perusal of the terms of the questioned agreement evinces no basis for the application of the
pactum commissorium provision. First, there is no indication of 'any contract of mortgage entered
into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks.

Second, there is no case of automatic appropriation of the property by BAYANIHAN. When the
SPOUSES defaulted in their payments of the second and third installments of the trucks they
purchased, BAYANIHAN filed an action in court for specific performance. The trial court rendered
favorable judgment for BAYANIHAN and ordered the SPOUSES to pay the balance of their
obligation and in case of failure to do so, to execute a deed of assignment over the property involved
in this case. The SPOUSES elected to execute the deed of assignment pursuant to said judgment.

Clearly, there was no automatic vesting of title on BAYANIHAN because it took the intervention of
the trial court to exact fulfillment of the obligation, which, by its very nature is ". . anathema to the
concept of pacto commissorio" [Northern Motors, Inc. v. Herrera, G.R. No. L-32674, February 22,
1973, 49 SCRA 392]. And even granting that the original agreement between the parties had the
badges of pactum commissorium, the deed of assignment does not suffer the same fate as this was
executed pursuant to a valid judgment in Civil Case No. 80420 as can be gleaned from its very
terms and conditions:

DEED OF ASSIGNMENT

KNOW ALL MEN BY THESE PRESENTS:

This deed made and entered into by Uy Tiong also known as Henry Uy and Kho Po
Giok, both of legal age, husband and wife, respectively, and presently residing at 307
Ligaya Bldg., Alvarado St., Binondo, Manila, and hereinafter to be known and called
as the ASSIGNORS, in favor of Bayanihan Automotive Corporation, an entity duly
organized and existing under the laws of the Philippines, with principal business
address at 1690 Otis St., Paco, Manila and hereinafter to be known and called the
ASSIGNEE;

-witnesseth-

WHEREAS, the ASSIGNEE has filed a civil complaint for "Specific Performance with
Damages" against the ASSIGNORS in the Court of First Instance of Manila, Branch
V, said case having been docketed as Civil Case No. 80420;

WHEREAS, the ASSIGNEE was able to obtain a judgment against the ASSIGNOR
wherein the latter was ordered by the court as follows, to wit:
 WHEREFORE, judgment is hereby rendered ordering the
defendants, jointly and severally to pay the plaintiff the sum of
P40,000.00, with interest at the legal rate from July 31, 1970 until full
payment. In the event of their failure to do so within thirty (30) days
from notice of this judgment, they are hereby ordered to execute the
corresponding deed of absolute sale in favor of the plaintiff and/or the
assignment of leasehold, rights over the defendants' apartment
located at No. 307 Ligaya Building, Alvarado Street, Binondo, Manila,
upon the payment by the plaintiff to the defendants the sum of P
3,535.00. The defendants shall pay the costs.

WHEREAS, the court, upon petition by herein ASSIGNEE and its deposit of sufficient
bond, has ordered for the immediate execution of the said decision even pending
appeal of the aforesaid decision;

WHEREAS, the ASSIGNORS have elected to just execute the necessary deed of
sale and/or assignment of leasehold rights over the apartment mentioned in the
decision in favor of the herein ASSIGNEE;

NOW, THEREFORE, for and in consideration of the foregoing premises, the

ASSIGNORS have transferred assigned and ceded, and by these presents do
hereby transfer, assign and cede all their rights and interests over that place known
as Apartment No. 307 at the Ligaya Building which is located at No. 864 Alvarado
St., Binondo, Manila, together with the corresponding leasehold rights over the lot on
which the said building is constructed, in favor of the hererein ASSIGNEE, its heirs or
assigns.

IN WITNESS WHEREOF, We have hereunto signed our names this 27th day of May,
1971 at Manila, Philippines.

UY TONG/HENRY UY KHO PO GIOK

Assignor Assignor

ACR-2151166 Manila 1/13/51 ACR-C-001620

Manila March 3, 1965

This being the case, there is no reason to impugn the validity of the said deed of assignment.

II. The SPOUSES take exception to the ruling of the Court of Appeals that their failure to deny the
genuineness and due execution of the deed of assignment was deemed an admission thereof. The
basis for this exception is the SPOUSES' insistence that the deed of assignment having been borne
out of pactum commissorio is not subject to ratification and its invalidity cannot be waived.

There is no compelling reason to reverse the abovementioned ruling of the appellate court.
Considering this Court's above conclusion that the deed of assignment is not invalid, it follows that
when an action founded on this written instrument is filed, the rule on contesting its genuineness and
due execution must be followed.
That facts reveal that the action in Civil Case No. 121532 was founded on the deed of assignment.
However, the SPOUSES, in their answer to the complaint, failed to deny under oath and specifically
the genuineness and due execution of the said deed. Perforce, under Section 8, Rule 8 of the
Revised Rules of Court, the SPOUSES are deemed to have admitted the deed's genuineness and
due execution. Besides, they themselves admit that ". . . the contract was duly executed and that the
same is genuine" [Sur-Rejoinder, Rollo, p. 67]. They cannot now claim otherwise.

III. The SPOUSES also question the enforceability of the deed of assignment. They contend that the
deed is unenforceable because the condition for its execution was not complied with. What
petitioners SPOUSES refer to is that portion of the disposition in Civil Case No. 80420 requiring
BAYANIHAN to pay the former the sum of P 3,535.00. To buttress their claim of non- compliance,
they invoke the following receipt issued by the SPOUSES to show that BAYANIHAN was P535.00
short of the complete payment.

RECEIPT

This is to acknowledge the fact that the amount of THREE THOUSAND (P3,000.00)
PESOS, more or less as indicated in the judgment of the Hon. Conrado Vasquez,
Presiding Judge of the Court of First Instance of Manila, Branch V, in Civil Case
entitled "Bayanihan Automotive Corp. v. Pho (sic) Po Giok, etc." and docketed as
Civil Case No. 80420 has been applied for the payment of the previous rentals of the
property which is the subject matter of the aforesaid judgment. [emphasis supplied.]

(Sgd.) Pho (sic) Po

Glok

(Sgd.) Henry Uy

August 21, 1971

The issue presented involves a question of fact which is not within this Court's competence to look
into. Suffice it to say that this Court is of the view that findings and conclusion of the trial court and
the Court of Appeals on the question of whether there was compliance by BAYANIHAN of its
obligation under the decision in Civil Case No. 80420 to pay the SPOUSES the sum of P3,535.00 is
borne by the evidence on record. The Court finds merit in the following findings of the trial court:

... Defendants 'contention that the P 3,535.00 required in the decision in Civil Case
No. 80420 as a condition for the execution of the deed of assignment was not paid
by the plaintiff to the defendants is belied by the fact that the defendants
acknowledged payment of P3,000.00, more or less, in a receipt dated August 21,
1971. This amount was expressly mentioned in this receipt as indicated in the
judgment of the Honorable Conrado Vasquez, presiding Judge of the CFI of Manila,
Branch V, in Civil Case entitled Bayanihan Automotive Corp. versus Kho Po Giok,
docketed as Civil Case No. 80420, and also expressly mentioned as having been
applied for the payment of the previous rentals of the property subject matter of the
said judgment. Nothing could be more explicit. The contention that there is still a
difference of P535.00 is had to believe because the spouses Kho Po Giok and Uy
Tong executed the deed of assignment without first demanding from the plaintiff the
payment of P535.00. Indeed, as contended by the plaintiff, for it to refuse to pay this
small amount and thus gave defendants a reason not to execute the Deed of
Assignment. is hard to believe Defendants further confirm by the joint manifestation
of plaintiff and defendants, duly assisted by counsel, Puerto and Associates, dated
 September, 1971, Exhibit "O", wherein it was stated that plaintiff has fully complied
with its obligation to the defendants caused upon it (sic) by the pronouncement of the
judgment as a condition for the execution of their (sic) leasehold rights of
defendants, as evidenced by the receipt duly executed by the defendants, and which
was already submitted in open court for the consideration of the sum of P3,535.00.
[Emphasis supplied]. [Decision, Civil Case No. 121532, pp. 3-4].

This Court agrees with private respondent BAYANIHAN's reasoning that inasmuch as the decision in
Civil Case No. 80420 imposed upon the parties correlative obligations which were simultaneously
demandable so much so that if private respondent refused to comply with its obligation under the
judgment to pay the sum of P 3,535.00 then it could not compel petitioners to comply with their own
obligation to execute the deed of assignment over the subject premises. The fact that petitioners
executed the deed of assignment with the assistance of their counsel leads to no other conclusion
that private respondent itself had paid the full amount.

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

(a) The deed of assingnment is in the nature of a pactum commissorium and,

therefore, null and void.

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

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

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

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

SO ORDERED.

Fernan (Chairman), Gutierrez, Jr., and Feliciano, JJ., concur.

Bidin, took no part.

 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF
THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory
receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February
15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent
Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with
preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the
loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo,
Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the
said title the next day. The approved loan application called for a lump sum P80,000.00 loan,
repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was
required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to
develop his other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank;
and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at
12% annual interest, payable within 3 years from the date of execution of the contract at semi-
annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering
a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But
this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being
informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance
(p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the
P63,000.00 balance (p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued Resolution No. 1049, which provides:
 In view of the chronic reserve deficiencies of the Island Savings Bank against its
deposit liabilities, the Board, by unanimous vote, decided as follows:

1) To prohibit the bank from making new loans and investments [except investments
in government securities] excluding extensions or renewals of already approved
loans, provided that such extensions or renewals shall be subject to review by the
Superintendent of Banks, who may impose such limitations as may be necessary to
insure correction of the bank's deficiency as soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings
Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to
take charge of the assets of Island Savings Bank (pp. 48-49, rec).

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for
January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan
for injunction, specific performance or rescission and damages with preliminary injunction, alleging
that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is
entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with
interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind
the real estate mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the
mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of
the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central
Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the
amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining
order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court
of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific
performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor
collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

 1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the

promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real
estate mortgage be foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on
April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is
ready and willing to perform his part of the contract, the other party who has not performed or is not
ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he
signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings
Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan
started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the
Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank
from doing further business. Such prohibition made it legally impossible for Island Savings Bank to
furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take
over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265,
which took effect on June 15, 1948, the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere did it
prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of
the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez
Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is
never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the
contract by him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be
taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in
asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper
considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be
legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-
deducted interest was an exercise of his right to it, which right exist independently of his right to
demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less
neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This
Court previously ruled that bank officials and employees are expected to exercise caution and
prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151
[1981]). It is the obligation of the bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and evaluation of the properties
being offered as a loan security. The recent rush of events where collaterals for bank loans turn out
to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere
reliance by bank officials and employees on their customer's representation regarding the loan
collateral being offered as loan security is a patent non-performance of this responsibility. If ever
bank officials and employees totally reIy on the representation of their customers as to the valuation
of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued.
The representation made by the customer is immaterial to the bank's responsibility to conduct its
own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined
petitioners from presenting proof on the alleged over-valuation because of their failure to raise the
same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned
by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the
same issue before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since Island Savings Bank is now
prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant
specific performance in favor of Sulpicio M, Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the
partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note
to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a
P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to
pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the
Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party,
that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for
payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan
because he cannot possibly be in default as there was no date for him to perform his reciprocal
obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations, that
is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE
rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by
the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not
paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI
7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the
interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P 17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the
principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the
consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of
real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a
valid, voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).

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

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

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

Article 2089 provides:

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

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

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

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

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

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN

PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST
PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12%
INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE
COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED

UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M.
TOLENTINO.

NO COSTS. SO ORDERED.

Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.

Aquino (Chairman) and Abad Santos, JJ., took no part.

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-17072 October 31, 1961

CRISTINA MARCELO VDA. DE BAUTISTA, plaintiff-appellee,

vs.
BRIGIDA MARCOS, ET AL., defendants-appellants.

Aladin B. Bermudez for defendants-appellants.

Cube and Fajardo for plaintiff-appellee.

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

The main question in this appeal is whether or not a mortgagee may foreclose a mortgage on a
piece of land covered by a free patent where the mortgage was executed before the patent was
issued and is sought to be foreclosed within five years from its issuance.

The facts of the case appear to be as follows:

On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of P2,000 from plaintiff
Cristina Marcel Vda. de Bautista and to secure payment thereof conveyed to the latter by way of
mortgage a two (2)-hectare portion of an unregistered parcel of land situated in Sta. Ignacia, Tarlac.
The deed of mortgage, Exhibit "A", provided that it was to last for three years, that possession of the
land mortgaged was to be turned over to the mortgagee by way of usufruct, but with no obligation on
her part to apply the harvests to the principal obligation; that said mortgage would be released only
upon payment of the principal loan of P2,000 without any interest; and that the mortgagor promised
to defend and warrant the mortgagee's rights over the land mortgaged.

Subsequently, or in July, 1956, mortgagor Brigida Marcos filed in behalf of the heirs of her deceased
mother Victoriana Cainglet (who are Brigida herself and her three sisters), an application for the
issuance of a free patent over the land in question, on the strength of the cultivation and occupation
of said land by them and their predecessor since July, 1915. As a result, Free Patent No. V-64358
was issued to the applicants on January 25, 1957, and on February 22, 1957, it was registered in
their names under Original Certificate of Title No. P-888 of the office of Register of Deeds for the
province of Tarlac.

Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff having remained unpaid up to 1959,
the latter, on March 4, 1959, filed the present action against Brigida and her husband (Civil Case No.
3382) in the court below for the payment thereof, or in default of the debtors to pay, for the
foreclosure of her mortgage on the land give as security. Defendants moved to dismiss the action,
pointing out that the land in question is covered by a free patent and could not, therefore, under the
Public Land Law, be taken within five years from the issuance of the patent for the payment of any
debts of the patentees contracted prior to the expiration of said five-year period; but the lower court
denied the motion to dismiss on the ground that the law cited does not apply because the mortgage
sought to be foreclosed was executed before the patent was issued. Defendants then filed their
answer, reiterating the defense invoked in their motion to dismiss, and alleging as well that the real
contract between the parties was an antichresis and not a mortgage. Pre-trial of the case followed,
after which the lower court rendered judgment finding the mortgage valid to the extent of the
mortgagor's pro-indiviso share of 15,333 square meters in the land in question, on the theory that the
Public Land Law does not apply in this case because the mortgage in question was executed before
a patent was issued over the land in question; that the agreement of the parties could not be
antichresis because the deed Exhibit "A" clearly shows a mortgage with usufruct in favor of the
mortgagee; and ordered the payment of the mortgage loan of P2,000 to plaintiff or, upon defendant's
failure to do so, the foreclosure of plaintiff's mortgage on defendant Brigida Marcos' undivided share
in the land in question. From this judgment, defendants Brigida Marcos and her husband Osmondo
Apolocio appealed to this Court.

There is merit in the appeal.

The right of plaintiff-appellee to foreclose her mortgage on the land in question depends not so much
on whether she could take said land within the prohibitive period of five years from the issuance of
defendants' patent for the satisfaction of the indebtedness in question, but on whether the deed of
mortgage Exhibit "A" is at all valid and enforceable, since the land mortgaged was apparently still
part of the public domain when the deed of mortgage was constituted. As it is an essential requisite
for the validity of a mortgage that the mortgagor be the absolute owner of the thing mortgaged (Art.
2085), the mortgage here in question is void and ineffective because at the time it was constituted,
the mortgagor was not yet the owner of the land mortgaged and could not, for that reason, encumber
the same to the plaintiff-appellee. Nor could the subsequent acquisition by the mortgagor of title over
said land through the issuance of a free patent validate and legalize the deed of mortgage under the
doctrine of estoppel (cf. Art. 1434, New Civil Code,1 since upon the issuance of said patient, the land
in question was thereby brought under the operation of the Public Land Law that prohibits the taking
of said land for the satisfaction of debts contracted prior to the expiration of five years from the date
of the issuance of the patent (sec. 118, C.A. No. 141). This prohibition should include not only debts
contracted during the five-year period immediately preceding the issuance of the patent but also
those contracted before such issuance, if the purpose and policy of the law, which is "to preserve
and keep in the family of the homesteader that portion of public land which the State has gratuitously
given to him" (Pascua v. Talens, 45 O.G. No. 9 [Supp.] 413; De los Santos v. Roman Catholic
Church of Midsayap, G.R. L-6088, Feb. 24, 1954), is to be upheld.

The invalidity of the mortgage Exhibit "A" does not, however, imply the concomitant invalidity of the
collate agreement in the same deed of mortgage whereby possession of the land mortgaged was
transferred to plaintiff-appellee in usufruct, without any obligation on her part to account for its
harvests or deduct them from defendants' indebtedness of P2,000. Defendant Brigida Marcos, who,
together with her sisters, was in possession of said land by herself and through her deceased
mother before her since 1915, had possessory rights over the same even before title vested in her
as co-owner by the issuance of the free patent to her and her sisters, and these possessory right
she could validly transfer and convey to plaintiff-appellee, as she did in the deed of mortgage Exhibit
"A". The latter, upon the other hand, believing her mortgagor to be the owner of the land mortgaged
and not being aware of any flaw which invalidated her mode of acquisition, was a possessor in good
faith (Art. 526, N.C.C.), and as such had the right to all the fruits received during the entire period of
her possession in good faith (Art. 544, N.C.C.). She is, therefore, entitled to the full payment of her
credit of P2,000 from defendants, without any obligation to account for the fruits or benefits obtained
by her from the land in question.

WHEREFORE, the judgment appealed from is reversed insofar as it orders the foreclosure of the
mortgage in question, but affirmed in all other respects. Costs again defendants-appellants.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes and De Leon, JJ., concur.
Barrera, J., took no part.

Footnotes

1
Art. 1434, N.C.C. provides that "When a person who is not the owner of a thing sells
or alienates and delivers it, and later the seller or grantor acquires title thereto, such
title passes by operation of law to the buyer or grantee."
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 109946 February 9, 1996

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS, MYLO O. QUINTO and JESUSA CHRISTINE S. CHUPUICO, respondents.

DECISION

BELLOSILLO, J.:

DEVELOPMENT BANK OF THE PHILIPPINES filed this petition for review on certiorari assailing the
decision of the Court of Appeals holding that the mortgages in favor of the bank were void and
ineffectual because when constituted the mortgagors, who were merely applicants for free patent of
the property mortgaged, were not the owners thereof in fee simple and therefore could not validly
encumber the same.1

On 20 April 1978 petitioner granted a loan of P94,000.00 to the spouses Santiago Olidiana and Oliva
Olidiana. To secure the loan the Olidiana spouses executed a real estate mortgage on several
properties among which was Lot 2029 (Pls-61) with Tax Declaration No. 2335/1, situated in Bo.
Bago Capalaran, Molave, Zamboanga del Sur, with an area of 84,108 square meters, more or less.
At the time of the mortgage the property was still the subject of a Free Patent application filed by the
Olidianas with the Bureau of Lands but registered under their name in the Office of the Municipal
Assessor of Molave for taxation purposes.2

On 2 November 1978 the Olidiana spouses filed with the Bureau of Lands a Request for
Amendment of their Free Patent applications over several parcels of land including Lot No. 2029
(Pls-61). In this request they renounced, relinquished and waived all their rights and interests over
Lot No. 2029 (Pls-61) in favor of Jesusa Christine Chupuico and Mylo O. Quinto, respondents
herein. On 10 January 1979 Free Patent Nos. IX-5-2223 (covering one-half of Lot No. 2029 [Pls-61]
and IX-5-2224 (covering the other half of the same Lot No. 2029 [Pls-61]) were accordingly granted
respectively to respondents Jesusa Christine Chupuico and Mylo O. Quinto by the Bureau of Lands
District Land Office No. IX-5, Pagadian City. Jesusa Christine Chupuico later obtained Original
Certificate of Title No. P-27,361 covering aforementioned property while Mylo O. Quinto was also
issued Original Certificate of Title No. P-27,362 in view of the previous free patent.3

On 20 April 1979 an additional loan of P62,000.00 was extended by petitioner to the Olidiana
spouses. Thus on 23 April 1979 the Olidianas executed an additional mortgage on the same parcels
of land already covered by the first mortgage of 4 April 1978. This second mortgage also included
Lot No. 2029 (Pls-61) as security for the Olidiana spouses' financial obligation with petitioner.4

Thereafter, for failure of Santiago and Oliva Olidiana to comply with the terms and conditions of their
promissory notes and mortgage contracts, petitioner extrajudicially foreclosed all their mortgaged
properties. Consequently, on 14 April 1983 these properties, including Lot No. 2029 (Pls-61) were
sold at public auction for P88,650.00 and awarded to petitioner as the highest bidder. A Certificate of
Sale was thereafter executed in favor of petitioner and an Affidavit of Consolidation of Ownership
registered in its name. However, when petitioner tried to register the sale and the affidavit of
consolidation and to have the tax declaration transferred in its name it was discovered that Lot No.
2029 (Pls-61) had already been divided into two (2) parcels, one-half (l/2) now known as Lot 2029-A
and covered by OCT No. P-27,361 in the name of Jesusa Christine Chupuico, while the other half
known as Lot 2029-B was covered by the same OCT No. P-27,361 in the name of Mylo O. Quinto.5

In view of the discovery, petitioner filed an action for Quieting of Title and Cancellation or Annulment
of Certificate of Title against respondents. After trial the Regional Trial Court of Molave, Zamboanga
del Sur, Branch 23, rendered judgment against petitioner.6 The court ruled that the contracts of
mortgage entered into by petitioner and the subsequent foreclosure of subject property could not
have vested valid title to petitioner bank because the mortgagors were not the owners in fee simple
of the property mortgaged. The court also found the mortgages over Lot No. 2029 (Pls-61) of no
legal consequence because they were executed in violation of Art. 2085, par. 2, of the New Civil
Code which requires that the mortgagor be the absolute owner of the thing mortgaged. According to
the court a quo there was no evidence to prove that the mortgagors of the land in dispute were its
absolute owners at the time of the mortgage to petitioner. The factual findings of the lower court
disclose that when the Olidiana spouses mortgaged Lot No. 2029 (Pls-61) to petitioner it was still the
subject of a miscellaneous sales application by the spouses with the Bureau of Lands. Since there
was no showing that the sales application was approved before the property was mortgaged, the
trial court concluded that the Olidiana spouses were not yet its owners in fee simple when they
mortgaged the property. The lower court also said that with the subsequent issuance of the Free
Patent by the Bureau of Lands in the name of respondents Chupuico and Quinto, it could be gleaned
that the property was indeed public land when mortgaged to petitioner. Therefore petitioner could not
have acquired a valid title over the subject property by virtue of the foreclosure and subsequent sale
at public auction.7

Resultantly, the trial court declared the following as null and void insofar as they related to Lot No.
2029 (Pls-61) being a public land: the real estate mortgage dated 4 April 1978, the second mortgage
dated 23 April 1979, the foreclosure sale on 14 April 1983, the certificate of sale registered with the
Register of Deeds of Zamboanga del Sur on 1 September 1983, and the affidavit of consolidation of
ownership registered with the Register of Deeds on 2 August 1985.

Petitioner then appealed to the Court of Appeals which likewise ruled in favor of respondents, hence
the instant petition.8

Petitioner now seeks to overturn the decision of respondent Court of Appeals holding that Lot No.
2029 (Pls-61) could not have been the subject of a valid mortgage and foreclosure proceeding
because it was public land at the time of the mortgage, and that the act of Jesusa Christine S.
Chupuico and Mylo O. Quinto in securing the patents was not tainted with fraud. The crux of this
appeal thus lies in the basic issue of whether the land in dispute could have been validly mortgaged
while still the subject of a Free Patent Application with the government.9

We agree with the court a quo. We hold that petitioner bank did not acquire valid title over the land in
dispute because it was public land when mortgaged to the bank. We cannot accept petitioner's
contention that the lot in dispute was no longer public land when mortgaged to it since the Olidiana
spouses had been in open, continuous, adverse and public possession thereof for more than thirty
(30) years. 10 In Visayan Realty, Inc. v. Meer 11 we ruled that the approval of a sales application
merely authorized the applicant to take possession of the land so that he could comply with the
requirements prescribed by law before a final patent could be issued in his favor. Meanwhile the
government still remained the owner thereof, as in fact the application could still be canceled and the
land awarded to another applicant should it be shown that the legal requirements had not been
complied with. What divests the government of title to the land is the issuance of the sales patent
and its subsequent registration with the Register of Deeds. It is the registration and issuance of the
certificate of title that segregate public lands from the mass of public domain and convert it into
private property. 12 Since the disputed lot in the case before us was still the subject of a Free Patent
Application when mortgaged to petitioner and no patent was granted to the Olidiana spouses, Lot
No. 2029 (Pls-61) remained part of the public domain.

With regard to the validity of the mortgage contracts entered into by the parties, Art. 2085, par. 2, of
the New Civil Code specifically requires that the pledgor or mortgagor be the absolute owner of the
thing pledged or mortgaged. Thus, since the disputed property was not owned by the Olidiana
spouses when they mortgaged it to petitioner the contracts of mortgage and all their subsequent
legal consequences as regards Lot No. 2029 (Pls-61) are null and void. In a much earlier case 13 we
held that it was an essential requisite for the validity of a mortgage that the mortgagor be the
absolute owner of the property mortgaged, and it appearing that the mortgage was constituted
before the issuance of the patent to the mortgagor, the mortgage in question must of necessity be
void and ineffective. For, the law explicitly requires as imperative for the validity of a mortgage that
the mortgagor be the absolute owner of what is mortgaged.

Finally, anent the contention of petitioner that respondents fraudulently obtained the property in
litigation, we also find for the latter. As correctly found by the lower courts, no evidence existed to
show that respondents had prior knowledge of the real estate mortgages executed by the Olidiana
spouses in favor of petitioner. The act of respondents in securing the patents cannot therefore be
categorized as having been tainted with fraud.

WHEREFORE, the petition is DENIED and the questioned decision of the Court of Appeals is
AFFIRMED.

SO ORDERED.

Padilla, Vitug, Kapunan and Hermosisima, Jr., JJ., concur.

Footnotes

1
Penned by Justice Consuelo Ynares-Santiago, concurred in by Justices Luis H.
Javellana and Minerva P. Gonzaga-Reyes.

2
Rollo, pp. 18-19.

3
Id., p. 19.

4
Id., pp. 19-20.

5
Id., p. 20.

6
Decision penned by Judge Camilo E. Tamin, RTC-Br. 23 Zamboanga del Sur.

7
Id., pp. 47-56.
8
Id., pp. 56-57.

9
Petition, pp. 4-5.

10
Id., p. 7.

11
96 Phil. 515 (1955).

12
Director of Lands v. De Luna, 110 Phil. 28 (1960).

13
Vda. de Bautista v. Marcos, No. L-17072, 31 October 1961, 3 SCRA 434.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 131679 February 1, 2000

CAVITE DEVELOPMENT BANK and FAR EAST BANK AND TRUST COMPANY, petitioners,
vs.
SPOUSES CYRUS LIM and LOLITA CHAN LIM and COURT OF APPEALS, respondents.

MENDOZA, J.:

This is a petition for review on certiorari of the decision1 of the Court of Appeals in C.A. GR CV No.
42315 and the order dated December 9, 1997 denying petitioners' motion for reconsideration.

The following facts are not in dispute.

Petitioners Cavite Development Bank (CDB) and Far East Bank and Trust Company (FEBTC) are
banking institutions duly organized and existing under Philippine laws. On or about June 15, 1983, a
certain Rodolfo Guansing obtained a loan in the amount of P90,000.00 from CDB, to secure which
he mortgaged a parcel of land situated at No. 63 Calavite Street, La Loma, Quezon City and covered
by TCT No. 300809 registered in his name. As Guansing defaulted in the payment of his loan, CDB
foreclosed the mortgage. At the foreclosure sale held on March 15, 1984, the mortgaged property
was sold to CDB as the highest bidder. Guansing failed to redeem, and on March 2, 1987, CDB
consolidated title to the property in its name. TCT No. 300809 in the name of Guansing was
cancelled and, in lieu thereof, TCT No. 355588 was issued in the name of CDB. 1âwphi1.nêt

On June 16, 1988, private respondent Lolita Chan Lim, assisted by a broker named Remedios
Gatpandan, offered to purchase the property from CDB. The written Offer to Purchase, signed by
Lim and Gatpandan, states in part:

We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La Loma,
Quezon City for P300,000.00 under the following terms and conditions:

(1) 10% Option Money;

(2) Balance payable in cash;

(3) Provided that the property shall be cleared of illegal occupants or tenants.

Pursuant to the foregoing terms and conditions of the offer, Lim paid CDB P30,000.00 as Option
Money, for which she was issued Official Receipt No. 3160, dated June 17, 1988, by CDB. However,
after some time following up the sale, Lim discovered that the subject property was originally
registered in the name of Perfecto Guansing, father of mortgagor Rodolfo Guansing, under TCT No.
91148. Rodolfo succeeded in having the property registered in his name under TCT No. 300809, the
same title he mortgaged to CDB and from which the latter's title (TCT No. 355588) was derived. It
appears, however, that the father, Perfecto, instituted Civil Case No. Q-39732 in the Regional Trial
Court, Branch 83, Quezon City, for the cancellation of his son's title. On March 23, 1984, the trial
court rendered a decision2 restoring Perfecto's previous title (TCT No. 91148) and cancelling TCT
No. 300809 on the ground that the latter was fraudulently secured by Rodolfo. This decision has
since become final and executory.

Aggrieved by what she considered a serious misrepresentation by CDB and its mother-company,
FEBTC, on their ability to sell the subject property, Lim, joined by her husband, filed on August 29,
1989 an action for specific performance and damages against petitioners in the Regional Trial Court,
Branch 96, Quezon City, where it was docketed as Civil Case No. Q-89-2863. On April 20, 1990, the
complaint was amended by impleading the Register of Deeds of Quezon City as an additional
defendant.

On March 10, 1993, the trial court rendered a decision in favor of the Lim spouses. It ruled that: (1)
there was a perfected contract of sale between Lim and CDB, contrary to the latter's contention that
the written offer to purchase and the payment of P30,000.00 were merely pre-conditions to the sale
and still subject to the approval of FEBTC; (2) performance by CDB of its obligation under the
perfected contract of sale had become impossible on account of the 1984 decision in Civil Case No.
Q-39732 cancelling the title in the name of mortgagor Rodolfo Guansing; (3) CDB and FEBTC were
not exempt from liability despite the impossibility of performance, because they could not credibly
disclaim knowledge of the cancellation of Rodolfo Guansing's title without the admitting their failure
to discharge their duties to the public as reputable banking institutions; and (4) CDB and FEBTC are
liable for damages for the prejudice caused against the Lims.3 Based on the foregoing findings, the
trial court ordered CDB and FEBTC to pay private respondents, jointly and severally, the amount of
P30,000.00 plus interest at the legal rate computed from June 17, 1988 until full payment. It also
ordered petitioners to pay private respondents, jointly and severally, the amounts of P250,000.00 as
moral damages, P50,000.00 as exemplary damages, P30,000.00 as attorney's fees, and the costs of
the suit.4

Petitioners brought the matter to the Court of Appeals, which, on October 14, 1997, affirmed in toto
the decision of the Regional Trial Court. Petitioners moved for reconsideration, but their motion was
denied by the appellate court on December 9, 1997. Hence, this petition. Petitioners contend that —

1. The Honorable Court of Appeals erred when it held that petitioners CDB and
FEBTC were aware of the decision dated March 23, 1984 of the Regional Trial Court
of Quezon City in Civil Case No. Q-39732.

2. The Honorable Court of Appeals erred in ordering petitioners to pay interest on the
deposit of THIRTY THOUSAND PESOS (P30,000.00) by applying Article 2209 of the
New Civil Code.

3. The Honorable Court of Appeals erred in ordering petitioners to pay moral

damages, exemplary damages, attorney's fees and costs of suit.

I.

At the outset, it is necessary to determine the legal relation, if any, of the parties.

Petitioners deny that a contract of sale was ever perfected between them and private respondent
Lolita Chan Lim. They contend that Lim's letter-offer clearly states that the sum of P30,000,00 was
given as option money, not as earnest money.5 They thus conclude that the contract between CDB
and Lim was merely an option contract, not a contract of sale.
The contention has no merit. Contracts are not defined by the parries thereto but by principles of
law.6 In determining the nature of a contract, the courts are not bound by the name or title given to it
by the contracting parties.7 In the case at bar, the sum of P30,000.00, although denominated in the
offer to purchase as "option money," is actually in the nature of earnest money or down payment
when considered with the other terms of the offer. In Carceler v. Court of Appeals,8 we explained the
nature of an option contract, viz. —

An option contract is a preparatory contract in which one party grants to the other, for
a fixed period and under specified conditions, the power to decide, whether or not to
enter into a principal contract, it binds the party who has given the option not to enter
into the principal contract with any other person during the period; designated, and
within that period, to enter into such contract with the one to whom the option was
granted, if the latter should decide to use the option. It is a separate agreement
distinct from the contract to which the parties may enter upon the consummation of
the option.

An option contract is therefore a contract separate from and preparatory to a contract of sale which,
if perfected, does not result in the perfection or consummation of the sale. Only when the option is
exercised may a sale be perfected.

In this case, however, after the payment of the 10% option money, the Offer to Purchase provides
for the payment only of the balance of the purchase price, implying that the "option money" forms
part of the purchase price. This is precisely the result of paying earnest money under Art. 1482 of
the Civil Code. It is clear then that the parties in this case actually entered into a contract of sale,
partially consummated as to the payment of the price. Moreover, the following findings of the trial
court based on the testimony of the witnesses establish that CDB accepted Lim's offer to purchase:

It is further to be noted that CDB and FEBTC already considered plaintiffs' offer as
good and no longer subject to a final approval. In his testimony for the defendants on
February 13, 1992, FEBTC's Leomar Guzman stated that he was then in the
Acquired Assets Department of FEBTC wherein plaintiffs' offer to purchase was
endorsed thereto by Myoresco Abadilla, CDB's senior vice-president, with a
recommendation that the necessary petition for writ of possession be filed in the
proper court; that the recommendation was in accord with one of the conditions of
the offer, i.e., the clearing of the property of illegal occupants or tenants (tsn, p. 12);
that, in compliance with the request, a petition for writ of possession was thereafter
filed on July 22, 1988 (Exhs. 1 and 1-A); that the offer met the requirements of the
banks; and that no rejection of the offer was thereafter relayed to the plaintiffs (p. 17);
which was not a normal procedure, and neither did the banks return the amount of
P30,000.00 to the plaintiffs.9

Given CDB's acceptance of Lim's offer to purchase, it appears that a contract of sale was perfected
and, indeed, partially executed because of the partial payment of the purchase price. There is,
however, a serious legal obstacle to such sale, rendering it impossible for CDB to perform its
obligation as seller to deliver and transfer ownership of the property.

Nemo dat quod non habet, as an ancient Latin maxim says. One cannot give what one does not
have. In applying this precept to a contract of sale, a distinction must be kept in mind between the
"perfection" and "consummation" stages of the contract.

A contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the
object of the contract and upon the price.10 It is, therefore, not required that, at the perfection stage,
the seller be the owner of the thing sold or even that such subject matter of the sale exists at that
point in time.11 Thus, under Art. 1434 of the Civil Code, when a person sells or alienates a thing
which, at that time, was not his, but later acquires title thereto, such title passes by operation of law
to the buyer or grantee. This is the same principle behind the sale of "future goods" under Art. 1462
of the Civil Code. However, under Art. 1459, at the time of delivery or consummation stage of the
sale, it is required that the seller be the owner of the thing sold. Otherwise, he will not be able to
comply with his obligation to transfer ownership to the buyer. It is at the consummation stage where
the principle of nemo dat quod non habet applies.

In Dignos v. Court of Appeals,12 the subject contract of sale was held void as the sellers of the
subject land were no longer the owners of the same because of a prior sale.13 Again, in Nool v. Court
of Appeals,14 we ruled that a contract of repurchase, in which the seller does not have any title to the
property sold, is invalid:

We cannot sustain petitioners' view. Article 1370 of the Civil Code is applicable only
to valid and enforceable contracts. The Regional Trial Court and the Court of
Appeals rules that the principal contract of sale contained in Exhibit C and the
auxiliary contract of repurchase in Exhibit D are both void. This conclusion of the two
lower courts appears to find support in Dignos v. Court of Appeals, where the Court
held:

Be that as it may, it is evident that when petitioners sold said land to the
Cabigas spouses, they were no longer owners of the same and the sale is
null and void.

In the present case, it is clear that the sellers no longer had any title to the parcels of
land at the time of sale. Since Exhibit D, the alleged contract of repurchase, was
dependent on the validity of Exhibit C, it is itself void. A void contract cannot give rise
to a valid one. Verily, Article 1422 of the Civil Code provides that (a) contract which is
the direct result of a previous illegal contract, is also void and inexistent.

We should however add that Dignos did not cite its basis for ruling that a "sale is null
and void" where the sellers "were no longer the owners" of the property. Such a
situation (where the sellers were no longer owners) does not appear to be one of the
void contracts enumerated in Article 1409 of the Civil Code. Moreover, the Civil Code
itself recognizes a sale where the goods are to be acquired . . . by the seller after the
perfection of the contract of sale, clearly implying that a sale is possible even if the
seller was not the owner at the time of sale, provided he acquires title to the property
later on.

In the present case, however, it is likewise clear that the sellers can no longer deliver
the object of the sale to the buyers, as the buyers themselves have already acquired
title and delivery thereof from the rightful owner, the DBP. Thus, such contract may
be deemed to be inoperative and may thus fall, by analogy, under item No. 5 of
Article 1409 of the Civil Code: Those which contemplate an impossible service.
Article 1459 of the Civil Code provides that "the vendor must have a right to transfer
the ownership thereof [subject of the sale] at the time it is delivered." Here, delivery
of ownership is no longer possible. It has become impossible.15

In this case, the sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing must,
therefore, be deemed a nullity for CDB did not have a valid title to the said property. To be sure,
CDB never acquired a valid title to the property because the foreclosure sale, by virtue of which, the
property had been awarded to CDB as highest bidder, is likewise void since the mortgagor was not
the owner of the property foreclosed.

A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with Art. 1458 of
the Civil Code, under which the mortgagor in default, the forced seller, becomes obliged to transfer
the ownership of the thing sold to the highest bidder who, in turn, is obliged to pay therefor the bid
price in money or its equivalent. Being a sale, the rule that the seller must be the owner of the thing
sold also applies in a foreclosure sale. This is the reason Art. 208516 of the Civil Code, in providing
for the essential requisites of the contract of mortgage and pledge, requires, among other things,
that the mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged, in
anticipation of a possible foreclosure sale should the mortgagor default in the payment of the loan.

There is, however, a situation where, despite the fact that the mortgagor is not the owner of the
mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale arising
therefrom are given effect by reason of public policy. This is the doctrine of "the mortgagee in good
faith" based on the rule that all persons dealing with property covered by a Torrens Certificate of
Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the title.17
The public interest in upholding the indefeasibility of a certificate of title, as evidence of the lawful
ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good
faith, relied upon what appears on the face of the certificate of title.

This principle is cited by petitioners in claiming that, as a mortgagee bank, it is not required to make
a detailed investigation of the history of the title of the property given as security before accepting a
mortgage.

We are not convinced, however, that under the circumstances of this case, CDB can be considered
a mortgagee in good faith. While petitioners are not expected to conduct an exhaustive investigation
on the history of the mortgagor's title, they cannot be excused from the duty of exercising the due
diligence required of banking institutions. In Tomas v. Tomas,18 we noted that it is standard practice
for banks, before approving a loan, to send representatives to the premises of the land offered as
collateral and to investigate who are real owners thereof, noting that banks are expected to exercise
more care and prudence than private individuals in their dealings, even those involving registered
lands, for their business is affected with public interest. We held thus:

We, indeed, find more weight and vigor in a doctrine which recognizes a better right
for the innocent original registered owner who obtained his certificate of title through
perfectly legal and regular proceedings, than one who obtains his certificate from a
totally void one, as to prevail over judicial pronouncements to the effect that one
dealing with a registered land, such as a purchaser, is under no obligation to look
beyond the certificate of title of the vendor, for in the latter case, good faith has yet to
be established by the vendee or transferee, being the most essential condition,
coupled with valuable consideration, to entitle him to respect for his newly acquired
title even as against the holder of an earlier and perfectly valid title. There might be
circumstances apparent on the face of the certificate of title which could excite
suspicion as to prompt inquiry, such as when the transfer is not by virtue of a
voluntary act of the original registered owner, as in the instant case, where it was by
means of a self-executed deed of extra-judicial settlement, a fact which should be
noted on the face of Eusebia Tomas certificate of title. Failing to make such inquiry
would hardly be consistent with any pretense of good faith, which the appellant bank
invokes to claim the right to be protected as a mortgagee, and for the reversal of the
judgment rendered against it by the lower court.19
In this case, there is no evidence that CDB observed its duty of diligence in ascertaining the validity
of Rodolfo Guansing's title. It appears that Rodolfo Guansing obtained his fraudulent title by
executing an Extra-Judicial Settlement of the Estate With Waiver where he made it appear that he
and Perfecto Guansing were the only surviving heirs entitled to the property, and that Perfecto had
waived all his rights thereto. This self-executed deed should have placed CDB on guard against any
possible defect in or question as to the mortgagor's title. Moreover, the alleged ocular inspection
report20 by CDB's representative was never formally offered in evidence. Indeed, petitioners admit
that they are aware that the subject land was being occupied by persons other than Rodolfo
Guansing and that said persons, who are the heirs of Perfecto Guansing, contest the title of
Rodolfo.21

II.

The sale by CDB to Lim being void, the question now arises as to who, if any, among the parties
was at fault for the nullity of the contract. Both the trial court and the appellate court found petitioners
guilty of fraud, because on June 16, 1988, when Lim was asked by CDB to pay the 10% option
money, CDB already knew that it was no longer the owner of the said property, its title having been
cancelled.22 Petitioners contend that: (1) such finding of the appellate court is founded entirely on
speculation and conjecture; (2) neither CDB nor FEBTC was a party in the case where the
mortgagor's title was cancelled; (3) CDB is not privy to any problem among the Guansings; and (4)
the final decision cancelling the mortgagor's title was not annotated in the latter's title.

As a rule, only questions of law may be raised in a petition for review, except in circumstances
where questions of fact may be properly raised.23 Here, while petitioners raise these factual issues,
they have not sufficiently shown that the instant case falls under any of the exceptions to the above
rule. We are thus bound by the findings of fact of the appellate court. In any case, we are convinced
of petitioners' negligence in approving the mortgage application of Rodolfo Guansing.

III.

We now come to the civil effects of the void contract of sale between the parties. Article 1412(2) of
the Civil Code provides:

If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed:

xxx xxx xxx

(2) When only one of the contracting parties is at fault, he cannot recover what he
has given by reason of the contract, or ask for the fulfillment of what has been
promised him. The other, who is not at fault, may demand the return of what he has
given without any obligation to comply with his promise.

Private respondents are thus entitled to recover the P30,000,00 option money paid by them.
Moreover, since the filing of the action for damages against petitioners amounted to a demand by
respondents for the return of their money, interest thereon at the legal rate should be computed from
August 29, 1989, the date of filing of Civil Case No. Q-89-2863, not June 17, 1988, when petitioners
accepted the payment. This is in accord with our ruling in Castillo v. Abalayan24 that in case of avoid
sale, the seller has no right whatsoever to keep the money paid by virtue thereof and should refund
it, with interest at the legal rate, computed from the date of filing of the complaint until fully paid.
Indeed, Art. 1412(2) which provides that the non-guilty party "may demand the return of what he has
given" clearly implies that without such prior demand, the obligation to return what was given does
not become legally demandable.

Considering CDB's negligence, we sustain the award of moral damages on the basis of Arts. 21 and
2219 of the Civil Code and our ruling in Tan v. Court of Appeals25 that moral damages may be
recovered even if a bank's negligence is not attended with malice and bad faith. We find, however,
that the sum of P250,000.00 awarded by the trial court is excessive. Moral damages are only
intended to alleviate the moral suffering undergone by private respondent, not to enrich them at the
expenses of the petitioners.26 Accordingly, the award of moral damages must be reduced to
P50,000.00.

Likewise, the award of P50,000.00 as exemplary damages, although justified under Art. 2232 of the
Civil Code, is excessive and should be reduced to P30,000.00. The award of P30,000.00 attorney's
fees based on Art. 2208, pars. 1, 2, 5 and 11 of the Civil Code should similarly be reduced to
P20,000.00.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the MODIFICATION as to
the award of damages as above stated. 1âwphi1.nêt

SO ORDERED.

Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.

Footnotes

1
Per Justice B.A. Adefuin-de la Cruz and concurred in by Justice Fidel F. Purisima
(now Associate Justice of the Supreme Court) and Justice Ricardo P. Galvez.

2
Exhibit 2; Records, pp. 149-151.

3
RTC Decision, CA Rollo, pp. 32-34.

4
Id., at p. 35.

5
Petition, p. 13; Rollo, p. 21.

6
Borromeo v. Court of Appeals, 47 SCRA 65 (1972).

7
Baluran v. Navarro, 79 SCRA 309 (1977).

8
G.R. No. 127471, February 10, 1999.

9
RTC Decision, CA Rollo, p. 49.

10
CIVIL CODE, ART. 1475.

11
Martin v. Reyes, 91 Phil. 666 (1952).
12
158 SCRA 375 (1988).

13
Id., p. 383.

14
276 SCRA 144 (1997).

15
Id., at pp. 157-158.

16
The following requisites are essential to the contracts of pledge and mortgage:

xxx xxx xxx

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged
or mortgaged.

17
Philippine National Bank v. Intermediate Appellate Court, 176 SCRA 736 (1989),
citing Quimson v. Suarez, 45 Phil 901 (1924).

18
98 SCRA 280 (1980) (Emphasis added).

19
Id., at 287.

20
TSN of the testimony of Atty. Rafael Hilao, Jr., p. 10, April 10, 1992.

21
Petition, p. 8; Appellant's Brief, p. 6; Rollo, pp. 6 and 16.

22
CA Decision, Rollo, p. 40.

23
See Philippine Home Assurance Corp. v. Court of Appeals, 257 SCRA 468 (1996).

24
30 SCRA 359 (1969).

25
239 SCRA 310 (1994).

26
Zenith Insurance Corporation v. Court of Appeals, 185 SCRA 402 (1990).
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-64159 September 10, 1985

CIRCE S. DURAN and ANTERO S. GASPAR, petitioners,

vs.
INTERMEDIATE APPELLATE COURT, ERLINDA B. MARCELO TIANGCO and RESTITUTO
TIANGCO, respondents.

RELOVA, J.:

The respondent then Court of Appeals rendered judgment, modifying the decision of the then Court
of First Instance of Rizal, which reads as follows:

(1) the complaint of the plaintiffs (herein petitioners) is hereby DISMISSED;

(2) the defendants-appellants spouses Erlinda B. Marcelo Tiangco and Restituto

Tiangco (herein private respondents) are hereby declared the lawful owners of the
two (2) parcels of land and all the improvements thereon including the 12-door
apartment thereon described in the complaint, in the counterclaim, in the cross-claim,
and in the Sheriff's Certificate of Sale;

(3) the plaintiffs-appellants and the defendant-appellee Fe S. Duran are hereby

ordered to deliver to (the Tiangcos) the two parcels of land and all the improvements
thereon including the 12-door apartment thereon, subject matter of the complaint,
counterclaim, and cross-claim, and in the Sheriff's Certificate of Sale;

(4) the plaintiffs-appellants and the defendant-appellee Fe S. Duran are hereby

ordered to pay solidarily to the Tiangcos the sum of Two Thousand Four Hundred
Pesos (P2,400) a month from May 16, 1972 until delivery of possession of the
properties in question to said Tiangco spouses, representing rentals collected by
plaintiffs-appellants and defendant- appellee Fe S. Duran;

(5) the plaintiffs-appellants and defendant-appellee Fe S. Duran are hereby ordered

to pay solidarily to the spouses Tiangco the sum of Twenty Thousand Pesos
(P20,000) as damages for attorney's fees, and the sum of Twenty-Five Thousand
Pesos (P25,000) for moral damages, and the costs. (pp. 149-150, Rollo)

The antecedent facts showed that petitioner Circe S. Duran owned two (2) parcels of land (Lots 5
and 6, Block A, Psd 32780) covered by Transfer Certificate of Title No. 1647 of the Register of
Deeds of Caloocan City which she had purchased from the Moja Estate. She left the Philippines in
June 1954 and returned in May 1966.
On May 13, 1963, a Deed of Sale of the two lots mentioned above was made in favor of Circe's
mother, Fe S. Duran who, on December 3, 1965, mortgaged the same property to private
respondent Erlinda B. Marcelo-Tiangco. When petitioner Circe S. Duran came to know about the
mortgage made by her mother, she wrote the Register of Deeds of Caloocan City informing the latter
that she had not given her mother any authority to sell or mortgage any of her properties in the
Philippines. Failing to get an answer from the registrar, she returned to the Philippines. Meanwhile,
when her mother, Fe S. Duran, failed to redeem the mortgage properties, foreclosure proceedings
were initiated by private respondent Erlinda B. Marcelo Tiangco and, ultimately, the sale by the
sheriff and the issuance of Certificate of Sale in favor of the latter.

Petitioner Circe S. Duran claims that the Deed of Sale in favor of her mother Fe S. Duran is a
forgery, saying that at the time of its execution in 1963 she was in the United States. On the other
hand, the adverse party alleges that the signatures of Circe S. Duran in the said Deed are genuine
and, consequently, the mortgage made by Fe S. Duran in favor of private respondent is valid.

With respect to the issue as to whether the signature of petitioner Circe S. Duran in the Deed of Sale
is a forgery or not, respondent appellate court held the same to be genuine because there is the
presumption of regularity in the case of a public document and "the fact that Circe has not been able
to satisfactorily prove that she was in the United States at the time the deed was executed in 1963.
Her return in 1966 does not prove she was not here also in 1963, and that she did not leave shortly
after 1963. She should have presented her old passport, not her new one. But even if the signatures
were a forgery, and the sale would be regarded as void, still it is Our opinion that the Deed of
Mortgage is VALID, with respect to the mortgagees, the defendants-appellants. While it is true that
under Art. 2085 of the Civil Code, it is essential that the mortgagor be the absolute owner of the
property mortgaged, and while as between the daughter and the mother, it was the daughter who
still owned the lots, STILL insofar as innocent third persons are concerned the owner was already
the mother (Fe S. Duran) inasmuch as she had already become the registered owner (Transfer
Certificates of Title Nos. 2418 and 2419). The mortgagee had the right to rely upon what appeared in
the certificate of title, and did not have to inquire further. If the rule were otherwise, the efficacy and
conclusiveness of Torrens Certificate of Titles would be futile and nugatory. Thus the rule is simple:
the fraudulent and forged document of sale may become the root of a valid title if the certificate has
already been transferred from the name of the true owner to the name indicated by the forger (See
De la Cruz v. Fable, 35 Phil. 144; Blondeau et al. v. Nano et al., 61 Phil. 625; Fule et al. v. Legare et
al., 7 SCRA 351; see also Sec. 55 of Act No. 496, the Land Registration Act). The fact that at the
time of the foreclosure sale proceedings (1970-72) the mortgagees may have already known of the
plaintiffs' claim is immaterial. What is important is that at the time the mortgage was executed, the
mortgagees in good faith actually believed Fe S. Duran to be the owner, as evidenced by the
registration of the property in the name of said Fe S. Duran (pp. 146-147, Rollo)."

In elevating the judgment of the respondent appellate court to Us for review, petitioners discussed
questions of law which, in effect and substance, raised only one issue and that is whether private
respondent Erlinda B. Marcelo-Tiangco was a buyer in good faith and for value.

Guided by previous decisions of this Court, good faith consists in the possessor's belief that the
person from whom he received the thing was the owner of the same and could convey his title
(Arriola vs. Gomez dela Serna, 14 Phil. 627). Good faith, while it is always to be presumed in the
absence of proof to the contrary, requires a well-founded belief that the person from whom title was
received was himself the owner of the land, with the right to convey it (Santiago vs. Cruz, 19 Phil.
148). There is good faith where there is an honest intention to abstain from taking any
unconscientious advantage from another (Fule vs. Legare, 7 SCRA 351). Otherwise stated, good
faith is the opposite of fraud and it refers to the state of mind which is manifested by the acts of the
individual concerned. In the case at bar, private respondents, in good faith relied on the certificate of
title in the name of Fe S. Duran and as aptly stated by respondent appellate court "[e]ven on the
supposition that the sale was void, the general rule that the direct result of a previous illegal contract
cannot be valid (on the theory that the spring cannot rise higher than its source) cannot apply here
for We are confronted with the functionings of the Torrens System of Registration. The doctrine to
follow is simple enough: a fraudulent or forged document of sale may become the ROOT of a valid
title if the certificate of title has already been transferred from the name of the true owner to the
name of the forger or the name indicated by the forger." (p. 147, Rollo)

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 had been regularly or irregularly issued by the court. Indeed,
this is contrary to the evident purpose of the law. Every person dealing with registered land may
safely rely on the correctness of the certificate of title issued therefor and the law will in no way
oblige him to go behind the certificate to determine the condition of the property. Stated differently,
an innocent purchaser for value relying on a torrens title issued is protected. A mortgagee has the
right to rely on what appears in the certificate of title and, in the absence of anything to excite
suspicion, he is under no obligation to look beyond the certificate and investigate the title of the
mortgagor appearing on the face of said certificate.

Likewise, We take note of the finding and observation of respondent appellate court in that
petitioners were guilty of estoppel by laches "in not bringing the case to court within a reasonable
period. Antero Gaspar, husband of Circe, was in the Philippines in 1964 to construct the apartment
on the disputed lots. This was testified to by Circe herself (tsn., p. 41, Nov. 27, 1973). In the process
of construction, specifically in the matter of obtaining a building permit, he could have discovered
that the deed of sale sought to be set aside had been executed on May 13, 1963 (the building permit
needed an application by the apparent owner of the land, namely, Circe's mother, Fe S. Duran). And
then again both plaintiffs could have intervened in the foreclosure suit but they did not. They kept
silent until almost the last moment when they finally decided, shortly before the sheriff's sale, to file a
third-party claim. Clearly, the plaintiffs can be faulted for their estoppel by laches." (p. 148, Rollo)

IN VIEW OF THE FOREGOING, We find the petition without merit and hereby AFFIRMED in toto
the decision of respondent appellate court promulgated on August 12, 1981.

SO ORDERED.

Teehankee (Chairman), Melencio-Herrera, Plana, Gutierrez, Jr., De la Fuente and Patajo, JJ.,
concur.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-40018 December 15, 1975

NORTHERN MOTORS, INC., petitioner,

vs.
HON. JORGE R. COQUIA, etc., et al., respondents, FILINVEST CREDIT CORPORATION,
intervenor.

RESOLUTION

AQUINO, J.:

Respondent Honesto Ong and City Sheriff of Manila filed a motion for the reconsideration of this
Court's resolution of August 29, 1975. In that resolution, it was held that the lien of Northern Motors,
Inc., as chattel mortgagee, over certain taxicabs is superior to the levy made on the said cabs by
Honesto Ong, the assignee of the unsecured judgment creditor of the chattel mortgagor, Manila
Yellow Taxicab Co., Inc.

On the other hand, Northern Motors, Inc. in its motion for the partial reconsideration of the same
August 29 resolution, prayed for the reversal of the lower court's orders cancelling the bond filed by
Filwriters Guaranty Assurance Corporation. Northern Motors, Inc. further prayed that the sheriff
should be required to deliver to it the proceeds of the execution sale of the mortgaged taxicabs
without deducting the expenses of execution.

1. Respondents' motion for reconsideration. — Honesto Ong in his motion invokes his supposed
"legal and equity status" vis-a-vis the mortgaged taxicabs. He contends that his only recourse was to
levy upon the taxicabs which were in the possession of the judgment debtor, Manila Yellow Taxicab
Co. Inc., whereas, Northern Motors, Inc., as unpaid seller and mortgagee, "has still an independent
legal remedy" against the mortgagor for the recovery of the unpaid balance of the price.

That contention is not a justification for setting aside the holding that Ong had no right to levy upon
the mortgaged taxicabs and that he could have levied only upon the mortgagor's equity of
redemption. The essence of the chattel mortgage is that the mortgaged chattels should answer for
the mortgage credit and not for the judgment credit of the mortgagor's unsecured creditor. The
mortgagee is not obligated to file an "independent action" for the enforcement of his credit. To
require him to do so would be a nullification of his lien and would defeat the purpose of the chattel
mortgage which is to give him preference over the mortgaged chattels for the satisfaction of his
credit. (See art. 2087, Civil Code).
It is relevant to note that intervenor Filinvest Credit Corporation, the assignee of a portion of the
chattel mortgage credit, realized that to vindicate its claim by independent action would be illusory.
For that pragmatic reason, it was constrained to enter into a compromise with Honesto Ong by
agreeing to pay him P145,000. That amount was characterized by Northern Motors, Inc. as the
"ransom" for the taxicabs levied upon by the sheriff at the behest of Honesto Ong.

Honesto Ong's theory that Manila Yellow Taxicab's breach of the chattel mortgage should not affect
him because he is not privy of such contract is untenable. The registration of the chattel mortgage is
an effective and binding notice to him of its existence (Ong Liong Tiak vs. Luneta Motor Company,
66 Phil 459). The mortgage creates a real right (derecho real, jus in re or jus ad rem, XI Enciclopedia
Juridica Española 294) or a lien which, being recorded, follows the chattel wherever it goes.

Honesto Ong's contention that Northern Motors, Inc., was negligent because it did not sue the sheriff
within the 120-day period provided for in section 17, Rule 39 of the Rules of Court is not correct.
Such action was filed on April 14, 1975 in the Court of First Instance of Rizal, Pasig Branch XIII, in
Civil Case No. 21065 entitled "Northern Motors, Inc. vs. Filwriters Guaranty Assurance Corporation,
et al.". However, instead of Honesto Ong, his assignor, Tropical Commercial Corporation, was
impleaded as a defendant therein. That might explain his unawareness of the pendency of such
action.

The other arguments of Honesto Ong in his motion may be boiled down to the proposition that the
levy made by mortgagor's judgment creditor against the chattel mortgagor should prevail over the
chattel mortgage credit. That proposition is devoid of any legal sanction and is glaringly contrary to
the nature of a chattel mortgage. To uphold that contention is to destroy the essence of chattel
mortgage as a paramount encumbrance on the mortgaged chattel.

Respondent Ong admits "that the mortgagee's right to the mortgaged property is superior to that of
the judgment creditor". But he contends that the rights of the purchasers of the cars at the execution
sale should be respected. He reasons out they were not parties to the mortgage and that they
acquired the cars prior to the mortgagee's assertion of its rights thereto.

That contention is not well-taken. The third-party claim filed by Northern Motors, Inc. should have
alerted the purchasers to the risk which they were taking when they took part in the auction sale.
Moreover, at an execution sale the buyers acquire only the right of the judgment debtor which in this
case was a mere right or equity of redemption. The sale did not extinguish the pre-existing mortgage
lien (See sec. 25, Rule 39, Rules of Court; Potenciano vs. Dineros and Provincial Sheriff of Rizal, 97
Phil, 196; Lara vs. Bayona, 97 Phil. 951; Hacbang vs. Leyte Autobus Co., Inc., L-7907, May 30,
1963, 8 SCRA 103).

Some arguments adduced by Honesto Ong in his motion were intended to protect the interests of
the mortgagor, Manila Yellow Taxicab Co., Inc., which he erroneously characterized as a
"respondent" (it is not a respondent in this case). Ong argues that the proceeds of the execution
sale, which was held on December 18, 1974, should be delivered to Northern Motors, Inc. "only to
such extent as has exceeded the amount paid by respondent Manila Yellow Taxicab to" Northern
Motors, Inc. That argument is not clear. Ong probably means that the installments already paid by
Manila Yellow Taxicab Co., Inc. to Northern Motors, Inc. should be deducted from the proceeds of
the execution sale. If that is the point which Ong is trying to put across, and it is something which
does not directly affect him, then, that matter should be raised by Manila Yellow Taxicab Co., Inc. in
the replevin case, Civil Case No. 20536 of the Court of First Instance of Rizal, Pasig Branch VI,
entitled "Northern Motors, Inc. versus Manila Yellow Taxicab Co., Inc. et al."
Ong's contention, that the writ of execution, which was enforced against the seven taxicabs (whose
sale at public auction was stopped) should have precedence over the mortgage lien, cannot be
sustained. Those cabs cannot be sold at an execution sale because, as explained in the resolution
under reconsideration, the levy thereon was wrongful.

The motion for reconsideration of Ong and the sheriff should be denied.

2. Petitioners motion for partial reconsideration. — The lower court in its order of January 3, 1975
cancelled the indemnity bonds for P480,000 filed on December 18, 1975 by Filwriters Guaranty
Assurance Corporation for Tropical Commercial Co., Inc. The bonds were cancelled without notice
to Northern Motors, Inc. as third-party claimant.

We already held that the cancellation of the bonds constituted a grave abuse of discretion but we
previously denied petitioner's prayer for the reinstatement of the bonds because Northern Motors
Inc. had given the impression that it had not filed any action for damages against the sheriff within
the one hundred twenty-day period contemplated in Section 17, Rule 39 of the Rules of Court.

As already noted above, the truth is that such an action for damages was filed on April 14, 1975
against the surety, the sheriff and the judgment creditor in Civil Case No. 21065 of the Court of First
Instance of Rizal, Pasig Branch XIII. The action involves the indemnity bond for P240,000 (No. 0032
posted on December 18, 1974).

It may also be noted that in a prior case, Civil Case No. 20536 of the Court of First Instance of Rizal
at Pasig, entitled "Northern Motors, Inc. vs. Manila Yellow Taxicab Co., Inc., et al.", a replevin case
(where an amended complaint dated January 15, 1975 was filed), the surety, Filwriters Guaranty
Assurance Corporation, was impleaded as a defendant by reason of its bond for P240,000. Northern
Motors, Inc. in that case prayed that the surety be ordered to pay to it damages in the event that the
eight taxicabs could not be surrendered to the mortgagee.

Northern Motors, Inc., in its instant motion for partial reconsideration, reiterates its petition for the
reinstatement of the bond filed by Filwriters Guaranty Assurance Corporation. If the said bond is not
reinstated or if the lower court's orders cancelling it are allowed to stand, the aforementioned Civil
Cases Nos. 20536 and 21065 would be baseless or futile actions against the surety. That injustice
should be corrected. Hence, our resolution of August 29, 1975, insofar as it did not disturb the lower
court's orders cancelling the indemnity bonds, should be reconsidered.

Northern Motors. Inc. further prays for the reconsideration of that portion of our resolution allowing
the sheriff to deduct expenses from the proceeds of the execution sale for the eight taxicabs which
sale was held on December 18, 1974. It argues that Honesto Ong or Manila Yellow Taxicab Co., Inc.
should shoulder such expenses of execution.

We already held that the execution was not justified and that Northern Motors, Inc., as mortgagee,
was entitled to the possession of the eight taxicabs. Those cabs should not have been levied upon
and sold at public auction to satisfy the judgment credit which was inferior to the chattel mortgage.
Since the cabs could no longer be recovered because apparently they had been transferred to
persons whose addresses are unknown (see par. 12, page 4, Annex B of motion), the proceeds of
the execution sale may be regarded as a partial substitute for the unrecovarable cabs (See arts.
1189[2] and 1269, Civil Code; Urrutia & Co. vs. Baco River Plantation Co., 26 Phil. 632). Northern
Motors, Inc. is entitled to the entire proceeds without deduction of the expenses of execution.

WHEREFORE, private respondents' motion for reconsideration is denied and petitioner's motion for
partial reconsideration is granted. The resolution of August 29, 1975 is modified in the sense that the
lower court's orders of January 3 and 6, 1975, cancelling the indemnity bond for P240,000 (as
reaffirmed in its order of January 17, 1975), are set aside. The said indemnity bond for P240,000 is
regarded as in full force and Respondent Sheriff of Manila is further directed to deliver to Northern
Motors, Inc. the entire proceeds of the execution sale held on December 18, 1974 for the eight
taxicabs which were mortgaged to that firm.

SO ORDERED.

Makalintal, C.J., Teehankee, Makasiar, Antonio, Esguerra, Muñoz Palma, Concepcion Jr., and
Martin, JJ., concur.

Castro, Fernando, and Barredo JJ., took no part.

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-21069 October 26, 1967

MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee,

vs.
RODOLFO R. VELAYO, defendant-appellant.

Villaluz Law Office for plaintiff-appellee.

Rodolfo R. Velayo for and in his own behalf as defendant-appellant.

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

Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435)
sentencing appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum of
P2,565.00 with interest at 12-½% per annum from July 13, 1954; P120.93 as premiums with interest
at the same rate from June 13, 1954: attorneys' fees in an amount equivalent to 15% of the total
award, and the costs.

Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil Code of
the Philippines (1950).

The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo
Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one
Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo
undertook to pay the surety company an annual premium of P112.00; to indemnify the Company for
any damage and loss of whatsoever kind and nature that it shall or may suffer, as well as reimburse
the same for all money it should pay or become liable to pay under the bond including costs and
attorneys' fees.

As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the
Surety Company "for the latter's further protection", with power to sell the same in case the surety
paid or become obligated to pay any amount of money in connection with said bond, applying the
proceeds to the payment of any amounts it paid or will be liable to pay, and turning the balance, if
any, to the persons entitled thereto, after deducting legal expenses and costs (Rec. App. pp. 12-15).

Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and
execution having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it
later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the
pledged jewelry to be sold, realizing therefrom a net product of P235.00 only. Thereafter and upon
Velayo's failure to pay the balance, the surety company brought suit in the Municipal Court. Velayo
countered with a claim that the sale of the pledged jewelry extinguished any further liability on his
part under Article 2115 of the 1950 Civil Code, which recites:
 Art. 2115. 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 more than said amount, the debtor shall
not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less,
neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation
to the contrary.

The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to
the Court of First Instance, the defense was once more overruled, and the case decided in the terms
set down at the start of this opinion.

Thereupon, Velayo resorted to this Court on appeal.

The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72):

It is thus crystal clear that the main agreement between the parties is the Indemnity
Agreement and if the pieces of jewelry mentioned by the defendant were delivered to the
plaintiff, it was merely as an added protection to the latter. There was no understanding that,
should the same be sold at public auction and the value thereof should be short of the
undertaking, the defendant would have no further liability to the plaintiff. On the contrary, the
last portion of the said agreement specifies that in case the said collateral should diminish in
value, the plaintiff may demand additional securities. This stipulation is incompatible with the
idea of pledge as a principal agreement. In this case, the status of the pledge is nothing
more nor less than that of a mortgage given as a collateral for the principal obligation in
which the creditor is entitled to a deficiency judgment for the balance should the collateral
not command the price equal to the undertaking.

It appearing that the collateral given by the defendant in favor of the plaintiff to secure this
obligation has already been sold for only the amount of P235.00, the liability of the defendant
should be limited to the difference between the amounts of P2,800.00 and P235.00 or
P2,565.00.

We agree with the appellant that the above quoted reasoning of the appealed decision is unsound.
The accessory character is of the essence of pledge and mortgage. As stated in Article 2085 of the
1950 Civil Code, an essential requisite of these contracts is that they be constituted to secure the
fulfillment of a principal obligation, which in the present case is Velayo's undertaking to indemnify the
surety company for any disbursements made on account of its attachment counterbond. Hence, the
fact that the pledge is not the principal agreement is of no significance nor is it an obstacle to the
application of Article 2115 of the Civil Code.

The reviewed decision further assumes that the extinctive effect of the sale of the pledged chattels
must be derived from stipulation. This is incorrect, because Article 2115, in its last portion, clearly
establishes that the extinction of the principal obligation supervenes by operation of imperative law
that the parties cannot override:

If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency
notwithstanding any stipulation to the contrary.

The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the
articles pledged, instead of suing on the principal obligation, the creditor has waived any other
remedy, and must abide by the results of the sale. No deficiency is recoverable.
It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the legal
prescription contained in Article 1484(3) of the same Code, concerning the effect of a foreclosure of
a chattel mortgage constituted to secure the price of the personal property sold in installments, and
which originated in Act 4110 promulgated by the Philippine Legislature in 1933.

WHEREFORE, the decision under appeal is modified and the defendant absolved from the
complaint, except as to his liability for the 1954 premium in the sum of P120.93, and interest at 12-
1/2% per annum from June 13, 1954. In this respect the decision of the Court below is affirmed. No
costs. So ordered.

Concepcion, C.J., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro, Angeles and
Fernando, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 133876 December 29, 1999

BANK OF AMERICA, NT and SA, petitioner,

vs.
AMERICAN REALTY CORPORATION and COURT OF APPEALS, respondents.

BUENA, J.:

Does a mortgage-creditor waive its remedy to foreclose the real estate mortgage constituted over a
third party mortgagor's property situated in the Philippines by filing an action for the collection of the
principal loan before foreign courts?

Sought to be reversed in the instant petition for review on certiorari under Rule 45 of the Rules of
Court are the decision 1 of public respondent Court of Appeals in CA G.R. CV No. 51094,
promulgated on 30 September 1997 and its resolution, 2 dated 22 May 1998, denying petitioner's
motion for reconsideration.

Petitioner Bank of America NT & SA (BANTSA) is an international banking and financing institution
duly licensed to do business in the Philippines, organized and existing under and by virtue of the
laws of the State of California, United States of America while private respondent American Realty
Corporation (ARC) is a domestic corporation.

Bank of America International Limited (BAIL), on the other hand, is a limited liability company
organized and existing under the laws of England.

As borne by the records, BANTSA and BAIL on several occasions granted three major multi-million
United States (US) Dollar loans to the following corporate borrowers: (1) Liberian Transport
Navigation, S.A.; (2) El Challenger S.A. and (3) Eshley Compania Naviera S.A. (hereinafter
collectively referred to as "borrowers"), all of which are existing under and by virtue of the laws of the
Republic of Panama and are foreign affiliates of private
respondent. 3

Due to the default in the payment of the loan amortizations, BANTSA and the corporate borrowers
signed and entered into restructuring agreements. As additional security for the restructured loans,
private respondent ARC as third party mortgagor executed two real estate mortgages, 4 dated 17
February 1983 and 20 July 1984, over its parcels of land including improvements thereon, located at
Barrio Sto. Cristo, San Jose Del Monte, Bulacan, and which are covered by Transfer Certificate of
Title Nos. T-78759, T-78760, T-78761, T-78762 and T-78763.
Eventually, the corporate borrowers defaulted in the payment of the restructured loans prompting
petitioner BANTSA to file civil actions 5 before foreign courts for the collection of the principal loan, to
wit:

a) In England, in its High Court of Justice, Queen's Bench

Division, Commercial Court (1992-Folio No 2098) against
Liberian Transport Navigation S.A., Eshley Compania Naviera
S.A., El Challenger S.A., Espriona Shipping Company S.A.,
Eddie Navigation Corp., S.A., Eduardo Katipunan Litonjua
and Aurelio Katipunan Litonjua on June 17, 1992.

b) In England, in its High Court of Justice, Queen's Bench

Division, Commercial Court (1992-Folio No. 2245) against El
Challenger S.A., Espriona Shipping Company S.A., Eduardo
Katipuan Litonjua & Aurelio Katipunan Litonjua on July 2,
1992;

c) In Hongkong, in the Supreme Court of Hongkong High

Court (Action No. 4039 of 1992) against Eshley Compania
Naviera S.A., El Challenger S.A., Espriona Shipping
Company S.A. Pacific Navigators Corporation, Eddie
Navigation Corporation S.A., Litonjua Chartering (Edyship)
Co., Inc., Aurelio Katipunan Litonjua, Jr. and Eduardo
Katipunan Litonjua on November 19, 1992; and

d) In Hongkong, in the Supreme Court of Hongkong High

Court (Action No. 4040 of 1992) against Eshley Compania
Naviera S.A., El Challenger S.A., Espriona Shipping
Company, S.A., Pacific Navigators Corporation, Eddie
Navigation Corporation S.A., Litonjua Chartering (Edyship)
Co., Jr. and Eduardo Katipunan Litonjua on November 21,
1992.

In the civil suits instituted before the foreign courts, private respondent ARC, being a third party
mortgagor, was private not impleaded as party-defendant.

On 16 December 1992, petitioner BANTSA filed before the Office of the Provincial Sheriff of
Bulacan, Philippines an application for extrajudicial foreclosure 6 of real estate mortgage.

On 22 January 1993, after due publication and notice, the mortgaged real properties were sold at
public auction in an extrajudicial foreclosure sale, with Integrated Credit and Corporation Services
Co (ICCS) as the highest bidder for the sum of Twenty four Million Pesos (P24,000.000.00). 7

On 12 February 1993, private respondent filed before the Pasig Regional Trial Court, Branch 159, an
action for damages 8 against the petitioner, for the latter's act of foreclosing extrajudicially the real
estate mortgages despite the pendency of civil suits before foreign courts for the collection of the
principal loan.

In its answer 9 petitioner alleged that the rule prohibiting the mortgagee from foreclosing the
mortgage after an ordinary suit for collection has been filed, is not applicable in the present case,
claiming that:
 a) The plaintiff, being a mere third party mortgagor and not a party to the
principal restructuring agreements, was never made a party defendant in the
civil cases filed in Hongkong and England;

b) There is actually no civil suit for sum of money filed in the Philippines since
the civil actions were filed in Hongkong and England. As such, any decisions
(sic) which may be rendered in the abovementioned courts are not (sic)
enforceable in the Philippines unless a separate action to enforce the foreign
judgments is first filed in the Philippines, pursuant to Rule 39, Section 50 of
the Revised Rules of Court.

c) Under English Law, which is the governing law under the principal
agreements, the mortgagee does not lose its security interest by filing civil
actions for sums of money.

On 14 December 1993, private respondent filed a motion for

suspension 10 of the redemption period on the ground that "it cannot exercise said right of redemption
without at the same time waiving or contradicting its contentions in the case that the foreclosure of
the mortgage on its properties is legally improper and therefore invalid."

In an order 11 dated 28 January 1994, the trial court granted the private respondent's motion for
suspension after which a copy of said order was duly received by the Register of Deeds of
Meycauayan, Bulacan.

On 07 February 1994, ICCS, the purchaser of the mortgaged properties at the foreclosure sale,
consolidated its ownership over the real properties, resulting to the issuance of Transfer Certificate
of Title Nos. T-18627, T-186272, T-186273, T-16471 and T-16472 in its name.

On 18 March 1994, after the consolidation of ownership in its favor, ICCS sold the real properties to
Stateland Investment Corporation for the amount of Thirty Nine Million Pesos (P39,000,000.00). 12
Accordingly, Transfer Certificate of Title Nos. T-187781(m), T-187782(m), T-187783(m), T-
16653P(m) and T-16652P(m) were issued in the latter's name.

After trial, the lower court rendered a decision 13 in favor of private respondent ARC dated 12 May
1993, the decretal portion of which reads:

WHEREFORE, judgment is hereby rendered declaring that the filing in

foreign courts by the defendant of collection suits against the principal
debtors operated as a waiver of the security of the mortgages. Consequently,
the plaintiff's rights as owner and possessor of the properties then covered by
Transfer Certificates of Title Nos. T-78759, T-78762, T-78763, T-78760 and
T-78761, all of the Register of Deeds of Meycauayan, Bulacan, Philippines,
were violated when the defendant caused the extrajudicial foreclosure of the
mortgages constituted thereon.

Accordingly, the defendant is hereby ordered to pay the plaintiff the following
sums, all with legal interest thereon from the date of the filing of the complaint
up to the date of actual payment:

1) Actual or compensatory damages in the amount of Ninety Nine Million

Pesos (P99,000,000.00);
 2) Exemplary damages in the amount of Five Million Pesos (P5,000,000.00);
and

3) Costs of suit.

SO ORDERED.

On appeal, the Court of Appeals affirmed the assailed decision of the lower court prompting
petitioner to file a motion for reconsideration which the appellate court denied.

Hence, the instant petition for review 14 on certiorari where herein petitioner BANTSA ascribes to the
Court of Appeals the following assignment of errors:

1. The Honorable Court of Appeals disregarded the doctrines

laid down by this Hon. Supreme Court in the cases of Caltex
Philippines, Inc. vs. Intermediate Appellate Court docketed as
G.R. No. 74730 promulgated on August 25, 1989 and
Philippine Commercial International Bank vs. IAC, 196 SCRA
29 (1991 case), although said cases were duly cited,
extensively discussed and specifically mentioned, as one of
the issues in the assignment of errors found on page 5 of the
decision dated September 30, 1997.

2. The Hon. Court of Appeals acted with grave abuse of

discretion when it awarded the private respondent actual and
exemplary damages totalling P171,600,000.00, as of July 12,
1998 although such huge amount was not asked nor prayed
for in private respondent's complaint, is contrary to law and is
totally unsupported by evidence (sic).

In fine, this Court is called upon to resolve two main issues:

1. Whether or not the petitioner's act of filing a collection suit

against the principal debtors for the recovery of the loan
before foreign courts constituted a waiver of the remedy of
foreclosure.

2. Whether or not the award by the lower court of actual and

exemplary damages in favor of private respondent ARC, as
third-party mortgagor, is proper.

The petition is bereft of merit.

First, as to the issue of availability of remedies, petitioner submits that a waiver of the remedy of
foreclosure requires the concurrence of two requisites: an ordinary civil action for collection should
be filed and subsequently a final judgment be correspondingly rendered therein.

According to petitioner, the mere filing of a personal action to collect the principal loan does not
suffice; a final judgment must be secured and obtained in the personal action so that waiver of the
remedy of foreclosure may be appreciated. To put it differently, absent any of the two requisites, the
mortgagee-creditor is deemed not to have waived the remedy of foreclosure.
We do not agree.

Certainly, this Court finds petitioner's arguments untenable and upholds the jurisprudence laid down
in Bachrach 15 and similar cases adjudicated thereafter, thus:

In the absence of express statutory provisions, a mortgage creditor may

institute against the mortgage debtor either a personal action or debt or a real
action to foreclose the mortgage. In other words, he may he may pursue
either of the two remedies, but not both. By such election, his cause of action
can by no means be impaired, for each of the two remedies is complete in
itself. Thus, an election to bring a personal action will leave open to him all
the properties of the debtor for attachment and execution, even including the
mortgaged property itself. And, if he waives such personal action and
pursues his remedy against the mortgaged property, an unsatisfied judgment
thereon would still give him the right to sue for a deficiency judgment, in
which case, all the properties of the defendant, other than the mortgaged
property, are again open to him for the satisfaction of the deficiency. In either
case, his remedy is complete, his cause of action undiminished, and any
advantages attendant to the pursuit of one or the other remedy are purely
accidental and are all under his right of election. On the other hand, a rule
that would authorize the plaintiff to bring a personal action against the debtor
and simultaneously or successively another action against the mortgaged
property, would result not only in multiplicity of suits so offensive to justice
(Soriano vs. Enriques, 24 Phil. 584) and obnoxious to law and equity (Osorio
vs. San Agustin, 25 Phil., 404), but also in subjecting the defendant to the
vexation of being sued in the place of his residence or of the residence of the
plaintiff, and then again in the place where the property lies.

In Danao vs. Court of Appeals, 16 this Court, reiterating jurisprudence enunciated in Manila Trading
and Supply Co vs. Co Kim 17 and Movido vs.
RFC, 18 invariably held:

. . . The rule is now settled that a mortgage creditor may elect to waive his
security and bring, instead, an ordinary action to recover the indebtedness
with the right to execute a judgment thereon on all the properties of the
debtor, including the subject matter of the mortgage . . . , subject to the
qualification that if he fails in the remedy by him elected, he cannot pursue
further the remedy he has waived. (Emphasis Ours)

Anent real properties in particular, the Court has laid down the rule that a mortgage creditor may
institute against the mortgage debtor either a personal action for debt or a real action to foreclose
the mortgage. 19

In our jurisdiction, the remedies available to the mortgage creditor are deemed alternative and not
cumulative. Notably, an election of one remedy operates as a waiver of the other. For this purpose, a
remedy is deemed chosen upon the filing of the suit for collection or upon the filing of the complaint
in an action for foreclosure of mortgage, pursuant to the provision of Rule 68 of the of the 1997
Rules of Civil Procedure. As to extrajudicial foreclosure, such remedy is deemed elected by the
mortgage creditor upon filing of the petition not with any court of justice but with the Office of the
Sheriff of the province where the sale is to be made, in accordance with the provisions of Act No.
3135, as amended by Act No. 4118.
In the case at bench, private respondent ARC constituted real estate mortgages over its properties
as security for the debt of the principal debtors. By doing so, private respondent subjected itself to
the liabilities of a third party mortgagor. Under the law, third persons who are not parties to a loan
may secure the latter by pledging or mortgaging their own property. 20

Notwithstanding, there is no legal provision nor jurisprudence in our jurisdiction which makes a third
person who secures the fulfillment of another's obligation by mortgaging his own property, to be
solidarily bound with the principal obligor. The signatory to the principal contract—loan—remains to
be primarily bound. It is only upon default of the latter that the creditor may have recourse on the
mortgagors by foreclosing the mortgaged properties in lieu of an action for the recovery of the
amount of the loan. 21

In the instant case, petitioner's contention that the requisites of filing the action for collection and
rendition of final judgment therein should concur, is untenable.

Thus, in Cerna vs. Court of Appeals, 22 we agreed with the petitioner in said case, that the filing of a
collection suit barred the foreclosure of the mortgage:

A mortgagee who files a suit for collection abandons the remedy of

foreclosure of the chattel mortgage constituted over the personal property as
security for the debt or value of the promissory note when he seeks to
recover in the said collection suit.

. . . When the mortgagee elects to file a suit for collection, not foreclosure,
thereby abandoning the chattel mortgage as basis for relief, he clearly
manifests his lack of desire and interest to go after the mortgaged property
as security for the promissory note . . . .

Contrary to petitioner's arguments, we therefore reiterate the rule, for clarity and emphasis, that the
mere act of filing of an ordinary action for collection operates as a waiver of the mortgage-creditor's
remedy to foreclose the mortgage. By the mere filing of the ordinary action for collection against the
principal debtors, the petitioner in the present case is deemed to have elected a remedy, as a result
of which a waiver of the other necessarily must arise. Corollarily, no final judgment in the collection
suit is required for the rule on waiver to apply.

Hence, in Caltex Philippines, Inc. vs. Intermediate-Appellate Court, 23 a case relied upon by
petitioner, supposedly to buttress its contention, this Court had occasion to rule that the mere act of
filing a collection suit for the recovery of a debt secured by a mortgage constitutes waiver of the
other remedy of foreclosure.

In the case at bar, petitioner BANTSA only has one cause of action which is non-payment of the
debt. Nevertheless, alternative remedies are available for its enjoyment and exercise. Petitioner then
may opt to exercise only one of two remedies so as not to violate the rule against splitting a cause of
action.

As elucidated by this Court in the landmark case of Bachrach Motor Co., Inc, vs. Icarangal. 24

For non-payment of a note secured by mortgage, the creditor has a single

cause of action against the debtor. This single cause of action consists in the
recovery of the credit with execution of the security. In other words, the
creditor in his action may make two demands, the payment of the debt and
 the foreclosure of his mortgage. But both demands arise from the same
cause, the non-payment of the debt, and for that reason, they constitute a
single cause of action. Though the debt and the mortgage constitute
separate agreements, the latter is subsidiary to the former, and both refer to
one and the same obligation. Consequently, there exists only one cause of
action for a single breach of that obligation. Plaintiff, then, by applying the
rules above stated, cannot split up his single cause of action by filing a
complaint for payment of the debt, and thereafter another complaint for
foreclosure of the mortgage. If he does so, the filing of the first complaint will
bar the subsequent complaint. By allowing the creditor to file two separate
complaints simultaneously or successively, one to recover his credit and
another to foreclose his mortgage, we will, in effect, be authorizing him plural
redress for a single breach of contract at so much cost to the courts and with
so much vexation and oppression to the debtor.

Petitioner further faults the Court of Appeals for allegedly disregarding the doctrine enunciated in
Caltex wherein this High Court relaxed the application of the general rules to wit:

In the present case, however, we shall not follow this rule to the letter but
declare that it is the collection suit which was waived and/or abandoned. This
ruling is more in harmony with the principles underlying our judicial system. It
is of no moment that the collection suit was filed ahead, what is determinative
is the fact that the foreclosure proceedings ended even before the decision in
the collection suit was rendered. . . .

Notably, though, petitioner took the Caltex ruling out of context. We must stress that the Caltex case
was never intended to overrule the well-entrenched doctrine enunciated Bachrach, which to our
mind still finds applicability in cases of this sort. To reiterate, Bachrach is still good law.

We then quote the decision 25 of the trial court, in the present case, thus:

The aforequoted ruling in Caltex is the exception rather than the rule, dictated
by the peculiar circumstances obtaining therein. In the said case, the
Supreme Court chastised Caltex for making ". . . a mockery of our judicial
system when it initially filed a collection suit then, during the pendency
thereof, foreclosed extrajudicially the mortgaged property which secured the
indebtedness, and still pursued the collection suit to the end." Thus, to
prevent a mockery of our judicial system", the collection suit had to be
nullified because the foreclosure proceedings have already been pursued to
their end and can no longer be undone.

xxx xxx xxx

In the case at bar, it has not been shown whether the defendant pursued to
the end or are still pursuing the collection suits filed in foreign courts. There
is no occasion, therefore, for this court to apply the exception laid down by
the Supreme Court in Caltex by nullifying the collection suits. Quite
obviously, too, the aforesaid collection suits are beyond the reach of this
Court. Thus the only way the court may prevent the spector of a creditor
having "plural redress for a single breach of contract" is by holding, as the
Court hereby holds, that the defendant has waived the right to foreclose the
mortgages constituted by the plaintiff on its properties originally covered by
 Transfer Certificates of Title Nos. T-78759, T-78762, T-78760 and T-78761.
(RTC Decision pp., 10-11)

In this light, the actuations of Caltex are deserving of severe criticism, to say the least. 26

Moreover, petitioner attempts to mislead this Court by citing the case of PCIB vs. IAC. 27 Again,
petitioner tried to fit a square peg in a round hole. It must be stressed that far from overturning the
doctrine laid down in Bachrach, this Court in PCIB buttressed its firm stand on this issue by
declaring:

While the law allows a mortgage creditor to either institute a personal action
for the debt or a real action to foreclosure the mortgage, he cannot pursue
both remedies simultaneously or successively as was done by PCIB in this
case.

xxx xxx xxx

Thus, when the PCIB filed Civil Case No. 29392 to enforce payment of the
1.3 million promissory note secured by real estate mortgages and
subsequently filed a petition for extrajudicial foreclosure, it violates the rule
against splitting a cause of action.

Accordingly, applying the foregoing rules, we hold that petitioner, by the expediency of filing four civil
suits before foreign courts, necessarily abandoned the remedy to foreclose the real estate
mortgages constituted over the properties of third-party mortgagor and herein private respondent
ARC. Moreover, by filing the four civil actions and by eventually foreclosing extrajudicially the
mortgages, petitioner in effect transgressed the rules against splitting a cause of action well-
enshrined in jurisprudence and our statute books.

In Bachrach, this Court resolved to deny the creditor the remedy of foreclosure after the collection
suit was filed, considering that the creditor should not be afforded "plural redress for a single breach
of contract." For cause of action should not be confused with the remedy created for its enforcement.
28

Notably, it is not the nature of the redress which is crucial but the efficacy of the remedy chosen in
addressing the creditor's cause. Hence, a suit brought before a foreign court having competence and
jurisdiction to entertain the action is deemed, for this purpose, to be within the contemplation of the
remedy available to the mortgagee-creditor. This pronouncement would best serve the interest of
justice and fair play and further discourage the noxious practice of splitting up a lone cause of action.

Incidentally, BANTSA alleges that under English Law, which according to petitioner is the governing
law with regard to the principal agreements, the mortgagee does not lose its security interest by
simply filing civil actions for sums of money. 29

We rule in the negative.

This argument shows desperation on the part of petitioner to rivet its crumbling cause. In the case at
bench, Philippine law shall apply notwithstanding the evidence presented by petitioner to prove the
English law on the matter.
In a long line of decisions, this Court adopted the well-imbedded principle in our jurisdiction that
there is no judicial notice of any foreign law. A foreign law must be properly pleaded and proved as a
fact. 30 Thus, if the foreign law involved is not properly pleaded and proved, our courts will presume
that the foreign law is the same as our local or domestic or internal
law. 31 This is what we refer to as the doctrine of processual presumption.

In the instant case, assuming arguendo that the English Law on the matter were properly pleaded
and proved in accordance with Section 24, Rule 132 of the Rules of Court and the jurisprudence laid
down in Yao Kee, et al. vs.
Sy-Gonzales, 32 said foreign law would still not find applicability.

Thus, when the foreign law, judgment or contract is contrary to a sound and established public policy
of the forum, the said foreign law, judgment or order shall not be applied. 33

Additionally, prohibitive laws concerning persons, their acts or property, and those which have for
their object public order, public policy and good customs shall not be rendered ineffective by laws or
judgments promulgated, or by determinations or conventions agreed upon in a foreign country. 34

The public policy sought to be protected in the instant case is the principle imbedded in our
jurisdiction proscribing the splitting up of a single cause of action.

Section 4, Rule 2 of the 1997 Rules of Civil Procedure is pertinent —

If two or more suits are instituted on the basis of the same cause of action,
the filing of one or a judgment upon the merits in any one is available as a
ground for the dismissal of the others.

Moreover, foreign law should not be applied when its application would work undeniable injustice to
the citizens or residents of the forum. To give justice is the most important function of law; hence, a
law, or judgment or contract that is obviously unjust negates the fundamental principles of Conflict of
Laws. 35

Clearly then, English Law is not applicable.

As to the second pivotal issue, we hold that the private respondent is entitled to the award of actual
or compensatory damages inasmuch as the act of petitioner BANTSA in extrajudicially foreclosing
the real estate mortgages constituted a clear violation of the rights of herein private respondent
ARC, as third-party mortgagor.

Actual or compensatory damages are those recoverable because of pecuniary loss in business,
trade, property, profession, job or occupation and the same must be proved, otherwise if the proof is
flimsy and non-substantial, no damages will be given. 36 Indeed, the question of the value of property
is always a difficult one to settle as valuation of real property is an imprecise process since real
estate has no inherent value readily ascertainable by an appraiser or by the court. 37 The opinions of
men vary so much concerning the real value of property that the best the courts can do is hear all of
the witnesses which the respective parties desire to present, and then, by carefully weighing that
testimony, arrive at a conclusion which is just and equitable. 38

In the instant case, petitioner assails the Court of Appeals for relying heavily on the valuation made
by Philippine Appraisal Company. In effect, BANTSA questions the act of the appellate court in
giving due weight to the appraisal report composed of twenty three pages, signed by Mr. Lauro
Marquez and submitted as evidence by private respondent. The appraisal report, as the records
would readily show, was corroborated by the testimony of Mr. Reynaldo Flores, witness for private
respondent.

On this matter, the trial court observed:

The record herein reveals that plaintiff-appellee formally offered as evidence

the appraisal report dated March 29, 1993 (Exhibit J, Records, p. 409),
consisting of twenty three (23) pages which set out in detail the valuation of
the property to determine its fair market value (TSN, April 22, 1994, p. 4), in
the amount of P99,986,592.00 (TSN, ibid., p. 5), together with the
corroborative testimony of one Mr. Reynaldo F. Flores, an appraiser and
director of Philippine Appraisal Company, Inc. (TSN, ibid., p. 3). The latter's
testimony was subjected to extensive cross-examination by counsel for
defendant-appellant (TSN, April 22, 1994, pp. 6-22). 39

In the matter of credibility of witnesses, the Court reiterates the familiar and well-entrenched rule that
the factual findings of the trial court should be respected. 40 The time-tested jurisprudence is that the
findings and conclusions of the trial court on the credibility of witnesses enjoy a badge of respect for
the reason that trial courts have the advantage of observing the demeanor of witnesses as they
testify. 41

This Court will not alter the findings of the trial court on the credibility of witnesses, principally
because they are in a better position to assess the same than the appellate court. 42 Besides, trial
courts are in a better position to examine real evidence as well as observe the demeanor of
witnesses. 43

Similarly, the appreciation of evidence and the assessment of the credibility of witnesses rest
primarily with the trial court. 44 In the case at bar, we see no reason that would justify this Court to
disturb the factual findings of the trial court, as affirmed by the Court of Appeals, with regard to the
award of actual damages.

In arriving at the amount of actual damages, the trial court justified the award by presenting the
following ratiocination in its assailed decision 45, to wit:

Indeed, the Court has its own mind in the matter of valuation. The size of the
subject real properties are (sic) set forth in their individuals titles, and the
Court itself has seen the character and nature of said properties during the
ocular inspection it conducted. Based principally on the foregoing, the Court
makes the following observations:

1. The properties consist of about 39 hectares in Bo. Sto. Cristo, San Jose
del Monte, Bulacan, which is (sic) not distant from Metro Manila — the
biggest urban center in the Philippines — and are easily accessible through
well-paved roads;

2. The properties are suitable for development into a subdivision for low cost
housing, as admitted by defendant's own appraiser (TSN, May 30, 1994, p.
31);
 3. The pigpens which used to exist in the property have already been
demolished. Houses of strong materials are found in the vicinity of the
property (Exhs. 2, 2-1 to 2-7), and the vicinity is a growing community. It has
even been shown that the house of the Barangay Chairman is located
adjacent to the property in question (Exh. 27), and the only remaining piggery
(named Cherry Farm) in the vicinity is about 2 kilometers away from the
western boundary of the property in question (TSN, November 19, p. 3);

4. It will not be hard to find interested buyers of the property, as indubitably

shown by the fact that on March 18, 1994, ICCS (the buyer during the
foreclosure sale) sold the consolidated real estate properties to Stateland
Investment Corporation, in whose favor new titles were issued, i.e., TCT Nos.
T-187781(m); T-187782(m), T-187783(m); T-16653P(m) and T-166521(m) by
the Register of Deeds of Meycauayan (sic), Bulacan;

5. The fact that ICCS was able to sell the subject properties to Stateland
Investment Corporation for Thirty Nine Million (P39,000,000.00) Pesos, which
is more than triple defendant's appraisal (Exh. 2) clearly shows that the Court
cannot rely on defendant's aforesaid estimate (Decision, Records, p. 603).

It is a fundamental legal aphorism that the conclusions of the trial judge on the credibility of
witnesses command great respect and consideration especially when the conclusions are supported
by the evidence on record. 46 Applying the foregoing principle, we therefore hold that the trial court
committed no palpable error in giving credence to the testimony of Reynaldo Flores, who according
to the records, is a licensed real estate broker, appraiser and director of Philippine Appraisal
Company, Inc. since 1990. 47 As the records show, Flores had been with the company for 26 years at
the time of his testimony.

Of equal importance is the fact that the trial court did not confine itself to the appraisal report dated
29 March 1993, and the testimony given by Mr. Reynaldo Flores, in determining the fair market
value of the real property. Above all these, the record would likewise show that the trial judge in
order to appraise himself of the characteristics and condition of the property, conducted an ocular
inspection where the opposing parties appeared and were duly represented.

Based on these considerations and the evidence submitted, we affirm the ruling of the trial court as
regards the valuation of the property —

. . . a valuation of Ninety Nine Million Pesos (P99,000,000.00) for the 39-

hectare properties (sic) translates to just about Two Hundred Fifty Four
Pesos (P254.00) per square meter. This appears to be, as the court so holds,
a better approximation of the fair market value of the subject properties. This
is the amount which should be restituted by the defendant to the plaintiff by
way of actual or compensatory damages . . . . 48

Further, petitioner ascribes error to the lower court awarding an amount allegedly not asked nor
prayed for in private respondent's complaint.

Notwithstanding the fact that the award of actual and compensatory damages by the lower court
exceeded that prayed for in the complaint, the same is nonetheless valid, subject to certain
qualifications.

On this issue, Rule 10, Section 5 of the Rules of Court is pertinent:

 Sec. 5. Amendment to conform to or authorize presentation of evidence. —
When issues not raised by the pleadings are tried with the express or implied
consent of the parties, they shall be treated in all respects as if they had been
raised in the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to raise these
issues may be made upon motion of any party at any time, even after
judgement; but failure to amend does not affect the result of the trial of these
issues. If evidence is objected to at the trial on the ground that it is not within
the issues made by the pleadings, the court may allow the pleadings to be
amended and shall do so with liberality if the presentation of the merits of the
action and the ends of substantial justice will be subserved thereby. The
court may grant a continuance to enable the amendment to be made.

The jurisprudence enunciated in Talisay-Silay Milling Co., Inc. vs. Asociacion de Agricultures de
Talisay-Silay, Inc. 49 citing Northern Cement Corporation vs. Intermediate Appellate Court 50 is
enlightening:

There have been instances where the Court has held that even without the
necessary amendment, the amount proved at the trial may be validly
awarded, as in Tuazon v. Bolanos (95 Phil. 106), where we said that if the
facts shown entitled plaintiff to relief other than that asked for, no amendment
to the complaint was necessary, especially where defendant had himself
raised the point on which recovery was based. The appellate court could
treat the pleading as amended to conform to the evidence although the
pleadings were actually not amended. Amendment is also unnecessary when
only clerical error or non substantial matters are involved, as we held in Bank
of the Philippine Islands vs. Laguna (48 Phil. 5). In Co Tiamco vs. Diaz (75
Phil. 672), we stressed that the rule on amendment need not be applied
rigidly, particularly where no surprise or prejudice is caused the objecting
party. And in the recent case of National Power Corporation vs. Court of
Appeals (113 SCRA 556), we held that where there is a variance in the
defendant's pleadings and the evidence adduced by it at the trial, the Court
may treat the pleading as amended to conform with the evidence.

It is the view of the Court that pursuant to the above-mentioned rule and in
light of the decisions cited, the trial court should not be precluded from
awarding an amount higher than that claimed in the pleading notwithstanding
the absence of the required amendment. But it is upon the condition that the
evidence of such higher amount has been presented properly, with full
opportunity on the part of the opposing parties to support their respective
contentions and to refute each other's evidence.

The failure of a party to amend a pleading to conform to the evidence

adduced during trial does not preclude an adjudication by the court on the
basis of such evidence which may embody new issues not raised in the
pleadings, or serve as a basis for a higher award of damages. Although the
pleading may not have been amended to conform to the evidence submitted
during trial, judgment may nonetheless be rendered, not simply on the basis
of the issues alleged but also the basis of issues discussed and the
assertions of fact proved in the course of trial. The court may treat the
pleading as if it had been amended to conform to the evidence, although it
 had not been actually so amended. Former Chief Justice Moran put the
matter in this way:

When evidence is presented by one party, with the expressed

or implied consent of the adverse party, as to issues not
alleged in the pleadings, judgment may be rendered validly as
regards those issues, which shall be considered as if they have
been raised in the pleadings. There is implied consent to the
evidence thus presented when the adverse party fails to object
thereto.

Clearly, a court may rule and render judgment on the basis of the evidence
before it even though the relevant pleading had not been previously
amended, so long as no surprise or prejudice is thereby caused to the
adverse party. Put a little differently, so long as the basis requirements of fair
play had been met, as where litigants were given full opportunity to support
their respective contentions and to object to or refute each other's evidence,
the court may validly treat the pleadings as if they had been amended to
conform to the evidence and proceed to adjudicate on the basis of all the
evidence before it.

In the instant case, inasmuch as the petitioner was afforded the opportunity to refute and object to
the evidence, both documentary and testimonial, formally offered by private respondent, the
rudiments of fair play are deemed satisfied. In fact, the testimony of Reynaldo Flores was put under
scrutiny during the course of the cross-examination. Under these circumstances, the court acted
within the bounds of its jurisdiction and committed no reversible error in awarding actual damages
the amount of which is higher than that prayed for. Verily, the lower court's actuations are sanctioned
by the Rules and supported by jurisprudence.

Similarly, we affirm the grant of exemplary damages although the amount of Five Million Pesos
(P5,000,000.00) awarded, being excessive, is subject to reduction. Exemplary or corrective
damages are imposed, by way of example or correction for the public good, in addition to the moral,
temperate, liquidated or compensatory damages. 51 Considering its purpose, it must be fair and
reasonable in every case and should not be awarded to unjustly enrich a prevailing party. 52 In our
view, an award of P50,000.00 as exemplary damages in the present case qualifies the test of
reasonableness.

WHEREFORE, premises considered, the instant petition is DENIED for lack of merit. The decision of
the Court of Appeals is hereby AFFIRMED with MODIFICATION of the amount awarded as
exemplary damages. According, petitioner is hereby ordered to pay private respondent the sum of
P99,000,000.00 as actual or compensatory damages; P50,000.00 as exemplary damage and the
costs of suit.

SO ORDERED.

Bellosillo, Mendoza, Quisumbing and De Leon, Jr., JJ., concur.

Footnotes

1 CA Decision in CA-G.R. CV No. 51094, penned by Justice Ricardo P. Galvez and

concurred in by Justice Fidel V. Purisima and Justice B.A. Adefuin-De la Cruz; Rollo,
pp. 38-58.
2 CA Resolution in CA G.R. CV No. 51094, dated 22 May 1998; Rollo, p. 60.

3 Rollo, p. 38.

4 Ibid., p. 39.

5 Ibid.

6 Ibid., p. 40.

7 Ibid.

8 Ibid.

9 Ibid.

10 Rollo, p. 41.

11 Ibid.

12 Ibid.

13 Rollo, pp. 41-42.

14 Rollo, pp. 10-36.

15 Bachrach Motor Co., Inc., vs. Esteban Icarangal, 68 Phil. 287.

16 154 SCRA 446.

17 71 Phil. 448.

18 105 Phil. 886.

19 Danao vs. Court of Appeals 154 SCRA 446.

20 Article 2085, Civil Code; Lustan vs. Court of Appeals, 266 SCRA 663.

21 Cerna vs. Court of Appeals 220 SCRA 517.

22 Ibid.

23 176 SCRA 741.

24 68 Phil. 287.

25 Rollo, p. 94.

26 Caltex Philippines, Inc. vs. Intermediate Appellate Court, 176 SCRA 741.
27 196 SCRA 29.

28 Bachrach Motor vs. Icarangal, 68 Phil. 287.

29 Rollo, p. 16.7.

30 Adong vs. Cheong Seng Gee, 43 Phil. 43; Sy Joc Lieng vs. Syquia, 16 Phil. 137.

31 Lim vs. Collector, 36 Phil. 472.

32 167 SCRA 736.

33 Philippine Conflict of Laws, Eighth Edition, 1996, Paras, page 46.

34 Article 17, par. 3, Civil Code.

35 Philippine Conflict of Laws, Eight Edition, 1996, Paras, p. 60.

36 Perfecto vs. Gonzales, 128 SCRA 640, as cited in Danao vs. Court of Appeals,
154 SCRA 447.

37 22 Am. Jur. 2d 193.

38 City of Manila vs. Corrales, 32 Phil. 85, 96.

39 Rollo, p. 103.

40 People vs. Morales, 241 SCRA 267.

41 People vs. Gamiao, 240 SCRA 254.

42 People vs. Cascalla, 240 SCRA 482.

43 Lee Eng Hong vs. Court of Appeals, 241 SCRA 392.

44 Ibid.

45 Rollo, pp. 46-47.

46 People vs. Asoy, 251 SCRA 682.

47 TSN, April 22, 1994, p. 6.

48 Decision, Records, ibid.

49 247 SCRA 361, 377-378.

50 158 SCRA 408.

51 Article 2229, Civil Code.

52 Philtranco Service Exporters, Inc. vs. Court of Appeals, 273 SCRA 562.